Development Economics (Macroeconomics) Assignment 2020

Joseph Cartwright, u1903671

Tutor: Subham Kailthya

Q1.
Unlike the ‘Big Push’ approach to poverty, Duflo, Kremer and Banerjee emphasised lower-
cost, small-scale interventions in part through an experimental approach of randomised
control trials rather than large-scale development aid. The change in approach contributed to
why they received the award. The idea was to pinpoint specific causal effects of different
methods and their relative success. For example, in the 1990s, Kremer attempted field
experiment interventions to try and improve school results in Western Kenya, and found that
among the largest barriers to success in this area were a lack of teacher accountability and
teacher support, rather than just lack of resources (Stevens, 2019).
However, it has been argued by Deaton that such trials suffer from a ‘transportation
problem’; showing that a treatment works in area x is ‘exceedingly weak evidence that it will
work in the same way elsewhere’ (Deaton, 2016). In other words, even if an RCT can
estimate average treatment effect well in one specific population, it may have limited reliable
external relevance. Causal effects may depend on factors that differ between the
experimental setting and other settings. Therefore, the economists’ works may have fewer
reliable implications than should merit the prize.

Q2.
Under the Malthusian Model, a country with high levels of resources relative to its population
will at first have higher living standards, allowing population to increase rapidly and outgrow
its resources. As resources such as land are fixed, a higher population will mean the quantity
of resources per population will lower over time and there will be diminishing marginal
product of labour (DMPL). At a certain point population will decrease again, for two reasons;
firstly, there will be insufficient resources for the population to subsist (a ‘positive’ check),
and secondly, due to e.g. the practical implications for a parent or social stigma, humans will
decide to have fewer children (a ‘preventative’ check - as Malthus puts it, ‘reason interrupts
his career’). Therefore, arguably all improvements in productivity will simply raise
populations until it is too large for even new resources to accommodate, and so the new
higher population will remain at subsistence without continued growth. In the last two
centuries the developed world has ‘escaped’ the model as acceleration in productive
innovations has persisted and more than offset DMPL, in part due to the ‘demographic
transition’ meaning preference for quality of a child (including better education) rather than
quantity.
Q3.
In 1988 West Germany had a very high value of capital intensity, leading the figures in the
table along with Japan (Hall and Jones, 1999). In fact, despite having a lower level of human
capital per worker (i.e. education here) and lower labour-augmented productivity than the
United Kingdom, its output per worker value was substantially higher as its capital-intensity
 
1
value is over 0.2 higher (1.118 to 0.891, measured to the power of relative to the US).
Therefore, physical capital was driving West Germany’s output per capita to a large extent.
Its capital-intensity was also the only component of growth that was higher than the US. Its
human-capital per worker was only 80.2% of the US, its productivity 91.2%, and so overall
its capital-intensity was not sufficient to raise its output per worker to more than a value of
0.818 relative to the USA.
The capital/labour values from growth accounting/output all come from data and the
productivity/technological component is taken as a residual, meaning that values of
physical/human capital estimates towards growth rates or output will not be affected if g or A
is biased towards capital. However, the extent to which technology comes from capital or
labour will be inaccurate. When there is capital bias, Y  F (TK , L ) and the Solow Residual
FK K T
g
is Y T , as FT T  FK K (Barro et al, 2004). If it is assumed that technology is Hicks-
Neutral, the impact of technological progress through labour (capital) will be overstated
(understated) as the residual is thought to encompass non-existent labour productivity
FK K
growth. In a capital-intensive country like West Germany, the ‘factor share’ of capital Y
is relatively higher, and so g will contribute a greater share of output relative to other
countries than if it were equivalent labour productivity increases.
Hall and Jones use labour-augmenting productivity and so the figure A, which is assumed to
come from labour productivity, is actually capital productivity. As the algebra below shows,

1
what was thought to be A is actually T - and as alpha is generally less than 0.5, the power
is less than 1. This implies T is higher than the Table value.

Y  (TK ) ( H )1

Y TK H
 ( )1
L Y L


Y  K 1 H 1
  T
L Y  L

Q4.
Institutions have a ‘reverse causality’ problem regarding growth; they are endogenous in that
countries with characteristics conducive to growth are in a position to create better
institutions (e.g. wealthy countries can collect more tax revenue for customs systems or
better provision of public goods). There could also be omitted variables like ethnic
homogeneity correlated with both institutions and growth.
Boehm and Oberfield (2020) run into a reverse causality problem. Correlation between court
congestion and homogenised inputs does not necessarily imply that court congestion is the
sole causal factor. OLS may have a positive bias (the paper suggests that states with
customised inputs may invest more in courts due to higher potential for disputes, meaning
less congestion). Therefore, just a correlation would overestimate how much input adoption
changes because of court congestion.
The instrument is the age of high courts as a predictor for court backlog. An instrument is
relevant if it is highly correlated with the endogenous regressor (in this case, court
congestion). A new high court will have no backlog and the two are indeed correlated.
This is not sufficient for an instrument; it also needs to be uncorrelated with the error term, to
ensure it is measuring the impact on the dependent variable (inputs) ONLY through the
desired regressor (court congestion). It is possible that new states are poorer, meaning less
sophisticated technology, therefore possibly more homogenised inputs. So while older courts
will increase backlog, therefore ceteris paribus homogeneity of inputs, they will also be
poorer, meaning inputs may be LESS homogenous and the positive correlation between
court age and homogenous inputs will be smaller. Therefore, the true relationship may be
understated. If this is the only violation (meaning a negative bias) and OLS indeed has a
positive bias, IV estimates will be lower than OLS estimates.