University of Nairobi Economics Discussion
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There is no upper limit for the number of words in the answer, (total words is at least 350 or 350) but this is a graded assignment, the content is interesting, don’t be too boring in writing.Q1 What were the most important 1-2 new things you learnt from the lecture and/or readings that you did not know before class? Describe one way in which what you learnt connects to either a different subject/topic you are interested in, or a personal experience.Q2 What were 1-2 points discussed in lecture/readings that you are still confused/unclear about and would like some further clarification on? Q3 What topics/questions would you like to learn more about or discuss more based on content covered in the lecture/readings?
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Agenda for the day
1. Key Policy Goals & Challenges
2. Growth & Inclusion
3. State & Market
Meaningful Progress in Reducing Poverty Rates over time
Poverty Ratios in Rural and Urban India: 1977-78 to 2009-10
60
53.1
50
40
51.3
45.6
45.2
39.1
40.8
37.3
44.5
38.9
38.2
32.4
28.3
30
27.5
25.7
20.7
20.2
20
36
20.3
10
0
Rural
Urban
1977-78
1983
1987-88
1993-94
Total
2004-05
2009-10
But India still has (by far) the largest absolute number of
people living in poverty
Key Policy Challenges
The fundamental challenge is poverty reduction, and
improving the quality of life of 1.4 billion people
Growth is essential
But so is the quality of the growth with regard to
distribution, environment, and economic/political inclusion
One way to summarize the objective of Indias
economic development (Joshi 2017) is:
Rapid, inclusive, stable and sustainable growth of national
income within a framework of liberal democracy
We now turn to objectives (growth & inclusion) and
tools for getting there (state & market)
Agenda for the day
1. Key Policy Goals & Challenges
2. Growth & Inclusion
3. State & Market
What is growth?
Rate of change in income
Year
GDP
Growth
1990
10
–
1991
12
0.2
1992
13
0.08
1993
13.5
0.04
GDP
14
12
10
8
GDP
6
4
2
0
1990
1991
1992
1993
Growth
0.25
0.2
0.15
Growth
0.1
0.05
0
1991
1992
1993
Growth per Capita 1960-2007
The Power of Compounding!
What is the difference between annual GDP/capita
growth rates of 2%, 3%, 5%, and 7% for standards
of living of future generations?
Years
Growth
Rate
10
20
30
40
50
2%
1.22
1.49
1.81
2.21
2.69
3%
1.34
1.81
2.43
3.26
4.38
5%
1.63
2.65
4.32
7.04
11.47
7%
1.97
3.87
7.61
14.97
29.46
Why is Output/Worker So Different
Across Countries?
The extent of physical capital used in production
You can plough a field with manual tools, with an animal plough, or
with tractors
Capital widening (more workers use capital)
More farmers use tractors instead of ploughs
Capital deepening
Use of more capital/worker (better tractors, harvesters, etc.)
Differences in human capital (health & education)
Magnified greatly with complementarities (more on this later)
Differences in productivity
Defined as the efficiency with which other inputs (typically capital and
labor) get converted to output (driven by technology, management)
So the main drivers of growth are increasing capital/worker
(both physical and human) and increasing productivity
Robert Lucas (1988)
The diversity across countries in measured per capita income levels is
literally too great to be believed. Compared to the 1980 average for what
the World Bank calls the ‘industrial market economies’ (Ireland up through
Switzerland) of U.S. $10,000, India’s per capita income is $240, Haiti’s is
$270, and so on for the rest of the very poorest countries.
I do not see how one can look at figures like these without seeing them as
representing possibilities. Is there some action a government of India
could take that would lead the Indian economy to grow like Indonesia’s or
Egypt’s? If so, what, exactly?
The consequences for human welfare involved in questions like these are
simply staggering: Once one starts to think about them, it is hard to think
about anything else.
Robert E. Lucas Jr. (1988) [Nobel Laureate 1995]
Bill Gates (2007)
Harvard was just a phenomenal experience for me. Academic
life was fascinating. And dorm life was terrific.
But taking a serious look back
I do have one big regret.
I left Harvard with no real awareness of the awful inequities in
the world the appalling disparities of health, and wealth, and
opportunity that condemn millions of people to lives of despair.
I knew nothing about the millions of people living in
unspeakable poverty and disease in developing countries.
It took me decades to find out.
Bill Gates (2007) – Harvard Commencement Address
Solow Model Implications
One of the most widely used models to understand economic
growth (by Robert Solow 1986 Nobel Prize winner)
Main prediction of the Solow Model is that poor countries
should grow faster on average
Higher marginal returns to capital (both physical and human capital)
Easier to adopt existing technologies than to invent new ones
A key implication of this is convergence over time between
rich and poor countries
Poor countries should grow faster on average till they reach similar levels
of per-capita income as rich countries
Convergence?
Baumols Convergence Club
Need to look at more data!
Will Poor Countries Catch Up? (1)
Case for: No they wont
Theoretical and practical cases of poverty traps
Assume minimum consumption needed for survival
Low incomes imply low saving (all income consumed to survive),
and low investments; and so productivity does not go up
Also, even if savings exist for investments with high potential
returns (as predicted by Solow model), these investments may
not take place in the absence of key public goods
Especially law & order, property rights, contract enforcement
Further, even if property rights are in place, private returns to
investments may be low in the absence of other investments
Coordination failure (example of multiple industries)
Will Poor Countries Catch Up? (2)
Case for: Yes they will
The long-run source of economic growth is technological progress (this is
what determines the growth rate of developed countries)
It is much easier to copy/imitate technologies than to innovate from scratch
Also, marginal product of capital is higher in poor countries
Thus, poor countries should be able to grow faster
Several countries have shown dramatic progress in the past 50 years
Taiwan, South Korea, Hong Kong, Singapore Asian Tigers
China since 1980; India since late 1980s
Most important for global poverty alleviation
Success stories in Africa as well (Botswana)
Summary seems to be that it is possible to catch up, but by no
means inevitable
Globalization seems to be a key force in promoting convergence (increased
movement of capital, ideas, and people)
Does Income Measure Well Being?
