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Global Economics and Development. Long-Run: Centuries Medium Run: Decades Human Development Index/Inequality Adjusted HDI Purchasing Power Parity Income Per Capita Health Education Short Run: Shocks  Fluctuations ECON 403 Topics in Macroeconomics Fall 2013 TR 1 – 2:15 pm.

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global economics and development
Global Economics and Development
  • Long-Run: Centuries
  • Medium Run: Decades
    • Human Development Index/Inequality Adjusted HDI
      • Purchasing Power Parity Income Per Capita
      • Health
      • Education
  • Short Run: Shocks  Fluctuations
    • ECON 403 Topics in Macroeconomics

Fall 2013 TR 1 – 2:15 pm


Why Nations Fail

Elusive Quest for Growth

Exorbitant Privilege

Graham: Measuring Happiness








New International

Monetary Architecture


Debt and Crisis


Educational Reform

Can It Scale?


Virtual Economy

Bear Trap


Is This Time


Soviet Extraction:

Ukrainian Famine

thinking long run
Thinking Long-Run

Extractive institutions  Vicious circles

Critical Junctures

  • Contingency/Reversal of fortune

Inclusive institutions  Virtuous circles

endowments institutions endowments
Endowments – Institutions - Endowments

Inequality, cause and effect: Political power  Economic power

Reinforce status quo? Promote progress?

  • Why nations fail:

Geography hypothesis/Culture hypothesis/Ignorance hypothesis

 Prescriptions:

Authoritarian growth/Modernization Theory/Washington Consensus

Acemoglu and Robinson: Institutions hypothesis

Extractive Institutions  Vicious Circles

  • Economic institutions
  • Insecure property rights
  • Slavery/Plantation system
  • Encomienda
    • Mita/Repartimiento
  • Reversal of fortune
  • Monopoly: La Serrata
  • Dual economy
  • Crony capitalism
  • Marketing boards
  • Political institutions
  • Absolutism
    • Infighting/Failed state
    • Ethnic fractionalization
  • Iron Law of Oligarchy
  • Elites: Librod’Oro
  • Indirect rule
  • Patronage networks

Apartheid/Jim Crow

why nations fail institutions hypothesis
Why Nations Fail: Institutions Hypothesis
  • Economic institutions
  • Enforced property rights
    • Patent protection
  • Rule of law
  • Open Markets
    • Commenda
  • Political institutions
  • Pluralism
  • Constraint on executive
  • Secret ballot/Wide suffrage
  • Free media: Muckrakers

Inclusive Institutions  Virtuous Circles

Creative Destruction

(pursuit of transient rents)

  • Theory of Development
  • Institutional Drift
  • Critical Juncture
  • Contingency
  • Preconditions
  • Centralized State
  • Constraint on executive
  • Pluralistic coalition
  • Critical junctures we have known
  • Neolithic Revolution
  • Fall of Rome
  • Black Plague
  • Atlantic Trade
  • Glorious Revolution
  • Industrial Revolution
  • French Revolution
  • Colonialism
  • The Great War
  • Energy Crisis
the medium run cumulative causation stuck in a trap
The Medium-RunCumulative Causation: Stuck in a Trap

Lack of social infrastructure

  • Low payoff to skill

 Little skill acquisition

 Lack of social infrastructure

Lack of skills/lack of means to employ knowledge

 Primary production

 Primitive techniques

 Stagnation

 Poverty Trap

cumulative causation escaping the trap the elusive quest for growth
Cumulative CausationEscaping the Trap: The Elusive Quest for Growth

Build social infrastructure

  • Subsidize targeted industries/Tax consumption
  • Coordinate...industrial complex development...assure critical mass
  • Foster “Great expectations”  Self-fulfilling optimism

Exploit Technology LEAPS

  • Creation without destruction...when there’s nothing to destroy

Take Advantage of Demography

  • Age and vested interest
  • Immigration: the future of the West

Harness Creation without Destruction...Pursue Increasing Returns

  • Complementary inventions and technologies
    • Railroads and the steam engine/The internet and PCs

 Increasing Returns

development per capita income what matters
Development (per capita income): What Matters?
  • Sala-i-Martin: 2 million regressions testing 59 suspects
    • Rule of law, accumulation, initial education, openness help
    • War, political instability, primary goods specialization hurt
    • Government stance, price distortion, ethnic fractionalization don’tmatter
  • Easterly and Levine
    • Africa’s Growth Tragedy: Ethno linguistic fractionalization
    • Tropics, Germs, Crops
      • Institutions: protection of property rights index
      • Endowments—geography: Settler mortality, latitude, landlocked, crops, minerals
      • Policies: Openness to trade, overvaluation, inflation
      • Other variables: Ethnic fractionalization, religion, legal origin

FINDINGS: Endowments  Institutions  Economic Development

Engerman & Sokoloff/Acemoglu, Johnson and Robinson get the ring

  • What about policies?
    • Once per capita income is explained by institutions, policy variables individually and together are insignificant

