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3. Pick a specific country and explain whether it might or might not be a promising candidate to privatize its urban water supply. What makes this country different from its neighbors in this regard?
I propose that Haiti pursue privatization of its urban water supplies. Pre-earthquake sources (Wikipedia, 2009: http://goo.gl/wlRWq) suggest that quality of water service by the government and other operators was very bad, and since that disaster service has almost certainly become worse. A web search produces a report (from an organization known as NC AWWA-WEA, http://goo.gl/rfhqO) that claims that "at least a third" of the Port-au-Prince population now purchases water from private operators. The same report says that private water trucks are used to supply water to areas not serviced by the government and that they apply sanitation treatments. If there is anything good that has come of the earthquake in Haiti, it's that there remains increased world attention and support from governments and non-profits (although Haiti's neighbor, the Dominican Republic, experienced the same earthquake, it has received less international attention since it is much better off than Haiti). This attention and support could provide resources and scrutiny to ensure that Haiti avoids the problems other water privatization efforts have experienced. International advisers could help monitor for corruption of regulators by operators. The existing water trucking regime could be expanded to provide a measure of competition that avoids exercise of monopoly power by operators.
Haiti is one of the best examples in my opinion for a vicious circle of poverty which challenges the water sector as a whole. As one of the poorest countries on the American continent it faces a huge number of challenges which discourage almost any economic activity due to political instability, poor institutional performance, poor infrastructure, frequent natural disasters, social catastrophes and a destroyed environment. Dramatic deforestation (98%) almost eliminated the ecosystems function to produce clean water in quality and quantity. Hurricanes (also “Sandy” had a strong impact on Haiti, almost unnoticed by the media) and earthquakes (like 2010) are likely to frequently destroy basic infrastructure and discourage investments in water infrastructure. Many people live in shelters and can’t afford to pay for water services, even as a basic human need.
These challenges encourage neither pure privatization nor no-privatization, but maybe a decentralized mixture. Sustainable tecnical assistance by NGOs and foreign aid is a chance, but has to beware unintended and sometimes even counterproductive outcomes. Interestingly, Haiti has community organized water committees who sell “water to slum dwellers at a small profit, which is reinvested in small-scale community infrastructure such as sports facilities or sanitary facilities. The water is bought from the utility, for which the water committees are one of their best-paying customers”. Private operators can also operate water systems according to the framework law (http://goo.gl/ZbKiu). Maybe such a hybrid approach gives consumers the choice to find the best solution by choosing between private operators and public operators. For Haitis unique situation, there might be diferent solutions for urban and rural water and sanitation needs as for any other country.
I would support the privatization of urban water supply everywhere. I think that any activity, including natural monopolies, is best served by unregulated private companies trying to make a profit. However, privatizing the supply of water is an unpopular cause around the world. The case of Cochabamba in Bolivia is just one example.
There are countries, though, were lack of privatization is less harmful than in others. One such country would be Sweden. Sweden’s urban water supply is by law a municipal responsibility. Water is abundant and has the highest standards of quality, and consumers have grown accustomed to regard water supply simply as a non-issue. Water is cheap and of high quality, so why complain? (http://www.siwi.org/documents/Resources/Water_Front_Articles/2002/WF4-02...)
At the same time, Sweden has one of the lowest rates of corruption in the world, the efficiency of the public sector might be one of the highest in the world (even though it might be much lower than the private sector’s), trust in public institutions is high and businesspeople are regarded with suspicion by the general public (just check the Millenium trilogy ). So, in order to avoid political and social unrest and to concentrate on more pressing issues first, if there is one country that I would leave for last in my quest to privatize urban water-supply, that would be Sweden.
The first assumption I'll make is the irrigation infrastructure in a country that would benefit from privatization is nonexistent or rudimentary. As noted in the lectures, a robust pipe system results in a natural monopoly. Although we would generally agree that competition is important, achieving allocative efficiency without benefitting from economies of scale would result in a higher cost burden on the consumer, reducing total surplus. Therefore, the employed method of obtaining water should be similar to that in Yemen, in which privatization will result in competition. A natural monopoly is better in government control because whether the State is democratic, autocratic, or somewhere in between, the political establishment has a strong incentive to keep the mass population happy with provisions such as water. Therefore, to the extent that a monopoly is necessary, it is best run either entirely by the government or, to decrease likelihood of x-inefficiency, by a government enterprise.
Second assumption is that if the country is to benefit from privatization, there needs to be a (relatively) strong rule of law. The government has to be able to regulate market provisions (such as water) for quality and safety. Next, the country should have good trade relations with a developed country. I believe the best way to implement a strong, privately developed water system is from the technical expertise of more advanced nations, rather than domestic corrupt enterprises like the ones detailed in lectures. I believe this has several advantages. There will be a decreased risk of corruption from MNCs that come from regulated countries like the United States that have an established reputation. They will also be the most technically efficient with modern devices and regulations. Finally, this will propel the LEDC nation in question towards a freer economy by fomenting a relationship with large, international markets.
Based on the above assumptions, I believe India would benefit tremendously from privatizing water supply in urban areas. South India has a huge growth potential, a strong democracy that respects the free market, rule of law, and a critical under provision of clean water.Wealthy families privately source water from tanks, even in modern cities like Chennai, if they don't have access to the metro water system, not just for drinking but for showers and other house work. The rapidly growing middle-class is underserved by the government and would be very profitable to an MNC. Furthermore, a success in India can serve as a model for riskier and less developed but politically similar countries in the region.
India. It is very urgent to privatize urban water supply. Its urgent because many people still do not have access to safe drinking water, losses in distribution by public authorities, poor services etc. Pipelines often found with drains. No or low maintenance of pipelines. Largely water supply is unmetered. So people have no incentive to save water.
But still I think that privatization of water will not be an easy task. Firstly, because of sentiments of people associated with rivers like Ganga (revered as mother Goddess). There will be wide spread opposition. Secondly due to mass corruption, I don't think contracts will go to right people and therefore privatization may do very little to provide good services to people. What eventually would be the result? Poor not able get water at all while rich using it to clean roads.
Neighboring country like China can do it easily as religious sentiments are not associated with water and corruption is less.
While Yemen has the most serious problem in water retention privatization efforts would be hampered, because of the lack of government control, rampant corruption and a lack of skilled workers. The lack of penetration of government control is associated with a myriad of issues, which hamper development/privatization efforts –first and foremost- security.
Zanzibar (specifically the main Island of Unguja) Tanzania could have a chance of successfully utilizing privatization for its urban water supply. Unguja suffers from a “tragedy of the commons” problem. The sheer numbers of wells on the Island have lowered the ground water table to a degree that salt water from the Indian Ocean is seeping in. Investment into the water production infrastructure from the 1960’s is needed only 1/3 of the system is operational. Zanzibar has a functioning government which could regulate and exert control over private companies. Private companies would find that Zanzibar has a relatively high number of literate semi-skilled workers available. Zanzibar aside from sporadic unrests enjoys a higher degree of political stability than its neighbor Kenya. Thus, the risk of diminished returns for an investing company is lower. Zanzibar’s main economic sector is tourism, thus local business stakeholders would benefit from the project. Moreover, tourism provides the income for many locals who would purchase the water services. Corruption is a problem in Zanzibar, yet it is lower than in Kenya. Recent political pressures from the population have brought the corruption issues to the forefront, and highlighted its negative effects.
I believe that Laos would not be a good candidate for privatizing water provision. Geography and institutions would present several significant challenges. Laos is a country with a fairly low population density, and only one city of any considerable size. The population is largely scattered in small towns. Furthermore, these towns are often separated by hills, mountains, rivers, or forests. These factors would lead to high fixed costs for any water provider. Some of the recent developments in water supply and sanitation have been supported by grants from NGOs and IFIs. These kinds of funding sometimes have a poor record of providing return on investment, which may indicate that the government and outside funders have underpriced water in the past. This could pose problems, as a private supplier may have to impose price increases and this could be unpopular and result in re-nationalization. Laos receives very bad scores on perceived corruption and rule of law. If contracts prove to be selectively enforced, or if rent seeking or other forms of corruption become common, a private supplier would probably not be able to improve service. Certain customers may receive preferential treatment, rationing by political connection may occur, and customers may observe poor service and/or maintenance. Finally, as a single-party state that is relatively isolated from trade and foreign investment, it is possible that any bidders for a water provision contract would be closely connected to the party or government. This leads me to believe that institutional problems would be entrenched in bidding firms just as strongly as they are in the government. By contrast, Laos' neighbor Thailand has a much cleaner government with a record of some successful public-private enterprises and profitable privatizations of some utilities in some areas. Another neighbor, Cambodia, started in the early 90's from a very low level of development, and in only 20+ years has made significant gains. Despite major problems with corruption and rent seeking the water supply in many Cambodian cities and towns has improved greatly. A third neighbor, China, has had a similar record of improvement in the last 20+ years. For these reasons, I believe that Laos would face more challenges than its neighbors would/have if it were to privatize the provision of water.
My apologies for the lateness - I am now several months behind, but 'plugging away'. The answer given was completed independently before review previous answers - thanks, rrw
Honduras has the potential to significantly improve its urban water supply with privatization. Currently only 3 municipalities are privatized (two with 30 year concessions). The experience of Puerto Cortes provides a good example. The urban water supply in Honduras is marked by waste (loss or uncompensated use), inconsistencies in supply and deteriorating infrastructure. With privatization (in this case a 30 year concession to 2029), Puerto Cortes saw a reduction in waste (from 40% to 25%) and increase in overall supply (doubled). This came with a 25x increase in nominal cost and the unpopular but necessary action of adding meters and disconnecting non-payers. The company created was locally owned (initially by the municipality, but later shares were sold to local interests). A regulatory board for oversight was created by the city. Using this as a model, other urban areas in Honduras would likely benefit from similar action. The form of the public-private cooperation may vary by the degree of investment (public vs. private) needed for maintenance and improvement of existing systems. Given the poorer infrastructure, it is more likely that concessions of 25-30 years or leases of 15-20 years would better serve to encourage private investment. Less helpful as a model would be management contracts of shorter duration (4-7 years) to simply run existing systems, leaving investment by the public sector dependent on current political or fiscal events.
Neighboring countries differ some from Honduras. Lack of government stability plagued Guatemala, even after the guerrilla war ended in 1996. Although considered ‘water rich’, Nicaragua has vacillated between a fully private system (before 1979) and inconsistent efforts toward a centralized authority (National Water Authority). The more recent struggle has been between comprehensive government oversight and decentralization to urban areas, utilizing public-private companies as noted above (with a significant factor being the attendant unpopular but necessary increased cost to the consumer). The current water system is inefficient (estimated at 55% non-revenue loss). El Salvador’s water supply is very fragmented (many different modes of service), polluted (minimal treatment of municipal wastewater) and lacking consistent government oversight (multiple failures in the last decade to pass regulatory laws).
Indonesia. Indonesia is one of example where the government is actually owned water resources for public welfare, it is actually stated in Indonesia law under UUD 45 No 33. However, during its implementation, since the water supply are totally controlled by the government, then it becomes BUMN or Government Company, therefore the CEO usually hold by city mayor. And this is the major source for corruption, since there is no transparency of money flows, income and profit of the company. It also gives free access of water for CEO family member, including some people in the government, which is meant, they could easily over used the resources. The citizen, itself has to accept low quality of water, which sometimes, has weird smell, turbid water, and it can not be drunk directly. Although the best idea in this case is to privatise the water, but it would be against Indonesia’s Law in UUD 45 no.33. And to change that law, it would take too much political cost and political lobby, since it is very profitable source for corrupt government and politician.
Accordingly to Marin (2009), in the 1990s, many governments embarked on a series of reforms of urban water supply and sanitation (WSS) services. Reforms were badly needed: millions of people lacked access to piped water and sanitation services; and for millions of others, service was often poor. Deteriorated infrastructure, fast urban growth, and large investment needs coexisted with poorly run utilities, artificially low tariffs, and scarce fiscal resources.
