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Sarah Rachal
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Although we have focused previously on foreign direct investments in LDCs, I did not have a solid understanding of how these investments fit into a global financial climate. Eichengreen and Mody’s paper provides a good explanation for how interest rates for bonds in industrialized, wealthy countries unintentionally impact interest rates in developing, emerging markets. The authors posit that governments in countries with emerging markets have little control over their interest rates and that these rates are instead dictated by rates in industrialized countries and especially in the United States. What most interested me was the different ways in which different regions were impacted by changes in the United States’ interest rates. The authors compared East Asia and Latin America, regions which have experienced varying levels of success in development. Latin America is strongly affected by changes in U.S. interest rates, which has caused major financial problems in the past. In contrast, East Asia is less indebted, and its markets have the ability to respond to global credit changes with more flexibility. This flexibility has allowed East Asia to maintain economic growth over a long period, regardless of changes in U.S. interest rates. Going forward, development-related organizations such as the World Bank would do well to focus on interest rates in less financially stable regions, such as Latin America and Africa, which are more strongly dependent on interest rates in industrialized countries.
Toggle Commented Nov 18, 2015 on ECON 280 for Thursday at Jolly Green General
The 4 degrees Celsius climate change report provides a strong argument for policies that would internalize negative externalities associated with climate change and environmental degradation. Based on estimates, floods, fires, and rising sea levels will likely destroy large amounts of physical capital, especially in the least developed countries. Agricultural productivity will also be negatively affected, slowing economic growth and leading to malnutrition in poor countries. The impacts of climate change on health through malnutrition and increased disease will negatively affect human capital and productivity, further impacting the economy. Increased heatwaves, floods, and other climate-related natural disasters will increase risk and uncertainty for firms, causing a reduction in investments in countries near the equator. With all of these impacts in mind, governments clearly need to take further action to curb greenhouse gas emissions. Although policymakers tend to focus on short-term economic effects of policies, a lack of action will likely lead to major economic failures in the future. Internalizing the negative externalities of fossil fuels through regulations would be an effective way to incorporate the full costs of greenhouse gas emissions into firms’ decision-making processes. Since a 4 degree Celsius temperature increase by 2100 is viable given current emissions trends, and there may be a CO2 threshold past which massive temperature increases are inevitable, governments should seriously consider prioritizing the environment, even at the expense of current economic growth.
Toggle Commented Nov 12, 2015 on ECON 280 for next Thursday at Jolly Green General
Sach’s and Malaney’s article made the costs of malaria abundantly clear, and they are certainly staggering. I had only considered the the public and private health costs and lost income associated with malaria, as do many economists who study the effects of disease burden. However, changes in household behavior and macroeconomic effects should be considered as well when weighing the costs and benefits of malaria prevention programs. Malaria is more debilitating than most other parasitic diseases in Africa, with the Plasmodium falciparum malaria species causing fever spikes above 104 degrees every 24 hours. While this may affect children more than healthy adults with immunity, adults lose work time as well by spending time with their sick children. Long term cerebral, kidney, and liver damage can also occur, potentially exacerbating other health conditions later in life. It is unsurprising that the risk of all-cause mortality fell significantly farther than malarial mortality with the use of mosquito nets, because even people who recover from malaria can suffer long-term organ damage. Additionally, while anyone can be infected with malaria, malaria disproportionately impacts the poor. I would agree with the authors’ assertion that there is bidirectional causation between malaria and poverty. Malaria is relatively treatable with antiparasitic drugs; however, they must be taken on the correct schedule to prevent relapse, which is not always realistic for poor patients. Malaria parasites can live in liver cells undetected by the immune system for a long time, and complete disease eradication is necessary for treatment. One current prevention method being used in Africa is drug prophylaxis, where children in high-risk areas are given malaria drugs each month during the rainy season. These programs have been effective in reducing malaria prevalence and mortality and are relatively low-cost, but a concern is that they may increase the risk of drug resistance. The potential risks of malarial drug resistance must be weighed against the benefits of current disease reduction, with the hope that better drugs can be developed in the future. Given the widespread health, economic, and social implications of malaria, it is shocking that only $100 million was spent per year on malaria prevention and treatment worldwide when this article was written. This is certainly an underallocation of funds, and governments should consider anti-malaria campaigns when attempting to improve economic growth and general development.