CONCLUDE: Policies may affect growth over a decade, as found by other studies

Bad policies are symptoms of bad institutions


development one schoolhouse at a time kimenyi can contract teacher results be scaled up
Development, One Schoolhouse at a TimeKimenyi: Can Contract Teacher Results be Scaled Up?
  • In randomized experiment implemented by NGOs, low-paid “contract teachers” performed better than higher paid civil service teachers in Western Kenya.
  • But can the result be scaled up, i.e., when implemented on large-scale by government agencies?
  • Another randomized experiment performed: half the contract teachers worked for NGOs, half for government agencies.
    • Government hired somewhat more “qualified” contract teachers
    • Government hires more likely related to someone in system  cronyism
  • Other things equal, only NGO contract teachers performed better than civil service teachers
    • Payroll delays significantly affected performance/Paym’t by gov’t more delayed
  • Kimenyi concludes: Don’t leave education reform to government
  • Alternative conclusion: Clean up the payroll system and public education will do fine
    • Equal fractions of NGO and gov’t teachers did well enough to be hired full time
gaddy russia before and after
Gaddy: Russia, Before and After

Soviet growth under extractive institutions

  • The Easy Part: Move resources from low productivity agriculture to higher productivity manufacturing
  • The Hard Part: Spur innovation/Creative Destruction
    • Perverse quotas and prices

The Post-Soviet Virtual Economy

  • Loss-making manufacturing ought to shut down
    • Unemployment/Social discontent
  • Siberian industries and cities ought to be downsized
    • Extreme cold/high transport costs  uneconomical settlement
  • Primary producers/fictitious prices maintain the status quo
    • Oligarchs keep export earnings
    • Putin maintains power: A “protection racket”
  • Required subsidy grows with time

 Unsustainable Bear Trap

antholis china and india the political realities
Antholis: China and India – The Political Realities
  • China and India are not monolithic states
    • Regions and provinces matter
      • India: 35 states/China: 22 provinces + Taiwan
    • Local issues  Beijing and New Delhi can’t easily lead
      • Migration
      • Land acquisition for industry and urbanization
      • Infrastructure provision
      • Fiscal federalism: Center bail-out of sub-national entities
  • China: GDP Monotheism/Fragmented Authoritarianism
    • Central Ministry – Provincial Government Matrix
    • Global Coast vs. Protectionist Interior
    • Special Enterprise Zones/Environmental sustainability issue
  • India: Secessionist Threat/Ethnic Conflicts/Caste Conflicts
    • Regional parties critical for Congress or BJP coalitions
    • Advanced States: Benefit from high-tech diaspora
    • Backward States: Cronyism
    • Legacy of socialist subsidies: Unreliable power/shoddy infrastructure

The Short-Run in a Floating Age

Managed float: intervention  $ reserves  $ privilege

Currency misalignments  Currency crises

Latin America’s “Lost Decade”

Tequila/East Asia

Global demand for $s  Capital inflows to US

US International Debt  Threat of “Bank Run”

The US Housing Bubble  (Developed) World in a Slump

Dysfunctional US Finance/Dysfunctional US Politics

 Dawn of a new international monetary architecture?

the euro an alternative to the
The Euro: An Alternative to the $?

Why a €?

  • Euro economics: Transactions costs/CAP/German Discipline
  • Euro politics: Integration  Peace/Tie Germany to West Europe

Eurozone Imbalance

  • Early 2000s: German wage discipline

 German competitiveness  Current account surplus

  • Capital inflows to peripheral countries

 Financial bubbles/Housing bubbles/Fiscal bubbles


  • Iceland: When fishermen become investment bankers

Crash  Brit and Dutch Screwed

  • Cyprus: Oligarch/Mafiya Laundry

Crash  Russians Screwed


Talvi: New Economic Geography

  • Latin American and other emerging economies not dragged down by the crisis
  • Chinese expansion  commodity boom
  • Latin American countries with relatively high net commodity exports advantaged by rising commodity prices
  • Advanced country deleveraging
  •  capital inflows to emerging economies
  •  growth of emerging economies
carmen reinhart s remarks carmen bemoans debt
Carmen Reinhart’s Remarks: Carmen bemoans debt
  • Emerging economies had reduced debt
    • Deleveraging followed 1997-98 crises
  • Advanced countries (and Emerging Europe) entered crisis with high Public + Private Debt
    • Deleveraging has been and will continue to be prolonged ~ Decade

 Downward pressure on demand, output, & employment

    • Massive monetary easing lightens debt burden
      • Stemmed debt deflation spiral
      • But private saving eaten up by public borrowing
  • Vulnerabilities for emerging economies
    • Build up of domestic debt
      • Brazil: private debt and non-federal government debt

Reinhart: For a banking crisis, don’t need external debt, just debt

    • China slowdown  commodity price collapse
this time ain t different reinhart and rogoff
This Time Ain’t Different Reinhart and Rogoff
  • “Excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.”
  • “Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced.”
  • Highly leveraged economies “can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, lenders disappear, and a crisis hits.“
  • Eight centuries of experience suggests this time is not different.
this time ain t different but it s not another depression econ 403
This Time Ain’t Different(but it’s not another Depression, ECON 403)

Consequences of banking crises

  • Real GDP down – Unemployment up
  • Government revenue down
  • Government bailout of banks
  • Government debt/GDP UP
    • But 90% is not a ratio to be particularly feared
    • Austerity sucks...and doesn’t spur recovery

“A recession is no time to cut spending”

  • Prolonged slump
    • Deleveraging
    • Zero lower bound  Monetary policy weakened

Fiscal policy would work, given the chance: STIMULUS NOW