Midterm Flashcards

Question

Moral hazard

Answer 1

the two actions problem. Problem: you can’t observe a borrower’s true type. Only borrower knows if they will use money in a risky or well-behaved way

Answer 2

OPEC members put their money in banks, banks were looking for new borrowers, developing countries needed money but because they remained risky borrowers, banks charged high interest. This led the “debt crisis” as loans denominated in dollars must be repaid in dollars, so if dollar fails the system fails.

Answer 3

the principal means by which the international financial community has influenced economic policy in the developing world. Conditions such as: reduce state budgets, raise taxes, raise interest rates, control wages, privatization, liberalize imports, foreign investments, devalue currency.

Answer 4

defined as a basket of currencies, is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves consisting of the Euro, Japanese Yen, Pound Sterling and US dollar. IMF members have SDRs in relationship to the capital they contribute to the IMF

Answer 5

is foreign aid that must be spent in the country providing the aid or in a group of selected countries. Money that a rich country lends to a poor country, on condition that the poor country spends the money on goods from the rich country.

Answer 6

this is an issue with food aid. Tied aid costs at least 50% more than food bought locally and 33% more than food bought in regional markets. Does not stimulate local economy. In fact, by flooding the local market with free food, it decreases the price of locally available food and therefore reduces the incentives of local producers to plant more – perpetuating food shortages and actually undermining agricultural development.

Answer 7

modern cultures were more conducive to economic development than traditional cultures. Traditional Culture: Rural Communal: priority is survival of the group Hierarchical society, Kinship ties, Ascriptive values, Defer to authority, Parochialism, Distrust of innovation ``` Modern Culture: Urban Individualistic: pursuit of self-interest Fluid social mobility Nuclear family Universalistic values Question authority Outward orientation Open to innovation ```

Answer 8

Protestantism encourage capitalistic economic development - Asceticism, disapproval of luxury - Protestant work ethic - Moral code - Emphasis on study, education

Answer 9

theory that states as population growth is ahead of agricultural growth, there must be a stage at which the food supply is inadequate for feeding the population

Answer 10

Malthus believed there were two types of “checks” that in all times and places kept the population growth in line with the growth of the food supply: “preventative checks’ such as moral restraints (abstinence, delayed marriage until finances become balanced) and marriage against persons suffering poverty or perceived as defective and “positive checks” which lead to premature death, disease, starvation, war resulting in what is called a Malthusian catastrophe. Catastrophe would return population to a lower, more “sustainable” level

Answer 11

is the transition from high birth and death rates to lower birth and death rates as a country or region develops from a pre-industrial to an industrialized economic system. The theory was proposed in 1929 by the American demographer Warren Thompson, who observed changes, or transitions, in birth and death rates in industrialized societies over the previous 200 years. Most developed countries have completed the demographic transition and have low birth rates; most developing countries are in the process of this transition crude birth/death rate vs. Time (development a. Phase 1: primitive stability b. Phase 2: epidemiological transition in the rate of population growth, c. Phase 3: fertility transition (birthrate) d. Phase 4: modern stability

Answer 12

family formation has costs and benefits. Parents choose the number of children to have depending on these costs and benefits. Therefore, the number of children per family declines when costs rise, benefits fall, or both. Ex. of costs: pay for school, food, clothes. Time. Healthcare. Housing. Ex. of Benefits: child labor, support in old age, love.

Answer 13

a population increase that continues even after a fall in birthrates because of a large youthful population that widens the population’s parent base. Fewer children per couple in the succeeding few generations will not mean a smaller or stable population size because at the same time there will be a much larger number of childbearing couples

Answer 14

costs/benefits to the individual versus costs/benefits to society. Tends to result in “over education” in developing countries. Tends to lead to “brain drain”. May also lead to political unrest: virtually every revolution led by educated middle-class frustrated by lack of opportunities.

