AMERICAN UNIVERSITY Department of Economics Comprehensive Examination- Development Economics January 2013 Directions • Answer two (2) questions from each of the two parts—development microeconomics and development macroeconomics—for a total of four (4) questions. • Be sure to pace your answers within the given time constraint. • Read the questions carefully and make sure to answer what is asked. • Answers are judged on clarity of exposition, command of the relevant literature, and accuracy and depth of technical detail. • Use diagrams and equations if helpful but be sure to label them. 1 PART 1. Development Microeconomics Answer two of the four questions from this part. 1. Intrahousehold allocation a) In much of the development microeconomics literature a unitary household model is used to understand household behavior. Explain the underlying assumptions of this model and the implications of the model for intrahousehold allocation, specifically addressing the implication of the model for the division of labor and allocation of goods within a household. Assuming the unitary model is correct, what are some of the policy implications of the model? b) Concerns over the assumptions of the unitary model of the household have led to the development of alternative models of intrahousehold allocation such as Pareto-efficient and non-Pareto efficient collective models. Provide some studies and evidence that challenge the unitary model assumptions. Explain how Pareto-efficient collective models differ from the unitary model. Describe how empirical tests have been conducted to test the validity of the unitary model and to test whether household allocation is Pareto efficient. In general, what conclusions and policy implications can be drawn from these tests? 2. Risk and insurance a) Describe the risks faced by poor agricultural households in developing countries. Assuming these households are risk averse, discuss the ex-ante and ex-post actions households might take when faced with these risks, noting the reasons for employing certain strategies. How should the fact that risk influences household behavior be incorporated into policymaking? Give an example to illustrate your point. b) Although markets for credit and insurance are imperfect, rural households in developing countries employ a variety of ex-post mechanisms to cope with risk and smooth consumption. Describe these mechanisms. Explain how you might test whether these mechanisms bring about a Pareto-efficient allocation of consumption risk at the community level (where community can be defined as a village, ethnic group, network, etc.). In general, what does the empirical evidence suggest about the ability of households within a community to smooth consumption? What are some of the reasons why these results might emerge? 2 3. Education a) Suppose you want to empirically investigate the impact of school characteristics on student achievement. From a conceptual perspective, discuss the factors that are likely to influence student achievement in school and how school characteristics fit into this overall conceptual framework. Describe the empirical issues in conducting an analysis of the impact of school characteristics on student achievement and how you would go about addressing these issues. b) Countries often attempt to improve education outcomes by investing in a substantial school expansion in a relative short period of time. Suppose a country underwent a substantial expansion in secondary schools two decades ago and you would like to determine the longterm effects of this expansion on education outcomes, the probability of being employed, and income earnings. Assuming you have detailed household- and individual-level cross sectional data from a recent year, discuss step-by-step how you would go about testing whether the previous investment in secondary school had an impact on the chosen indicators. In answering, be sure to discuss what additional information you would need to collect and how you would conduct the analysis. 4. Labor a) In nearly all countries, there exists a wage gap between male and female workers with wages generally higher for male workers. Discuss the varied reasons as to why wages might differ by gender and discuss how you would go about empirically testing which of these differences is the primary determinant of the wage gap. If the male-female wage gap is zero, does it necessarily mean that there is no discrimination? Explain your answer. b) Child labor has been a controversial policy area within developing countries with some arguing that the practice should be banned while others stating that such bans are unenforceable and do not get to the root of the problem; namely that it is a product of poverty. Discuss the competing views on child labor and poverty. How would you go about empirically testing the relationship between child labor and poverty? What does the evidence suggest about the link between child labor and poverty and what are the implications of this evidence for policy? 3 PART 2. Development Macroeconomics Answer two of the four questions from this part. 5. Development goals a) List and briefly describe the eight Millennium Development Goals (MDGs). With respect to a particular country or a particular region (e.g., South Asia, sub-Saharan Africa, East Africa, Central America) of your choice, which do you consider to be the three most important MDGs? Explain your reasons why you consider these to be the most important MDGs for your chosen country/regions region and what tools would you use for monitoring. b) With respect to the three MDGs you have selected in part a), describe the historical trends in progress and prospects of achieving the goals in a timely manner in either the selected country/region or on a worldwide basis. c) With respect to the three MDGs and country/region you have selected in part a), describe the steps/policies you would recommend to accelerate progress, and explain how and why your recommended steps/policies would accelerate progress on achieving these MDGs. 6. Growth models a) The standard Solow growth model frames growth of output in terms of stocks of productive inputs and productivity growth. Explain the model’s basic assumptions and key behavioral questions, write the expression for output per capita in the steady-state, and explain its intuition. Explain how endogenous growth models differ from the Solow-type growth models in how they represent the causes of growth. b) Using growth rate diagrams, contrast the impact of a permanent increase in the savings rate on growth and income over time in the standard Solow model and in an endogenous growth model.[Be sure to label your graph.] Relate these savings impacts to predictions of each of these models regarding convergence among nations. c) Use the growth rate diagram to distinguish between absolute and conditional convergence. Briefly summarize the empirical evidence on absolute and conditional convergence across nations, states and regions. Is it possible for endogenous growth models to be associated with convergence? Justify your answer. 4 7. Growth, inequality, and poverty a) Recent years have seen numerous efforts to understand ‘poverty’ more deeply as well as to analyze the relationships between growth, inequality, and poverty. What are the methodological issues in measuring poverty? How is the Multidimensional Poverty Index different from past measures? What are its strengths and weaknesses? b) Explain the classical as well as recent views on the nature of the relationship between income inequality and growth. Recently, authors such as Dollar, Forbes, Milanovic, and Bourgignon have reexamined this relationship. Discuss the major findings. According to these authors, will income inequality help or hurt economic growth? c) What is the role of institutions in promoting economic growth in developing countries? How does the experience of China conform to the theoretical expectations? Justify your answer. 8. Trade and growth a) Developing countries are often urged to further open their economies to greater international trade. What are the factors that determine whether trade liberalization raises or reduces economic growth? If trade liberalization raises economic growth, would all sectors of the economy or segments of the population benefit? Why or why not? Provide examples to illustrate your point. b) Outline the empirical evidence regarding openness to trade and growth. Why is it difficult to determine whether trade causes growth, or vice versa? c) Answer one (1) of the following questions: (i) Discuss the instruments and estimation methods economists have used to provide further evidence on the direction of causality between trade and growth. OR (ii) For a country or region of your choice, describe the steps/policies that have made it possible for it to benefit from trade liberalization. Are there likely to be ‘losers’ alongside the ‘winners’? 5