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Danny Lynch
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Often when we discuss development policy, ‘problems’ of dual causality are beneficial despite the endogeneity issues that researchers face. For example, understanding how much education leads to rising income versus how much rising income increases average education levels is not necessarily a huge concern for policymakers, since policies relating to either education or income could potentially cause a virtuous cycle of development. However, reverse causality is completely different. Here, a misspecified model could lead policymakers to pursue policy that has no impact whatsoever. The question of whether or not aid reduces poverty faces this potential problem, because it could be that countries that are already poor receive more development, and thus poverty would drive aid rather than aid driving a reduction in poverty. I think Milovich’s solution to use an instrumental variable was a necessary one, although I am still skeptical that the variable exploits exogenous variation in aid. In other words, I find it difficult to believe that the additional aid that countries received when they were on the United Nations Security Council was uncorrelated with existing levels of poverty in that country. Even though levels of aid dropped back down after countries left the UNSC, this does not mean that the increase in aid was not due to increased attention to a country’s needs (and thus uncorrelated with their poverty level) but could simply be due to the fact that politicians and policymakers have short attention spans. If this is the case, the instrumental variable would be correlated with the outcome variable through channels other than its effect on the independent variable, and the exclusion restriction would be violated. It could be that this problem explains why Milovich found that aid did not reduce income poverty even though it reduced other forms of poverty included in the MPI. However, I doubt that this is a serious problem, and the results are believable for the most part. Whether or not the instrumental variable is a good one, much of the literature on the topic faces serious endogeneity problems, and this study is definitely a step in the right direction when it comes to solving these problems.
Toggle Commented Nov 12, 2020 on Last Post of the Year at Jolly Green General
It seems odd to me that the structural reform within developing countries seemed to always take place at the same time as declining interest rates in industrial countries (at least this is what happened in the 1920s, 1970s, and 1990s). Before even considering econometrics to try and find support for either of the two reasons that caused increased capital flow, is there really no occasion where a developing country undertook serious reform at a time of rising rates in industrial countries? If no such example exist, this would lead me to believe that structural reform is endogenous to increased capital flows. Would it be possible that the act of investing in a development country could itself spur reform, and that this reform likewise would encourage investment? If this were the case, one could argue that lower rates in the US influenced an initial flow of financial capital, whereby leading to reforms in the developing country and thus a second flow of capital for an entirely different reason from the first. However, based on the historical timeline, this doesn’t seem like it was the case (since capital flowed “irrespective of the pace of domestic reform”). Another thought I had is in regards to the ability of East Asian issuers of fixed-securities to be able to time the market and successfully avoid issuing bonds when US rates are high. How is this the case, and why don’t we see the same thing for Latin American countries?
Toggle Commented Nov 6, 2020 on For Friday's Discussion at Jolly Green General
I think the most crucial point to note about CCTs is that their goal is to not only alleviate poverty in the short term, but to also reduce poverty in future generations. This study clearly illustrates the beginnings of this second goal, since enough time has passed after Progresa was created to see longer-term effects such as on labor market outcomes. However, I would imagine CCTs will have even more extensive effects that researchers will not be able to ascertain until much more time has passed. Simply based on the human capital theory, an initial investment in a child’s education will increase their own lifetime earnings potential. However, the higher levels of both education and income will lead them to invest more in their own children, regardless of whether or they receive a cash transfer. If this is true, then just one round of CCTs would be effective in reducing poverty several generations down the line. Of course, this is impossible to measure empirically since Progresa was not created until 1997. I’m also interested in the differential impact on men versus women with regards to labor market participation, especially since the increase in education was very similar for both genders. I don’t recall reading an explanation as to why this occurred, but I would hypothesize that this is because men are probably expected to enter the labor market regardless of the level of education that they receive. Women, on the other hand, are likely encouraged or forced to participate in household production, and thus the additional education allows them to more easily transition to the labor market, possibly because of increased intra-household bargaining power. Whatever the reason, the added benefit for women represents another success for Progresa in achieving economic development.
Toggle Commented Oct 30, 2020 on For Friday's Discussion at Jolly Green General
I think the idea of comparing the rate of return on education to alternative investments could be an extremely useful tool for policymakers (even if there isn’t a fully accepted consensus on what the social rate of return is, it’s undoubtedly high). This makes me wonder, though, why aren’t policymakers doing this? As noted when we discussed land grant institutions, the government is severely underinvesting in education in the US. I think one explanation could be that many estimates of social return exclude non-monetary benefits, making the cost-benefit ratio look larger than it really is. Another part of the paper that I found interesting was the screening hypothesis. For the most part, I disagree with the hypothesis because I feel as though college has taught me how to think. However, if I were to quit school a week before graduation, the amount of foregone knowledge would be minimal, but the lack of a degree would put me in a much worse place in terms of the labor market than if I had just finished my last week. Because of this, I think the fact that studies have found some limited support for the screening hypothesis makes intuitive sense.
