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Contents

List of Sidebars
List of Figures and Tables
Preface

1 What Development Economics Is All About

2 What Works and What Doesn’t?
3 Income
4 Poverty
5 Inequality
6 Human Development
7 Growth
8 Institutions
 9 Agriculture
10 Structural Transformation
11 Information and Markets
12 Credit and Insurance
13 International Trade and Globalization
14 Choose Your Own Epilogue

Notes
Index
Sidebars

2.1. Progressing with PROGRESA

2.2. Impacts of SCTs in Sub-Saharan Africa
2.3. Hope
2.4. Worms
2.5. A Remittance “Natural Experiment” from the Philippines
2.6. What? An Economic Placebo?
2.7. Impacts of a Treatment on the Nontreated in Lesotho
3.1. PPP and the Big Mac Index
3.2. Green Accounting and the Pollution Drag on GDP
4.1. The “Hunger Hurts—Need Cheap Calories” Approach to Poverty
Measurement
4.2. Drought, Poverty, and Inequality: The Sahel
 4.3. Poverty and Witch Killing in Rural Tanzania
5.1. Income Polarization Is Not Income Inequality—and Why It Matters
5.2. Remittances and Inequality
6.1. Do More Schools Mean More Education?
6.2. Do Conditions Matter?
6.3. Bednet Spillovers
6.4 . The Last Mile?
6.5. A Cash Transfer Program for AIDS
6.6. Keeping the Water Safe
6.7. The Long-Term Effects of Famine
7.1. The Growth Legacy of the Vietnam War
7.2. The Man Who Ran 2 Million Regressions
8.1. Typing, Eating, and “Path Dependency”
8.2. How Malaria Became Central to the Institutions Debate
8.3. How Market Institutions Make It Tough to Do Business in Sub-
Saharan Africa
8.4 . Do Land Rights Make People More Productive?
8.5. Entrepreneurial Monks and the “Innovation Machine”
9.1. Upward-Sloping Demand Curves?
9.2. Learning from Others
9.3. Who Controls the Cash?
9.4 . Bad to Be a Female Plot
9.5. The Mystery of Maize in Mexico
10.1. Can China Feed Itself as People Leave the Farm?
10.2. Who Migrates and Who Doesn’t?
10.3. Do Nonfarm Activities Increase Inequality?
10.4 . The Supermarket Revolution
10.5. Smart Cities
10.6. Climate Change and Poverty
11.1. Famine and Missing Markets in Tigray
11.2. All in One Price
11.3. Estimating the Shadow Price of Corn
11.4 . The High Cost of Saving Two in a Billion
11.5. Walmart in Nicaragua
11.6. Saving Fish with Cell Phones
11.7. Nudging Poor Farmers to Use Fertilizer
11.8. Which Seeds to Save?
12.1. Saving for a Rainless Day
12.2. Is It Credit or Insurance?
12.3. Credit and Productivity in Peru
12.4 . Muhammad Yunus and the Grameen Bank
12.5. Why Poor People Pay a High Price for (Ex-Ante) Insurance
12.6. Holding On to the Last Cow (or Two)
12.7. Insuring with Satellites
13.1. A Migration Lottery
13.2. Migrants on Rails
13.3. Bat Drain or Bat Gain?
13.4 . “The Dragon’s Gift,” “The New Scramble for Africa,” and “Aid 2.0”
Figures and Tables

