Economic Development for Fragile Countries

University of Waterloo
Department of Economics
Econ 383: Economic Development for Fragile Countries
Fall 2012

All information related to the Final Exam is provided in this file.

Time & Date: Friday, December 14 from 12.30 pm to 3.00 pm

Allocated Rooms for the Exam: PAC 9 & 10

Office Hours for the Final Exam Period:
Monday and Wednesday from 4.00 pm to 5.30 pm
Friday from 2.00 pm to 3.30 pm

Syllabus:
The Final exam for this course is comprehensive. The exam will include all materials covered during the lectures for this course. 1. Development and Underdevelopment Todaro – Chapters 1 & 2 Ray – Chapter 2 2. Alternative Theories of Development Todaro – Chapters 3 & 4 Ray – Chapters 3 & 4 3. Inequality, Poverty and Underdevelopment Ray - Chapters 7 & 8 Todaro - Chapter 5 Internal Dimensions of Development 4. Population Todaro - Chapter 6 Ray - Chapter 9 5. Agriculture Todaro - Chapter 9 Ray - Chapters 11 & 12 6. Urbanization and Rural Urban Migration Todaro - Chapter 7 Ray - Chapter 10

Papers: 1. Amartya Sen (December 1983), "Development: Which way now?" The Economic Journal, 93(372), pg. 74562. 2. Stavros.Theofanides (1988), "The Metamorphosis of Development Economics", World Development, 16 (12), pg. 1455-63. 3. Robert Dorfman (January 1991), "Economic Development from the Beginning to Rostow", Journal of Economic Literature, 29(2), pg. 573-582 (sections 1 to IV only). 4. R. Amin et al (April 1994), "Poor women's Participation in Income-generating Projects and their Fertility Regulation in Rural Bangladesh: Evidence from a Recent Survey." World Development, 22(4), pg 555-565. [Summary of the paper can be found in the file titled “Summary of the Journal Articles”-will be uploaded soon]

Instructions:
(1). Read both the textbook and the lecture notes thoroughly to perform well in the final exam.
(2). Try to solve the problems at the end of each chapter from Todaro.
(3). Solve the sample questions for the two midterm exams.
(4). I am including an additional sample test in this file for you to work out. A brief (incomplete) solution for the short questions is provided.
(5). Read the assigned articles and summarize the key concepts.

Important Concepts:
Population population growth in many developing countries affects their chances of becoming more economically developed, and conversely, economic development affects population growth.
Historical and recent trends in population * The dependency burden * The hidden momentum of population growth * The demographic transition
Population growth rate * Fertility(birth) and mortality (death) rates * Age specific fertility rates * The “echo effect”
The demographic transition (the three stages of development)
Two models of population
-The Malthusian model
- The microeconomic household theory of fertility
Population growth is a real problem
Population growth is not a real problem
Policy prescriptions for developed and developing countries

Agriculturecountry’s development strategy must include plans for achieving agricultural progress and rural development.
Three complementary elements of agriculture and employment-based strategy
Stylized facts about agriculture and development
The structure of agrarian systems in the developing World
Three types of countries: * Agriculture based countries * Transforming countries * Urbanized countries
Latin America the Latifundio–Minifundio dualistic pattern
Asia (Transforming Economies) Fragmentation and subdivision of peasant land
Africa Subsistence agriculture and shifting cultivation
Four types of markets in agricultural production land, labor, capital and credit
Uncertainty and risk in agriculture market
Two types of tenancy * Fixed rent tenancy * Sharecropping
Argument for fixed rent tenancy
Argument for sharecropping
Subsistence farming: risk aversion, uncertainty, and survival

Rural-Urban Migration the most complex dilemma of development process: the phenomenon of massive and historically unprecedented movements of people from the rural countryside to the cities of Africa, Asia and Latin America and the problems related to urbanization and migration.
Urbanization trends and projections
The role of cities
Benefits
* Agglomeration effects Localization and urbanization economies * Two theories of city size * Industrial districts
Costs Congestion and high price of real estate
First city bias and urban giantism
The role of formal and informal sector of the economy
The Harris–Todaro migration model * Assumptions * The diagrammatical and the mathematical representation of the model
Policy options for limiting rural–urban migration.

Sample Questions: (the solutions are brief and incomplete) 1. Are developing countries experiencing a demographic transition much like the one developed countries did at their earlier stages of economic development or are there important differences?
Answer: The demographic transition is broadly similar for middle-income countries, although death rates have fallen more quickly. In some low-income countries birth rates remain stubbornly high, while death rates have declined. See the lecture notes for details. 2. Is there evidence that an increase in per capita income stimulates population growth?
Answer: No. This is an assumption of the Malthusian population trap, but one not borne out by the evidence. Briefly explain the Malthusian population model. 3. Explain the reasons for the hidden momentum of population growth and state its implication for population levels.

Answer: Even after a decline in birthrates to replacement levels, population growth continues because of a large, young population that widens the potential parent base. Implication: Population will not stabilize for a couple of generations.

4. Explain the concept, goals, and methods of integrated rural development.
Answer: A solid answer will be based on the section, “Toward a Strategy of Agricultural and Rural Development,” in Todaro, Chapter 9. 5. What are the primary determinants of agricultural labor productivity?
Answer: See the section on the economics of agricultural development.
6. Is sharecropping economically efficient or inefficient? Explain.
Answer: See the lecture note on the section of sharecropping and the argument for sharecropping. 7. What are the key characteristics of the agrarian system in Asia that distinguish it from that of Latin America? Explain your answer.
Answer: Land fragmentation, greater population density and absentee landlords. Explain the agriculture systems in these to two regions.

