Econ 461: Economic Development Lecture 25: April 16 Conclusion

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Econ 461 Economic DevelopmentLecture 25 April
16Conclusion
Sandra Poncet Lorch Hall, room 207 Email
sponcet_at_umich.edu Office Hours Mondays 1630-18
Wednesdays 1030-12
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Structure of the lecture
End of lecture 24 on civil wars
Rapid conclusion critical issues for the 21th
century
Final Exam/ Practice
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End of lecture 24 on civil wars
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A-Causes of civil wars
1-Opportunities
b-Other elements of opportunities
Foregone revenues (opportunity costs) enter
significantly on war
-proxied by income per capita, growth rate and
schooling -but could also proxy
grievances -in fact typical grievance is not
low income but unequal repartition and we will
see that is does not seem to be significant
Availability of conflict-specific capital (guns,
experience) enters
-proxied by time since last conflict (duration
of peace) -but also proxy for hatred
associated with past war (grievances)
Military advantages of rebels enter with
positive impact on war
-proxied by favorable terrain (mountains,
forest) unequal population dispersion weak
gvt military capability social cohesion
ethno linguistic fragmentation (ELF)
-positive impact of ELF on war ? perception of
ethnicity difference as a cause there seems to
be a non linear relationship inverted U
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II-Empirical evidence
A-Causes of civil wars
2-Grievances
Apparent lack of significance of proxies of
objective grievances
NS of degree of political rights
NS of Inequality indicators
Religious fractionalization and polarization
have wrong sign
But some evidence that violent conflicts are
positively explained by -abuses of civil rights
as monitored by Amnesty International -ethnic
dominance largest ethnic group45-90 of the
population
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Typical regression to explain outbreak of civil
war (collier and Hoeffler 2006)
Source Collier, P. and A. Hoeffler, 2006,
Unintended Consequences Does Aid Promote Arms
Races?
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II-Empirical evidence
A-Causes of civil wars
3-Conclusion on causes of civil wars
It appears that opportunity provides more
explanatory power than grievance.
Economic viability appears to be the predominant
systematic explanation for rebellion
Policy implications
Economic development is critical to
peace -increases the opportunity costs of
rebellion and reduces grievances through higher
income and growth -reduces the availability of
easy financing through increased economic
diversification (away from natural resources)
Aid can be captured as rents and can (through
fungibility) increase military expenses -need
to focus on technical assistance -no program
assistance but projects assistance (on
education/health)
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II-Empirical evidence
B-Consequences of civil wars
Modern civil war has been development in reverse
1-Economic consequences
Huge costs for the country at war
During conflict reduction of GDP growth rate by
2.2 each year (as average duration is 7 years
shrinking by 15)
After conflict overall 21 years needed to
recover Present value of GDP loss 105 initial
GDP
Origin of these costs
-Direct destruction of infrastructure and other
capital.
-Diversion of public resources from productive
activities to violence
-Dissavings
-Disruption suppression of liberties, increase
in insecurity
-Flight of capital (financial and human) from
the country
-Shift away from vulnerable economic activities
towards those that are less vulnerable such as
arable subsistence agriculture.
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Illustration of the shift away from vulnerable
economic activities towards those that are less
vulnerable such as arable subsistence
agriculture.
Abrupt start of disruption in 1972
Source Collier, P. (1999), On the Economic
Consequences of Civil War, Oxford Economic Papers
51 168-83.
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II-Empirical evidence
B-Consequences of civil wars
Modern civil war has been development in reverse
1-Economic consequences
Even greater costs negative externalities
(spatial and time)
Loss of income for region Present value of GDP
loss 115 initial GDP Plus costs of arm races
(so most of the costs is borne by the neighbors)
Temporal externalities conflict trap greater
probability of war in the future half of civil
wars are due to post-conflict relapses
Typical civil war costs 50 billion w/o
valorization of non-eco costs
2-Non-economic consequences
-Social consequences Health (AIDS,
malaria) Psychological costs
orphans, forced migration
-Political consequences Loss of social capital
(trust, honesty) Deterioration in political
institutions
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The answer is a clear NO
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III-Policy implications
A-Evidence on conflict duration and Post-conflict
3 strong explanations of civil wars long
duration and repetition (weak incentives for
peace)
-Absence of lock-in of peace settlements no
enforcement through international treaties (?
international war) rebellion army
disintegrates (so time inconsistency problem for
the gvt once rebellion is weakened incentives
for vengeance)
-Presence of finance for rebel
groups typically Diaspora (more extreme as do
not bear cost of new conflict) subventions
from hostile governments
-Legacy of hatred and war-specific capital
(weapons and skills)
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III-Policy implications
B-Implications
Typical categorization into prevention, ending
conflict and maintaining post-conflict peace
But securing credible end to conflict is the
best prevention to war
More promising policies (for governments and
external actors) Reduction of military
spending (just diversion of financing w/o
deterrence effects)
International actors (US, UK, F, China) have a
considerable scope to reduce the feasibility of
rebellion through curtailing finance and armaments
Reintegration of rebels in society increase
in their opportunity costs and depreciation of
war-specific expertise
Favoring post-conflict recovery -external
military stabilization record is
mixed -coordinated international intervention
on economic and political assistance technical
assistance and aid
But beware limited absorption capacity optimum
timing is 5 years after
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Conclusion
Scope for far more economic work, both
theoretical and empirical on civil wars
Necessary to guard against excessive
generalization from econometric results as what
applies on average does not apply to all cases
However results evidence that economic factors
matter for start, duration and end of civil wars
This has implications for policy
Especially as -costs of civil war are typically
very high -and most are external to the active
participants, borne either by neighbors or the
next generation.
Promising policies are just beginning to filter
into international policy coordinated approach
to failing states
It will be key to ensure feedback and
accountability in order to assess what works and
learn from failures
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GLOBAL CONCLUSION
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Conclusion
Key things I would like you to walk away with
We live in a complex world -endogeneity
reverse causality circularity direct and
indirect impact (multiplicity of channels)
-non-linearity and threshold
Avoid lure of oversimplification -1-rules of
thumb dont work
-need for policy creativity searchers versus
planners -no one size fits all policy
context matters -most profitable policies are the
ones addressing the most binding constraints
need for a diagnostic approach
-2-because of complementary incentives
problems obvious measures may not help
increase health spending, invest in
infrastructures
-3-avoid confusing of causes and effects
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Conclusion
Globalization is making developed and developing
countries increasingly interdependent
Challenges of the management of WORLD PUBLIC
GOODS
-environment
-health
-stability safety wars terrorism as by
products of poverty financial stability
Possibly growing awareness of need for
supranational institutions end of sterile
protectionist stand of maximizing welfare
domestically without concern of potential
backlash
We (especially voters in rich nations) are
actors we will get the world we stand for
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FINAL EXAM
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Final exam
Friday 20th 1.30-3 pm in 1360 East Hall
90 minutes long 40 of the final grade On
lectures 13-25
Four parts Part I True/False/Uncertain 15
minutes Part II Relationship between terms 15
minutes Part III MCQ 10 minutes Part IV
Short essays is worth 30 points.
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Practice Final exam
I-TRUE/FALSE/UNCERTAIN (explain)
1. In a country with zero-tariff on imports meant
to be processed and reexported (export-processing)
, a given nominal tariff rate on imported
finished goods would typically provide a lower
effective protection for the home-made yarn
sector than for the clothing sector relying on
imported yarn.
2. The promotion of prudential regulations on
financial intermediaries transactions should be
discarded as an effective to avoid future
financial crises since it is a pie in the sky
scheme, similarly to plans for a world bankruptcy
court or a world currency.
3. OLS estimations are expected to lead to the
underestimation of the impact of aid flows on
economic growth as they do not correct the
endogeneity bias.
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Practice Final exam
II-Relationship between terms 3 to choose from
1. overvalued currency, speculative attack
2. productive specialization, trade-growth nexus
3. omitted variables, reverse causality
4. motivation, opportunity
5. current account deficit, reserves
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Practice Final exam III-MCQ
1. If the population growth rate is 2, the
incremental capital output ratio is 3, the saving
ratio is 24 and the depreciation rate is 5, the
rate of growth of income per person
is (a) 1. (b) 2. (c) 3. (d) 5.
2. Which of the following is an argument in favor
of trade liberalization? (a) Increased
investment. (b) Infant industry. (c) Fluctuating
export earnings. (d) Increased government revenue.
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Practice Final exam MCQ
3. Which of the following is NOT a reason for the
shift of paradigm away from the market
fundamentalism in the 1990s? (a) Lost decade for
development (b) Resolution of the debt
crisis. (c) East Asias success can not be
attributed to the Washington Consensus. (d) Recog
nition of market imperfections.
4. Which of the following CAN NOT be said about
institutions (a) Institutions not only affect
the size of the social pie but also how it is
distributed (b) Institutions are path-dependent,
possibly leading to trap effects. (c) Institut
ions are exogenous to economic growth. (d) Institu
tions determine incentives to invest and innovate
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Practice Final exam MCQ

