Students

Poverty exists in every country around the world; however, its depth is greater in less developed nations. Calorie counting, local poverty assessments, poverty line, and poverty gaps are methods used to measure levels and degree of poverty.

The poverty gap per day is a measure that allows accounting for how poor the population of a country is whereas the poverty headcount measure determines the number of poor people who live in the country. Global institutions, governments, and non-governmental organizations are interested in fighting poverty and supporting policies that eradicate it.

The purchasing power parity calculations of the poverty lines support the international comparison of poverty across countries given it adjusts for the global difference in the cost of living. Using the market exchange rates to convert poverty lines to dollars may be misleading given the goods the poor purchase are not necessarily tradable. Market exchange rates reflect prices of exports and imports which the poor do not readily purchase.

The Gini coefficient, as calculated from areas derived from the construction of the Lorenz curve, provides a single measure of income inequality which, in turn, offers a perspective of the changes in the income distribution within and across countries over time. Overall, although regions of the world, such as Latin America and Sub-Saharan Africa, have seen increases in income inequality and higher poverty, the world income inequality has decreased due to the economic growth process of China and other parts of Asia.

The levels of production of countries around the globe depend on the productivity of the different factors of production including total factor productivity, TFP. Growth of output may be decomposed into the growth of the different productivity levels of each contributing factor. TFP may be explained by geography, institutions, and other aspects not already considered in the productivity of both capital and labor.

The Neoclassical Solow Growth model explains output growth as a function of savings, population, TFP, share of capital in total income, α, and the depreciation rate, δ. Given the diminishing returns to capital, the Solow Growth model predicts economic convergence while technology is exogenously determined. On the other hand, the Endogenous Growth Theory determines technological change within the model (endogenous technology) making innovation depend on the country’s knowledge base. This fact puts developed nations at an advantage that makes economic divergence more plausible, unless technology transfers compensate the lag developing nations face in the creation of knowledge.

Empirical evidence shows the crucial role of TFP through institutions (enforcement of property rights) and geography (ease of transportation and existence of location-specific disease).

Economic development implies structural changes that bring with them migration from the rural to the urban areas. Both the Lewis and the Harris-Todaro models explain this process departing from different premises that reach different conclusions. Lewis concludes full urban employment as the product of rural-urban migration due to the always higher wage in manufacturing relative to agriculture. The Harris-Todaro model concludes there is urban unemployment due to the fact that not all migrants find a job in the city and due to the elastic demand curves for labor in both sectors (manufacturing and agriculture).

Sectoral growth as development strategy may be either balanced or unbalanced. The unbalanced growth is a more realistic approach as it does not require perfect synchronization of efforts and such a great budget for the developing country. The big-push theories support the idea of allowing key sectors to grow so they, in turn, “push” other complementary sectors.

Other development strategies account for import substitution and export promotion. Although import substitution was popular in the 1950s and 1960s, it did not prove successful in the developing countries. The export promotion, though, was crucial for growth in Asia due to the supporting role of the government. Finally, although foreign aid may be perceived as beneficial and so confirmed by Jeffrey Sachs, it does bring some controversy as William Easterly states it when he refers to it as a strategy that creates disincentives for receiving countries to become competitive in the world markets.

International trade is based on the comparative advantage nations hold that is determined by the difference in the opportunity costs of producing goods and services. If trade partners specialize, everyone involved in trade should benefit towards greater consumption possibilities. However, trade does not escape politics that deal with accounting for the winners and losers of trade and the “give and take” policies. Politics and bilateral trade agreements may limit trade opportunities that would bring additional benefits to society.

Protecting trade does have net social effects for society due to the net loss in overall social well-being. Trade convertibility and exchange-rate regimes are discussed to understand the logistics of trade and how it is affected by the world currencies and their value relative to the domestic currency.

Institutions determine constraints on human behavior as imposed by societal rules. They may be formal or informal depending on if they are accepted by all members legally or by social norms and the nation’s culture. In the end, all institutions ameliorate bottlenecks and failures that exist in the markets and daily interaction among individuals.

These institutions (formal and informal) are crucial in tackling different problems that may deter growth and development. These problems include: the informational problem, the hold-up problem, the cooperation problem, and the coordination problem. These problems are inherent to a society in which human beings, intentionally or unintentionally, may take advantage of a situation for their own gain. The uncertainty and delays that these problems impose may deter or affect decision-making that affects an economy. Hence, institutions become ways of restraining undesirable outcomes that create inefficiencies.

