M1: Idea of development

Debraj Ray: Introduction: Development Economics book

 He points out that the economic transformation of all developing countries is the most complex
phenomenon.
 80% of today’s population stays in developing countries.
 Common features of underdeveloped or developing nations: Informal institutions to formal
constructs, absence or under functioning of markets and inequality plays an important part in any
development problem. Also, lack of information and weak legal structure are something that’s
common.
 He makes no generalization and believes that all countries are different.

Sir Hans Singer: Pioneers Revisited: Frontiers of Economic Development

 Poverty is multifaceted and too complex; it is too country specific.
 In all developing countries, there is governance problem.
 6 areas of development studies:
1. Globalization: from winners and losers to a ‘win-win’ force.
2. Urbanization: civic participation, urban informal sector, planning, infrastructure and environment.
3. Environment degradation: sustainable development
4. Footloose volatile financial flows: urban and rural microcredit as an instrument to create new
opportunities for poverty reduction.
5. Trade in services, technology and brainpower.
6. Child labour

Paul Collier: Falling Behind and Falling Apart: The Bottom Billion

Daron Acemoglu: So Close Yet So Different: Why Nations Fail

M2: Theories of Development

Kaushik Basu: On the Goals of Development: Frontiers of Economic Development

 Focus on GDP and GNP is absurd, HDI too has criticism but nations should focus to achieve
‘comprehensive development’. GDP doesn’t focus on issues like like environmental concerns,
standard of living, inequality between classes, regions and gender and poverty.
 Talks about interdependence of the goals of different nations.
 Stresses on the failure of social and political institutions.
 Recently World Bank has focused on ‘societal development’ including basic human rights, access to
just legal system, literacy and good health. According to them advantages of HDI to promote equity
and poverty reduction are:
1. HD is desirable as an end in itself.
2. Promote productivity.
3. Reduces human reproduction which is desirable.
4. Political stability.
5. Healthy civil society and democracy.
6. Good for environment.

 Quintile growth: Do not focus on the income of the whole nation, instead focus on the economic
condition of the poorest 20%- their per capita income and growth in PCI.
 Their talents are not yet realized because of their limited access tp education and credit.
 Taxing rich is an option but if it leaves the bottom quintile worse-off then focus should be on growth
in the right direction.

 Advantages to focus on quintile growth:

1. Coincides with non-economic factors.
2. Synced with HDI.
3. Poverty and inequality reduction are broader objective.
4. Efficiency of government.
5. Gives true picture of country.
6. Moving target: bottom 20% will always be identified till the time inequality exists.

 Disadvantages to focus on quintile growth:

1. Weak transfer axiom: giving from rich (top) in bottom 20% quintile to the poor in the same 20%
quintile is of no use. It will result in no change of income. However, this problem is tackled through
rank-weighted quintile income index in which highest weight is given to the poorest.
2. Focus is only on either rich or poor; no focus on middle-income.
3. Rich has better incentives to hide their incomes. Therefore, result will be from middle class to poor.
4. This further leads to class distribution.
5. To check the progress of this phenomenon is difficult since majority of them work in informal sector
and do not pay taxes.
 To recognize conditional morality is important because it can enable the design of coordinated plan
on the part of nations for achieving goals that are beyond national income and income growth.
 Part of the problem is not so much to persuade leaders that quintile income matters but rather to create
global institutions that make it possible for countries to pursue these goals.
Daron Acemoglu,Simon Johnson and James Robinson- 2001: “The Colonial origins of
Comparative Development: An Empirical Investigation”
 Strong relationship between settler mortality and current institutions. How?