F I G UR E S

2.1. An income transfer project creates both direct and indirect income
effects
4.1. The poverty line
4.2. An asset recursion function with a poverty trap
5.1. Frequency distributions of income for Albania, Nicaragua, Tanzania,
and Vietnam
5.2. Decile frequency distributions of income for Mexico and Sweden
5.3. Ranking of population from poorest to richest
5.4. The Lorenz curve
5.5. Intersecting Lorenz curves
6.1. The HDI increases sharply with per capita income and then tapers off
 6.2. The classic “MVPL = w” rule
6.3. The costs and benefits of going to secondary school for girls and
boys in rural Lesotho
6.4 . Life expectancy at birth rises sharply with per capita income
7.1. The firm’s output (Q) increases with labor inputs (L) but at a
decreasing rate
7.2. Aggregate production per worker (y) increases with capital per
worker (k) but at a decreasing rate
7.3. Savings per worker is output per worker times the savings rate, s
7.4 . A is the steady-state income and capital per worker in the economy
7.5. An increase in the savings rate leads the economy to a higher steady-
state capital-labor ratio and income per worker
7.6. An increase in the labor-force growth or depreciation rate takes the
economy to a lower steady-state income and capital per worker
7.7. As productivity in the economy increases, the steady-state capital and
output per worker rises from point A to B to C
7.8. Average household savings rates vary widely across countries
7.9. Real monthly wages in China and Mexico converged between 1996
and 2008
7.10. Illustration of a regression of variable Y on X
7.11. No significant relationship between initial (1900) per capita income
and country growth rates between 1990 and 2010
8.1. Responses of undergraduates at UC Davis to the question, “How
entrepreneurial are ____?”
9.1. There is a positive association between countries’ agricultural and
non-agricultural economic growth
 9.2. The household as consumer optimizes at the point of tangency
between the indifference curve and budget constraint
9.3. In the consumer model, a rise in the price of food triggers substitution
and real income effects that reinforce one another
9.4 . The farm household produces at the point where the food price equals
the marginal cost of producing food
9.5. The farm profit effect shifts out the budget constraint, possibly
resulting in a positive effect of food prices on the household’s food
demand
9.6. Technological change can shift the agricultural supply curve outward
9.7. A liquidity constraint (segment EH) can result in suboptimal
production and a welfare loss
9.8. Concave production possibilities frontier (PPF)
9.9. Markets enable the household to increase its welfare by separating its
production and consumption decisions
10.1. Changes in per capita GDP and agriculture’s share of employment,
1990–2005
10.2. The Lewis model
11.1. Equilibrium in the village berry market without trade
11.2. The regional price is higher than the village price
11.3. Transaction costs cut producers off from higher prices in outside
markets
12.1. Consumption smoothing seeks to break the connection between
consumption and income and keep households above their subsistence
minimum even in bad years
13.1. World food prices are increasing and becoming more volatile
13.2. With trade, the consumer surplus equals the sum of areas a + b + c + d
13.3. With an import tariff, consumers lose a + b + c + d, government gains
c, producers gain a, and there is a deadweight loss of b + d
13.4 . A very high tariff can drive an economy into self-sufficiency,
producing a deadweight loss of b + c
13.5. China, Tunisia, South Africa, and India achieved rapid income growth
after opening up to trade; Zimbabwe, which followed import-
substitution policies, saw its per capita income decline
13.6. Per capita income growth in South and North Korea, 1950–2002
13.7. Mexico’s trade with the United States increased after NAFTA took
effect on January 1, 1994
13.8. Foreign direct investment inflows to low- and middle-income
countries have increased sharply in the new millennium
13.9. Total world remittance receipts have increased sharply since 1970
TAB LES