Toggle Commented Oct 23, 2020 on For Friday's Discussion at Jolly Green General
For me, the most interesting parts of this paper were the mentions of bargaining power within a household and how changes in relative power could positively affect outcomes (such as for the children in the family). Specifically, I was glad when the author mentioned how increasing a woman’s education and her chances of joining the labor force could increase her bargaining power. Last year in my Labor Economics course, I wrote my term paper on intra-household time allocation during the Great Recession, focusing on changes in relative bargaining power. One of the coolest findings in that paper was that for recently unemployed individuals who were single, the majority of time reallocated from working went towards time-intensive leisure, and very little additional time went towards household production. Conversely, recently unemployed married individuals allocated over twice as much of their new-found free time towards household production. This clearly shows a change in bargaining power: because the unemployed individual had a low opportunity cost to working around the house (due to having no wage), they had low bargaining power and took on more household work. I was excited to see the connection between the two papers. The second most interesting part of this paper for me was how increases in development can, in some ways, lead to higher gender inequality because technology can lower the cost of discrimination. That’s a crazy notion because it is something I never would have thought of and yet it makes perfect sense from an economic perspective. An individual who benefits from discriminating also faces costs, and if better technology decreases the costs, they’re going to discriminate more.
Toggle Commented Oct 9, 2020 on Duflo for Friday at Jolly Green General
For me, the most salient part of Epplin’s remarks was when he talked about the real rate of return to the US agricultural institutions. At first, I was amazed just how beneficial they were (with a benefit-cost ratio of 32). I thought for sure Epplin was going to talk about how much of a success this was, but he immediately pointed out that given the fact that the benefit outweighed the cost by this much, the US must still be severely underinvesting in agricultural research and educational institutions. He asks “how much ‘grinding toil and poverty’ persists… as a result of our inability to effectively educate the public.” Although this perspective is a bit more somber than solely focusing on the widespread success of the investments in agricultural institutions, I think it is crucial. I don’t believe I would have thought of the fact that because such investments have been so successful, the US is not fully internalizing this positive externality, and should invest more. I certainly wouldn’t have considered it in terms how much poverty could have been eradicated if we had corrected for this market failure. I also think it was important that he mentioned why the US has underinvested. Even though intervention can increase total social welfare, the groups that do not benefit or are made worse off will resist the change. To add to this, I would emphasize that market failures often remain uncorrected when these groups have influence over political decision-making. Epplin’s arguments are so important because their applications are much further reaching than agricultural institutions and land grant universities. Failure to correct inefficient markets is an obvious problem in other places where powerful individuals or firms have vested interests in keeping the status quo, such as with carbon emissions.
Toggle Commented Oct 1, 2020 on For Friday's Discussion at Jolly Green General
I thought there were several interesting insights in Quiggin’s article. First, looking at Friedman’s idea of the labor leisure trade-off through the lens of sustainable development was really interesting. Since our society treats leisure as consumption (Quiggin’s example of shopping during free time), increasing leisure as a means to reduce carbon emission (such as from driving) doesn’t sound like a reasonable idea to me. His arguments as to the feasibility of increased usage of mass transit as well as a transition to electric cars does make a lot of sense though, especially with the recent success that electric cars have seen over the past decade. If the prices of batteries in electric cars continue to fall, I could see a large scale transition to electric cars in the next decade or so. Another point I wanted to reflect on was his explanation as to what a transition to zero-carbon would look like in terms of changes in national income. I’m critical as to the idea that the obstacle to becoming zero-carbon is only a “marginal slowdown in in the rate at which standards of living improve.” This may be true, but it is an extreme simplification that overlooks how difficult it will be to enact this change. It will be difficult to convince politicians to pursue policy that, from a surface level or short term perspective, only slows economic growth. Of course, I think the mathematical representation is a useful resource to understand just how easy it would be to theoretically transition to zero-carbon, but it would definitely be much more challenging in practice. Lastly, his insight into how developing countries can ‘leapfrog’ technological development (such as transitioning directly to mobile phone usage and skipping over landline), made me think about the idea of convergence and divergence in economic growth. Examples of technological leapfrogging are in line with the theory of convergence. Empirically, however, the growth rates of many poorer countries are diverging, and the international income gap is widening despite the ability of such profound ‘leapfrogging.’ This could be due to the lack of effective economic and political institutions in developing countries that are capable of implementing the infrastructure to support this technology.