• 5. What is NOT an argument of Rodrik (2006)s
  comparison of subsidies for modern exportables
  with import liberalization?
• Import liberalization induces the contraction of
  the modern exportable sector, which is
  unfavorable to growth.
• Modern export subsidies induce the contraction of
  the modern importable sector and traditional
  exportable sector, which is unfavorable to
  growth.
• As the elasticity of supply of traditional
  exportables is higher than that of modern
  exportables, import liberalization may promote
  export growth but with little economic growth
  overall.
• (d) As the elasticity of supply of traditional
  exportables is higher than that of modern
  exportables, modern export subsidies may promote
  export growth but with little economic growth
  overall.

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Practice Final exam
IV-Short answers Bullet points are fine but
dont just state, explain!! 5 properly explained
arguments are expected to get the maximum number
of points.
IV-1. What are the main limitations of the
empirical literature on the trade and growth
nexus? Your response should relate to the
arguments made by Rodrik on the econometric work
of Dollar and Kraay. IV-2. What may explain the
lack of impact of aid on economic growth? IV-3.
What explains that observers have compared the
IMF which mandate resembles that of a
firefighter in the international financial
markets- to a pyromaniac?
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V-Structured essay
V-1. Which country may be the most vulnerable to
a debt crisis? Explain. Your answer should relate
to the literature on the causes and indicators of
debt burden. V-2. What may have brought this
country to this high level on debt? Your answer
should cover both the level and the structure of
debt? V-3. What may explain that debt
rescheduling may not solve the debt crisis?