Prep Exercise Prompt for 9/7/16…

Now that we’ve got our basic background on the “standard” model of economic growth out of the way, we can get down to the criticism. In Wednesday’s reading, we explore the question of why, despite significant efforts to the contrary, many less-developed countries (LDCs) son’t in fact seem to be “converging” on the wealth and income of the global north. Indeed, as Lant Prichett and Bill Easterly argue, much of the past 60 years has simply been part of a much longer trend towards global “divergence” in wealth. Meanwhile, economist Gregory Clark puts our current fascination with economic growth in historical perspective, suggesting that for most of human history, growth was not a normal part of economic life.

Your question then is this: What’s driving the continued divergence in wealth and income between much of the global north and south? Is it best understood, as Easterly does, in terms of the failure of the Sachs-style aid/financing gap model, or as part of a longer-term historical process, as Pritchett and and Clark might suggest?

 

Why Some Countries Remain Poor: Getting Out of That Poverty Trap

The household can be seen as the basic unit of society and a country, so its lessons on survival and growth can be very much useful at the country level. So like the household, if a country lives on it incomes and generates enough value (through trade, saving and technological reinforcement) to reinvest it would bring about the required growth that will take it to the next level, and if this is consistent, it will get in on the ladder of economic growth.

Using the household scenario, Sachs made a strong argument for the use of foreign aid to get the poor off the ‘extreme poverty trap’. William Easterly argued on the contrary that foreign aid was meant to cover up the ‘financial gap’ required for growth and economic development. He thinks the whole idea of having foreign aid to cover up the required resources for economic growth has not worked. Through a study of different countries that has benefitted from foreign aid premised on the ‘financial gap’ concept, he was able to clearly show the weakness of the claims of ‘aid as the solution to the problems of developing countries.’

Is foreign aid the solution to the problems of the world’s ‘extremely poor’? Yes and No! Yes, in that, as in the example of a poor household that is struggling to meet its daily needs, saving (and investing) for meaningful economic growth is not an easy choice to make for developing countries as they are always faced with pressing issues that require immediate attention.

Foreign aid though as Easterly argued would only be successful if it is directly linked to investment and then invest  to growth. The myriad of different domestic factors that play in makes it difficult to make a good guess on whether foreign aid will go ‘one-on-one’ with investment and then invest to growth. Some of these domestics factors can be political, economic, political and socio-cultural. For example, governments are always at the center of the whole process, the policy choices that they make affect the whole process. So, even when Foreign aid is coming in the right figures, a poor governance system would provide all the unneeded condition for failure.

Esther Duflo and Abhijit Banerjee made a good study on the daily realities of life of the poor in different parts of the world. Their study shows how different factors affect the lives of the poor and their quest to escape the poverty trap. What their study offers on the foreign aid debate is that there are a lot of factors at the grassroots level that are tying the poor to the unfortunate conditions they are in. Cultural factors like how they spend their resources, how and what they eat all contribute to their stagnation in the ‘vicious circle of poverty’. These factors combined with their ‘limited access to efficient markets and quality infrastructure’ put them in a disadvantaged situation that foreign aid can help, but cannot totally bail them out of.

 

Word Count: 498

Why Some Countries Remain Poor: Getting Out of That Poverty Trap

Prompt for 8/29/16

 

 

The options of a single household to climb up the economic ladder (or even get a foot up on the ladder) are limited—meaning that the options of a nation to do the same are extremely limited. A single household must decide the best way to use its money but Sachs thinks that the reason they stay poor is a poor allocation of their resources—his theory is transferrable to the national level seeing as if a single household is unable to earn money, then a national government is largely unlikely to be able to tax these households, leaving them penniless.

 

Sach’s household example in which a household too poor to save will require aid, although difficult, can scale up to the country level. It may be too optimistic to state, but, it is not impossible for me to imagine aid directed in one area (say agriculture) in several small scales across the country leading to, even just a small boost in the economy. The aid would not scale up to the country level unless countries gave more so we would need to see the scale up happening from the benefits—if markets increase in agriculture because of aid then that increase in economic health can be propelled to the national level.

 

Aid, harnessed in the right areas, is the only guarantor of a successful future for countries caught in a “poverty trap”. Sachs comments that a “rise in [GDP] per capita is typically the result of…saving and capital accumulation, increasing specialization and trade, technological advance, and greater natural resources per person. Although saving is not realistic for a country in a poverty trap, the other aspects are realistic for a country receiving aid. Aid harnessed in areas like agriculture and medicine allow for increased training and a specialization in these areas. Aid can bring about technological advance (if the advances are being brought in and are useful to the countries. Greater natural resources per person would be the last to occur—as the economy begins to grow as a result of aid in these other areas. The tricky part to foreign aid is being careful to help countries get out of a poverty trap without entrapping them more by taking away their markets or jobs because of the kind of aid one gives.

