Part B: Week 6 Introduction

Question 1

Solow growth model (2)

Answer 1

Resources flow to take advantage of arbitrage opportunities

Diminishing returns to capital exist - so capital flows to poorer countries to allow them to catch up with rich countries.

Question 2

What does long run development depend on in the closed economy (3)

Answer 2

Initial endowments
Technology
Preferences

Question 3

Open economy - regarding technology and trade

Answer 3

Technology flows remove technology differences between countries, resulting in equal A. (Unlike closed model, where tech determines development, and same as neoclassical - tech flows are free and immediate)

Trade in goods = factor prices, so endowments should not matter (opposes closed theory) , and so there should be convergence

Question 4

Has there been convergence in growth rates?

Answer 4

No - divergence actually

So open model idea of trade in goods equalising factor prices removing endowment importance and convergence is proved wrong

Question 5

Which population has the largest proportion of people living in extreme poverty?

Answer 5

Sub Saharan Africa

Question 6

There is the idea of poor but happy. So poverty not just about income

What should be included when considered poverty (4)

Answer 6

Poor health
Poor education
Difficulty to realise your ambition (get loans, insurance etc)
Poor quality of life

Question 7

Are the poor trapped? Poor today poor tomorrow: Reasons (3)

Answer 7

Poor today, poor tomorrow because of…

Low education, poor health, low productivity

Question 8

What are the policy implications to solve this? Sachs

Answer 8

Foreign aid - then once richer/healthier/better educated, they can support themselves

Question 9

Are the poor trapped? Reason for no

Answer 9

Reasons are complicated and specific to the context (country)

Question 10

Policy implications of using money (e.g foreign aid) when no poverty trap exists

Answer 10

Providing money will not help, does not fix underlying reasons

Question 11

2 views on poverty traps

Answer 11

Sachs and Easterly

Question 12

What influences development in Sachs

Answer 12

Geography influences economic development.

Question 13

So according to Sachs, why are poor countries stuck in a trap? (4)

Answer 13

Weather - hot and infertile

Low productivity>low income>can’t buy climate adaption tech>prod remains low

Malaria infested>low productivity>can’t afford prevention>remain malaria-infested

Landlocked - expensive or politically difficult to export

Question 14

What was the big push

Answer 14

Foreign aid can solve these issues to improve productivity and income to invest in their own country to be able to support themselves

Question 15

Poverty trap S curve (pg 23)

Question 16

Now Easterly’s view on poverty traps (White Man’s Burden)

Answer 16

No poverty traps

Question 17

Why did he believe this (evidence)

Answer 17

Many examples of countries who made their way out without aid.

Also little growth in Africas GDP per capita despite aid. (Against Sachs big push)

Question 18

So what did Easterly believe causes of poverty were then? (3)

Answer 18

Corruption, autocratic politics.

Absent institutions

Dysfunctional bureaucracy. Local details matter

Question 19

White man’s burden

Answer 19

Aid is harmful - it creates dependencies and corruption

Question 20

How does aid create corruption

Answer 20

Leakages - passes through bureaucrats

Question 21

When does Easterly believe poor can support themselves?

Answer 21

Free markets and right incentives

Question 22

How can the poor do this?

Answer 22

Local solutions found by trial and error, specific to their context

Question 23

Example of White Man’s burden and 2 findings

Answer 23

Free distribution of malaria bednets
- people dont value when free.
- aid dependency - people will not pay once free distribution ends.

Question 24

Key advantage of free markets

Answer 24

Provide information on preferences
- i.e only people buying own nets make sure nets go to those who value and need the most.

Question 25

L shaped poverty trap (pg 23)

Answer 25

Just poverty trap diagram with no trap

Question 26

Health based poverty trap idea B) Health-income cycle

Answer 26

People cannot work because they are sick, remain sick and do not have income to afford a doctor. Thus income is a function (determinant) of health yt+1 = f(ht), f’>0 but health is also a function (determinant) of income (reverse causality!)

Question 27

Health based poverty trap diagram (pg 32)

Answer 27

Same S shaped curve (capacity) Linear line is piece rate . Y axis is work capacity, X axis is employment income.

Question 28

So how do we find whether poverty traps exist or not in graphical form?

Answer 28

See whether S shaped (trap exists) or L shaped (no trap).

Question 29

What is the key to addressing poverty traps

Answer 29

Identify factors which create a trap. Need GOOD DATA

Question 30

How can we answer these small questions to understand choices of the poor (e.g not valuing free provisions for malaria) 2 important things we need in answering these questions

Answer 30

Theory - identify causal factors Empirical analysis - find which factors are most relevant under certain environments

Question 31

Sachs v Easterly on Malaria bednets

Answer 31

Sachs: free provision Easterly: free markets - let them buy at full price

Question 32

3 Questions to be asked in this experiment

Answer 32

Will people buy at full price Will people use for free Will people buy if no longer made free?

Question 33

Evidence favouring Sachs Millenium village, and Eval

Answer 33

It’s about fertiliser. People can’t afford fertiliser. So… free fertiliser led to harvest multiplying. With extra income they can support themselves forever. Eval: if profitable, why did farmers not buy a little, then earn more, then buy more etc?

Question 34

Why did they not buy fertiliser in small bits

Answer 34

Only available in large quantities - indivisible investment therefore a trap

Question 35

Farmers also did not know how fertiliser works, how profitable, or if applicable for their land. Trap or not?

Answer 35

Information constraints are not a trap

Question 36

Farmers can’t save between harvest and planting season Trap or not?

Answer 36

Saving constraints are not a trap - there were reasons such as behavioural issues such as present bias, etc that makes them save less than optimal

Question 37

So what do not contribute to traps (2)

Answer 37

Saving constraints Information constraints

Question 38

Problem of just using observational data

Answer 38

Selection issues - can’t simply just compare farmers bought fertiliser vs have not.

Question 39

So what should we use and why?

Answer 39

Random controlled trials - to prove any difference between results are due to the treatment

Question 40

So from then we can test information and saving constraints in RCT

Answer 40

E.g through info provision, control vs treatment Etc