2.1. Present Value of Costs and Benefits of a Hypothetical Project

3.1. An Input-Output Table (in USD)
3.2. Leontief Multipliers
3.3. An Input-Output Table with Green Accounting
3.A1. The Leontief Coefficient (A) Matrix
3.A2. The Identity (I) Matrix
3.A3. The I – A Matrix
3.A4. The Leontief Multiplier Matrix M = (I – A)–1
3.A5. Factor Input-Output Vector AF
3.A6. Factor Value-Added Multiplier Matrix MF = AFM = AF(I – A)–1
4.1. Incomes and Poverty Measures for a Hypothetical Village
4.2. Poverty Dynamics in Rural Mexico
4.3. A Transition Matrix of Poverty Dynamics in Rural Mexico
5.1. A Hypothetical Income Distribution
5.2. Gini Coefficients for Selected Countries
5.3. Impacts of Drought on Household Income Inequality and Poverty in
Burkina Faso
5.4. Impacts of an Income Increase on Per Capita Income, Inequality, and
Welfare in a Hypothetical Economy
6.1. The Two Ends of the Human Development Spectrum
6.2. Country HDIs by Per Capita Income Quintile
6.3. Over- and Underperformers in Human Development
6A.1. Results of a Cost-Benefit Analysis of Secondary Schooling in
Lesotho
9.1. Net Benefit Ratios by Rural Household Group in Four Central
American Countries
10.1. Nonfarm Income Shares of Selected LDCs
13.1. David Ricardo’s Illustration of Comparative Advantage
13.2. The Largest Trading Partners of the United Kingdom (2011)
13.3. Zambia’s Major Trading Partners
13.4 . Major Free-Trade Agreements by Year
Preface

The RebelText alternative textbook project was launched at the Taylor dinner
table one night in fall 2012. Ed had just told the campus bookstore to order up
125 copies of an undergraduate econometrics textbook at $150 a shot. (That’s
a gross of $18,750 just from one class.) Over dinner that night, Ed’s twenty-
year-old son, Sebastian, announced that he had spent $180 (of his parents’
money) on a new edition calculus text required for his course. Sebastian’s little
brother, Julian, exclaimed, “That’s obscene!” Sebastian responded, “You’re
right. Basic calculus hasn’t changed in decades. You don’t need new editions to
learn calculus.”
Before dinner was over, Ed’s two kids had ambushed him and made him
promise never, ever, to assign an expensive textbook to his students again.
“So, what do you want me to do then, write one?” Ed asked them.
“Exactly,” they answered in unison.
“And get a good title for it,” Ed’s wife, Peri, added.
 The first RebelText creation was Essentials of Econometrics, with Aaron
Smith and Abbie Turiansky. That seemed like a big enough project, but then Ed
was assigned to teach a 350-student undergraduate development economics
course. Naturally, he felt he had to write a book for that one, too. Travis
climbed on board. That’s how Essentials of Development Economics became
the second member of the RebelText line.
What’s RebelText? It’s a textbook series designed to be affordable, compact,
and concisely written for a new generation that is more at ease “Googling”
than wading through big textbooks. Being both more affordable and compact,
it’s easier to carry around. Write in it. Don’t worry about keeping the pages
clean or whether there will be a market for your edition later, because at this
price there’s no need to resell it after the class is through. RebelText will
naturally evolve as needed to keep pace with the field, but there will never,
ever, be a new edition just for profits’ sake.
In 2014, RebelText and UC Press struck an alliance. This UC Press edition
offers readers a more complete coverage of what we see as the essentials of
development economics than the original print-on-demand edition, while
keeping the book affordable and compact. Through our new partnership with
UC Press, we hope to turn RebelText into a better and higher impact alternative
textbook initiative in a world that we all believe is in desperate need of
textbook reform.
There is particularly a need for a new undergraduate development
economics textbook. The books out there seem more interested in
summarizing a bunch of topics than in teaching people what they really need to
know in order to do development economics. This book is different.
WHO SHOULD USE T HIS BOOK AND HOW