Hypothesis: Settler mortality → settlements → early institutions → current institutions → current

performance

 Why do countries have varying per capita income? Some can afford better institutions and invest a lot
more in human capital. Eg; North and South Korea, East and West Germany. Nevertheless, we lack
reliable estimates of the effect of these institutions on economic performance.
 To see the impact of institutions on economic performance, they have tried to propose a theory
of institutional differences among countries colonized by Europeans to derive a possible source
of exogenous variation. Three major ideas of theory:

1. Extractive states and neo-europes (term coined by Alfred Crosby): extractive states were
resource rich and were thus used to transfer resources from colony to colonizer. No protection
for private property, no emphasis on checks and balances against government power. Eg; the
most extreme was that of Leopold of Belgium in the Congo. His philosophy was that the colonies
should be exploited, not by market economy operations but by state intervention. On the other
hand, neo-europes: exact opposite of extractive states. Eg; Australia, New Zealand, Canada and
United States.
2. The decision of the colonizers was highly dependent on the disease environment state of the
nation. If it was bad, the state being extractive one was more likely.
3. The colonial state and institutions persisted even after independence.
 Countries where Europeans faced higher mortality rates are today substantially poorer than colonies
that were healthy for Europeans.
 Denoon (1983) emphasizes that settler colonies had representative institutions which promoted what
the settlers wanted and that what they wanted was freedom and the ability to get rich by engaging in
trade.
 Aim of the colonizers varied and that determined how a country’s development took shape after
independence. Eg; Africa was never institutionalized. Eg; main objective of Spanish and Portuguese
colonization was to obtain gold and other valuables from America.

 Result:
1. Institutions today are predetermined by colonial policies and cannot be changed.
2. Colonial experience as one of the many factors affecting institutions.
3. Mortality rates are exogenous and are useful to see the effect of institutions on economic performance.

Jeffrey D. Sachs-2003 “Institutions don’t Rule: Direct effects of Geography on per capita
income”
 Hypothesis: levels of per capita income are strongly correlated with geographical variables such
as climate zone, disease ecology and distance from the coast.
 He claims that the authors like Acemoglu et. al. are incorrect while they explain cross country patterns
of income per capita on the basis of ‘choice of institutions’. Further, he states that the choice of
institutions were indeed based on direct effects of geography on production systems, human health and
environmental sustainability.
 Geography directly affects the choice of institutions: “DIRECT-GEOGRAPHY-PRODUCTIVITY-
LINKAGE”
 Equation: In(Yi)= Bo + B1Qi + B2Zi + e
Dependent: Y= log of income per capita of country i
Independent: Q= quality of institutions, Z= Geographical variables.
Assumption:
 1. Since income is affected by geography (Z), the argument suggests that Z works only through Q, with
no direct effects once ! is entered in regression equation.
2. B2 is zero so Z variables have no additional explanatory power beyond their possible indirect role in
affecting Q.
3. Null hypothesis: H0: B2=0

Result: even after narrow confines of equation, null hypotheses is easily refuted.
 He claims that complex process like development cannot be explained by 2-3 variables alone.
 He further proved his results by choosing malaria as a disease which was major reason for the mortality
rates at that time. He claimed that regions where there is high risk of malaria transmission have lower
per capita income than non-malarious regions, controlling for the quality of institutions.
 Towards conclusion: there is good theoretical and empirical reason to believe that the development
process reflects a complex interaction of institutions, policies and geography.

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Daron Acemoglu et.al. 2009: “Reevaluating the modernization hypothesis”
 This paper critically evaluates the modernization hypothesis: per capita income causes the creation and
consolidation of democracy. (Seymour Martin Lipset (1959)).
 Critical juncture hypothesis: institutional change which affects both economic and political
development is initiated by differences during a certain critical historical juncture.
 The available evidence suggests that the institutional differences created at the critical juncture of
European colonization persisted and significantly contributed to the large differences in both the form
of government and the economic success of the societies.
 Unlike other previous work, they have investigated the relationship between income and transitions to
and from democracy in a panel of countries by controlling for country fixed effects. These fixed effects
are systematically related to historical variables associated with political and economic divergence in
history, and this lends support to the critical juncture hypothesis.
 Results show that once fixed effects are gone, the positive relationship between per capita income and
democracy disappears. Therefore, they conclude that the modernization hypothesis needs to be re-
evaluated, with much greater emphasis on the underlying factors affecting both variables and the
political and economic development path of societies.