A major component of the new reforms was a heavy reliance on the private sector. For governments that lacked enough fiscal resources to cover the financial losses of public utilities and to invest in infrastructure rehabilitation and expansion, public-private partnerships (PPPs) for water utilities seemed to be an attractive solution. The market share of water PPP projects in developing and emerging countries stood at only about 7% of the total urban population, up from less than 1% in 1997 and about 4% in 2002.
But what are the circumstances leading to water privatization? Based on Alcazar et al (2000) paper about Buenos Aires (Argentina) water concession, we list some determinants for water privatization:
(i) cost and scarcity of raw water: privatization can reduce the marginal cost of water and optimize their use, given the scarcity of raw water.
(ii) supply and demand: inhabitants in regions further away from major urban centres or with higher poverty indices may not receive an adequate service.
(iii) management: besides defects in collection and investment, state-owned water companies are generally mismanaged. And inefficient operation, combined with low water tariffs, result in low investment rates.
(iv) externalities and health problems: the principal externality from the system resulted from contamination of groundwater and rivers by septic tanks, cesspools and direct discharge of untreated sewerage and industrial effluent, what can result in serious health problems.
Based on these assumptions, I believe that the countries of Eastern Europe such as Poland can be promising candidates for privatization of their water supply. Second OECD (2006), the portion of urban populations having access to centralised water services in EECCA (Eastern Europe, Caucasians and Central Asia) countries remains at a high level, but the quality of that access has deteriorated: disruptions of water supply, pipe breaks, and unaccounted-for-water have steadily increased in recent years. Countries from the same region as Russia have presented successful results in cities with PPP.
México. The water consumption is highly subsidized, unmetered in the majority and reckless. Also prevails high water losses, growing demand, shortages, drains and few maintenance. I really don't know the specific situation in U.S., Guatemala and Belize but as far as i know, the water sector is also state-owned in those 3 countries. In general, i think that water provision is a problem in several countries due to the fact that the tariff charged is not the same as the marginal cost of production; of course, this issue incorporates a subject of a "vital source" which in practice means some subsidies in a privatized scheme. So, although Mexico is a good potential for privatize, several problems can occur as corruptions, low incentives for possible expropiation, inefficient enforcement related to unpayed bills and monopolisitc strucutre pre-privatization prevail.
Pakistan, where water is being supplied by municipal authorities and local governments are held responsible for sanitation and water distribution. Water is not accessible to the population living in remote areas. Quality and distribution system is very pathetic. Major issues are intermittent water supply, limited wastewater treatment and mixing of sanitation water with safe drinking water. Which led serious health concerns and grown the number of individuals infected by waterborne diseases. Moreover, distributers are even unable to cover the service and maintenance cost and government have to spend numerous amount of money in term of subsidy. All these problems indicate toward the need to privatize the Urban water supply. As in the last decade the privatization process in Pakistan has really delivered in terms of quality, outreach and low cost. Moreover, by comparing Pakistan water supply system with neighboring countries like China, our municipal authorities are less accountable so greater chances of rent seeking plus local govt. machinery is inefficient and takes a lot of time in implementing new projects.
In Guatemala many households obtain their water through informal private means, from wells to trucks transporting water to neighborhoods.
The pipe system is usually in the hands of local governments. Although it might be a good idea in order to increase the quality and access (and maybe even reduce its price, as the current informal option tends to be several times more expensive), I consider that the process of privatization should be done cautiously and taking into consideration how to deal with three problems. First, the high levels of corruption can bring different inefficient scenarios: a) a monopolist provision without proper regulation, in order to benefit the private sector; and, b) an inadequate regulation of the utility in order to satisfy certain supporters of the political party (cheaper water to certain industries, or cheaper water to certain population). Second, the lack of prepared public officials might harm planning and the managing of the privatization, including the regulation of the privatized utility. Thirdly, in case of a lawsuit, the judicial system might not be sufficiently independent of political pressures or efficient enough. Therefore in many small cities something similar to Cochabamba in Bolivia might be expected.
My choice is Ethiopia. There has been water supply failure in the capital city Addis Ababa since 1991. There have been instances in which the entire city or its parts were lacking water supply for three to four days in a week. The people are told that the new water reservoir was being constructed and once completed, the water and power supply will be ensured. But, that has been elusive to this date. Privatizing urban water supply would be proper after putting regulatory mechanisms with regard to investment, tax holidays, and management as well as consultation mechanisms with the government to avoid any misunderstandings and to ensure transparency.
Ethiopia is different from its neighbors in many respects. Its population is around 90 million, second to Nigeria in Africa. It is land locked since 1991. There is high inflation and it hits the urban poor most, and finding clean water is very difficult for the poor who cannot afford to buy the bottled water. Water is not scarce in the country compared to its neighbors: Eritrea, Djibouti, Somalia, and Sudan, and investing in water would not be expensive
7. Some people argue that disease reduces growth others that growth reduces disease. What empirical problems does this circularity create if we want to estimate the causal effect of disease on growth or vice-versa? What empirical strategies may help us to break this circle?
The cross-geographic (countries or sub-national units) negative correlation between growth and disease would only indicate that high growth and low disease incidence go together. It would not be able to distinguish which way the causality runs.
A way to find an empirical test would be to find places where a specific exogenous intervention to reduce disease took place - e.g., introduction of a vaccine. Then you can compare growth rates before and after the intervention. Even better if you can find two places which are comparable in other respects, but one had the vaccine intervention and other did not (the control). Then you can compare growth rates between the two places post-intervention.
Causal loops, such as the vicious cycle of low growth and disease, confound straightforward attempts at measuring causal effects. For example, one could measure the change in disease prevalence following a period of economic growth, but the economic growth is not an independent variable - it is affected by the prevalence of disease. So, the measurement wouldn't really help answer the question of "What change in disease prevalence should we expect if the economy were to magically grow by some amount?" Studies that exploit randomized interventions are the main way of counteracting this problem empirically. Alex linked to a study (http://goo.gl/mMlD0) that shows one example - measuring the incomes of similar people, some of whom were treated for malaria in childhood, some of whom weren't. Other data analysis techniques, such as causal modeling (e.g. http://goo.gl/z0cV5) may also help tease out how variables interact.
The main empirical problem is that no exact causality relation can be defined between the factors disease and growth. Diseases both for humans and for crops are mainly rooted in the geographic location of a country (empirical evidence for a relation between GDP and distance form equator is given in this video http://goo.gl/3xOW5).
On the one hand, diseases reduce education (closed schools) and quantity of the working population. Diseases like Malaria, Dengue or Yellow fever are clearly rooted in the geographical location.
On the other hand, lacking growth usually results in a lower living standard as institutions have a lower performance in public health, education and infrastructure. Other diseases like AIDS and H1N1 are transmitted beyond borders.
To identify the amount of labor loss due to diseases, one method would be to take a country’s actual GDP per capita and multiply it by the persons capable of working affected by illness and deaths trough diseases. An empirical problem is that usually there is no sufficient reliable data about the amount of persons capable of working and/or the spread of diseases, especially in sub-Saharan Africa.
Diamond and Sachs argue that disease is a factor which reduces growth. Low GDP per capita and mortality/morbidity are part of the "vicious cycle" in development. As a country develops economically obtaining a higher GDP, life expectancy is also, generally higher. Cross country regression studies show that economic growth and life expectancy are positively correlated. These macro-studies may not take pertinent factors into consideration. The empirical problem in the circle creates is that a number of variables are at play, thus establishing the causal factor is difficult having the danger of correlating spurious relationships i.e. ...events or variables have no direct causal connection, yet it may be wrongly inferred that they do, due to either coincidence or the presence of a certain third. Separately, estimating factors of growth would give some indication, because as a country develops so do the growth factors, but the problem on how to measure the causal relationship between economic growth and disease -specifically- remains. Daren Acemoglu and Simon Johnson in "Disease and Development: The Effect of Life Expectancy on Economic Growth” did the following: Obtained estimates of mortality by disease pre 1940's from the League of Nations and public health sources. The researchers then constructed an instrument for change in life expectancy -predicted mortality- based on pre-intervention of mortality (diseases) and dates of global intervention. The study results indicate that global efforts to combat poor health conditions in less developed countries can be very effective. However, shed doubt on claims that unfavorable health conditions are the ROOT cause of poverty in some nations. (Geography is a play, endemic diseases etc...)
The discussion will be limited to recent data to avoid the problems inherent in historical data.
One problem with the question, as stated , is the use of ‘disease’ as a unitary concept. It is unlikely that economic growth and iatrogenic disease, obesity, dementia, coronary heart disease and alcoholism and drug use will have the same correlations, or possible causal direction, as malaria, typhoid, Ebola, yellow fever and leprosy.
WHO expects any project in developing countries to submit an HIA (health impact assessment) examining the potential negative health impacts of : transportation, food & agriculture, housing, waste, energy, industry and urbanization. A clear indication of the complexity of the issue.
A confounding factor lies in the fact that health care is a contributor to GDP. In the USA , in 2010, it accounted for 17.9% of GDP, compared to that of Argentina ( a ”failed economy”) at 8.1%.
Socioeconomic inequalities are also a crucial factor. In the USA GDP has grown between 1980 - 2000 but so has the discrepancy between the life expectancy of less-deprived and more deprived groups. 2.8 years in 1982 to 4.5 years in 2000 ( Singh & Siahpush: Oxford Journals).
Some diseases also produce unexpected outcomes. The recent SARS epidemic in China motivated individual families to save to buy cars to avoid travelling by public transportation. A boost to the economy through purchasing, roads, petrol supplies, automobile servicing etc. but an increase in road fatalities and a reduction in air quality.
Rather than looking at disease and economic growth, what is required is a measure of health (physical, mental and emotional) and economic growth. In addition there would have to be a correction factor for health costs similar to that of purchasing power, and a measure of equality of health care across socioeconomic groups.
Iatrogenic disease is the 3rd most fatal disease in USA.
In 2012 35.7% of Americans and 49.5% of non-Hispanic blacks are obese (CDC data) and according to WHO over 80% of Americans are overweight.
Coronary heart disease death rate per 100,000 (age standardized) is 80.5 in USA and 70.6 in Argentina while Alzheimer’s/Dementia is 24.8 (3rd highest in the world) in USA and 5.9 in Argentina (World Life Expectancy.com)
The way the question is stated, there's somewhat of a false dichotomy. Indeed, it's not hard to accept that both incidence of disease adversely affects growth rate and an growth, too, results in decreased disease. In effect, there's a healthy positive feedback between the two – which can be good or bad. Rapid growth rates will decrease disease which will increase growth and so forth.
Understanding that positive feedback generally results in exponential patterns, a rough empirical strategy to establish mutual causation would be to see if the rate of disease in a country is dropping exponentially while GDP per capita is increasing exponentially.
However, at a given point in time, it might be fair to suggest that one is causing the other. For example, in India today growth is largely a result of increased foreign investment and stronger political institutions respecting free markets, not necessarily better health outcomes. However, the health conditions in India are increasing, so it is fair to say at this point in time growth is causing a reduction in disease.
To establish a causal relationship, the best strategy is to compare India as a whole with a geographical region bounded by the similar constraints in terms of climate, culture, and political system. Indeed, it might be useful to compare South India, which is considered to be far more developed, to the rest of India as an indicator that even within a relatively similar political, cultural, and religious environment increased growth rate has resulted in a decreased incidence of disease.
However, I am wary to ascribe causation to anything as complex as a health system. The only way to be truly convinced of causality is through a randomized control trial, the scale of which for this question is untenable economically and logistically.
Nota bene: my apologies for the lateness - I am now several months behind, but 'plugging away'. The answer given was completed independently before reviewing previous answers - thanks, rrw
In developing countries, empirical problems would include the difficulty in allotting resources, either to other factors believed to increase growth (more fixed capital investment, educating laborers, investing in technology) or factors that decrease disease (cleaner water, basic immunizations, nutrition, health education). Given the breadth of foreign aid to developing countries, efforts directed toward social or human capital in one region (such The Bill and Melissa Gates Foundation efforts in water, sanitation and hygiene) could be compared to another similar region where the effort was more focused on developing industry (textiles in Southeast Asia; oil development; etc).
