Introduction and Ch. 1ARE/ECN 115A

Preface It was Winter Quarter 2012. The imaginary scent of pepper spray still permeated the air around the Occupy tents on the UC Davis Quad. I gritted my teeth and told the campus bookstore to order up 125 copies of an undergraduate econometrics textbook at $150 a shot. (That’s a gross of $18,750 just from my class.)

Over dinner that night, my 20-year-old son, Sebastian, just back from occupying the Port of Oakland, said he spent $180 on a new edition calculus text required for his course. My 16-year-old son, Julian, exclaimed: “That’s obscene.” Sebastian responded, “You’re right. Basic calculus hasn’t changed in decades. You don’t need new editions to learn calculus.”

Before dinner was over, my two kids ambushed me and made me promise never, ever, to assign an expensive textbook to my students again.

“So, what do you want me to do then, write one?” I asked them.

“Exactly,” they answered in unison.

“And get a good title for it,” my wife, Peri, added.

The next day, RebelText was born.

What I Do(Besides cause trouble)

· High-level Impact Evaluation· Poverty and Inequality· Migration, human capital and development· Environment-development interactions (CGD,

resource extraction)· Gender· REAP/PRECESAM/ENHRUM · Editor, Am J Ag Econ

What Is Poor?Wealth category % Characteristics

Ultra poor Ohianaminami (‘from here you are dying’)Known locally as ‘bottles’ (i.e., you scratch them and nothing comes off)‘God is their only help’Physically frail or ill so no strength to workNot mentally sound so unemployableSo poor that ‘if you throw away rubbish they would want to keep it’They begNoone to depend on: ‘just roaming the world’They live off other people’s leftoversNo land or propertyLive in a family house (sometimes abandoned)Nearly OhianaminamiStill weak but can workThey hire labour when they can to work on landSubsistence, no sellingCannot borrow or use credit because they cannot pay backChildren not working or have diedAutoahiaafo (A little better than the poor)They have strength to workWith a little working capital they can work betterFarming and small tradingDon’t get credit but can borrowDon’t own land but sharecrop (Abuna or Abusua )Landowners (inherited or acquired)Hire out landBenefit from family remittancesInvest in their children’s educationHave better off childrenSometimes own a carBuild and rent out housesLease land for rubber plantations (new trend)Go outside community to buy wholesale and sell inside the communityDon’t provide creditLend amongst themselves

TOTAL 100

18

Nearly poor 22

A little better than the poor

29

Non poor 31

(NB group estimated that one half of these

households are now LEAP beneficiaries)

A Social Cash Transfer Program

“Improve the living standards of Orphans and Vulnerable Children (OVC)”

UNICEF with country government

One of seven programs like it in Sub-Saharan Africa

Main Goal:

Transfer Scheme

• Unconditional social cash transfer (SCT)– Targeted to poor and vulnerable households

• Asset poor, labor poor, often elderly and infirm, many child-headed households

• About US$50 per quarter

• Represents about 30% of income for the treated households

Social Protection vs. Production?

• Should countries spend scarce resources on SCTs?

• …or should they spend them on productive programs?– New crop technologies, input subsidies, crop

price supports, extension

• The big question UNICEF and African governments face

Q: What Happens When A Transfer Hits the Target Household?

A: It Spends It

Expenditure shares on:

A B C D

Crop 22% 27% 12% 15%

Livestock 25% 16% 30% 21%

Retail 32% 37% 27% 33%

Services 4% 4% 4% 6%

Production 2% 2% 2% 1%

ROW 15% 15% 25% 24%

Transfer

Control

Treatment

Transfer

Control

Treatment

T,NT

T, T

Transfer

Rest of Lesotho

Rest of World

Control

Treatment

T,NT

NT,NT’

T, T

Transfer

Rest of Lesotho

Rest of World

Control

Treatment

T,NT

NT,NT’

NT,T

NT’,NT

T, T

Transfer

Rest of Lesotho

Rest of World

Treatment

Control?

T,NT

NT,NT’

NT,T

NT’,NT

NT,C

T, T

Effect on Total Income

  Multiplier Level ChangeTotal Income Y    

Nominal 2.23 7.38(CI) ( 2.08- 2.44) (6.89 -8.06 )

Real 1.36 4.5(CI) ( 1.25- 1.45) (4.15 -4.80 )

Effect on Household IncomesHousehold A Income Multiplier 

nominal 1.15

cpi increase in % 1.96%

real 1.03

Household C income

nominal 1.08

cpi increase in % 1.88%

real 0.33

0.330.33+1.03

=24 %

Ineligible Households

Effects on Production

Production multiplier for: HH A (24% pop)  HH C (76% pop)

Crop 0.03 0.15

Livestock 0.02 0.26

Retail 0.07 0.52 Services 0 0.08

Other Production 0 0

TOTAL 0.13 1.01

1.010.13+1.01

=89 %

How to Do Studies Like This?