8. Suppose the rural wage is $1 per day. Urban modern sector employment can be obtained with 0.5 probability and pays $2 per day. Will there be any rural–urban migration? Explain your reasoning, stating explicitly any simplifying assumptions, and show all work.
Answer: In this case, the expected urban wage is equal to the rural wage. Only an individual who is risk-loving will migrate. 9. What are the characteristics of those who migrate to urban areas? What positive and negative effects do their leaving have on those who remain?
Answer: Younger, better educated, and probably less risk-averse, given their willingness to migrate. These factors suggest they could be more entrepreneurial than average had they not migrated, which would benefit the rural area and help alleviate the urbanization problem. Discuss the entrepreneurial migration model that is discussed in the lecture. 10. Are developing-country cities too large, too small, or about right in size? Justify your answer with evidence from developing economies.
Answer: Too large. Cities are capital intensive, the largest cities are increasingly found in the developing countries, and there are many urban biases causing the distortion. Emphasize the two theories of city size, the first city bias of the developing countries and the reasons for urban giantism.
11. What are the main features of the Harris-Todaro model of rural–urban migration? Answer: Rational economic decision based on costs/benefits. The reward to migration is expected rather than actual urban income. The probability of obtaining an urban job depends on urban employment rates. High rates of urban unemployment are inevitable. Explain the HT model, its underlying assumptions and provide both graphical and mathematical representation of the model.

12. What is the definition of a city? Why does a city exist in the first place?
Answer: discuss in terms of population density. To a large degree, cities are formed because they provide cost advantages to producers and consumers through what are called agglomeration economies. These agglomeration economies come in two forms: -Urbanization economies -Localization economies Describe the two effects.

13. In order to generate equilibrium with no unemployment in the HT model employment in both sectors must be subsidized. Answer: Describe the HT model and the equilibrium condition.

14. For sharecropping to be an equilibrium contract both risk and monitoring cost must be present. Answer: See the lecture notes on sharecropping.

15. Economists tend to ask two questions in a bilateral contracting situation: Is the outcome efficient? How are the gains distributed?

(a). Suppose that landlords and tenants care only about the expected or average gain from the contract, and not about risk. Comparing a sharecropping contract to a fixed-rent contract: which of these is efficient? Briefly explain.

(b). Now suppose (realistically) that tenants lack assets and do not have access to insurance or credit markets. They are therefore in a poor position to bear risk. Can this help explain the persistence of sharecropping contracts? Briefly explain.

Answer:
(a). Compare the economic surplus and employment level under the two contracts.
(b). Compare the expected rate of return for landlords and tenants under the two contracts in good state and bad state.

16. Group lending was the most striking innovation of the Grameen Bank, and it has been widely imitated by other microfinance initiatives.

(a). How does group lending address the problems that limit the supply of credit to poor households from traditional formal-sector lenders (e.g., banks)?

(b). A careful study of the operations of the Grameen Bank in the early 1990s concluded that each dollar of lending increased the consumption expenditures of borrowing households by 17 cents relative to what they would have been without the loan (repayment rates were almost 100% so this was net of repayment). Loans were very costly to administer, however, and at the interest rate charged on the loans, the Grameen
Bank required a subsidy of 22 cents on every dollar of lending to remain sustainable. In your view, does this look like an effective use of public funds? Would it be better, for example, to reduce the subsidy (i.e., increase the commercial viability of the operation) by charging a higher interest rate? Answer: Pages 763-767 from Todaro and the paper on “Women's Participation in Income-generating Projects and their Fertility Regulation in Rural Bangladesh: Evidence from a Recent Survey". 17. Classical economists (The Malthusian Population Trap model) thought that fertility would rise with increases in household income, up to some maximal number of births per woman over the reproductive cycle, at which point fertility would stabilize.

(a). Is the global evidence on fertility behavior consistent with the classical model?

(b). How does the modern neoclassical theory of fertility (the microeconomic theory of fertility) differ from the classical theory, in predicting how fertility responds to household income? Briefly explain the key predictions of the neoclassical approach and how they are obtained. Answer: Explanation is provided in chapter 6, pages 286-293 from Todaro.
18. What are some of the differences between the population policies of China and India? What factors may have contributed to their success or failure?
Answer: The case study provides some clues to the answer. Efforts in India, a functioning democracy (despite the authoritarian tendencies of Mrs. Gandhi in the 1970s), have meant that population control have come up against resistance. On the other hand, China’s ability (inherent in its political system) to enforce birth control policies has meant it has been more successful.

19. Explain why rural urban migration persists in the face of substantial urban unemployment? How would the Harris –Todaro model explain this situation. Evaluate the Harris –Todaro model.
Answer: The HT model is based on the differences in the expected income between the two sectors .Explain the HT model with the diagram that is discussed in class.

20. Explain carefully the opportunity costs of a mother’s time, what may lead these to change over time, and what effects these changes have on family decisions.
Answer: An increase in earning opportunities outside the home may lead the family to substitute child quality and consumption of other goods and services for quantity of children.