The problem is different for wealthier countries. For example, in the US a study in 2007 by DeVol and Bedroussian suggested that seven of the most common chronic diseases [cancer, diabetes, hypertension, stroke, heart disease, pulmonary conditions, and mental disorders] accounted for more than $277 billion in direct costs (for treatment) and over $1 trillion in lost or reduced productivity. Here, empiric strategies could take several different tracks. A study could look at specific interventions to focus on incentives (to companies, physicians and individuals) to better prevent or treat these diseases in different companies in a particular region. Another study might focus on the effect of diseases based on incidence and prevalence in specific industries or businesses in healthier states (like Utah, Alaska, Colorado, California) and similar populations in less healthy states (like West Virginia, Tennessee, Arkansas, Kentucky).
Assuming an analysis in an econometric scheme is being implemented, a doble causality relation causes biased coefficients (overestimation or underestimation) so the interpretations and results are incorrect. The posible solutions for finding a unbiased coefficient can consist in a Difference in Difference Strategy which consists in finding a natural experiment i.e. an exogenous event that affect one variable so the effect is only "one-direction", or using an Instrumental Variable Strategy which consists in finding some variable "z" that only affects "y", through "x" ( y = F [ x (f(z)) ] ). For instance, in the IV strategy consisting in assesing the effect of disease on growth, the instrument could be an index of infectiousness of the disease. On the other hand, in the case of finding an event which could function as a natural experiment, a freeze which kill some viruses could be taken as one.
At first sight, it seems plausible that both statements are correct. There seems to be a correlation between the two, however this could mean any of a number of things. That disease reduces growth, that growth reduces disease, some combination of the former and the latter; and that something else creates growth and reduces disease at the same time. To find out which is the case we should discern the mechanisms by which all variables can be correlated and then either design experiments that can reinforce or discard the hypothesis, or study empirical data that might support any of the claims.
In the case of disease affecting growth, it seems obvious that healthy labor is going to be able to perform more and higher quality work, and that resources can be diverted from taking care of the sick to more productive activities. Moreover, a healthy population is going to be able to invest more in education and the benefits of human capital are going to be reaped during more years.
In order to find empiric evidence for this and to assess its effect on growth we could study populations where an intervention has been directed towards disease prevention and mitigation and see whether and how much economic growth has been affected compared with places where such intervention has not occurred. Maybe this could materialize in a randomized field trial, where randomly selected provinces in one country are applied a program of disease prevention and mitigation. However the challenge of such an experiment would be to determine effects that can be spread over a large number of years.
The mechanism by which economic growth can affect the incidence of disease can be by way of increased wealth. Economic growth means generally that families over time become wealthier. More wealth means more ability to cope with disease if it strikes, by being able to afford medical consultations and drugs. Wealth also brings with it better hygienic conditions (sewers, clean water, etc…) which are key to prevent infectious diseases. Wealth also allows better readiness for defensive strategies against disease (mosquito nets to prevent malaria transmissions, condoms to prevent AIDS spread, etc.)
In order to evaluate the incidence of growth on disease we should look at correlations of income and disease, for example measuring GDP per capita against incidence of malaria in malaria-prone countries. It’s not clear, though, how growth (other than by its long term effect on income) can affect disease. An empirical study that might help with that question might investigate areas where government investment has been directed exclusively towards economic activity-creating infrastructures, compared with areas that received no investment.
When there are plausible mechanisms through which causation can run in both directions, then comparisons between populations which merely show correlation between the two variables cannot distinguish between the hypotheses. Thus, they would not provide a reasonable estimate of the impact of an exogenous change to either variable on the other.
To escape the analytical trap there are a few techniques I can think of: (1) randomized control studies where an exogenous change is applied by the experimenter to some subpopulations (treatment group) and not other similar subpopulations (control group). (2) natural experiments that are similar to a rct, with some danger of backwards causation (e.g. a government program to reduce disease that is phased in across different regions; the danger would be that the order which was chosen depended on a variable which was itself correlated with growth). (3) Studies of timeseries which could show growth picking up within populations before disease dropped or vice versatile.
The causality between growth and disease runs in both directions. To break this causality, we have to introduce an exogenous factor that effect the growth but not disease. And this will probably give us the variations in growth rates excluded the effect of disease. However, its pretty difficult to break this causal relation.
A simple regression will not help us here because correlation will not help us to understand clearly what the direction of the causality is.
One way is to use instrumental variables. We select a third variable that is link to diseases but not to growth and then we proceed to perform a couple of regressions.
Another option is to use variables from different periods in time. This is done by Robert Putnam in his study of social capital in Italy and by Acemoglu et al. in their study of settler´s mortality and its impact in institutions and contemporary economic growth.
The results of the literature on the effect of poor health on economic growth are not clearcut, some authors finding a negative and significant effect, while others did not. Moreover, if the causal relationship between health and income runs in both directions the estimation by the OLS would yield biased and inconsistent estimates of the structural parameters.
To break this circle, Audibert, Motel e Drabo (2012) change traditional health measures (prevalence, incidence, mortality rate, life expectancy at birth), which do not give a good indication of the disease burden, by the Disability-Adjusted Life Year (DALY) per capita calculated by the World Health Organization (WHO), which gives a good indication of the disease burden whatever the main causes of this burden. DALY represents “a one lost year of healthy life and extends the concept of potential years of life lost due to premature death to include equivalent years of healthy life lost by virtue of being in states of poor health or disability”.
Moreover, Rivera and Currais (1998) estimated the effect of health on income growth using cross-country time series data on income per worker, health (health expenditure), education, investment rate, population growth and the various instruments such as physician contacts per person, rate of dialysis treatments per million population, number of in-patient beds per 1000 population, and alcohol consumption per capita over 15 as a non-medical health determinant. However, they carry out the Hausman test to check the existence of endogeneity that confirmed the existence of a feedback effect between health and income, which bias the results observed.
Growth does reduce disease, but it is only applicable in the society that has enough knowledge or at least not poor countries. Also it has to be known and need to classify what kind of disease, because disease for rich or developed countries, developing countries and least developing countries are different. For instance in the rich countries, which majority has problem with heart, lung, diabetes, hepatitis and cancer. Those kinds of diseases are high cost and also taken from wrong life style, from this argument it can be drown conclusion that disease reduce growth. US can be taken as Example here. In Developing countries such as Indonesia, growth is argued could reduce disease, it is because disease in developing countries are majority caused by the environment such as like Malaria and diarrhea. By investing on human knowledge thus can be tackled down, usually economic growth is followed by better education. What can we done :
1. Encourage people to have healthy and clean life
2. The government should not give any help for certain diseases which are caused by the human mistake such as: Obesity, drug user, Smoker and others
3. Each people should pay their own health service without any intervention from the government, which is mean it should be privatised. Therefore, people would pay more attention towards their life style due to the high consequences they will face.
Education is an important determinant of income — one of the most important — but it is less important than most people think. If everyone had the same education, the inequality of income would be reduced by less than 10%. When you focus on education you neglect the myriad other factors that determine income. The differences of income among people who have the same education are huge.
Income is an important determinant of people's satisfaction with their lives, but it is far less important than most people think. If everyone had the same income, the differences among people in life satisfaction would be reduced by less than 5%.
Income is even less important as a determinant of emotional happiness. Winning the lottery is a happy event, but the elation does not last. On average, individuals with high income are in a better mood than people with lower income, but the difference is about 1/3 as large as most people expect. When you think of rich and poor people, your thoughts are inevitably focused on circumstances in which their income is important. But happiness depends on other factors more than it depends on income.
Paraplegics are often unhappy, but they are not unhappy all the time because they spend most of the time experiencing and thinking about other things than their disability. When we think of what it is like to be a paraplegic, or blind, or a lottery winner, or a resident of California we focus on the distinctive aspects of each of these conditions. The mismatch in the allocation of attention between thinking about a life condition and actually living it is the cause of the focusing illusion.
1. What are the main problems facing agriculture and agricultural productivity in the developing world, and how do those mirror the broader problems facing developing nations? Be as specific as possible.
(This would be better with line breaks!)
The main problems facing agriculture and agricultural productivity in the developing world are:
(1) Poor institutions and bad government policies.
(2) A slowdown of technological and political innovation.
Point 1 has many effects. Ineffective governments are unable to provide the basic support needed for agricultural productivity growth - if there are no safe roads to transport fertilizer or crops, it's hard to grow enough food. Bad agricultural policies have had catastrophic effects in the past (e.g. collective farming in China), and hinder improvements today. Governments that restrict trade (e.g. Malawi) or ban genetically modified crops (e.g. Western Europe) make the problem of feeding the world more difficult.
Point 2 is also felt in a number of ways. In the past, scientific innovations have been able to expand the world's agricultural output dramatically (e.g. Borlaug's techniques that led to the Green Revolution). Today, technological advances seem to be smaller and less frequent. Policies that encourage innovation (e.g. relaxing of restrictive intellectual property protections) or enable more or different people to try their hand at farming (e.g. land reform efforts) may help. However, even these policies may "run out of steam" (e.g. IP laws can only get so lax, and land can only be divided up so much) and require yet-to-be-thought-of ideas to enable further growth.
These problems obviously extend beyond agriculture - poor institutions are harmful to the developing world in lots of ways (e.g. non-representative government keeps bad politicians and bad ideas in place), and a slowdown in technological innovation has negative implications for the whole world's economy.
The main problems of AGRICULTURE root in geography and the institutional framework. GEOGRAPHY determines the amount of land for agricultural use (limited by natural limits such as deserts or mountains), it determines which agricultural products can be produced (tradable goods such as wheat vs. perishable goods such as tropical fruits), how many costly pesticides need to be used (lack of frost in tropical latitudes) and to which amount production factors such as water and land are available and affected by diseases, climate change and natural catastrophes (see Caribbean islands). War, corruption and poor market mechanisms as possible results of poor INSTITUTIONS also hinder agricultural production. Institutions determine the legal framework for production which includes land ownership (who possesses land?), land use (can I destroy forests for stockbreeding or monocultures?), water use (can I use common goods like lake water for free?), agro-chemicals (what fertilizers are allowed?) and has impact on local and international market access (taxation, subsidies, infrastructure). Both over-regulation (to many obstacles to start production process and join the market) and under-regulation (large informal sector with all its implications) can be a result of bad institutions, so institutions really matter. Institutions can also regulate the inflow of new technology as we saw with the example of China. Culture is also an important factor for formal and informal institutions.
AGRICULTURAL PRODUCTIVITY: In 2007, one third of the world's workers were employed in agriculture, but interestingly agricultural production just accounts for less than five percent of the gross world product (http://goo.gl/qfZTa). Agricultural Productivity depends on different variables such as crops, technology available, incentives and land availability. Developing countries also have the highest rate of population growth which demands a constant increase of agricultural productivity to prevent hunger crisis (see Green Revolution). On the long run, there are many problems with increased agricultural productivity as they might have the following negative impacts on ground, water and air like occurrence of pesticides in soil and groundwater, soil compaction (heavy machinery), vulnerability of crops to diseases and pests, resistance of pathogens to antibiotics and resistance of pests to pesticides, reduction of biodiversity in crops and livestock as well as wild species, possible impact of plant and animal products with value-reducing substances or pesticide poisoning among farmers (according to WHO estimates late 1980s worldwide 20,000 cases resulting in death!) and increased energy consumption and CO2 emissions.
(2/2) The following problems are specific to agriculture:
1. Land reforms:
- Although land reforms tend to be seen as a win for the poor, land redistributions mean that economies of scale are somewhat lost and specialization decreases, thus lowering productivity. However there is a good trade-off by lowering poverty due to decreased wealth inequality.
- At the same time, lower productivity due to economies of scale can be, in some cases partially and in others enormously (China and ex-communist countries), offset by the increased effort the new tenants are going to put in working and caring for the land when property and produce belongs to them.