 

Aid, although difficult, is the only option. It’s been decades since large economic growth for many developing countries. If it has not happened on their own terms by now—we are only trusting it to happen by chance without some kind of aid. (Word Count 430)

 

References:

Jeffery Sachs (2005), The End of Poverty: Economic Possibilities for Our Time, Chapters 1-3

William Easterly (2001), The Elusive Quest for Growthpp. 25-44

Abhijit V. Banerjee and Esther Duflo (2007), “The Economic Lives of the Poor,” The Journal of Economic Perspectives, 21:1, pp. 141-168

Why Some Countries Remain Poor: The Lesson of a Single Farm Household, Can Foreign Aid Save Them?

The main lesson from single farm household is ‘careful resource management and investment can lead to economic growth.’ The choices that governments make in regard to national resources matters hence political will in development plays a very significant role. The national’s natural resources and its people/labor force are original solution to their poverty. The single farm household just decided to save out of the little they produced; this should teach us how prudence governments should be.

Now, in quest to understand on why some nations remain poor even with Sachs’ notion that says, ‘When poverty is extreme, the poor do not have the ability-by themselves-to get out of the mess.’ It is a fallacy to believe that in extreme poverty the nation cannot save itself. However, natural disasters are inevitable such as prolonged drought which unfortunately, most of the impoverished countries are associated due to their geographical position. In this regard such countries have multiple problems including poor soils for agriculture, landlocked nations etc. But these can be worked around with proper technology and physical investments.

Foreign aid has two aspects: First, rich countries including US have tried their best in helping the economies of poor countries to takeoff, even now are still helping using what is called ‘financing gap approach’ but the poor nations are still stack in their poverty. There are common traits across most poor countries especially in Africa: First, poor leadership which led to creation and implementation of bad policies in different economic aspects such trade, fiscal discipline, governance and other strategic areas. Second, most countries seemed to be deep routed in mismanagement of public resources and corruption is the order of the day. In so doing they do not utilize the highly skilled labor force available hence the progress is hindered. So even if foreign aid comes, it does not reach the intended beneficiaries.

Another aspect is with donors themselves. The political will should be exercised when the donor’s wants to deal decisively with problems the poor countries are facing. A good example Sachs points Malawi in dealing with HIV/AIDS during Malewezi when he was the vice president of the country. If the donors really wanted to stop spread of epidemic they would have increased funding. Many lives could have been saved that would have contributed to economic growth of the country.

 

Reference:

Jeffery Sachs (2005), The End of Poverty: Economic Possibilities for Our Time, Chapter 1-3

William Easterly (2001), The Elusive Quest for Growth, pp.25-44

Tyler Cowen and Alex Tabbarok, Introduction to the Solow Model (video, five parts): No Math Introduction, Geography and Development 1

Abhijit V. Benerjee and Esther Duflo (2007), ‘The Economic Lives of the Poor,’ The Journal of Economic Perspectives, 21:1, pp.141-168

8/29 Blog Entry 1- Bryce Jacob

By looking at a single household and how each individual goes about to survive will reflect the economic structure of a nation. Examining the factors that surround their life such as: the type of work done, family size, geographic location, and disease rate will put economic development in the right direction. These factors can help point to show the lack of government assistance, social mobility, and life span of many within the same economic status. Overall it shows what is actually happening in a nation and by understanding the many factors that play into the well-being and economic status of one household will help end extreme poverty.

I believe that Sachs metaphor does apply to the nation as a whole. Since a nation is made up of individuals- it starts with them for any change in the economic structure to be created and maintained. As Easterly points out, the poor have very little incentive to save money due to their geographic location, work, family size, etc. which takes a good proportion of people unable to participate in a market economy. With an outside assistance program it will allow the household to be able to generate enough income to either save or spend at the market. This is a self- perpetuating system, for example, a farming family with better fertilizer (due to a government assistance program) will be able to yield more crops. With additional crops they can afford to sell their goods and expand the current market. Overall this allows for households to specialize in certain areas due to them relying on each other for goods and services, and strengthens the economy due to increased buying and spending.  By changing the incentives for certain cohorts of people (for example farmers) with outside assistance programs it will provide the push needed to expand the economy as a whole. It ultimately allows for more income and goods/services to be generated- and the country will be able to participate more in the international market because of a stronger domestic economy.