When we sat down to write Essentials of Development Economics, we wanted a

compact book for an upper-division undergraduate development economics
class. That is primarily what this is. The knowledge in this book should poise
any undergraduate to engage in further study or to venture out into the real
world with an appreciation for the essential concepts and tools of economic
development. More than a textbook, this can be a helpful basic reference for
any graduate student, researcher, or development practitioner.
There’s a striking disconnect between development textbooks and journal
articles. Specialized journal articles really are what shape the way we think
about development economics problems and research. Sadly, they are not
written for undergraduate courses. Nevertheless, the topics they cover,
research approaches they use, and critical findings they present are essential to
understanding development economics, and they can be made accessible.
Journal article synopses are highlighted in sidebars throughout this book.
RebelText is intended to be used interactively with online content. QR
(Quick Reference) codes at the end of each chapter link readers with online
materials, including images, animations, video clips, and interviews with some
influential development economists. You can access all of the URLs behind the
QR codes on the website rebeltext.org, or by clicking on links in the e-version
of this book. We encourage you to explore the multimedia material as a way to
make the concepts come to life. On the website you’ll also find the data sets
included in this book, homework problems, study questions, and
supplementary appendixes. When we use RebelText, the website becomes a
center of class activity.
RebelText was created to make learning and teaching as efficient as
possible. Students need to learn the essentials of the subject. They do not want
to wade through thick textbooks in order to locate what they need, constantly
wondering what will and won’t be on the next test. Because it is concise, there
is no reason not to read and study every word of Essentials of Development
Economics. All of it could be on the test. Master it, and you will be conversant
enough to strike up a conversation with any development economist and may
even be able to get directly involved with development economics projects.
You can think of this book as presenting the “best practices” and state-of-the-
art methods for doing development economics. By mastering it, you’ll also
have the conceptual and intuitive grounding you need in order to move on to
higher level development economics courses. You’ll probably find yourself
referring back to it from time to time, so keep it on your shelf!
If you are teaching or learning with RebelText, consider contributing your
ideas about novel uses of the book and website, interesting data sets, programs,
and projects. To find out how, visit rebeltext.org and click on “contributing to
RebelText.” Some of our best links have come from our students!
ABOUT T HE AUT HORS

Ed loves teaching economics, especially microeconomics, econometrics, and

economic development. He’s been doing it for about twenty-five years now at
UC Davis, where he is a professor in the Department of Agricultural and
Resource Economics. He’s also done a lot of economics research; he has
published more than one hundred articles, book chapters, and books on topics
ranging from international trade reforms to ecotourism, immigration, and
rural poverty. He’s in Who’s Who in Economics, the list of the world’s most
cited economists, and he has been editor of the American Journal of
Agricultural Economics. He has worked on projects with the United Nations,
the World Bank, the Organization for Economic Cooperation and
Development, and the Inter-American Development Bank, as well as with
foreign governments, including those of Mexico, Honduras, Canada, and
China. His new book, Beyond Experiments in Development Economics: Local
Economy-Wide Impact Evaluation (Oxford University Press, 2014), presents a
new approach to doing impact evaluation and cost-benefit analysis. You can
learn more about Ed at his website: jetaylor.ucdavis.edu.
Travis Lybbert was initially torn between environmental studies and
landscape architecture as an undergraduate major at Utah State University. A
class on environmental and resource economics demonstrated the power of
economics as a way to size up social problems and evaluate potential solutions.
After graduating with an economics major (and French and environmental
studies minors), he and his wife, Heather, lived in Morocco for a year on a
Fulbright fellowship. The experience prompted him to pursue graduate work
in economic development at Cornell University. After teaching for two years at
the Honors College at Florida Atlantic University, he arrived at UC Davis,
where he is currently Associate Professor in the Department of Agricultural
and Resource Economics. Travis has worked in North Africa (Morocco,
Tunisia, Syria), sub-Saharan Africa (Burkina Faso, Niger, Ghana, Ethiopia,
Kenya), India, and Haiti. As a visiting researcher, he has spent time at the
World Trade Organization and the World Intellectual Property Organization in
Geneva, the University of Cape Coast in Ghana, and the Max Planck Institute in
Munich. His current projects cover a range of topics, including drought risk
and vulnerability, asset and poverty dynamics, technology adoption and
markets, childhood and maternal nutrition, and intellectual property and
international technology transfer. Travis teaches graduate and undergraduate
courses in economic development, applied economics, and econometrics. To
learn more about him, visit his faculty website: tlybbert.ucdavis.edu.
ACKNOWLEDG MENT S