2. Subsidies to agriculture in developed nations and trade barriers:
- Subsidies lower the prizes of agricultural produce in rich countries, which lowers the competitiveness of the agricultural produce of developing nations. This reduces the potential market for developing nations agricultural produce, which leads to less specialization.
- Barriers to specific types of crops (GMs) in Europe mean that such productivity-enhancing crops cannot be grown, not only for export but neither for internal consumption due to fears of contamination and becoming entirely banned from access to European markets.
3. Population growth:
- If population growth is greater than agricultural productivity growth, ever increasing use of sub-marginal land is the consequence. This land has lower yields, which makes overall productivity drop.
- Another effect could be that the same acreage is used to grow more produce, which combined with the lack of use of fertilizers can in the end mean that land is exhausted from one year to the other and it finally yields much less produce than initially.
4. Lack of rain:
- Makes the need for irrigation infrastructures even more important for developing nations, however, such infrastructures are scarce (4%). This could be further worsened by the effect of a possible climate-change, leading to less rain in developing nations.
If you look at countries like Haiti the primary issues for agriculture are a) IMF enforced free trade agreements and b) the resulting destruction of domestic maarkets by imports from Developed Countries where agriculture is subsidized.
Agriculture mirrors BROADER PROBLEMS FACED BY DEVELOPING NATIONS as in poorer countries agriculture makes up about 26 %, but in the richest countries just about 1 % of GDP. Thus, share of employment in agriculture in 2006 was of 75% in Tanzania compared to 1% in the Netherlands (http://goo.gl/c9XRi), so most developing nations still didn´t pass this structural transition to become industrialized nations and shifting informal sectors to formal sectors. Agricultural products and raw materials are the primary export goods of developing countries which usually are subject to price fluctuation, unfair trade regimes on global markets and speculation at commodities exchanges. The gross national product is therefore generally very small, the foreign exchange earnings are very low, malnutrition and famine are present and maintain education and health at a low level. Referring to Adam Smith, being a landlocked country is also a major problem as waterways and coastal access is crucial for a country’s trade (http://goo.gl/lWnxE).
Be as specific on location..
land access, land rights, trust, and motivation from good government rule and policies
capital access (purchasing good seed, fertilizer, pesticides & herbicides to be competitive)
access to machinery (productivity)
The main problems in the agriculture and its productivity is that the prices are increasing and a declining in productivity is prevailing. The increase in prices is due to the expansion of developing countries; situation that represents a problem for those economies that have a relatively low growth. On the other hand, the declining in producitivy could be the result of a less spending in R&D; this is relevant for the developing economies because of the growing demand and it's relatively lower level of R&D.
(1/2) Agricultural productivity in developing nations is being hindered by several factors. The first set of factors does also affect other activities in the same way as it affects agriculture:
1. Lack of infrastructures (roads, railways and waterways).
- Makes fertilizer and other agricultural supplies and equipment more expensive, thus lowering the use of such productivity-enhancing goods.
- Access to markets is also hindered, making it less profitable to trade. Thus, crops grown in a specific area need to be of a greater variety (for local consumption) and specialization (and the productivity improvement that usually comes with it) is not promoted. Adam Smith already noted that access to waterways (and many developing lands are landlocked) were key to access broader markets and thus to greater specialization and in turn to higher productivity. This statement could be generalized to transport infrastructures in a broad sense.
- The infrastructure problem can be generalized to industry as well. Supplies in general become more expensive and so does produce, making the nation as a whole much less competitive even though labor costs are much lower than in developed countries.
2. Bad Institutions, political instability, insecurity.
- Makes investment in agricultural equipment (tractors, warehouses…) a risky proposition, since profits and capital can be seized or maimed; the tendency to save and invest will be greatly diminished.
- This is the same for industry; investment is key to economic growth in any area of activity.
3. Low levels of education and R&D investment.
- Education, which would be good to improve knowledge about agriculture and general business abilities among rural population is also lacking. Subsistence economies make education a luxury that few can afford, thus condemning future generations to live in the same state of poverty as their progenitors.
- Although the outcome of R&D in agricultural productivity could be a general public good and could be copied free, there is a lack of sufficient R&D on specific crops grown, types of land or specific agriculture problems in the developing world. R&D investment is hindered by an unstable economic environment.
- Other activities, and maybe even more so than in agriculture, greatly benefit from education (increase in human capital) and R&D. In effect, the fact that education and R&D is generally low in such countries makes agriculture the most viable option for economic development since the need for education and technique is lower than for many other activities.
There are a myriad of problems associated with agricultural productivity levels in developing nations, which mirror a country’s broader problem-set. Calestrous Juma in “The New Harvest,” states that the main problem in regard to agricultural development is: a need to strengthen systems and infrastructure that “move an agricultural economy from subsistence level toward growth generation and high productivity gain.” Dalia Cervantes-Godoy and Joe Dewbre in “The Economic Importance of Agriculture for Poverty Reduction,” argue that the agricultural revolution is a pre-cursor to an industrial revolution thus, a base upon which the economy of a country as a whole can build.
The above mentioned strengthening of a system refers also to governance and policies. Developing nations face systemic problems such as described by the corruption trap (rent seeking) as well as ineffective and/or counter-productive policies which may include land reforms or import tariffs. These systemic problems affect not only the agricultural sector, but all socio-economic sectors of a given nation. Corruption will affect a country’s legal system as well as the economy (i.e. manufacturing, service sector) as a whole.
The infrastructure needed for higher agricultural productivity includes a variety sectors. Among these sectors are food processing, packaging, storage and transportation (e.g. roads, railway, and airports), food safety (quality control), distribution systems, and exports. Moreover, a lack of research and development (R&D) initiatives and/or creative thinking solutions will hamper productivity gains. Similar to systemic problems, infrastructural problems and a lack of creative R&D hold back the socio-economic development of any given country. A legal system where courts and judges are not available to the rural populace is ineffective, and almost all the above mentioned sectors affect agricultural as well as general economic productivity.
Dr. Juma also states that “Climate Change” may very well emerge as a factor affecting the world’s agricultural productivity. Overall climate change too, then will affect almost a plethora of socio-economic sectors in each and every developing nation. Adam Smith in “The Wealth of Nations” already in 1776 pointed out that “all economics is development economics.”
Problems with agricultural productivity
1. Lack of Capital - developing world has less access to tractors, fertilizers, and irrigation (water resources). Similarly lack of a good storage and links from farm to the final consumer.
2. Lack of productive labor - the labor is at times uneducated and use suboptimal methods of agriculture. (e.g. in India, they use Urea as a fertilizer, which has nitrogen, but not potassium and phosphorous. This reduces N, P, K balance of the soil) Similarly tube wells lead to depletion of ground water. Better access to education would help the farmers.
3. Lack of Markets - heavy regulations, bans on international trade by the government. Government might be a 'Monopsony' and farmers might be forced to sell at lower prices to middle men, and government appointed boards
4. High % of wastage, due to lack of cold storage facilities.
5. Subsidies for certain crops (e.g. rice and wheat in India) would lead to more of those being grown, against vegetables. Thus a small change in weather -> floods or droughts leads to high volatility in vegetable prices. Whereas the grains more of them are stored in government owned warehouses, and simply rot.
This doesn't give a proper signaling effect of prices for the farmers to grow.
6. Land Reforms - farmers owning their own land might have more incentives to be productive compared to waged laborers. But at the same time, too small holdings of land might be against economies of scale. Hence optimal plot size needs to be held by farmers.
7. Heavily dependent on climatic conditions. Need insurance against inclement weather.
Hence to improve productivity ->
1. Better infrastructure (capital stock), i.e. roads, fertilizer and irrigation. Cold storage chains for perishable items
2. Better productivity, more agricultural research and best practices to be shared with farmers. Need to educate on sustainable growth in agriculture.
3. Enabling transparent markets -> which give price signals so as the markets can make land use optimal.
4. Ensure the food supply chain isn't restricted by bottlenecks. (transport connectivity and cold storage for the final market)
5. Tackle wasteful subsidies. Ensure limits on minimum support prices.
6. Have land reforms, to reduce the 'rent extraction' from land lords
7. Have developed group insurance for farmers against inclement weather. This would help them out of a debt trap (incase they cant pay loans if crop fails due to unforeseen circumstances)
Transportation. The absence of adequate transportation infrastructure and systems inhibits agriculture as an industry, and as a result, production, even if it might be adequate, cannot be successfully distributed. Lack of transportation capabilities limits the distribution of seed stocks, equipment, fertilizers and other inputs, resulting in an under-provision of the necessities for planting. And, when production is able to occur, even at a performance level below what might otherwise be, the product of the efforts cannot be efficiently distributed beyond areas nearby the production base. On a broader basis, the lack of adequate transportation infrastructure limits labor mobility, restricts availability of capital goods and impairs a nation's potential for growth.
The suspicion of scientific progress twinned with government bureaucracy is severely curtailing agricultural productivity in developing countries, especially in South Asia. Norman Borlaug and MS Swaminathan saved India, but there is a growing belief that modern and industrial agriculture is destroying the environment and causing cancer.
The pseudoscientific claims defended by fairly intellectual people has resulted in a movement to incentivize organic or "natural" farming. This has been tried in developing countries and it has failed (read: Zimbabwe).
Unfortunately, as Milton Friedman would say, the policies in India instituted to protect the most vulnerable have perverse consequences. NREGA, which supposedly guarantees 100 days of labor in rural districts, has only provided a cash stream to corrupt officials while impeding the process of agricultural development.
With the intention of curbing structural unemployment, the Central Government only provides financial assistance to labor projects that reject the use of modern technology completely. This has hugely detrimental effects on the country as a whole.
This mirrors broader problems that government initiatives are driven not by a desire to develop economically but to benefit a small group of corrupt beneficiaries. It also demonstrates that there is a sizable population that rejects science and technology for unsound reasons, and this will ultimately keep India and its peers trapped in a perpetual period of development.
My Mom works with John Deere in India and part of her job is speaking with farmers for market research. She claims there is a very significant latent demand among Indian farmers in the South for good equipment from abroad. However, bad government policy will continue to asphyxiate growth in general.
The main problems facing agriculture and agricultural productivity in the developing world are:
1) a lack of investment (both physical and human)
2) barriers to trade (both physical and legal)
3) environmental issues (pollution, overuse of water, etc)
(2) often causes (1), of course. Behind these direct problems lie a few deeper causes:
Poorly defined or insecure property rights reduce investment as landowners and farmers underinvest from fear of being expropriated. Poorly defined rights also cause common pool problems such as overpollution or overuse of water (war and other conflicts can be thought of as a particular type of uncertain property rights).
Catering to rent seekers (i.e. corruption) creates bad government policies such as protectionism, misappropriation of funds for low return pork barrel projects instead of high return public goods (e.g. roads), uncertainty in the protection of private property can also be a result of a corrupt government
Lack of social capital (e.g. trust) can exacerbate shortcomings of government by making it acceptable to exploit poorly defined property rights.
Overall, these are the same issues that plague emerging market countries across their economies, though some issues may be more salient for farming than other industries (e.g. improvements to land are immovable in the face of land reform.
Most of population in the developing world is engaged in agriculture related activities for example, 44% of the labour of Pakistan employed in agriculture sector but have low level of production as compare to the developing world. There are a number of factors responsible for low productivity in agriculture sector. 1. Small land holding: Majority of the farmers in the developing countries own small pieces of land which are usually in scattered form. So they can’t reap the benefits of large scales. They hesitate to heavily investment in agriculture sector. Farmers don’t take the risk of using more advanced and latest technology at their small farms like, GMO technology.
2. Poor Institutions: badly working institutions are considered responsible for poor agri-productivity. In presence of Weak institutions none of the government policy can work effectively either it is related to land reforms, price-ceiling, irrigation or pave roads etc. Government agencies have lack of coordination, responsiveness and accountability which encourage rent seeking. Weak institutions distort the market operations and strengthen the powers of intermediaries in agriculture markets. Farmers are not pretty well aware from the prices prevailing in the market and weather forecasts (so they are unable to take any precautionary measures to protect their crops from any weather related disasters). Whereas well functioning institutions encourage the free flow of information.