Answer 15

``` Conditional cash transfer (CCT) programs aim to reduce poverty by making welfare programs conditional upon the receivers' actions. The government (or a charity) only transfers the money to persons who meet certain criteria. ``` Brazil - Pioneer in the development of Conditional Cash Transfer programs • Means-tested programs to efficiently target the poor while increasing social investment • Provides cash grants to families who send their children to school and public health clinics • 93% of the women are the recipients of the Bolsa Family check in, child mortality declines 77% in 10 years • Bolsa has a lower average drop out rate compared to Brazil's overall average • The percent of people who live under $2 a day has declined • Social spending percentage of GDP has risen

Answer 16

why nations fail: critical junctures- specific political institutions are created at a particular moment in time because of the balance of power and the contextual conditions of that moment in time. Once created, however, those institutions set up incentives that tend to perpetuate the power of initial actors. Institutions are sticky because it is difficult to change institutions once they have been set up, even if the power of actors who created them and even if the contextual conditions change

Answer 17

a. Latin America i. No easy wealth: creates economy of production ii. Colonized by soldiers and adventurers who wanted to get rich, came alone: “encomienda” model, highly unequal distribution of wealth. iii. Colonized by the Spanish, and absolutist monarchy, controlled directly by Regents iv. Catholicism b. US i. Rich in gold, minerals: creates economy of extraction ii. Colonized by settlers who brought families to work their own land: small farmer model, relatively equal distribution of wealth (except in South US) iii. Colonized by the British, a constitutional monarchy, and given extensive self rule iv. Protestantism

Answer 18

is the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former.

Answer 19

a. A trade policy based on the idea that a developing country can industrialize by substituting domestically manufactured products for previously imported manufactured goods. b. Key components of ISI: i. Tariffs (raise cost of imports to consumers) ii. State intervention to subsidize selected industries 1. Loans, infrastructure, subsidies of inputs. c. Advantages: i. Establish “infant industries: 1. Like human infants, new industries needed parental (state) protection before they could survive on their own in international markets ii. Stimulated forward and backward linkages, promoting additional industrialization. iii. Political support from labor and business. 1. Under ISI, relatively high wages became a benefit (in the form of increased consumer demand) as well as a cost (higher cost of the product). 2. However, since tariffs protected the product from foreign competition, cost mattered less. 3. Jobs and business protected from failure. 4. Both national business and labor unions therefore tended to resist ending ISI protections. iv. Tax income from tariffs. d. Disadvantages of ISI i. Higher consumer prices ii. Inefficient and uncompetitive industries iii. Dependence on imports of capital stock 1. Debt 2. Labor-saving technology  unemployment

Answer 20

a. Advantages and Disadvantages: Demand for manufactured goods grows faster Price of manufactured goods less unpredictable than primary products Value added is higher (profit higher) Creation of synthetics helps rather than hurts Reliance on foreign markets can cushion economy from domestic recession South Korea Example: Begin with ISI, to establish infant industries, based on consumer goods in low-tech, labor-intensive industries; Then creates incentives for industries to export goods instead of selling only in domestic markets - lower taxes on profits from exports, no tariffs on imports used in production of exported goods, government subsidies/loans or monopoly rights limited to exporters; Finally, use profits from exports to establish new infant industries, in increasingly capital-intensive and technology-intensive sectors Can all countries successfully promote exports? Developed country markets are not unlimited: South Korea had special access due to concern about need to prove superiority of capitalism vis-a-vis N. Korea. South Korea was also given leeway by international markets to blend protectionism and open trade, as well as loans and other assistance. Developing countries compete with each other to supply developed country markets. How many South Koreas/Brazils can there be? According to dependency theory, these countries, which have moved towards industrialization and diversified economies, belong to the semi-periphery. Semi-periphery countries "partially deflect the political pressures which groups primarily located in peripheral areas might otherwise direct against core-states" and thus stabilize the world-system. But they remain a distraction and an illusion: most countries cannot achieve semi-periphery status. EOI versus "neoliberalism" Neoliberalism refers to an economic philosophy which embraces free trade, open markets, deregulation, balanced budgets, and privatization, with only a limited role for the state in the economy. Under neoliberalism, the state does not select or promote any particular sector of the economy. Under EOI, the state does selectively promote exports by the manufacturing sector. Under neo, manufacturing exports may increase equally; or not.

Answer 21

An enclave economy is defined as an economic system in which an export based industry dominated by international or non-local capital extracts resources or products from another country. It was widely employed as a term to describe post-colonial dependency relations in the developing world, especially in Latin America.

Answer 22

Hirschman introduces the concept of backward and forward linkages. A forward linkage is created when investment in a particular project encourages investment in subsequent stages of production. Steel --> automobiles. A backward linkage is when investment in an industry leads to the growth of industries that supply inputs. Coal

Answer 23

``` Establishing territorial boundaries; Creation of political institutions, passed on to colonies at independence; Economic structures (restrictions against development of native industries competing with colonizers, trade restrictions, resources extraction, establishment of monoculture economies); Changes in social structure; Changes in culture: language, religion, education ```