EC104 Topic 10 (2)

amarjotsidhu's version from 2015-06-06 16:33

Section 1

Question Answer
Solow Swam model = neoclassical predictions for catch up predicts convergence in globalised world; technological progress should align capital returns, productivity, labour conditions and force countries to go through the demographic transition (population growth); replaced Harrod-Donmar savings-based model; diminishing returns to capital accumulation, technology universal, factors mobile, K/L equalised across countries ; convergence = poorer countries grow faster than richer ones
Why is Solow model wrong?tfp not same across all countries; obstacles to factor mobility prevent equalization of J/L e.g. geography; economic policies differ
Lucas modelrestoration of income equality (e.g. Africa since 2000 has seen growing incomes due to China); obstacles to growth removed through imitation of good policies and institutions; in a globalised world, capital mobility and financial liberalisation relax the savings constraint = K/L and TFP gaps are reduced; countries that start growing later have faster initial growth then experience growth proportional to income gap with leader
Africa nownow 3 times as rich as in pre-industrial times ; life expectancy is lower in Africa than elsewhere but has increased considerably (has grown because of Western, not home grown technology); in the 20th century Africa fell further behind in income terms but has caught up in terms of life expectancy
Does geography matter in Africa?no part of Africa is rich, but some parts are richer than others e.g. northern and southern tips which have some geographical advantage e.g. climate, closeness of EU markets, etc. BUT, poorest countries in sub-Saharan Africa cannot be predicted by geography
Geographical categories in AfricaResource scarce and coastal (88% ROW and 33% in Africa) - tend to best ; resource scarce and landlocked (1% ROW, 33% Africa) - tend to worst as it harder to import and export
Africa 1950-80extensive growth, with land area under cultivation increasing in an unsustainable way (economically and environmentally) -> no manufacturing = no transfer to intensive growth = unsustainable growth in Africa
Income levels in Africa 1950-2000richer countries have not all taken off into sustained growth; some poorer countries have got poorer in terms of gdp/capita e.g. Somalia, Angola
Why has Africa not taken off despite equal access to rich markets as emerging Asian markets ?Africa unlucky in endowments, poor social capital
Unlucky endowmentsmuch of Africa is arid and ill suited to agriculture with low and erratic rainfall = hard to irrigate such areas + we don't where water is but while Australians ignore their inhospitable parts, Africans don't as coastal areas are often less attractive to live in (more malarial); mosquitos in Africa better at transmitting disease = harder to beat malaria; Africans live insland = more dispersed = slows knowledge transmission which makes trade more expensive
Malaria problemkills 1-3 million people a year in SSA = 10% GDP loss between 1980-1995
Low population densityjust a 1/4 of Asia; too many countries; lots of ethnic, linguistic and religious fractionalisation = countries competitive with each other = limited cross border activity
Natural resource curse (Sachs & Warner)lack of endowments in areas, exposure to external shocks, civil conflict much more likely, Dutch disease
Lack of natural resourcescountries subject to external shocks as they are dependent on import prices for goods; civil wars caused by natural resources, geographic and ethno-political relationships (e.g.Boko Haram) BUT, some countries have quite a few natural resources e.g. Libya
Dutch disease in Africareliance on certain exports = no need to set up domestic manufacturing industries. in the case of Africa, reliance on oil and resources production/exports for foreign exchange earnings = ignorance of manufacturing; reliance on aid makes dutch disease worse
Origins of duthc diseasewhen dutch found fas, they went from being a major exporter of many different goods to just being a gas exporter

Section 2

Question Answer
Poor social capital in Africamultiple ethnicities and languages in African countries = problem (boundaries poorly drawn by Europeans) = makes it harder to trade and is associated with civil war (7 SSA countries had civil war in 1990s); associated with dictatorships which is declining but still has poor election institutions = BAD as democracies don't fight each other and are good for growth -> higher cost of engaging in economic activity
Problems with dictatorial regimesunequal rights; politics in favour of cutting pie in your favour, not increasing the pie = no interest in economic growth , just helping specific groups; focus on government persistence rather than development -> POOR INSTITUTIONS
Focus on agriculture some governments wanted to develop rural areas = Tanzania foribly relocated the majority of its populations in the early 1970s to create collective farms = people's private property taken away = few incentives to work hard; labour productivity fell 90% and people fled to towns
Poor justicewhen the legal system is slow/expensive/corrupt, it will not be used = people unlikely to enter into contracts unless they know other party very well
Poor modern transportroad network only as 7% as dense as india; rail freigh rare = double cost of Asia; high port wages vs. Europe = discourages business and investment
Consequences of poor instiuttionssubsistence agriculture, low productivity in all sectors; farming risky (poor soil quality) = farmers need insurance but not commercial insurance available (conditions so poor) + weak banking so borrowing cannot occur = self insure (hold stocks, grow small amounts of many crops, work in agriculture party time and have fragmented plots) = cuts economies of scale and learning by doing + stocks rot
Public sector expenditure problemsoverspending on wages, underspending on nonwage items e.g. kenya - 10x staff of private sector per head but 20x the chance of having no antibiotics; public services not run for public but for patronage
Trade restrictionsAngola and Ethiopia banned private trade, tanzania banned all private village shocks, etc. = poor decisions
Low investmentsince 1980s, capital stocks have fallen 20% ; returns to investment are very low, 1/3 lower than in any other region which goes against the conventional theory that with little capital, returns to capital should be very high ; Africa = 'capital hostile'
Recent African growthbased on strong demand growth for primary exports driven by Chinese growth but doubtful whether this will lead to sustained catch up growth (resources sent back to china, primary centered growth)
Washington Consensusby World Bank = it was willing to lend money to Africa if it countries accepted the consensus = 10 policy prescriptions originally for LA debt crisis; market funamentalism/neoliberalism
Key features of Washington Consensusfiscal discipline; reduction of subsidies (reduction in corrupt transactions); trade liberalisatlon (BUT, this opens up africa to imports yet Africa has nothing to export); free market competitive exchange rates; deregulationl property rights
Problem with Washington Consensuspolicies were one size fits all and not suitable for Africa = failure
African aidgoes to areas where it shouldn't go; only increases growth in 'good policy' environments and does not lead to better policies or institutions; WB has become more selective in aid allocation
Rajan & Subramanianaid has no effect on growth even in good policy environments; aid seems fundamental to escaping development trap so perhaps hasn't given enough
Conclusion with Africafar behind; poor institutions and geography working together; WC has failed
Kraay and Raddatzlow savings and low levels of productivity have not created proverty trap in Africa; large scale increases in aid will not necessarily be proportionately more effective than more moderate amounts of assistance
Easterly on sources of growth in Africa and Asialargest increases in gdp/capita in africa and east asian tigers have been homegrown rather than the result of foreign intervention or aid
Nunn and Puga on impact of slave trade in africabetween 1400-1900, multiple slave trades = forced migration of millions = devastated economies, political institutions collapsed, societies fragmented
Temin on impact of black deathreduced labour supply but land intact = dramatic rise in real wage + shift in marriage pattern so women got married at older ages = reduction in rate of population increase; durable rise in people's income;
Acemoglu and Robinson on extractive institutionsin a large number of colonies, Europeans created an extractive state = extract natural resources, no econ. development; if Europeans settled in large numbers then institutions established - this determined by disease environments where Europeans could settle