In short, two major things, which interact:
1. Poor institutions and infrastructure.
2. Adoption or existing productive methods.
To expand further:
1: Poor infrastructure and questionable governance severely limits farmers access to both capital (e.g. tractors) and input (fertilizer and fuel) markets. These same limitations make export markets difficult for many farmers. Poor roads, landlock, tariffs (including those from developed countries) all contribute to these issues. Even external governance negatively affects developing nations in terms of agriculture; arguably, more so than any other sector, protectionism is strongly upheld in the agricultural sector.
2. Even if there is access to capital, inputs, and technology (which is much more transferable and often not subject to capital requirements), adoption among farmers in developing nations is extremely low. Cultural and political influences often act negatively here. There are countless instances where farmers are shown the clear advantages of modernization, yet revert to inefficient cultural practices. Political influences are often not helpful - while it is not fair to scapegoat Europe as the only negative influence, their anti-market/anti-industrialization/anti-GMO stance heavily influences developing nations. This is especially clear in Africa, which is geographically and cultural more aligned with Europe than Asia and South America, whose developing nations (re: Green Revolution) have made far more progress in agriculture than Africa.
For a more comprehensive list of concepts, I would reference Robert Paarlberg's studies.
First, agricultural subsidies in developed countries. This profoundly affects agriculture in developing countries as it curtails their capacity to export and even compete in their own countries.
Second, low educational levels. This affects how to improve the crops, but also how to manage an operation that is successful and increases its complexity.
Third, inadequate public institutions (due to corruption or lack of a high-skilled civil service), in order to implement successful policies (or promote the private sector to implement them in Public Private Parternships) to: reduce transportation costs (ports, roads, railroads); increase quality (R&D, adequate storage facilities, including cold rooms), among others. Inadequate public institutions also impose restrictions that affect the size of the operation, by making it hard to formalize a firm and enable it to export, to imposing burdensome regulations that makes a growing firm uncompetitive for international markets.
Fourth, inefficient public provision of water affects crops, due to the lack of a constant flux of water.
Fifth, the opposition of Europe to buy GMO, harms agricultural productivity in developing countries (mainly Africa), as they are not able to use more resistant and fast growing crops.
Finally, some governments introduce practices that directly harm agriculture by introducing price controls or boards that generate a monopoly/monopsony that affects farmers.
Nota bene: my apologies for the lateness - I am now several months behind, but 'plugging away'. The answer given was completed independently before reviewing previous answers - thanks, rrw
Main problems include inadequate natural resources, lack of adequate infrastructure, insufficient land to support a living wage, lack of supporting institutions and an inconsistent market. Inadequate natural resources can relate to poor access to water (no irrigation, landlocked or poor/no aquifer), poor access to fertilizer, lack of adequate native crops to cultivate and poor access to alternative crops (including GMO). Inadequate infrastructure can compound the initial problems with poor road systems or lack of alternative transport (water/rail/truck), poor physical distribution of resources present (such as poor water supply) and inability to get the harvest to market (local, national or international). Insufficient land can relate to property laws with unjust distribution of land, inaccessibility of arable land or poor distribution of risk/reward (as with sharecropping). This overlaps with institutions in the developing country that fail to provide incentive for improvements on these issues (infrastructure, property rights, access to markets). Agriculture is inherently volatile and risky on a year to year basis and ‘safety nets’ provided by the institutions would be important (examples might include protective tariffs, increased trust/decreased corruption in the market, military stability, etc). Just as each of these problems apply to agriculture, in the same manner any nascent market would require basic infrastructure and institutions to support and provide incentives for further development.
Land tenure system, lack of ownership, size of land per household/diminutive holdings in case of Ethiopia, lack of inputs such as fertilizer, lack of infrastructure such as roads, problem of access to credit, absence or shortage of farm animals in countries like Ethiopia, periodic droughts and cyclical famines in many rural communities of developing countries figure prominently as affecting agriculture and agricultural productivity.
In Ethiopia, agriculture has been mainstay of Ethiopian economy. There are vast areas of land in the lowland areas, but remained infested with malaria. They have not been suitable for settlement and agriculture. Most of rural population settled in suitable lands, which barely accommodate the growing human and animal population. These lands have been over utilized, and yield little. Rural poverty has been entrenched for decades but has been aggravated since the 1974 revolution due to heavy taxes, and land redistribution that made the homestead small for farming. The situation has not been better either. The fertilizer market is dominated by the government supported agency, the price of which is not affordable for an average farmer. The rural farmer has been forced to buy the highly priced fertilizer, and expected to pay after harvest. Because of the recurrent drought, he falls in debt as there is no harvest or poor harvest. There has been internal migration to look for rural employment in “better of” areas or to the few agro- industrial centers, which most of the time, help little. However, many rural farmers are less productive as they work with primitive tools which have not been improved for ages that affect agricultural productivity
Several ways to look at the agricultural problems in the developing world exist. One of them is to look at the developing countries institutions from the perspective developed in “Why Nations Fail”. Most of the agriculture in the developing world is taking place among the extractive institutions with poorly enforced property rights and absence of creative destruction. Extractive institutions diminish incentives facing agricultural companies and workers, making developing world agriculture less productive and profitable.
Another way to look at these problems is through the Solow model. Developed world agriculture has sufficient capital to purchase tractors, fertilizers, and advanced crops whereas developing world agriculture is labor-intensive and lacks capital. This diminishes agriculture’s profitability via the vicious circle of low productivity causing low capital which causes low productivity again. However, empirical observations do not support Solow’s theory as applied to agriculture.
Lastly, the problem facing agriculturally-driven developing nations during most of the 20th century is that the real prices of agricultural products have been going down or remaining stagnant. “Green” revolution increased agricultural products’ supply, reducing agricultural profits and stagnating developing economies in turn.
I would state 4 main problems facing agriculture and agricultural productivity in the developing world special case: INDONESIA.
1. Geographical and bad infrastructure: this argument is based on my personal experience when i did my research in east Indonesia part with specific case in Rice production. In Indonesia, there are only two seasons: dry and rainy seasons. Since the rain only occur usually started from September until April. Rice can be produced 4 times in a year. It takes 3 months only to cultivate it. But since, the land are depended on rain, therefore, the farmers only could able to produce once in a year. Sometimes, their productions are even not fully satisfied in terms of quality and quantity, due to: high rain density would harm the rice itself. Since lack of infrastructures such as: irrigation, bad road, and low technological approach. Many of the farmers are still using Cow and buffalo to plow the land, and it really slows down their production.
2. Many farmers are producing the same thing; therefore, their production has low price value in the market. During the dry season, they usually cultivate any kind of bean such as; soybean, peanut and many more, but the problem is, over production, and they have no access and any knowledge to find buyers, which would buy their products.
3. Over use of pesticides. Because of the farmer are lack of knowledge in cultivating processes, most of the time, they don’t know how much the quantity of the pesticide they can use. Therefore, it could lead into two serious problems: 1). The products are highly contaminated with chemical element, which result a bad product. 2). Pest became more resistant to the pesticide and it would result low production and even damage the entire plants. It happens in cacao production especially in east Indonesia part.
4. Bad institutional: The governments in this case, are considered failed to guide the farmers and to educate the farmers in terms of cultivating knowledge and so on. The governments are considered has failed to provide markets for the farmers to sell their products.
1. Lack of free trade – Likely has multiple implications
a. Farmers may be growing crops to which the country / land is not best suited to, since there is domestic demand that needs to be met but there are no imports. This amounts to going against the comparative advantage
b. Price volatility (usually exacerbated by government imposed price restrictions) maybe leading to farmers not getting the best price for their product, over time leading to erosion of incentive to farm
c. Misplaced subsidies (populist measures / influence of farmer or seed company lobbies) – Allocation of generous subsidies to farmers for inputs such as water and electricity creates and mismatch between the true production cost of an agricultural commodity and its market price
d. Arguably, also the cheap imports from developed economies (with highly subsidized farming) impeding the agricultural development of developing nations, though in the medium term may amount to subsidized food for low-income countries
2. Bad infrastructure – Leading to lack of fertilizers, pesticides and other inputs in a timely and
3. Poor institutions – Government’s near monopsony in procurement of agricultural products, inefficient food distribution systems with leakages
The agricultural sector continues to play a crucial role for development, especially in low-income countries where the sector is large both in terms of aggregate income and total labor force. Moreover, agriculture contributes to both income growth and poverty reduction in developing countries – by generating income and employment in rural areas and providing food at reasonable prices in urban areas.
As contended by many authors, sustained economic growth in less developed countries requires policies for economic development that yield incentives for efficient expansion of agriculture as well as industry. Some reasons for it: a) increases in agricultural output stimulate the demand for industrial inputs such as fertilizer and farm equipment as well as expand the supply of agricultural goods used to inputs to nonagricultural production; b) agricultural growth raises the real income of farm households and hence their demand for food and other agricultural products as well as for industrial goods and services; c) broadly based agricultural growth has significant spillover effects that go to the heart of improving social welfare as part of the development process.
In addition, we must look back on the determinants of the Green Revolution and discuss the foundations of agricultural growth. In developing countries that have experienced sustained increases in yields, the mode of agriculture has been intensive and has involved adoption of new varieties by farmers, irrigation and massive use of fertilizer which presupposes good institutions. In the coming decades, massive productivity increases in Sub-Saharan Africa will be necessary if the subcontinent is to catch up with the rest of the world. The challenge is thus of a different nature than before. Further cropland expansion (which was the basis for the slow yield increases that took place in the past), with a few exceptions, is really not possible. New seeds that are resistant to climate risks and adapted to local conditions will need to be developed and sustainable irrigation systems expanded. The most difficult challenges are institutional and economic. Often smallholders cannot internalize the benefit of their efficiency (compared with large farms) because of missing markets for insurance and credit, low education levels, limited market access and market information, and insecure property and usage rights. Hence, although new advances in R&D – such as genetically modified organisms and extension services – are important for future growth and poverty reduction, getting fundamental institutions right is a prerequisite for growth and a priority on the agricultural development agenda.
Efforts to stimulate agriculture’s role in pro-poor growth should, on the basis of the
principles above, be used to guide renewed attention to three priority areas. These are to:
● Enhance agricultural sector productivity and market opportunities.
● Promote diversified livelihoods on and off the farm.
● Reduce risk and vulnerability.
Enhancing agricultural sector productivity and improved market
Improving sector productivity and expanding market access is at the core of a more
robust agricultural economy. Productivity gains will depend upon a supportive policy
environment that enables rural producers to use the resources available to them more
efficiently and sustainably. Secure and equitable access to land and water resources,
rangelands, fisheries and forests is a key ingredient of this policy environment. The
development of rural financial services is equally important to allow for purchases of
inputs and equipment in order to increase the productivity of land and labour and
stimulate income-generating activities. Productivity gains will also depend upon access to
information and technology developments framed by a demand-led and multidisciplinary
approach. Market access will depend on improved physical access and reduced
transactions costs, particularly through appropriately targeted infrastructure and better
transport services. Support for producer associations will enhance capacity to engage in
market places dominated by increasingly large food processing and modern food retail
industry such as global supermarket chains.
Promoting diversified livelihoods…
The connections between the agricultural and non-agricultural rural economies are
key drivers of diversified livelihoods. A thriving agriculture sector underpinned by
improved productivity will expand the rural economy and influence wages and food
security. Traditionally, agricultural policy has focused on increasing agricultural
production, neglecting investment in post-harvest enterprises and non-agricultural assets
for more diversified rural livelihoods while treating as socially undesirable those
household strategies involving movement out of rural areas. To reverse this trend,
governments and external partners should improve their understanding of labour markets
and migration patterns and incorporate that understanding in national policies; establish
functioning land markets, so that people are more able to move to new forms of economic
activity; promote entrepreneurship; and tailor investments in infrastructure, education
and health services to new livelihood patterns.