Amartya Sen (Nobel Laureate 1998) capabilities
Development is expansion of human freedoms, income is only
important instrumentally, poverty is capability deprivation.
So, development should focus on:
Democracy, social choice.
Expanding access to markets
Equality within countries so that all citizens, not just the average
citizen, faces a broad choice set.
Importance to society of expansion of womens freedoms
Problem: not easily quantified, outcomes are highly complex
Examples of these Limitations
Averages can be deceptive
Ghana
Vietnam
GDP/Capita in 2001 PPP Dollars
$2,250
$2,070
Proportion of Population in Poverty
44.8%
17.7%
Income versus other measures of well being
Guatemala
Sri Lanka
GDP/Capita in 2001 PPP Dollars
$4,400
$3,180
Proportion of literate adults
67%
92%
Life Expectancy at Birth
65 years
72 years
The Human Development Index (HDI)
Why do we define and use it?
Because income alone does not define well being at least as per the
capabilities view of development
What is it?
It considers a countrys performance on three measures:
1. Health: Measured by life expectancy
2. Education: Measured by adult literacy (2/3 weight) and gross school
enrollment ratio (1/3 weight)
3. Standard of living: Measured by GDP/Capita in PPP $
Each of these 3 components are measured by an index from 0 to 1
The HDI averages all 3 indices with equal weights on each component
Impact of Using HDI vs. GDP/Capita
The two are highly correlated, so rankings of countries
dont change too much one way or the other
The main place where it makes a difference is that the Arab
states do less well than would be indicated by their income
alone, and more egalitarian/communist states do much
better (Sri Lanka, Cuba, Kerala)
Practical impact is that investments in health and education
are seen as ends in themselves as opposed to merely being
about human capital
But, the ideas have been highly influential and bear a
strong footprint in international development policy
Millennium Development Goals
These were the targets set by the United Nations at the turn
of the Millennium (2000) with regard to goals for the
international community to reach by 2015
They constitute the most commonly used vision statement
for international development policy
1.
2.
3.
4.
5.
6.
7.
8.
Eradicating extreme poverty and hunger,
Achieving universal primary education,
Promoting gender equality and empowering women,
Reducing child mortality rates,
Improving maternal health,
Combating HIV/AIDS, malaria, and other diseases,
Ensuring environmental sustainability, and
Developing a global partnership for development
Growth & Inclusion Summary
Most important determinant of long-term economic welfare
of a country (including India) is its average rate of growth
(sustained over this period)
But growth by itself is not enough to achieve the goals of
development
Also, important for the growth to be inclusive so that the
benefits of growth accrue broadly:
Key for poverty reduction
Key for improving capabilities (health & education) for all
Key to maintain functioning democratic institutions (one person
one vote vs. one dollar one vote)
Agenda for the day
1. Key Policy Goals & Challenges
2. Growth & Inclusion
3. State & Market
Markets – Strengths
Do an amazing job of aggregating information across different
decentralized actors and using prices as signals for the optimal
use of resources
Example 1: Pizza at 2am
Example 2: Factor allocation (land, labor, capital)
Combination of prices and competitive markets are a powerful
positive force for efficient resource allocation
Philosophical/Moral underpinning of markets comes from a
libertarian tradition
No transaction takes place unless both sides want it
But varying extents of coercion as a function of outside options
Economies of scale in production
Comparative advantage
Source at lowest cost; sell at highest value (maximize surplus)
Expanding the scope of market access/transactions a key
enabler of economic growth (Adam Smith)
Markets – Weaknesses
Standard sets of market failures (within a neo-classical
framework)
Distribution: Markets are wonderful but the market does
not care for you if you dont have purchasing power
Externalities, coordination, public goods
Information asymmetries, monopolies/market power, regulation
Example of Pharmaceutical Research
Undemocratic? 1 person 1 vote vs. 1 Dollar 1 vote
Three major reasons why states get involved in economies
Provision of public goods
Correcting externalities
Redistribution, social insurance
Economics Vs. Other Social Sciences
Example from lecture on Global Chaos of Love
State Vs. Market (1)
Figuring out the relative role of the state and the market has
been one of the central questions for theoretical and empirical
social sciences for over 2 centuries!
Core tension in public policy continues to be relevant at every
point in time and across societies
Comparative economic systems is an entire field
Think about current discussions on whether to use the Defense
Procurement Act to ramp up COVID-19 related supplies?
Should the government do this? Pros and cons?
Broad empirical fact of the 20th century appears to be that growth
rates are higher when markets play a leading role in the allocation
of factors of production (China, India)
Much more likely to allocate resources efficiently. Why?
Better incentives!
State Vs. Market (2)
But not paying attention to distribution can create political
conflict and threaten the basis for investment/growth
Recent US elections?
Figuring out the right balance between the state & the market is
an ongoing struggle (at both aggregate and sector levels)
Phases of Indian economic history can be viewed through the
different phases of this lens
Core policy challenge is to deliver inclusive growth
Some of the most promising pathways for reforms try to
combine the advantages of markets (private provision) with
interventions to provide purchasing power for the poor
Vouchers/charter schools
Advanced Market Commitments (AMCs) for vaccines
But there are non-trivial design challenges
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