It’s important to understand that just throwing huge amounts of aid to a country’s development is not the best thing to do. This is a huge point brought out in the Easterly article, about why the Harrod-Domar Model of filling the “financing gap” is inherently wrong. It involves a much more complicated process that takes into account the historical, political, and social/cultural complexities of each nation. Sachs and Duflo both relate the same idea that you must understand the individuals that make up the nation. It seems to me this is the way to actual uncover the real problems of why the poor remain poor. With a better understanding of the problem a more fine-tuned solution can be created to change the incentives of the households and of the nation to further development. At the end of the day, aid used strategically, will help end the poverty trap.

(WORDS 486)

References:

Jeffery Sachs (2005), The End of Poverty: Economic Possibilities for Our Time, Chapters 1-3

William Easterly (2001), The Elusive Quest for Growthpp. 25-44

Abhijit V. Banerjee and Esther Duflo (2007), “The Economic Lives of the Poor,” The Journal of Economic Perspectives, 21:1, pp. 141-168

Single Households: Implications for the Use and Benefit of Outside Aid

Katie Norman–Prep Exercise 1, 8/29/2016

I believe that we can learn a great deal about why some nations remain poor by looking at the stylized experiences of a single household. Single households represent the foundation of nations. Understanding their lived experiences and the many factors that play a role in their successes and struggles can lead development work in the right direction.

Jeffrey Sachs makes it clear that understanding the experiences of a single household can prove invaluable in grasping why some nations remain poor while others thrive. Throughout his metaphor, Sachs explains that through successful implementation of saving and trade practices and the use of technology and resources a family can increase its income per capita. His explanation of capital accumulation, trade specialization, and the ways technology and resources can improve the living standards of a single household is overwhelmingly optimistic for certain countries where resources are limited. Acknowledging this, he continues his metaphor by explaining the ways in which reduction of household income per capita occurs. He addresses lack of saving, absence of trade, technological reversal, natural resource declines, adverse productivity shock, and population growth. Each of the areas that Sachs addresses as reasons single households stay poor can also indicate why nations remain in poverty. The lessons drawn from Sachs’ analysis can be used at both the individual and country level. If a household is unable to save and improve their income per capita, it is likely that they will require outside assistance. Likewise, if a country is unable to save and improve their overall wealth, it is likely that they too, will need outside assistance.

It is hard to generally state that aid from the outside is what is best for a country. It is important to gain understanding of a country’s specific needs by analyzing their political background, physical geography, governance successes/failures, cultural barriers and several other factors (Sachs, 56-65). From my understanding, there is significant debate over whether or not aid from the outside will be best for a country’s future success. Sachs believes that in order for countries in extreme poverty to improve, they must first get their foot on the ladder of development. Once they do this, they will be able to continue upward. Sachs believes that outside aid in getting these countries on the ladder is necessary. From an investment standpoint, William Easterly proposes that the idea that Western countries need to fill the financing gap is outdated and is not effective in practice. He suggests that aid from the outside be conditional on matching increases in a country’s saving rates. This way, countries will have incentive to save on their own and there will be a joint effort in getting a foot on the development ladder. The work that Abhijit Banerjee and Esther Duflo present suggests that understanding the economic lives of the poor can provide development workers with information needed to truly understand how to improve the living standards and quality of life of poor nations.

(492 words)

References:

Jeffery Sachs (2005), The End of Poverty: Economic Possibilities for Our Time, Chapters 1-3

William Easterly (2001), The Elusive Quest for Growth, pp. 25-44

Abhijit V. Banerjee and Esther Duflo (2007), “The Economic Lives of the Poor,” The Journal of Economic Perspectives, 21:1, pp. 141-168

Prep Exercise Prompt for 8/29/16…

Over the next several course meetings, we’ll hear from four titans of contemporary development economics, Jeffrey Sachs of Columbia University, William “Bill” Easterly of NYU and formerly of the World Bank, and Esther Duflo and Abhijit Banerjee of MIT.  In the texts you’re reading for Monday, each provides (if you can tease it out) a succinct narrative about how economies grow in theory, and about why some fail in practice.