Toggle Commented Sep 25, 2020 on Readings for Friday at Jolly Green General
I think the most important point that you can draw from this article is that there are certain political, social, and economic factors that differ in each country that largely prevent a homogenous approach to economic growth policy. Whether it is because of the ‘Confucian ethos’ that attributed to the development of informal institutions regarding higher savings rates and emphasis on education, or because of the broader historical context with incredibly large FDI from the United States, there were several unique factors that required a unique approach to economic growth. With that said, there were several reforms that reminded me of textbook examples of economic growth theory, specifically the Lewis Two Sector model. For example, South Korea transitioning to capital-intensive industries such as textiles and later electronics and automobiles is modern-sector enrichment. However, they also provided programs to promote technological development in the agricultural sector and supported prices to mitigate the sectoral wage gap. This is akin to traditional sector enrichment. Underneath these broad changes though, there were a lot of actions by the government that I thought were unique to the situation, such as the nationalization of credit. This surprised me at first, but without well-developed capital markets it would have been impossible for South Korea to build up their modern sector as fast as they did, even with help from the US. Since the government was careful to promote competition and avoid monopolies by measuring the efficiency of the companies to which they provided credit, nationalization of credit was probably a smart government policy (though I’m critical as to why they favored provision of credit to the chaebols). Overall, the close interactions between the state and private enterprises probably helped a lot.
Toggle Commented Sep 17, 2020 on Miracle on the Han for Friday at Jolly Green General
I thought Krugman made several insightful analogies in his discussion surrounding formal models in economics. Specifically, relating his map-making analogy to how economists overlooked certain non-formalized areas of economics was interesting. I’m surprised that high development theory was largely ignored even though nobody knew how to model it yet. Economists at the time must have known that perfect competition was no more than a simplifying assumption. If it were an assumption that held true 100% of the time, it would make sense to ignore the high development theory based on increasing returns to scale. Since this is not the case, it surprised me that economists would overlook something simply because of its lack of formalization. Even more recently, it’s pretty clear that other than the Lewis two sector model that didn’t necessitate economies of scale, the Big Push idea didn’t gain traction until it was formalized. Although Krugman tries to strike a balance between models and looking more broadly at the complexity of the world, he clearly states that he believes models are necessary in economics. This is of course true: as in Krugman’s analogy with the dish-pan, economic models are extremely useful in simplifying the world to a point that is understandable given our constraints on time, money, and intellect. However, I think economists should place serious effort at looking beyond the theoretical models (more so than listlessly looking for “the folk wisdom on clouds” as Krugman phrased it). In actuality, I think this is occurring. For example, the field of behavioral economics questions whether the assumptions of rational behavior as they relate to utility and profit maximization are even accurate. I suppose in the end I more or less agree with Krugman that it is important to focus on both modelling as well as paying attention to ideas that go beyond the classic models, but I would place even more emphasis on the latter.
Toggle Commented Sep 10, 2020 on Krugman for Friday at Jolly Green General
Danny Lynch Wang et al. (2018) Reading this paper was particularly interesting because I’m in Comparative Institutional Economics with Professor Grajzl. In terms of theory, this paper was similar to a paper we read in that class by Mancur Olsen (although the Wang et al. paper was more empirical in nature). The most direct connection that I noticed is that both papers emphasized that the typical neoclassical aggregate production function was not enough to explain the differences in a country’s income and economic growth. There were some technical differences between the arguments (for example, Olson argued that institutional quality was one of the reasons that the total factor productivity was excessively large rather than seeing institutions and TFP as separate). However, both papers put forth the same general argument. One factor that I appreciated about this paper was that it specifically pinpointed what institutional factors hindered and helped growth (in contrast, the Olsen paper simply argued that institutions are important). What’s interesting to me is that the economic institutions mentioned are very political in nature. For example, three out of the four detrimental institutional qualities that the paper mentions are directly related to government action and policy (unnecessary protectionism, government misallocation, and corruption), while the fourth (financial instability) is likely a result of government action and is thus closely related. If these are the economic institutions that are failing, it would seem that they’re failing mainly because of ill-advised government action. I think an interesting follow up study could empirical assess what types of governments and government policies lead to the development of stronger economic institutions.
Toggle Commented Sep 3, 2020 on Reading for next Friday at Jolly Green General
Danny Lynch Sachs (2012) I found the author’s explanations of and justifications for his proposed SDGs to be very strong, although I think the article would have benefited from more suggestions as to how countries would pursue and attain them. For example, he emphasizes the necessity of active participation from the private sector to reach sustainability goals. While this may be true, it will require the development of strong economic institutions that can either regulate or offer some sort of incentive structure to convince profit maximizing companies to participate. While Sachs does caution against engagement with certain large companies involved with lobbying and also offers up certain strategies such as carbon taxation, more explanation regarding how the private sector would fit into the plan of SDG attainment would have been helpful. Similarly, though I found his emphasis on education very convincing, I would have liked it if he had provided specific ideas or examples of the targeted programs that he mentioned. Another comment I have is that I thought the section regarding lessons learned from MDGs was particularly powerful. It is comforting to know that someone who helped develop the MDGs can admit its shortcomings and learn from them instead of blindly pursuing new goals.
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Aug 27, 2020