14 PROMOTING PRO-POOR GROWTH:
Reducing risk and vulnerability…
Poor households with livelihoods dependent on agricultural production face
numerous shocks and stresses, some potentially catastrophic.
5. How much does depreciation account for in the United States? Use the National Income and Product Accounts to get a ballpark percentage. Comment on how much we have to invest to increase the capital stock in the next period.
Using the BEA's NIPA Table 1.7.5 shows that "Consumption of fixed capital" was about $1.9T in 2011. BEA's "Fixed Assets Accounts Tables," Table 1.1 shows "Fixed assets and consumer durable goods" at $51.1T in 2011. Assuming these are the right measures to use for "depreciation" and "capital stock," we get a depreciation rate of 3.79%. Analysis of past years shows that this is close to the average rate from 2000 to 2011. During this time the rate was lowest in 2006 (3.61%) and rebounded to 3.83% in 2009 before leveling off. To increase the capital stock, investment must outpace depreciation, so more than $1.9T must be invested. As a fraction of GDP (from NIPA Table 1.7.5 again), this is about 13% of output.
Assuming that depreciation is also known as “Consumption of fixed capital”, depreciation is equal to the difference between Gross National Income (GNI) and Net National Income (NNI). GNI was $ 14.6356 T. in the US in 2010 (http://goo.gl/JPw0A) and NNI was $12.4533 T. in 2010 (http://goo.gl/AnvD6), so depreciation is 1,18 %. Hence, the US would have to invest more than 2.0923 T. in 2010 to increase the capital stock.
As the Fixed Assets and Consumer Durable Goods can be taken as the Capital ( 51117.4 Billions US in 2011) and the Consumption of Fixed Capital can be account as depreciation ( 1,966.6 Billions US in 2011), then depreciation is at a rate of 3.84%. Taking that value of depreciation, is needed to invest more than the amount depreciated in order to growth (considering an economy not in SS). According to the National Accounts the depreciation up to the III quartier of 2012 is 2020.3 Billions US, so the investment until now should be greater than that amount.
According to the BEA, consumption of fixed capital in the year to date (3rd quarter of 2012) was 2,020 billion dollars. This is about 13% of GDP (15,776 B$). In order to increase the capital stock of the nation, the amount invested must be over this figure. The same source gives 2,524 billion dollars (16% of GDP) as the amount invested (broken down in 2,049 billion $ for private investment and 475 billion $ in public investment). These figures would guarantee that in the next year, the amount of capital is increased.
As Depreciation=Gross Domestic product-Net Domestic Product; For US economy, GDP is $15.811 trillion (Q3 2012) and NDP is $13.79 trillion. So Depreciation accounts $2.021 trillion. And the amount of more than $ 2.021 have to invest to increase the capital stock in the next period
Nota bene: my apologies for the lateness - I am now several months behind, but 'plugging away'. The answer given was completed independently before reviewing previous answers - thanks, rrw
According to the NIPA, for 2005, depreciation (consumption of fixed capital, in billions $US) was $1,604.80, with GDP of $12,455.80 (or roughly 12.9%). Gross domestic investment, capital account transactions and net lending totaled $1683.10 (but of note, personal savings for 2005 was actually negative = - $35.8). Growth of capital occurs below the steady state (investment > depreciation), so for 2006, I would have anticipated an increase in capital stock as overall investment exceeded depreciation.
Q3 2012 USD GDP increased 1.5 %, to increase growth the government should invest double from 15.609.697 should be invested double or half from the total GDP
According to the graph below, depreciation represented about 12% of the U.S. GDP between 2004 and 2011. Then, the net investment required to increase the capital stock in 2012 should exceed 12% of GDP. However, the chart shows that the net investment was, on average, 7.4 percentage points lower than the depreciation during the period in question.
Source: BEA (www.bea.gov).
9 April 2014: Where is the test?
I see no link on the page, and at the end of the short video the "next" button goes to the next lecture.
4. In the simple Solow model with Y=√K let δ be the depreciation rate and γ be the savings rate. Solve for the steady state level of output in terms of the “exogenous” factors δ and γ. Comment.
Starting equations are: Y = sqrt(K) , I = gamma * Y . D = delta * K .
Steady state occurs when I = D , so we have gamma * sqrt(K) = delta * K .
Squaring both sides we get gamma^2 * K = delta^2 * K^2 .
Solving for K, we get K = gamma^2 / delta^2 .
Output is then sqrt(gamma^2 / delta^2) = gamma / delta .
That is, steady-state output is the ratio of the savings rate and the depreciation rate. If the savings rate is larger than the depreciation rate, steady-state output will be large, which makes sense - investments output depreciation. If the depreciation rate is larger than the savings rate, steady-state output will be small, which also makes sense - depreciation outpaces investments.
The Seady Sate (SS) output is the solution for these two equations : "Investment (gamma * production) = Depreciation (delta* capital)" and "Production (output) = sqrt (capital)"; thus the Output in SS is : Y= gamma /delta. This means that the greater the saving rate, the greater the output, which makes senses because saving more resources allow us to invest more in capital which in the Simple Solow Model is the determinant for more output. On the other hand, when depreciation is higher than the saving rate the output is lower, which also makes sense because if the economy can't replace the capital that is depreciating then growth is not possible.
We have D = delta * K, and I = gamma * Y, and Y = sqrt(K). We need D = I, which gives sqrt(K) = gamma / delta. Therefore the steady state output Y* = gamma / delta. This shows that the output is directly proportional to the savings rate (this is logical, if we invest more we have more output), and indirectly proportional to the depreciation rate (again logical, the quicker capital depreciates, less production we have, since we are essentially losing capital and therefore have less means of production).
What's interesting here is that we have a direct relationship, as in if the investment rate were to double, the production would double, and if the depreciation rate were to double, the output would be cut in half.
Taking the log of the expression we find that: Log(Y*) = Log(gamma) - Log(delta).
But then differentiating this relationship, we get: dY*/Y* = d(gamma)/gamma - d(delta)/delta
What that means, is that if we want to keep production constant, and depreciation rates increases by a certain percentage, we need to increase the investment rate by the same proportion. The problem is both gamma and delta are limited by 1, so if let us say gamma is higher than delta (so higher output), and we have a big shock of delta, gamma cannot always cope, and we may be forced to go into a recession (for instance as per the video gamma is 0.3, delta is 0.02, if delta were to go to 0.08 gamma would have to go to 1.2, that is not possible so even at gamma at 1, production would fall.
The steady state will be characterized because no more capital growth can be expected. Capital growth is the difference between the capital that is added every period and the capital that is lost through depreciation. When the value of all new capital accumulated equals the value of capital depreciated, we will reach the steady state, because capital will remain constant.
Capital produced depends of the savings rate, it is assumed that everything that is saved will be invested in new capital, thus Kn= γY.
Capital depreciated will be a function of current capital which is lost at the delta rate, thus Kd= δK.
When both terms are equal we will reach the steady state: γY= δK.
But Y is a function of capital (Y=K^α). So the previous identity becomes: γK^α= δK.
Isolating K, we have that: K=(γ/δ)^(1/(1- α)). Since α=0.5:
K = (γ/δ)^2
K = physical capital
e = education
A = Ideas
δ = depreciation rate
γ = savings (I guess this means investment) rate
e *L is human capital
γ = Y/L is Output
I(nvestment) γ = 0.3√K
D(epreciation) δ = 0.02 K
ASSUMPTION: Y= F (A,K,eL). Read Output is a function of ideas, physical capital and “human capital”.
To simplify we assume A (ideas), e(ducation) and L(aborers) are constant. This results in Y=√K, read Output is equal to the square root of capital (each unit of capital added is less productive). Steady state is reached when saving/investment rate γ equals depreciation rate δ:
The more investment you have, the more output you have. Departing from the first Solow video, we could conclude:
Y = 0.3√K / 0.02 K
The results are really good. That is the steady state out is equal to gamma/delta. However, I would like to say something. It's clear that when higher saving rates imply higher level of capital and therefore higher output. But if we assess welfare by consumption. We should take into accountat that if saving rate is too high (higher than rK/Y) we can foster welfare by lowering saving rate. The saving rate that allows us to reach the optimal level of consumption is gamma=rK/Y (Golden rule). Am I right?
The steady state is one whee the depreciation rate delta time capital K equals the savings rate gamma times output Y. Setting Y=√K, delta * K = gamma * √K, or K = gamma^2 / delta^2
Putting Y back in, you get (in steady state) K = gamma / delta
As Y=√KY= sqrt , K=gamma*Y , D= delta*K, steady state condition will meet when I=D setting K = gamma^2 / delta^2, and then putting it back in output function we will get steady state condition i.e, Y=sqrt(gamma^2 / delta^2) = gamma / delta . For the increase in growth, saving rate should be more than capital depreciation whereas growth will tend to reduce when capital stock in the economy depreciates more than the saving.
Y=K1/2 and at steady state, depreciation = investment (δK = ƔY or Y = δK/Ɣ).
(substitute) Y = δY2/Ɣ (solve for Y) Y* = Ɣ/δ
In the Wolfram modeling, depreciation ranged from 1-10% while savings ranged from 5-50%. Reducing depreciation (better quality, good maintenance, better surveillance), especially in the lower range (inversely proportional) has a greater impact on output than a similar percentage change in increased savings (linear gains) This could potentially help in allocation of limited resources in situations where both cannot be adequately addressed.
Supposed S: 10%/year
Capital: 10 4
Y= K ½
Saving: S: ∫ y.dk = ∫ K½ dk
1: ½ . K3/2+ C
Saving: 2K √K+C
static economic investment would result depreciation in saving because the accumulation of assets each year will going to depreciate, therefore, each year the investment should be increased, and it would give positive correlation with saving rate, because if we produce more, we can save more. If we invest in static mode, then i will be trapped in maintenance cost, and the profit will keep going down year by year. Therefore, more investment each year is necessarily needed.
The Solow model relates to savings, capital accumulation and population growth and seeks to explain the variation of the product per capita. The production function Y = T f(K, L), is transformed in per capita terms, Y/L = T f(K/L, L/L), i.e.:
y = T f(k), (1)
where y is the production per capita, k is capital per capita (capital-labour ratio) and T is the technological level, which affects the marginal productivity of capital and labour.
On equilibrium, I = S = sY; however, a portion of the gross investment, I, is intended to be used for depreciation of the fixed capital (dK), if d is the depreciation rate, ΔK = I – dK:
ΔK = sY – dK (2)
As Solow works in per capita terms, the equation (2) needs to be divided by L:
ΔK/L = sy – dk (3)
The basic assumption is that Solow, in stable equilibrium, there is a k = K/L constant, so that ΔY/Y = ΔK/K = ΔL/L = n. The natural population growth rate, n, presents itself as an exogenous variable. Whereas the technical progress, the stable equilibrium requires a positive variation of k = k/L ratio (greater amount of capital per worker) is accompanied by a higher variation of capital stock, relative to population growth, n, i.e.:
Δk/k = ΔK/K – n (4)
Dividing (4) by L, gets that ΔK/L = Δk + nk; replacing the second member this equation in (3), the fundamental Solow equation:
Δk = sy – (n + d)k (5)
This fundamental equation states that the increase in capital per worker (Δk), the deepening of capital needs to be equal to the per capita savings (sy), less the expansion of capital, (n + d)k. The nk savings ratio serves to equip new workers entering the labor market, with the same ratio K/L of already employed; dk portion needs to be used to depreciate capital per capita.
In long-term steady state (soon, deepening the capital Δk is null), the per capita savings sy becomes equal to the increase of capital (n + d)k, being the ratio K/L constant:
sy = (n + d)k. (6)
In this case, the aggregate savings is enough to provide capital to the population that grows at a rate n = ΔY/Y and to the depreciation of the existing capital.
This means that a greater depreciation rate leads to a lower steady state output. A greater savings rate leads to a higher steady state output.