In Sachs’s chapters, he plays out an extended metaphor suggesting that in the experiences of an impoverished household unable to escape from their life of bare subsistence, we might learn something about the poverty of nations.  To wit, your question:

To what extent can we learn about why some nations remain poor from the stylized experiences of a single household?  Do the lessons from Sachs’s household example (that a household too poor to save will, in all likelihood, require outside assistance of some kind – be it education in a new farming technique, government investment in a road to help them bring their goods to market, a loan or grant of money) “scale up” to the country level?  If a country is caught in a “poverty trap,” in which it cannot save the resources to invest in developments that will make its workers more productive (machines, education, healthcare, infrastructure, etc.), will aid from outside be its best bet for future success? If not, why not (NB: Easterly and Banerjee/Duflo might be of use)?

How Do We Measure Development (and Why Does it Matter)?

 

To measure economic development we have to measure the economic growth, although they are not the same, economic growth is a key part for economic development. Economic development can include economic growth, well-being, improvement in education and health. Economic growth is the economic capacity of a country, considering how the income is produced, spent and distributed. It can be measured in GNP (Gross National Product) or in GDP (Gross Domestic Product). Both of these measurements are the “sum of the value of finished goods and services produced by a society during a given year” (Dwight Perkins, 2013). The GNP includes the income from citizens working outside the country borders but does not include the value of raw material used in production of goods. The GDP includes the output produced only within the borders of the country. The per capita income is the result from the division of the GNP or GDP by the total number of the country’s population, economic growth uses the per capita income to measure the changes within a period of time.

 

Usually there are not large differences between their GNP and GDP. In countries where their natural resources are exploded by multinationals that repatriate their profits the GDP can be higher than the GNP. There can also be countries with a GNP higher than their GDP when their citizens work aboard and income goes back into their countries. In developing countries is more difficult to have complete data of the GDP, because there are activities that never enter in the market place (works made by family members or house work that is mostly performed by women, these data could completely change the GDP of a country). Measuring GPD is difficult because it includes different goods, and it does not include the depreciation (machinery) or the “bads” an industry can produce, pollution for example. Another problem in comparing GDPs of different countries is that they are calculated in their national currency and they have to be converted into the same currency (US dollars usually), this also represents a problem because the same service or good does not have the same value in every country even if they are converted to the same currency.

 

Even though the ones mentioned above are the most common ways of measuring economical progress there are other ways such as the Index of Sustainable Economic Welfare, Green GPD, Genuine Savings; and indexes that do not use GDPs (Ecological Footprint, Subjective Well Being).

 

With the Human Development Index the UNDP quantifies the crucial elements for human development (health, education and economy). The index converts the data of every country into a number that allows comparing them, access to resources, for example, is converted to US$ and knowledge in years in two different variables; and the three dimensions are expressed in percentage and not in different units. The percentages cannot be combined for the total of HDI, 10% decrease in the health index cannot be compensated with an increase of 10% in the income.

 

Word Count: 499

 

References:

Dwight Perkins et al (2013), Economics of Development, 7th edition, pp. 23-32; 40-53

 

Robert Costanza, Maureen Hart, Stephen Posner, John Talberth (2009), “Beyond GDP: The Need for New Measures of Progress,” Pardee Paper #4, Boston University

Frederick S. Pardee Center for Center for  the Study of the Longer-Range Future

 

Diane Coyle, “The Way We Measure Economies is Inherently Sexist,” World Economic Forum, April 13, 2016

 

Prep Exercise Prompt for 8/24/16…

Although GDP is (as many of the readings you’ve completed for today suggest) an inherently flawed concept and measure of development, its popularity suggests that it must have its uses. What, in your estimation, ought to be the place of GDP in efforts to measure development? What’s the most important thing that GDP and GDP growth tell us? And given its limitations, how might it be improved without staring over from scratch?

Posting Instructions…

Students:

Thanks for an interesting and engaging first day of class.  Please register on the course blog as soon as possible, and be sure to read over the requirements for posting.  The first prompt will go up tonight, and posts will be due by Wednesday at 1 PM.  Once you’ve registered (and you’ve given me a day to sort out everyone’s statuses behind the scenes), you will be able to post and comment at will.  To do either, you’ll need to first log in.  When you first log in, you’ll be asked to update your profile (which you can do as little or as much as you like).  then, select “Dashboard” from the left-hand side menu.  Next, select “Posts,” on the left hand side of the “dashboard.”  From there, select “Add New,” write in your title, and compose your post (click “Publish” when you’re finished, selecting “Blog Post” from the Categories Menu on the right-hand side).  While I’d recommend composing your exercise in a word processing program of your choice and then pasting it in, should you need to modify your own post, that can also be done through the system.

For the visually-inclined, this is what you should see when you log in:

 

When you click on “Posts, you’ll see this:

 

And when you’ve selected “Add New,” this will be your screen:

Don’t hesitate to email if you have trouble with this process.