RebelText would not exist if it weren’t for our families and students. Special
thanks go to Sebastian and Julian, who shamed Ed into launching RebelText; to
Peri, who has supported this project from the start; to Heather, Hannah, and
Rockwell, who fully embraced the adventurous sabbatical year in Ghana that
gave Travis the professional breathing room to work on this book; to
colleagues at the Economics Department of the University of Cape Coast who
made Travis’s sabbatical year possible; to Steve Boucher and Michael Carter
for providing many thoughts, inputs, and field tests of our book in the
classroom; and to our cutting-edge team of graduate student assistants,
including Anil Barghava, Isabel Call, Michael Castelhano, Diane Charlton,
Mateusz Filipski, Justin Kagin, Dale Manning, Karen Thome, and Abbie
Turiansky, all of whom provided valuable research assistance and advice at
various stages of this project. Finally, we thank the many undergraduate
students who kept us going by repeatedly telling us how “awesome” RebelText
was and for catching errors and typos. They, too, are part of this project.
J. Edward Taylor and Travis J. Lybbert
Davis and Berkeley, California
Another random document with
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 Mutta niinkauvan, kun hän jaksoi istua, sai rohdin kuontalokin
kulkea hänen koukistuneitten sormiensa läpi rullalle ja sitä tietä ne
menivät pappilan ruustinnan karvamattolangatkin. —

Pahemmin ei voinut kukaan loukata Miinaa, kun puhumalla

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tupasessaan.

Mutta ei hän sieltä sittenkään aivan mielisuosiolla lähtenyt. —

Pettymyksiä.

Kaarlo heitti pallon huimaavan korkealle ilmaan.

Suuren lapsijoukon käsivarret kohosivat kuin jännitetyt jouset, ne

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Pojat, jotka luonto on varustanut vahvemmilla käsivarsilla,

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Mutta yksi niistä — pienin ehkä — vilkas ja vikkelä kuin orava,
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pienet, valkoisen pitsin verhoamat käsivartensa ylös, kohti putoavaa
palloa, joka kiisi kuin nuoli suoraan ja empimättä pieniin, pehmoisiin
tytön käsiin.

"Minä!" kajahti riemuhuuto lapsen suusta ja ylpeänä voitostaan

keikautti hän valkohiuksista päätänsä.

Pojat katselivat vähän nyrpeissään sivu suun mennyttä voittoa ja

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Vaan kun Ellin suurien silmien voitonriemu kävi aivan

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Kun pallopeli alkoi ikävystyttää, heittäytyivät tytöt piiritanssiin

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"Hei vaan, kuinka kauvas täällä näkee!" huusi kehoittavasti se,

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"Kiivetkäämme mekin sinne! Yks', kaks', kolme!" huudahti Elli ja

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kaidepuun takaa, taikkapa kellarin katoltakin, — mihinkä joskus
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Elli painui verannan alimmalle rappuselle istumaan. Äsken niin

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*****

"Se on siis päätetty", sanoi isä tyytyväisesti. "Ja minä toivon

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olisi tulevaisuutta tällä alalla ja sitä minulla varmasti onkin! Saat
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Isä hymyili. "Hyvä, olen siis selvillä ja tyytyväinen lasteni

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"Mutta minuthan sinä aivan syrjäytät, isä", muistutti Elli "vai eikö
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"Ah sinä! Noo — sinusta kaiketi tulee kunnianarvoisa pikku rouva,

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Ellin raikkaat kasvot peittyivät synkkiin pilviin ja silmissään loukattu

ihmisarvo salamoi…

"Niin, tuomari Arvolahan on sinuun pahoin pikeytynyt. Ja,

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Kaarlo.

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oikeutta, niinhyvin kuin velvollisuuttakin, itse, omintakeisesti turvata
tulevaisuuttamme!"

