Distance Learning Program

Course Name: Development Economics

Main Instructor: Martina Miotto
Date: Spring 2023

Lecture 1: Introduction
 Lecture 1:
Introduction
Development Economics
Martina Miotto

Lecture slides not guaranteed to be error free. If you spot an error, please let me know.
Why study Development
Economics?

R. Lucas: “Once you start thinking about economic growth, you do not think
about anything else anymore”.
The “RCT Revolution”
Development Economics changed strongly around
year 2000
• Prior: Focus on…
• descriptive and structural work
• Macro-oriented work
• After: Focus on
• “Program evaluation”: Which (micro) interventions work?
• Focus on causal identification of treatment effects
• Broader “Credibility Revolution” in empirical economics
• “Invention” of RCTs (randomized controlled trials)
• RCTs easier to implement due to IT revolution
Roadmap:
• Introduction: Big picture (Week 1)
• What is the “baseline situation”
• Different theories of growth
• Toolkit RCT (Week 2)
• Infrastructure (Week 3)
• Small Businesses (Week 4)
• Large Businesses (Week 5)
• Labor Markets (Week 6)
Roadmap:
In-between:
• Methodological aspects in development research
• Implementing, analyzing, and evaluating randomized
experiments
• Some discussion of Diff-in-Diff and RDD methods.

• Analyze papers
Countries by GDP/capita in the World
(in PPP - just before Covid 19-pandemic)
• Qatar, Luxembourg, Singapore: > 100k US$
• Ireland, Norway, UAE, Kuweit, Switzerland, U.S.: 60-80k $
• France, UK, Japan ~ 45k $
• Czech Republic ~ 36k $
• Malaysia, Hungary, Poland ~ 31k $
• Mexico, Argentina ~ 21k $
• China, Thailand ~ 18k $
• World ~ 17k $
• Egypt, Indonesia, Albania ~ 13k $
• Philippines, Jamaica, Ukraine ~ 9k $
• India, Vietnam, Moldova ~ 7,5k
• Bangladesh, Cote d’Ivoire, Cameroon ~ 4k
• Ethiopia, Afghanistan, Haiti ~ 2k
• Niger, Liberia, Malawi, Mozambique, DR Congo ~ 0.7-1.2k
 Introduction Comparative Development

Night Lights across the Globe in 2016

Proxy of GDP: Night lights in 2016

Image from Ömer Özak’s Economic Growth and Comparative Development lecture notes.

Great deal of variation across continents, and within?

 Introduction Comparative Development

Night Lights across Regions – Africa

Ömer Özak Growth and Comparative Development Growth & Comparative Development 5 / 96
 Introduction Comparative Development

Night Lights across Regions – Asia

Ömer Özak Growth and Comparative Development Growth & Comparative Development 6 / 96
 Introduction Comparative Development

Night Lights across Regions – Australia

Ömer Özak Growth and Comparative Development Growth & Comparative Development 7 / 96
Night Lights across Regions – Europe

Ömer Özak Growth and Comparative Development Growth & Comparative Development 8 / 96
 Introduction Comparative Development

Night Lights across Regions – North America

Ömer Özak Growth and Comparative Development Growth & Comparative Development 9 / 96
Night Lights across Regions – South America

Ömer Özak Growth and Comparative Development Growth & Comparative Development 10 / 96
Was it always like this?
 Growth vs. Poverty:
• World Bank Poverty Thresholds
• Extreme Poverty: 1.90$ ;
• Poverty: 3.20$ ;
• Below Middle Class: 5.50$

• Is economic growth enough to reduce poverty?

• Or does it just increase inequality (only rich getting richer)?

• Economic Fields of “Growth” vs. “Development”

• Development economics: strong focus on policies that help the
poor / reduce poverty rates.
• Economic Growth: More focused on average income, and
macro/long-run growth.
Countries by share of population < 1.90 US$
(World Bank Pov. Line - World Bank Data, pre Covid-19)

• Malaysia, Ukraine, Turkey, China, Czech Republic < 1%

• Albania, US, Egypt, Italy, Morocco 1 – 2%
• Colombia, Vietnam, Pakistan, Mexico, Brazil 2-5 %
• Georgia , Indonesia, Romania, Philippines 5-10%
• Ghana, Bangladesh, Sudan 10-15%
• South Africa, India ~20%
• Kenya, Senegal, Uganda 35-40%
• Nigeria, Turkmenistan, Ruanda, 50-55%
• Mozambique, DR Congo, Madagascar 60-75%
Countries by share of population < 5.50 US$
(World Bank Pov. Line 3 - World Bank Data, pre Covid-19)