2. Of the older thinkers in development economics, say pre-1980, which one offers the greatest source of neglected insights into economic development? Defend your choice.
Adam Smith offers a lot of neglected insights into economic development. There is a common superficial reception of Smiths ideas as being in favor of absolute division of labor and free trade which in my opinion falls short. Indeed, Smith argued that under perfect conditions of liberty markets lead to perfect equality. Many interpretations seem to take this premise as a reality which is wrong of course as there is no reasonable argument that there are perfect conditions of “liberty” in a national or international context. Consequently, Smith doesn’t give an absolute argument for markets and division of labor but identifies certain conditions and limits.
It would be really interesting to hear Smiths opinion about IMF policies of the last decades as he strongly condemned the devastating British experiments in India and thus could be used not just in favor, but as imminent critique of international trade policies applied on developing countries. Smith yet goes deeper as he breaks the perspective of “national interests” by identifying "merchants and manufacturers" as the principal architects of policy that defend their own interests no matter what suffering their actions might cause to others, even in the most democratic society of that day.
This are really relevant observations which remain important to this day, made by a person of Enlightenment assuming that people were guided by sympathy and feelings of solidarity and the need for control of their own work.
My argument is that we need to precise our framework of thinking by breaking down protagonists from nation states to interest groups which influence economic policies like Smith showed us.
Joseph Schumpeter. Why? Because in the Mexican context the monopolistic practices are commonplace and one possible solution is to promote the "entrepeneur". This figure can be translate in innovation and competition that in a monopolisitc environment functions in the way of better quality, lower prices and higher quantities. This insight is really neglected by Mexican authorities. The majority of the biggest enterprises in México were once part of "one-of-the- biggest- in-1950's" or state-owned; fact that reveals that entrepenuership has not been enoguh promoted and a lack of competition which brings as result a welfare loss.
Adam Smith developed theories of international commerce, the development of industry and the role of government that are often times ignored by officials the world over, both in developing and in rich nations. The most important neglected insights for development today would be the idea that price controls can achieve anything other than negative outcomes. Price controls have proved throughout history that they only lead to goods shortages, corruption, diminished incentives to production, loss of productivity, wrong investments and in general, impoverishment. Another important insight from Adam Smith is that trade barriers can only harm the interests of countries the world over, beginning with the interests of the countries that build the trade barriers. Prohibitions to import or export certain goods from certain countries, tariffs, duties and subsidies are designed with many good ideals in mind but in the end they only serve to promote the interests of individuals in often inefficient industries while condemning consumers to sub-standard and overprized domestic goods and hinder the development of otherwise more efficient export industries.
I agree with the choice of Adam Smith, mainly for his support of international free trade, his support of competition, his opposition to mercantilism, and his opposition to crony capitalism.
I suggest that Peter Bauer (wasn't much of his work done before 1980?) offers many neglected insights. It's not that his ideas don't have proponents - they do, especially because his rhetoric appeals to those with certain political affiliations. It's that the reasons he presented for skepticism about central planning are often ignored. Have Chinese officials understood Bauer's arguments against anti-natal policies? Although Bauer's ideas considered "conservative," even political conservatives are loathe to implement them (though they might pay them lip service). Have conservative U.S. policy makers been mindful of Bauer's warnings about foreign aid supporting bad governments in the Middle East and Asia? I propose that Bauer's positions deserve more thought - either to strengthen them or refute them.
Alexander Gerschenkron’s (1904-1978) insights as economic thinker and historian may experiences a renaissance in the next century. A.G. advanced the “Linear Stage Theory” of economic development, but fostered the (anti-Marxist) belief that a country can leap over one or more stages in the economic development process. Thus, A. G. questioned the common paradigm that a “green revolution” is needed to precede the industrial stage. Africa embracing the wide spread uses of mobile (cell) technology may be an example of A.G.’s insights. With technology advancing at a greater speed each year in a multitude of economic endeavors A.G.’s insights may prove more and more valuable, especially in the case of the most backward countries (Asia, Africa) make the most gains in manufacturing. In “The Economic Backwardness of Historical Perspectives” A.G. questions: “how much differing degrees of what he terms “economic backwardness” a given country exhibits shapes its future development?” Therefore, for comparison A.G. detailed the differences in the industrialization paths of Germany, Britain and Russia. After doing so, he argued that state-strength and central organization matter to economic development. In other words he proclaimed, one may argue, good-governance matters.
Why will A.G. matter again? A.G. wrote post-WWII when western economic thinking focused on development in worn torn, developing economies. Ideas and lessons learned were mulled over, yet forgotten especially after the demise of the Soviet Union. History does not repeat itself, because specific circumstances are never the “same,” but they may evince similarities. Thus, A.G.’s insights may prove very valuable in researching the speedily emerging markets in Asia and Africa.
Joseph Schumpeter, his ideas of innovation are pretty valuable. According to him innovation, entrepreneur and market power are the drivers of economic growth. Innovative monopoly is better than perfect competition as it allows firm to temporary earn abnormal profits which are used to carry more research and development activities. So the firms have to compete in terms of innovation, more innovated firms capture the market power and use their profits for R&D. Innovation is at the heart of development process. Developing nations are far behind than the developed countries because they are not engaged in R&D, say Malaysia.
I propose Adam Smith, but not due to his analysis of free markets, as that have not been neglected by economists pre-1980s. I propose Adam Smith for his insights into geography and its effects on economic development that would later affect authors such as Diamond and Sachs. Geography influences transportation costs, therefore affecting the size of the market and with it, the level of specialization of the economy. Others would continue this insight and find other relevant aspects on how geography affects economic development. Geography originally affected the access to certain plants and animals that affected how a society was able to devote resources to farming, hunting and transportation. But also, geography influences which diseases affect society therefore affecting mortality rates which at the same time have an effect on which institutions grow and how much a society invests in human capital. Finally, geography also affects the access to minerals, water and other resources that affect the path of development the economy is able to take.
My bet is on Theodore Schulz. Although his concepts on ‘human capital’ are far from neglected, I suspect this is a deep and expansive lode, from which only a relatively small amount has been tapped. The activity of ants and bees can be studied with regard to ‘supply and demand’, using terms such as physical capital, depreciation, investment, population growth and even “GDP per capita” but it is the human intellect that brings the greatest variable to the study of economics. There is little controversy over the need for good health of labor as a basic tenet for economic growth, but what does this really mean in terms of investigation and application to macro and micro economies? For example, the USA spends an inordinate amount of nGDP on health care, with inconsistent (at best) or poor return on that investment in terms of improved health overall compared to other wealthy nations. The American national debate on revision of health care is complex but a better grasp of the economics of “good health” as it relates to human capital and how to best achieve this would sharpen and narrow the discussion (at least in economic classes).
2.0 Theodore W. Schultz (1902-1998) was American Economist, awarded Nobel Prize in 1979. He made original contributions to development economics through his study of human capital, the concept of which dates back to Adam Smith. He discovered that the cause for underdevelopment does not lie in the ranks of physical capital; on the contrary, it lies in the insufficient volume of resources which expresses itself in a mismatch of resources to the increasing of population quality as well as to the knowledge improvement. He underlined the fact that one of the fundamental facts for sustained economic growth is investing in human capital, giving the opportunity for innovation, not extending agricultural lands, as D. Ricardo believed. The obvious instance, he argued, in the United States, cereal production per hectare increased as a result of investment in human capital.
He further pointed out that good care for children; investments in schooling and health constitute advancing human capital. For Schultz, the main factor or even the decisive factor with regard to improving the welfare of poor communities is sustained improvement in population quality, not space, energy and crop land. He challenged the widely held view that there is limited land in the world for growing food and the cultivable land has been depleted. On the contrary, he advanced; human kind is endowed with intelligence and ability to apply his knowledge through research to reduce the costs of food production for growing world population. For him, differences in productivity of crop lands do not explain why farmers remained poor for ages in many parts of the world, what matters is investing in farm lands and human skills.
He discovered the fact that farmers the world over are entrepreneurs and are economic agents in the community, the idea of which has been elusive for many economists to recognize their entrepreneurial abilities. He remains one of the leading thinkers in development economics.
I would say Joseph Schumpeter: because he introduced theory of innovation and entrepreneurship. Development cannot be done without empowering the local society, also supported by the distribution of wealth and knowledge. In this case, Schumpeter assisted that development can be done through empowering the local society to have access to the capital resource. He also mentioned the importance of political entrepreneurship where the politician should be able to think and to act like entrepreneurship, managing a nation like managing a company, in this is to provide welfare and stabilisation for their people. This can be done through encourage people to do business and do innovation to keep their business going
I believe that the ideas of Joseph Alois Schumpeter (1883-1950) are often neglected when analyzing the economic development of nations, especially of developing countries. I refer, in particular, to the role of technology in society – that Schumpeter is considered a great reference – considering this variable the engine of economic development.
In “The Theory of Economic Development: an inquiry into profits, capital, credit, interest and the business cycle” (1911), Schumpeter discusses the causes of economic change. For him the economic changes originate, on the side of production, from distinct way of combining materials and forces to produce things to use in daily life of people. It's totally different modes of disposal materials and forces. These different modes Schumpeter (1911) called innovations or new combinations.
With regard to who will take the initiative of this change, Schumpeter credits the particular character: the entrepreneur. The businessman is a distinguished figure in society by being in possession of an energy and ability to carry out new things that would not be present so widespread among the population.
The dynamism of the economic system to Schumpeter depends on, as well, the emergence of the entrepreneur as creator of new combinations. More than that: it is someone who has the ability for the new is implemented. After the new combinations being added to the regular flow of economic activity, the entrepreneur loses his condition, thus, part of the capitalist class or bourgeoisie.
However, to implement his ideas or insights, the entrepreneur needs to have access to the means of production. In other words, what the entrepreneur needs is credit.
The fact is that usually the analyses of economic development focus much on poverty, education and health, and give little importance to items such as raising the productivity and competitiveness of businesses. This is also one of the determining factors of the middle-income trap in which several countries are affected (see, for example, Canuto 2011; Eichengreen et al 2011; and World Bank 2012).
So, I agree with Agénor et al (2012), for instance, when they say that “the middle-income trap is avoidable if governments act early – rather than late, when the benefits of cheap labour and the gains from imitating foreign technology are all exhausted – and decisively to promote innovation”.
6. In the theory of development there are lots of “traps” and plenty of “big push” mechanisms to get one out of traps. Which of these traps and mechanisms is most plausible? Bring empirical evidence to bear.
Looking at “growth miracles” like Japan and South Korea and “growth disasters” like Nigeria or Argentina, we can see that institutions might be one of the key factors to cause “traps” and “big pushes” (http://goo.gl/ONlrx). There are both exogenous and endogenous variables responsible for traps and big pushes likewise. BIG PUSHES mostly seem to happen if countries have a changed institutional framework after a solved (!) internal or external conflict where a traditionally skilled workforce can specialize in export markets through technology and innovation. Access to credit, raw material, food and access to new markets is important (see for example the Marshall Plan http://goo.gl/yuzE). Geopolitical interests of powerful states like the US have often determined if a country is granted access to these requirements. The best proof is growth miracles in Germany, South Korea and Japan after WWII which GDP growth rates are usually higher than world average: http://goo.gl/Wl1No. Foreign investment seems just beneficial if a significant part of the wealth created stays in the country (trough adequate salaries) to avoid the so called “braindrain”. We´ve learned that trust and informal institutions also play a big role for economic growth. TRAPS: National economies dominated by agriculture seem to be trapped by the export of cheap raw materials while they have to import expensive technology and machinery. The concept of “value chains” gives us a clearer understanding at which point in a production process “value” is added to a product and wealth is created. One good example is cacao cheaply brought from Central America to Europe and the US where value is added by transforming it into chocolate and it’s sold again for a high price as well in Central America. This shows us that missing technology transfer, property rights, trade barriers and low geopolitical “relevance” can be traps.
