DEVELOPMENT ECONOMICS Online course 2020 Instructor : Swarna - PowerPoint PPT Presentation

DEVELOPMENT ECONOMICS Online course 2020 Instructor : Swarna Sadasivam Vepa

LECTURE TWO Understanding the mechanisms of Development

LECTURE TWO PART- A

Lecture Notes # 2 Understanding the Mechanisms of Development – Angus Deaton ■ Development e economics i is a about l low-income c countries and l low-income p people. It . It s studies h how p poor c can a and d do escape p poverty ■ Causal i inferences f from e empirical e evaluation o of p programs, , randomized c control t trials a and e econometric m models d do n not tell u us t the m mechanism o of p poverty a alleviation ■ They t tell u us i if a a p program o of p poverty a alleviation w was a a success o or a a f failure. ■ Only t those e empirical e exercises t that a are d designed t to investigate, t , test, p , predict a and m modify a and m made f fit f for w wider application p potentially q qualify t to b be c called p progressive research s strategies. .

Testing the mechanisms ■ Angus Deaton suggests hypothetico deduction method to investigate the mechanisms ■ In this method the empirical research formulates hypothesis about the proposed mechanism, predicts using the data and tests the hypothesis. ■ If hypothesis is falsified, it is rejected or modified. If the mechanism is confirmed and difficult to explain, in other ways, additional credence is attached to the mechanism. ■ The falsified hypothesis may trace steps back change assumptions and test again

Mechanisms relevant to development tested by Deaton ■ Savings and Growth – connections ■ Commodity Prices – Determinants ■ Income and Food Consumption Puzzles – Search for Theory

Savings and Growth Connection -1 ■ The f famous t theory o of g f growth b by L Lewis p proposes t that s savi ving i is central t to e economic g growth. . ■ Capital a accumulation t takes p place w when s savi ving r rate c changes fr from 4 4 t to 5 5 % % o of G f GDP t to 1 12 t to 1 15 % % o of G f GDP a as p per L Lewis ■ Modigliani’s ’s L Life c cycle t theory o of S f Savi vings u unrelated t to development p proposes t that p people s save w when t they a are y young and d dissave w when t they a are o old ■ Later M Modigliani ( (1970) e extended t the t theory t to e economic growth t to p propose t that f fast g growing c countries h have h higher r rate of p f population g growth a and h higher s savi vings r rate, a , as t thy h have younger p population ■ The i international t time s series g growth r rate a and s savi vings r rate d data confirm t that w when s savi vings r rate i is h high G GDP g growth r rate i is h high

Savings and Growth- connection 2 ■ Solow m model ( (1956) h has s shown t that h higher s savi vings r rate d does n not support l long r run e economic g growth, t , though i in t the s short r run savi vings i increase G GDP g growth ■ In In 1 1991 s summers a and ca carroll found t that l lifecycle t theory o of f savi vings d does n not e explain e economic g growth a as c claimed b by Modigliani. . ■ The a age-consumption p profiles w were f found r remarkably s similar i in rich a and p poor c countries – disprovi ving t the i implied f fact t that y young are r richer t than t the e elderly i in p poor c countries w with h higher g growth ■ Deaton a and P Paxon ( (2000) f found t that s savi vings behavi viour ha has changed f for r reasons u unknown b both i in d developed a and d developing countries a and t there w weren’t ’t e enough l life c cycle savi vings and t they happen t too l late a and t too c close t to r retirement ■ Life c cycle s savi vings t theory i is v very w weak i in d developing c countries

LECTURE TWO PART- B

Commodity prices -Determinants ■ Low i income c countries d depend u upon t the e exports o of p f primary commodities w whose p prices v volatile - display s sudden s spurts a and sudden c collapse ■ Commodity p prices a are d difficult t to p predict d due t to h high a auto correlation w with p past p prices. . ■ Predictions o often g go w wrong. E . Even t the w world b bank p predictions o of f prices w were 4 4 t to 5 5 t times h higher t than w what w was r realized, m , making poor c countries t to p produce m more a and i incur l losses. . ■ The p popular m model u used t to e explain t the m mechanism o of f fl fluctuations w was s speculative s storage m model o of s f shocks ■ This m model w was t tested b by D Deaton w with d data a and p predicted t time series p prices a and f found t the pr pridictions close t to a actual p prices b but auto c correlations w were w wrong. . ■ A s simple f first o order a auto r regressive m model p performed b better

LECTURE TWO PART- C

Income and Food Consumption Puzzle -I – Search for Theory ■ Household f food c consumption i in t the p poor c countries d depends upon In Income. R . Rich e eat m more c calories t than t the p poor. F . Food consumption i is e expected t to g go u up w with i income ■ Simon K Kuznets i in 1 1976 n noticed t that i in t the p poor a and r rich countries t that p per c capita E Expenditure f falls w with h household s size ■ Deaton t tested t the r relationship u using o only f food e expenditure p per capita a and f found t that p per c capita f food e expenditure f falls s sharply as h household s size i increases i in l low i income c countries ■ In Income e effect o on f food c consumption a and e economies o of s f scale a are ar are probably g getting o off s f set b by h high p price e elasticity o of f consumption a and s substitution b by o other e expenditure ■ There i is n no e evi vidence s so f far f for t the a above e explanation a and i it remains a a p puzzle

Income and Food Consumption Puzzle -II – Search for Theory ■ Despite a a h high r rate o of g f growth o of p f per c capita In Income i in In India t the average c calorie a and p protein c consumption p per c capita h has b been falling i in a all e expenditure g groups i in In India ■ Deaton a and Dr Drez investigated t the i issue w with s survey d data a and found i it b be f factually c correct. . ■ One o of t f the u unverified e explanations i is r reduction i in l loss o of f f food due t to i intestinal i infections ■ The o other u unverified e explanation i is d decline i in c calorie requirements d due t to m mechanization a as s suggested b by P Prof. C f. C.H .H. . Ra Rao ■ Deaton i is o of t f the o opinion, i , if m f mechanization i is t the e explanation, , the c consumption s should s stabilize o once t the n need f for p physical work i is e eliminated i in t the e economy, ,

Barriers t to u understand m mechanisms ■ Methodological rigour and understanding of theory and historical evidence ■ Measurement problems ■ International comparisons enhance measurement problems