Less-developed countries suffer from these problems with greater incidence than developed countries due to less strong enforcement of the law or inexistence of needed regulations. Institutions and their advancement, thus, are crucial to enhance economic cooperation and push prosperity.

The central planning economy was held as an appropriate way of organizing economic activity to minimize business cycles and unexpected outcomes such as unemployment. However, central planning is proven to have been inefficient in its production and coordination outcomes due to its incentives system. The production fulfillment plan provoked negative by-products that revealed inadequate quality, unbalanced output mix, and shortages in both goods and labor.

Coordination mistakes in price or quantity both imply losses; the issue is to minimize the loss given the slopes of both the marginal cost and marginal benefit curves. When coordination is perfect, the optimum quantity is given by the intersection of both the marginal benefit and marginal cost curves.

When institutions are weak vertical integration works well, which reduces the hold-up problem but increases inefficiency.

There are two main political regimes in the world and its history: democracy and autocracy. The former allows freedoms and the spread of political power, and the latter limits freedoms and concentrates power in the hands of a few or a single dictator.

Both a democracy and an autocracy have economic effects on society. Autocracy does not redistribute income to the poor and it limits access to markets and to social mobility. Democracy enacts policies preferred by the median voter and is more participative. Different types of democracy have either smaller governments (presidential type) or larger governments due to additional separation of powers (parliamentary). Their kind of electoral votes, proportional or majoritarian, have different impacts on the level of welfare for a nation.

Democratization got stronger in the twentieth century with a few countries starting in the 1800s. Out of three waves of democratization in the history of the world, democratization in developing countries happened mostly in the third wave (1975-1994). Costa Rica is the only developing nation that was part of the first wave of democratization. Income, education, and income inequality are definitely factors that relate to democracy, although with no certainty of any causation effect between them.

Legal and fiscal institutions are crucial for providing key incentives to economic behavior while deepening markets and financial development. Institutions become enablers or obstacles to smoother transactions and greater productivity towards better economic growth and development.

Common-law countries and civil-law countries differ in how they rely more on a code of law or legal precedents, respectively. The former countries provide better shareholder and creditor rights than civil-law countries, and developed countries have better measures in the quality of law enforcement.

Fiscal institutions may provide incentives to decrease economic activity in different proportions depending on the elasticity of supply and demand in the different markets. For instance, a tax on labor may decrease quantity supplied of labor by a greater proportion when the labor supply curve is highly elastic. If that is the case, the tax base decreases by a greater amount and government revenues decreases more than if the tax is imposed in a less elastic supply of labor.

Other factors such as administrative constraints, corruption, and the size of the underground economy affect both legal and fiscal institutions negatively while increasing inefficiencies and reducing government revenues.

Culture has been studied throughout centuries by different scientists around the world. Economists have been incorporating these studies in their effort to understand the different factors that explain economic performance of countries and regions alike.

Studies by Hofstede, Guiso, Schwartz, Licht et al., and others have proven to have enlightened the discussion about the role of trust, religion, beliefs, autonomy and enbeddedness, or, in a nutshell and as Hofstede defines it, of the human mind, on the economy. There is empirical evidence that proves that more conservative, collectivist, and masculine societies may grow differently than societies that are, for instance, more egalitarian and individualistic.

Understanding the influence of cultural attitudes on formal institutions and civil participation proves extremely important when addressing the economic development of different areas of the world.

Land is one of the factors of production that can enhance economic growth. However, depending on how workers relate to it, it may be cause for inefficiencies and increase in poverty.

If workers are given the incentives to give their best effort in increasing farm productivity, agriculture becomes a motor to prosperity. Different forms of land tenancy have different economic and social effects that affect the output per worker.

Land reform has been a movement towards allowing better land equality and enhancing output growth, although it has not always been the product of a benevolent government. Reform has taken place in the midst of political turmoil and economic distress, and as a result of labor mistreatment. However, reform has allowed better land distribution and, hence, more fruitful labor for a more inclusive participation towards greater agricultural income. The distributive effects of land reform are not always as intended and can still be improved in some regions of the world where affluent people still influence the outcomes.

This chapter does a great job at explaining the history of land tenure in different parts of the globe and how it was diversely addressed, depending on the political and social forces behind it. It provides an informed way of understanding the agricultural developments in developing nations.