• UK, Switzerland, Japan, Czech Republic < 1%

• US, Poland, Estonia ~ 2%
• Hungary, Spain, Italy ~3 %
• Turkey, Ukraine, Greece, Thailand, Argentina 5-10%
• Brazil, Kosovo, Romania, China, 21-27%
• Vietnam, Mexico, Albania 30-40%
• Guatemala, Philippines, Armenia, South Africa 50-55%
• India, Kenya, Senegal ~87%
• Nigeria ~92%
• Malawi, Burundi, Madagascar, DR Congo > 96%
Dollar, Kleineberg and Kraay (2016):
Relationship of Growth and Poverty
• Does income of the lowest 20%/40% of population
grow at same rate as avg. income?
• 1980: 52% of world population live on < 1.25$ a day
• 2010: 21%
• Data on 121 countries, starting from 1970
(POVCALNET and LIS databases)
• Representative household surveys on income and
consumption levels across income distribution
• Used by World Bank to estimate poverty shares
Dollar, Kleineberg and Kraay (2016):
Relationship of Growth and Poverty
• 285 within-country growth episodes of at least 5 years

• Compare growth in average incomes in the poorest

quintiles against growth in overall average incomes.
• Variance decomposition:
• 61% of cross-country variation in income growth of
poorest 20% is due to growth in average incomes.
• 77% of poorest 40%.
Dollar, Kleineberg and Kraay (2016):
Relationship of Growth and Poverty
Dollar, Kleineberg and Kraay (2016):
Relationship of Growth and Poverty
• Little evidence that other policies are significantly
correlated with income growth of bottom 20/40%,
• beyond any direct effect on average income growth.
• e.g. gov. expenditures on schooling, health, agriculture,
• Exceptions:
• Bottom income grew faster than average income in Latin
America in 2000s, slower in Asia
• BUT: Overall, bottom income grew faster in Asia than in
Latin America
• BUT 2: Causality? Poverty Reduction causing growth?
• And evidently:
• Constant relative inequality implies growing absolute
inequality if incomes grow.
Ravallion (2005): Growth and Inequality
• Relationship between income growth and Gini Index
• 290 “spells” from 80 countries, 1980-2000.
• Insignificant relationship overall
• Positive significant relationship post- ’92
• But not very robust (e.g. not when using changes over three surveys
(between t and t-2).
GDP, HDI and capabilities
• Problems of GDP/capita as measure for development:
• Ignores non-market goods and services
• e.g., unpaid household work
• Ignores externalities, public goods
• e.g. environmental degradation
• Ignores rights, freedoms

• Human Development Index

• Weighted average of
• life expectancy (at birth),
• exp. years of schooling, and
• average GNI per capita.
• “Inequality weighted” and “Gender weighted” HDI now exist too
!
"# …"!
• Inequality : Penalty term of 1 − %
&
multiplied to each of 3 ingred.
• More details here
Amartya Sen: Capabilities Approach
• Roughly: Development should expand people’s
“budget sets” - things they are able to do
• Individual’s wellbeing, happiness, or life satisfaction
cannot be well measured in its cardinality
• But we can assume that enhancing capabilities will make
people better off.
• Motivates including income, education and life expectancy
in HDI
• Motivates study of Poverty
• Poverty is not just less money available
• Implies a stunting of the potential of people to contribute
to society to their fullest potential
• Large new literature on how poverty narrows focus on “survival”.
Some tricky food for thoughts.. FLFP?
Some tricky food for thoughts.. FLFP?
What are the different theories of
growth? A snapshot.
• Classical growth theory
• Neoclassical growth model
• Endogenous growth theory
• Unified growth theory
Classical growth theory
• Adam Smith, David Ricardo (mainly British economists,
18th-19th century)
• Born to explain contemporary economic growth
(Industrial revolution)
• Drivers of economic growth: division of labor, gains
from trade, accumulation of capital à Productive
investment and re-investment of profits
• Division of labor (Smith): when people specialize they
increase their productivity
• Gains from trade (Ricardo): extends on Smith: when
people/countries have a comparative advantage they should
specialize on that as it comes with the lowest opportunity
costs for them, and then they can trade the surplus product
Neoclassical growth model
• Robert Solow, Trevor Swan (20th century - beginning)
• Outlines how a steady economic growth rate results
from three economic forces: labor, capital, and
technology
• Technology is important for long-term economic
growth but the model does not explain why
technological progress occurs
• Treats technological progress as exogenous, it is out of the
control of economic agents
• Diminishing returns to capital: as an economy
accumulates more capital, the marginal product of
capital declines à the rate of economic growth slows
down
Endogenous growth theory
• Paul Romer, Rober Lucas (20th century – end)
• Human capital (investment in R&D, education,
innovation) is key for technological advancement
and therefore long-run economic growth
• Suggests there might be increasing return to scale from
human capital
• Importance of policy agents to invest in education
and technology
• And of firms to invest in intellectual property rights
Unified growth theory
• Oded Galor (20th-21st century)
• Non-UGT faild to capture key empirical facts in the growth
process of countries and the rise of inequality across them
• Non-UGT focus on the modern/current growth regime
• UGT capture all phases of development: Malthusian epoch
(majority of human history), exit from it, emergence of human
capital as central element of growth, fertility decline, origins of
sustained modern growth, raise of inequality across countries in
past two centureis
• UGT:
• Technological progress initially offset by population growth
• At some point these two forces lead to increase peace of technological
progress à Bigger role of education à Fertility decline à Increase of
income per capita à emergence of sustained economic growth
• Variations in biogeographical characteristics, culture and institutions,
generated different speed of transition from stagnation to growth
across countries à divergence of income per capita in different
countries
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