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Caroline Sanders
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I’ve probably brought this up in too many of my blog posts, but I think this paper is another great example of how coordination (or lack thereof) can influence development progress in LDCs. The global credit market, at least in some aspects, seems to be another determinant of development that is shaped by complementarities. While the paper did not examine these financial relationships explicitly in the context of development, it is still an issue that pervades the paper. In their conclusion, the authors write, “global credit conditions have had an important impact on the market for developing-country debt.” Indeed, U.S. interest rates do have an impact the financial outcomes of LDCs; the authors find evidence of a negative impact of higher U.S. interest rates on developing countries borrowing behavior. If access to credit/international finance is an integral component of a country’s development strategy, than it’s ability to successfully do so is inherently dependent on exogenous conditions in global credit market. It would be interesting to see this paper’s analysis updated to include new trends following the 2007-08 financial crisis and to note how any of the U.S.’s extraordinary (and perhaps controversial) policies like quantitative easing influence behavior in other countries. It would also be interesting to include data on developing countries in Africa and if/how their behavior differs from LDCs in East Asia and Latin America.
Toggle Commented Nov 18, 2015 on ECON 280 for Thursday at Jolly Green General
Climate change is an issue that I haven’t had had a lot of exposure to academically and, frankly, tend to avoid due in part to its highly politicized nature. However, I really appreciate this article’s perspective and its focus on the effects of climate change more so than the causes. While the article does say that climate change is human-induced, that is definitely not the focus on the paper. Focusing on consequences, the summary stresses the impending realities of a warmer climate should compel our undivided attention and a swift global response. I think the article does a great job of presenting these possible outcomes objectively while simultaneously emphasizing the inequity of the burden these changes would place on developing countries. However, I would have liked to read more about potential World Bank strategies to combat climate change in both developed and developing countries. How would the WB create a more established international market for climate change? The article mentions that “large-scale and disruptive changes” in the environment are not accounted for in traditional economic models of decision-making, so current outcomes likely do not reflect the true costs to society and ultimately lead to inefficiencies. How can these costs and negative externalities best be included in decision-making strategies going forward? What impact could updating models to include these previously unaccounted costs have on market expectations? The article ultimately calls for “early, cooperative, international” action to avoid the effects of global warming. This seemingly simple solution is disappointing (maybe even unrealistic). Policymakers in the U.S., for example, don’t agree on the legitimacy of climate change, let alone on a potential policy response. Intra-country disagreement can only fuel international disagreement, and when combined with climate’s status as global public good, it becomes clear that coordination failure plagues the effectiveness of climate change policy. As with underdevelopment, complementarities are a major hurdle to achieving the desired end.
Toggle Commented Nov 11, 2015 on ECON 280 for next Thursday at Jolly Green General
One of the main points I took away from Rodrick’s discussion is that there is no “one-size-fits-all” solution for growth. While he does propose the success of a two-pronged strategy that: a) stimulates growth in the short-run and b) sustains growth in the long-run, he suggests that the specifics of those policies should be determined on a county-by-country basis considering the available institutional framework and characteristics of the economic environment. However, according to economist Ian Fletcher, “Theory assumes short-term efficiency is the origin of long-term growth. But long-term economic growth is about turning from Burkina Faso into South Korea, not about being the most-efficient possible Burkina Faso forever.” While I understand Rodrick’s point that every country is not on the same path to development, and therefore personalized growth strategies are more likely to produce favorable results, I wonder if there’s some merit to the idea that there is a “right (or at least better) way” to promote growth and development, regardless of individual circumstances. Rodrick champions the power of high-quality institutions in supporting long-term growth and recognizes that these high-quality institutions “can take a multitude of forms.” But are some combinations of high-quality institutions inherently better than others? Did South Korean policies work simply because they were implemented in South Korea at the right time and with the right conditions in mind or is there something more fundamentally successful about those policies that other countries should try to emulate regardless? Do economists even have the authority to make these kinds of judgment calls? All this questioning reminded me of a book we read in International Development called “The Elusive Quest for Growth,” written by economist William Easterly. Easterly tackles what he calls failed panaceas for economic growth and development – education, population control, foreign investment, government intervention – much like Rodrick provides evidence that there’s no magic bullet for development. However, where Rodrick suggests focusing on institutional quality, Easterly goes deeper and suggests that no development policy – personalized or not – will be successful without first changing the underlying incentives to which people respond.
In the last section of the paper, the authors strive to give some insight into some specific economic behaviors of the poor – one question I wished they had tackled is why the poor seem to go it alone most of the time. Throughout the article, the authors provide evidence that small scale and lack of a capital is a common problem that hampers the efficiency and success of poor entrepreneurs. When I was in Ghana during spring term, we could hardly turn the corner without seeing crowds women with babies on their backs competing to hawk bags of plantain chips and bottles of water or young men trying to sell us packs of gum through the bus window. The authors give the example of the women in India making dosas and suggest it would be more efficient for the women to work in pairs. So why don’t these women pool their resources and skills, work together, and share the profits? Why aren’t there more cooperatives or similar institutions (formal or informal) in place that seek to empower the poor and encourage community cooperation and groth? For example, if three of the women making dosas chose to work together, they might be able to produce enough collateral to secure a loan, buy some capital, increase the efficiency of their dosa-making operation, and ultimately their income. With more success, they may even be able to establish a more permanent eatery in their community. Both the UN and the ILO recognize the power of cooperatives in promoting economic and social growth among all groups of people – men, women, and children – particularly in agricultural communities. Is this seeming lack of cooperation another example of market failure or risk spreading behavior? On a different note, today the BBC is airing a program called “Don’t Panic – How to End Poverty in 15 Years,” in which Professor Hans Rosling says the world is on track to eradicate extreme poverty in the next 15 years. I think it will be really interesting to see how Rosling’s presentation addresses some of the inherent issues faced by the poor noted in this article. Here’s the link →
Great minds think alike because Jack and I are definitely on the same page. While reading Krugman, I couldn’t help but wonder if the field of behavioral development economics is facing challenges similar to those of high development theory when it comes to mathematical modeling and acceptance in mainstream economic theory. If you think back to the article we read for Tuesday, the authors present a model of human decision-making (automatic, social, based on mental models) that is indeed the opposite of the assumption of rationality that pervades economic models. However, the authors assert that this more complex approach is important to the formation of effective policy because it better resembles how people actually think. We don’t necessarily need a mathematical model to understand or believe that this theory makes sense because we experience it almost on a daily basis. For example, you probably feel richer with a one-dollar bill in your pocket as opposed to four quarters – why? The feeling’s not rational, but it may be as simple as that’s just the way our brains work. Krugman discusses some of the politics of academia (as Daniel put it) that explain why some theories don’t pass muster with mainstream thinking and are therefore rejected. However, with new insights that challenge an assumption as fundamental as rational decision-making, why haven’t behavioral economic concepts made larger headway into how economists model, and more importantly, teach basic principles like choice and utility? Krugman writes that creating effective models requires “a willingness to do violence to the richness and complexity of the real world.” However, it does not excuse completely disregarding concepts that enrich our understanding, but don’t neatly fit the model.
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Sep 16, 2015