"Sillä tavallahan se asia kuitenkin tavallisesti tässä Jumalan

luomassa maailmassa menee —"
 "Tässä miesten muokkaamassa maailmassa — niin olemme
epäilemättä lähempänä totuutta. Vai luuletteko, uskallatteko luulla
Jumalasta jotain niin alhaista, äärimmäisen ilkeämielistä, että hän
olisi sysännyt naisen siihen alennustilaan, missä tämä vuosituhansia
on saanut värjötellä?"

"Elli, Elli — elä pidä noin suurta suuta. Ehkäpä ne vuosituhannet

juuri kumoavat väitteesi —"

"Mahdollisesti, jos naisasia olisi vieläkin siinä pisteessä, missä se

Aabrahamin aikoina oli — mutta Jumalan kiitos, ne samaiset
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kieltämättä me olemme matkalla oikeutta, täydellistä tasa-arvoa
kohden, olkoonpa tämä matkamme viimeinen virstapylväs vielä
kuinka kaukana tahansa."

"Sinä olet oikea naisasian agitaattori, Elli!" pisti Kaarlo väliin,

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voitiin vaan hymyillä ja etäällä, etäällä — vaikka tulevassa — on
sekin, jolloin sille enään vaan tarvitaan hymyillä. Nyt on toiminnan,
työn ja taistelun aika!"

"Kiitä Luojaa, lapseni, että elät ajassa, joka sallii sinun nauttia työsi
hedelmiä", lausui äiti. "Minun nuoruudessani saimme tyytyä — ah
emmehän kaikkea uskaltaneet uneksiakaan — mitä te nyt saatte
todellisuudessa omistaa ja nauttia…"

"Ja kuitenkaan, äiti, ei vielä meilläkään ole läheskään kaikkea,

mitä pitäisi olla! — No niin, isä, minä olen päättänyt lukea lääkäriksi
kuten Kaarlokin." —

"Vai päättänyt? Sehän kuuluu erittäin juhlalliselta… Mutta minulta

ei totisesti riitä rahoja siihen, — saan luvan ilmoittaa."

"Vai niin, isä rukka! Olet siis ikuisessa kiitollisuuden velassa

kohtalolle, joka salli kolmannen lapsesi syntyä tytöksi, säästääkseen
kukkaroasi ja estääkseen sen julmuuden tapahtumasta, mikä olisi
ollut välttämätön, jos se kolmaskin olisi ollut poika!"

Isä näytti harmistuneelta, eikä löytänyt pitkään aikaan sanoja

vastineeksi.

"Et sinä toki henno särkeä Ellin tulevaisuutta", sanoi viimein äiti
pyytävän hellästi niinkuin ainakin.

"Te naiset olette niin hiton itsepäisiä toisinaan…"

"Ei isä, kyllä sinulta pitää riittää rahoja Ellillekin, Kaarlon ja minun
on elettävä sitä myöten. Muuten minäkin olen aivan onneton",
lämpeni Esko. "Sehän olisi muuten samaa, kuin jos riistettäisiin Elliltä
vaatteet meille pojille — ja hän työnnettäisiin alastomana pakkaseen!
Se ei saa tapahtua, isä!" —

"Voi tuota Eskoa, sehän on itse olennoitu oikeus ja hyvyys!"

riemuitsi Elli. — "Enkös olekin aina sanonut, että Esko se on, joka
meidän kotimme piirissä edustaa tulevaisuuden herttaista, ylevää,
täydellistynyttä miestä. Tuollaisesta veljestä kannattaa ylpeilläkin!"

Mutta isä vääntelihe nyrpeänä tuolissaan. Hän muistutti suurta

mehiläistä, joka on lentänyt kärpäspaperille ja koettaa turhaan
irroittautua siitä…
 *** END OF THE PROJECT GUTENBERG EBOOK
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