Toggle Commented Nov 4, 2015 on econ 280 for Thursday at Jolly Green General
After reading this paper, it would be easy to lose faith in the power of applied development economics, since there is no magic bullet that can start or sustain economic growth. However, now that development economists realize that there is no universal solution, they can focus on implementing country-specific experimental policies. Rather than analyzing the developing world as a whole, Dani Rodrik examined growth trends in individual countries. Rodrik then analyzed the policies implemented by those countries and how they helped to achieve higher-order economic principles. While this analysis does not provide concrete development solutions, it does have strong policy implications. First of all, it indicates that countries must take the initiative to develop their own economic policies. These policies may be loosely based on what has been effective in similar countries, but they need to take the country’s particular political and cultural climate into account. Rodrik highlights the importance of strengthening institutions in maintaining economic growth but is careful to note that these institutions can take varying forms in different countries. In LDCs, economic policies may be set by ineffective governments following advice given by foreign analysts and advisors. In order to maximize outcomes, the education of economists from LDCs should be a priority. Rather than focusing on traditional economic theories, these economists could learn on a broader scale which higher-order economic principles have consistently led to growth. They could then use their familiarity with the economic, political and social environment of their respective countries to generate experimental policies. As Rodrik states, these experimental policies fail sometimes; however, they can also ignite development and lead to sustained economic growth, as witnessed in many of the Asian countries Rodrik uses as examples.
This article did a fantastic job of explaining the choices made by people living in poverty and extreme poverty, and it challenged many of my assumptions about how the poor choose to spend their money. In any economic model, assumptions are a necessity even though they may not always be accurate. In most models of market behavior, perfect information and perfect competition are assumed. While this may be effective in modelling the behavior of relatively wealthy and educated people, Banerjee and Duflo’s paper indicates that these assumptions are much worse at predicting the economic choices of the poor. Before reading this paper, I assumed that the poor would be forced to spend all of their income on necessities such as food and shelter. Furthermore, I assumed that as poor people earned more money it would be spent on more food and more nutritious food, which would likely provide the largest benefit to the hungry poor. However, these assumptions were clearly untrue, with the poor spending ~65% of their budget on food and 10% of their food budget on sugar, salt and other processed foods. They also spent more money on festivals and entertainment than I expected. Since the choice to spend part of such a limited budget on unnecessary expenditures does not make sense economically, there are clearly other factors at play. While eating tasty but innutritious food and attending festivals is not an investment in a poor person’s capabilities, poor people clearly find utility in these offerings. Festivals allow the poor to participate in society and celebrate their culture, and tasty foods activate pleasure centers in the brain. It is possible that choosing to spend their income on these goods allows the poor to feel like they have some autonomy and freedom of choice in their lives. I would be interested to learn how this research corresponds to the World Bank’s recent report on behavioral economics. Overall, this article brings up many factors specific to development economics and helps to explain why it is impossible to model development without considering culture, politics, environment, psychology, and other inputs.
As a science major, I have a strong appreciation for accurate, well-controlled models. However, I was quickly swayed by Krugman’s argument for more relaxed restrictions on modelling in the case of development economics. While many of Hirschman’s ideas sound logical, especially the importance of backward linkages and forward linkages in developing industries, it is difficult to accept their validity without a basic model. It is unfortunate that these intriguing ideas were laid aside for so long because of Hirschman’s choice to leave mainstream economics. While Krugman’s model does make sense and provides some validity to Rodan’s Big Push idea, one must still question whether it would hold true given the many complex factors affecting a developing economy. Considering the difficulty of modelling so many inputs, the next logical step would be to conduct a randomized trial on the impacts of a Big Push program. I was able to find an interesting article about Jeffrey Sachs, a Columbia economist who set up a “millennium village project” in rural African villages. The investments in these villages followed a Big Push format but were more focused on human capital than physical capital. The article concluded that these interventions did not significantly impact household income and that the unrandomized trial was not particularly valid. However, I would be fascinated to find data on a more industrially-focused Big Push in a larger region, which would be more indicative of the macroeconomic effects of these interventions. http://www.economist.com/node/21541001
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Sep 16, 2015