• 1. Compelling research problem• 2. Good theory• 3. Careful review of what others have done• 4. Clear, testable hypotheses

– Here, that transfers create significant spillovers

• 5. Good Data• 6. Convincing empirical approach

From Theory to the Field

Making a Difference (We Hope)

ARE 115AEconomics of Development

• Our course websites: rebeltext.org and smartsite

• E-mail Coordinates:• J. Edward Taylor jetaylor@ucdavis.edu• Kjersti Nes nes@primal.ucdavis.edu• Michael Norton norton@primal.ucdavis.edu• Anil Bhargava bhargava@primal.ucdavis.edu• Ted Gilliland gilliland@primal.ucdavis.edu • Sunghun Lim slim@primal.ucdavis.edu

Book (The Core of this Course)Efficient and Compact, Economical, Portal to the Internet

Additional required readings will be posted on the course websites each week:

Rebeltext.org (public domain)Smartsite (specific to our class)

Grading

Weekly study questions (10%). Study questions will be posted on Smartsite.Your answers to them will be due on Smartsite no later than the time noted on each study question sheet (normally the end of the weekend following the week we cover the material in class).

Homework assignments (30%; 3@10% each).

A midterm exam (30%).

A final exam (30%).

What Is Development Economics?

• Everything: Just pick up a traditional textbook (or look in RebelText)

• So why have a field of development economics? – There must be something different about poor

countries. What is it?

• Book: How our thinking about development has evolved

Evolution of Development Thought

• Growth• Inequality and Poverty• Trusting Markets• Not Trusting Markets• The Experimental Revolution

Overview in Chapter 1; we’ll cover all of these in this class

Back to the Bigger Question: What’s Development?

• Economic development entails far-reaching changes in the structure of economies, technologies, societies, and political systems.

• Development economics is the study of economies that do not fit many of the basic assumptions underpinning economic analysis in high-income countries

– Including well-functioning markets, perfect information, and low transaction costs.

• When these assumptions break down, so do the most basic welfare and policy conclusions of economics

– And we need new tools.

Efficiency Versus Equity

• Rich countries: seen as separate– Grow the pie, then figure out how it gets

divvied up

• In Poor countries: Equity and efficiency cannot usually be separated

Why Efficiency Cannot Be Separated from Equity

• Banks are unwilling to loan money to small farmers• Poor people cannot get insurance to protect themselves

against crop loss or sickness• Poverty and malnutrition prevent kids from growing up to

become productive adults• Access to markets for the stuff people produce, the inputs

they use, and the goods they demand is different for the poor and rich

• The ability to get a job depends on who you are, not on how productive you are

• No more student loans?

How Do We Know When a Country is Developing?

• Is it growth? Per-Capita Incomes for Ethiopia,

Malaysia and Japan

05

10152025303540

Ethiopia

Mala

ysia

Japa

n

Th

ou

san

ds

of

US

$

Per-CapitaIncome

PPP Adjusted

Country

Per-Capita Income

PPP Adjusted

Ethiopia 90 710Malaysia 3880 8970Japan 34180 28450US$

But Careful: Costa Rica vs. Equatorial Guinea

Incomes, Mortality and Illiteracy, Costa Rica and Equatorial

Guinea

020406080

100120140160180200

Per

Cap

itaIn

com

e(P

PP

, x

US

$100

0)*

Adu

ltIll

itera

cy(%

)

Costa Rica

EquatorialGuinea

Country

Per Capita Income (PPP, x

US$1000)*Infant

Mortality**

Adult Illiteracy

(%)Costa Rica 12 14 4Equatorial Guinea31 181 14.3* 2008**Deaths by age 5 per1,000 live births

Infa

nt

Mor

tait

y

Income and Growth

• In rich countries: development and growth are seen as similar

– E.g., think about urban development projects

• A lot of things correlate with income

– Life expectancy is higher in the US than Malawi

• But most development economists would say development is different from growth

– …though it’s hard to have development without growth

What Development Projects Focus On

• Concrete outcomes related to poverty, malnutrition, inequality, and health

• Basic physical needs like nutrition, shelter, and clothing

• Development of the mind (and of course people’s earnings potential), through education

• The environment, conservation, and sustainable resource use

• Human rights, gender and ethnic equity

• Government corruption

• Creation of infrastructure: transport, communications, market

So What Is Development Then?What Does the UN Say?

(The Millennium Development Goals)

http://www.youtube.com/watch?v=vddX4n30sXY(QR Code in RebelText)

Millennium Development Goals

• Set of targets adopted by 189 nations in Sept. 2000 (specific targets for each; p. 51)– 1. Eradicate extreme poverty and hunger– 2. Universal primary education– 3. Ender equity, empowerment of women– 4. Reduce child mortality– 5. Improve maternal health– 6. Combat HIV/AIDS, malaria, other diseases– 7. Environmental sustainability– 8. Develop a global partnership for development

• Some on track, others not (esp. child mortality, gender equity in school enrollment)

• Effects of recent crisis worrisome (Example from Mexico)• Per-capita income growth “increases the range of human choice” (W.

Arthur Lewis, 1995, The Theory of Economic Growth)

What Happens When Countries Develop?

• Social indicators improve (Chapters 3-5)– Health: Life expectancy, infant mortality– Education: Literacy, higher education

• Structure of economy changes (Chapter 8)– Shift from agriculture to higher-paying urban jobs– Expansion of markets

• Spatial• Varieties: inputs, outputs, credit, insurance, futures

• Institutions develop and deepen (Chapters 9-10)– Legal, market, government, etc.

• Ex: Contracts and Real Estate

• Accelerating then decelerating population growth (the population transition)– Emigration to immigration (the migration transition)

• Application of science to problems of production