This chapter studies the effects of having a weak system of property rights in developing nations. Larger informal economies are a deterrent to investment, greater markets, trust, and further business transactions.

Corruption is positively related to informal economies and absence of rule of law. It may also be associated to a larger government that finds in state-owned enterprises and relational capture instances to work towards the benefit of private interests of a group at the expense of social welfare.

Although nationalization and central planning were thought to be best policy practices after the Great Depression and World War II, they proved to be inefficient and detrimental to both the maximization of government revenues and the achievement of the social optimum.

Privatization started as the alternative to state-owned enterprises and, led by the “Asian tigers”, has proven to be a way to improve market outcomes where corruption levels are not as high. Although it brings challenges, the net gains for countries who have embraced privatization have been positive overall, especially for countries whose institutions are of better quality.

This chapter studies the challenges of imperfect markets that face lack of integration due to costs of transaction and obstacles in communication and transportation that make it difficult to reduce the price gap of different commodities in different regions, and can cause famines.

Price liberalization in Central and Eastern Europe unexpectedly caused a fall in output due to the absence of pre-existing market institutions. China, on the other hand, was able to see an increase in output due to the dual-track system they used.

The existence of monopsony in rural agricultural sectors brings the hold-up problem to life in which farmers would rather not invest in new technology fearing the monopsonistic trader may offer a lower price later that would not cover the costs of investment.

This chapter studies issues relating to underdeveloped financial markets. In particular the chapter addresses the topics relating to asymmetric information, moral hazard, adverse selection, and credit rationing.

The topics covered in this chapter are of particular relevance because poor people have very limited access to financial markets and credit. In particular, the issues relating to lack of collateral and expensive monitoring on small loans, make these problems a major constraint for the development opportunities of those in most need.

Additionally, the chapter discusses progress made in the field of microcredit, and how this innovative way to provide credit to the poor resolved a significant amount of the problems mentioned above. Particular emphasis is placed on group lending and dynamic incentives associated with it. Monitoring and mentoring topics prove fundamental to secure a high rate of repayment on small loans directed to the poor.

This chapter studies the main issues relating to the health care delivery system in developing countries. In this chapter the reader will learn about the main advances in terms of health related topics as well as the main challenges that developing countries face. Among the main topics the chapter discusses are the implications that diseases such as HIV, diarrhea, malaria, tuberculosis have on the accumulation of human capital, labor productivity, and the rate of growth and overall labor force level.

The chapter will also discuss the role that institutions and markets play in finding solutions for the problems mentioned above. For instance, in this chapter the role of drug development and pharmaceutical companies will be discussed. By the same token, the chapter also discusses the issues relating to market imperfections and lack of commitment and moral hazard on the consumers’ side.

This chapter studies the role of education and the challenges faced in developing countries. Particularly, the chapter deals with issues relating to the gender gap, child labor, and differences across different levels of educational attainment. The central theme of the chapter is that human capital accumulation is a fundamental necessity for most people to be able to achieve a higher standard of living and overall increased wellbeing.

In this chapter several empirical studies are analyzed to illustrate the difficulties of assessing the cost of education as well as the return on education. In addition, institutional issues are discussed such as corruption, allocation of public funds, educational reforms, and the reduction of teachers’ absenteeism, among others.

This chapter studies the importance of infrastructure investment and the many limitations faced by developing countries to effectively and efficiently accomplish this important goal. In this regard, the chapter places emphasis on the concepts related to geographic location, cost of capital, regulatory efforts, and the prevalence of white elephants in many developing countries.

This chapter also studies the issues relating to the importance that infrastructure investment plays in the process of economic growth. Countries that lack the capabilities to successfully undertake fundamental investment projects will fall behind on their development objectives.

This chapter studies the different definitions of corruption and the alternative measures of it. The chapter also studies and addresses the consequences of corruption on the level of economic development, and the implications for economic growth.

In addition, this chapter studies several issues that may affect corruption and its eradication, such as cultural differences across countries, and issues related to the good (“greasing the wheels”) and bad (“rotting the fruit basket”) of corruption.

This chapter studies the challenges of conflict and the implications it has on the level of economic development. In particular this chapter places a strong emphasis on conflict given that it is one of the most serious problems facing developing countries.

The chapter bases the analysis of the sources of conflict around the concepts of informational asymmetries and issues relating to commitment problems. In this regard, the chapter uses an empirical approach to study the differences that social, economic, and political variables may have in the origination, persistence, and avoidance of armed conflicts.