The middle income trap is also a plausible mechanism as any nation at some point faces innovation slowdown or limitations in scale or scope. Empirical evidence is comprehensively given by this graph: http://goo.gl/BVV9V. Except for the above discussed examples, regional GDP per capita stays below world average at a significantly slower growth over the last 50 years. I think De Soto offers a good suggestion to get out of the middle income trap by lowering the access to the formal sector. Actually, in the United States access to the formal sector (= obstacles to start a business) is pretty low which might explain its growth rates. As argued for big pushes, institutions might be the most important endogenous factor, while the mentioned exogenous factors also have to be taken into account.
Tyler's video on Jeffrey Sachs touches on the "poverty trap," which in my mind is a quite compelling idea. Sachs's book states that poor countries "start with a low level of capital per person," which persists because capital isn't accumulated at a rate high enough to keep up with population growth.
This notion is more plausible than the "middle income trap," which according to the World Bank's definition (http://goo.gl/nPrw3) might claim over 50% of countries (and all but a handful of the bottom-ranked ones). Is Haiti really in the same trap as Albania in any useful sense?
Unfortunately, results from Sachs's preferred "big push" mechanism have been somewhat disappointing (http://goo.gl/pUjKj). Might any "big push" be plausible? I am (unfortunately) skeptical - according to William Easterly (http://goo.gl/G22nY), trillions have been spent over the last 50 years on various interventions, and frustratingly little progress has been made in the worst-off countries.
In the same article Easterly states "some piecemeal interventions have brought success. Vaccination campaigns... and other aid-financed health programs have likely contributed to a fall in infant mortality in every region, including Africa" I think that if continued these efforts - focused, with tight feedback mechanisms, are more promising than grand schemes - Givewell.org concludes that one example of this type of effort, anti-malaria nets, is effective and efficient (http://goo.gl/IjZpO).
I think that the determinants of the poverty trap and the middle income trap are the more pausible obstacles for economic development. These are the lack of innovation, weak instiitutions and poor education. For example, Mexico is not a leading economy in innovation and neither in good education nor the Rule of Law (Institutions). A poor education functions in the way of lower incomes and therefore positions the poor people in the so-called "poverty trap", and an incomplete "Rule of Law" causes inefficient transactions and inhibits competition and innovation; thus, causing a lower economic growth or null of it. On the other hand, Japan and South Korea (countries that in the 1950's had a lower income per capita than Mexico) through stronger institutions and investment in human capital which directly translates into better education and higher levels of innovation (R&D), managed to achieve a "big push" into their economies. Therefore, i think that a "big push" consisting in human capital investment and strong institutions is essential for economic growth.
A survey of GDP per capita across countries shows that the distribution of incomes is not uniform and that a number of countries seem to be stuck in a middle income level. These countries achieved moderate growth rates in earlier development stages, but long before reaching the level of the richest nations, growth slows down. Growth is much lower than what would be expected from typical growth models and convergence theories, forcing such economies to stay in a sort of middle-income limbo indefinitely.
This effect might be explained by these countries reaching the apex of development (a low-income steady-state) for certain types of economic activities and not being able to transform into other types that would allow further development. As an economy reaches a certain development level, further growth seems to depend more and more on innovation. Innovation appears to be scarce in economies that have grown accustomed to expand through activities based on cheap labor, such as agriculture.
There are many traps and big pushes in development economics and depending on the evidence presented just as many are plausible. Countries with large amounts of resources such as hydrocarbons or rare earth elements (REE) often do worse than their poorer neighbors. In development economics this phenomenon is called a resource TRAP/curse and it is often tied to the corruption trap. Many of the affected countries top the 2011 Failed States Index e.g. Sudan, The Democratic Republic of Congo and Nigeria. In 1995, Jeffery M. Sachs and Andrew M. Warner published the paper “Natural Resource Abundance and Economic Growth” which published empirical proof of evidence for a negative relation between natural resource intensity and subsequent growth. Antonio Cabrales and Esther Hauk in “The Quality of Political Institutions and the Curse of Natural Resources” summarized the empirical evidence for the resource curse as follows: “ 1.) countries rich in natural resources grow slower on average than natural resource poor countries 2.) The cross-country evidence is inconsistent with a monotonic effect of resources on development/growth: (Robinson et al., 2006) 3.) The quality of institutions is decisive in determining whether natural resources are a blessing or a curse 4.) Natural resources have anti-democratic properties: oil and mineral wealth tends to make states less democratic (Ross, 2001; Lam and Wantchekon, 2002; Jensen and Wantchekon, 2004; Bulte and Damania, 2008) 5.) Many revolutions are linked to rents derived from natural resources (Collier and Hoeffler, 1998).” In particular, oil, gemstones, minerals and other lootable resources are associated with civil conflict while agriculture is not. Paulo Mauro addresses the plausibility of the corruption trap citing a body of theoretical evidence in Corruption: Causes, Consequences, and Agenda for Further Research.
In “Escaping the Resource Curse” Macartan Humphreys, Jeffrey D. Sachs, and Joseph E. Stiglitz argue that a BIG PUSH for better management of petroleum revenues and political change in the developing world may provide a valid strategy to break the curse. The authors, however, provide theoretical recommendations. Elinor Ostrom focused on common pool problems such as the resource trap. She provided empirical proof that a push for collective-choice arrangements and informal governance on the local level may be productive in solving tragedies of the commons in “Common-Pool Resources and Institutions: Toward a revised theory.”
Trap is the "Middle Income Trap". Since a lot of developing countries have a low levels of capital, but high supply of cheap labor. Thus initially they have use the labor to make labor intensive goods at a cheap price and increase growth by exports.
But once a country has exhausted the supply of marginal labor from countryside to the factories, and due to initial development, the wages have risen to a higher level, the low cost advantage doesn't stay for long.
Once the low hanging fruit has been picked, the growth rates collapse.
At this level, the country must innovate, and move to more services, and productive ways of increasing growth.
Examples of countries having moved out of the middle income trap: Japan, South Korea, Taiwan, Singapore
Examples of those who are still in the trap: Argentina, Turkey
Middle income trap is more plausible impedes the process of development. It is a situation when an economy stuck in a certain level of income and growth. And it is unable to further pursue the path of development. For example, the economies of South Africa and Brazil are being enlisted in the ‘middle income’ countries at the World Bank’s income categories since a decade. It results when a country’s cost of production increases due to increase in wages, energy prices and transportation cost etc. So country can’t compete with the advance economies that are producing cheap and high quality and innovative products. According to Jesus Felipe in 2010 for available data of the sample of 124 counties, amongst 52 middle income countries 35 were stuck in middle income trap that include 13 Latin American countries, 11 Middle East and North African, six Sub-Saharan African, three Asian, and two European countries . Therefore, I consider middle income trap more plausible for growth as majority of the developing world in trapped in it. To move out of this trap it requires Innovative and high-technology exports, massive R&D spending, more productive laborforce, and investment in human capital like education and health.
The low level equilibrium trap is quite plausible. This occurs when people are too poor to save any income. This lack of savings then limits the ability of the individual (or group of individuals) to invest any of the output and growth slows or stagnates. A ‘big push’ would involve a larger firm or government to provide the initial investment, with a focus on improving the health and income of the individuals.
An example would be the efforts of Jeffrey Sachs (along with Columbia University and several governments in Africa). Beginning in 2006, $150 million was invested in 14 areas in Africa to improve health (anti-malarial nets; safer water supply; primary school meals), agriculture (drip irrigation) and local technology (smartphones). Gains (over 300%) were noted in utilization of these services. A critical assessment noted although agricultural production improved by 70%, there were no additional individual or family savings (the gains were simply eaten).
This shows some success and merit to the idea of using a ‘big push’ mechanism, but questions would remain. Was the ‘push’ big enough - arguing if there was sufficient consideration of Paul Rosenstein-Rodan’s indivisibles (production function, demand and savings) to actually make a real (and sustainable) difference.
Traps can be seen on real example during monetary crisis in Indonesia 1997/1998 when the IMF imposed the rule to halt 16 banks in Indonesia and Indonesia should follow IMF role to open their market for MNCs into Indonesia’s market. It can be seen as “Debt Trap”, in dependency theory, the developing countries will always be depended on developed countries, because of lack of physical and expert skill labour, therefore, they are always just become “Natural Resources Exporter” and import ready goods. In this case, they cannot gain any benefits from trade, whereas the principle of trade itself is to bring benefits and increase wealth for both parties. In big push, during SBY’s administration, the government tried to push economic consumption on gas, by converting kerosene to gas, in daily cooking house consumption. As the result the government gave Rp. 100.000 or 10 USD low-income household every month to increase consumption. However as the result: high inflation and the price of good and services increased, and the Rp.100.000,- subsidies considered failed to tackle this good intended will from the government, at the end it just resulted bad unintended consequences.
Historically, the economic development of countries has been a more or less a long sequence from low income (poor) to high income (rich). And according to Kuznets (1971), economic development is a very complex process that involves: (i) the transfer of resources (labor and capital) from activities of low productivity (typically agriculture) into activities of higher productivity (industry and services); (ii) capital accumulation; (iii) industrialization and the manufacture of new products using new methods of production; (iv) urbanization; and (v) changes in social institutions and beliefs.
Understanding how countries go through the economic development sequence is the unending quest of development economists. Most often, the sequence is from low income to middle income and, ideally, to high income. In some cases, however, countries get stuck in the low- or middle-income groups for a long period of time and do not move up. In some other cases, reversals happen.
Felipe (2012) provides a working definition of the term “middle-income trap” and indicates that, in 2010, 35 out of the 52 middle-income countries were in the middle-income trap, 30 in the lower middle-income trap (nine of them can potentially graduate soon), i.e., they have been in this income group over 28 years; and five in the upper middle-income trap (two of them can potentially leave it soon), i.e., they have been in this income group over 14 years. Eight out of the remaining 17 middle-income countries (i.e., not in the trap in 2010) are at the risk of falling into the trap (three into the lower middle-income and five into the upper middle-income).
Of the 35 countries in the middle-income trap in 2010, 13 are Latin American, 11 are in the Middle East and North Africa, six in Sub-Saharan Africa, three in Asia, and two in Europe. Therefore, this phenomenon mostly affects Latin America, Middle East, and African countries.
Avoiding the middle-income trap is a question of how to grow fast enough so as to cross the lower middle-income segment in at most 28 years (which requires a growth rate of at least 4.7% per annum); and the upper middle-income segment in at most 14 years (which requires a growth rate of at least 3.5% per annum).
So, I agree with Agénor et al (2012), for instance, when they say that “the middle-income trap is avoidable if governments act early – rather than late, when the benefits of cheap labour and the gains from imitating foreign technology are all exhausted – and decisively to promote innovation”. As a consequence, I do not believe in “big push” mechanisms to get out of middle-income trap, which is a plausible problem in my opinion.
The Dutch disease, or the resource trap, is probably one of the most common afflictions for developing economies. There are so many different individual resources that could cause this that a country (or region within a country) that is poor in the most common forms of resources, capital, or institutions, may still be likely to be affected by this problem. See resources as obscure as guano mining during the 19th century in Peru and Chile, or coltan mining in DR Congo today.
A big push to get out of this trap might be an effort to take some of the surplus money created by the resource and diversify the economy and build up improved capital. This probably will not be very effective without improved institutions. For instance, Dubai tried to take its oil money and diversify to become a tourist destination, world financial center, and transport and logistics center. Its institutions remained authoritarian with a free market veneer. In the wake of the Great Recession, Dubai has not done nearly as well at economic diversification. This big push has probably not been very successful, on balance. Dubai is an example of a country with so many natural resources that it has accumulated enough capital to be able to attempt a big push. In many cases, a country would not even have the capital accumulation to be able to attempt a big push out of the Dutch disease.
Location and Institutions are important factors for national development. Ethiopia has been land locked since 1991. Its government has been criticized for human rights violation particularly after the 2005 national election, and many believe that the government lacks transparency. On the other hand, it is also believed that the country has been growing at a double digit for more than seven years and is the only non-oil economy in Africa to grow at this pace. How would one see this in light of this course?