University of Wisconsin-Madison
Department of Agricultural and Applied Economics
Development Economics Preliminary Examination
June 13-17, 2005
Answer any three of the following five questions. All questions have equal weight. Please type
your answers. Your answers must be submitted to Ian Coxhead, Development Prelim Chair, 413
Taylor Hall no later than 5 pm on Friday, June 17
1. The Millenium Development Goals (MGDs) are targets defined by the UN Development
Summit in 2000 and adopted by the World Bank as “a framework for measuring
development progress.” The first of these is to “eradicate extreme poverty and hunger”, or
more specifically, to
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
Halve, between 1990 and 2015, the proportion of people whose income is less
than one dollar a day.
Halve, between 1990 and 2015, the proportion of people who suffer from hunger
(www.worldbank.org).
According to the Bank, “2.8 billion people—more than half the people in developing
countries—live on less than $700 a year. Of these, 1.2 billion earn less than $1 a
day”. What will it mean, for world poverty and welfare, to halve these numbers?1
(a) Consider the poverty measures and poverty lines used in the World Bank’s MGD
targets. They clearly have the advantage of simplicity. What are their
disadvantages? Begin your discussion, both of measures and poverty lines, with a
formal consideration of alternative analytical approaches to poverty measurement
from the relevant literature.
(b) While the bulk of the poverty measurement literature focuses on changes in mean
incomes of the poor, in a world of fluctuating prices it is clear that the variances
of incomes also contain potentially important information. Discuss.
(c) Most conventional analyses of poverty alleviation can be interpreted as special
cases of a more general welfare analysis; they are special in the sense that in
focusing on the poor, they assign zero weight to changes in the welfare of
households whose incomes fall initially above the poverty line. Against the
benchmark of an “ideal” welfare measure based on marginal utility of income, are
poverty-based weights superior, inferior, or not normatively different to
commonly used alternative welfare weights, for example population shares or
income shares?
(d) Under what kinds of conditions would the case for an MGD poverty reduction
target that uses data from the entire income distribution be preferable to the
narrower focus of the WB targets?
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To provide perspective, consider the following excerpts from a UNDP news release of June 9 2005:
The number of people living in extreme poverty has fallen by 130 million worldwide since 1990, even with overall
[population] growth of more than 800 million in the developing regions since then, according to The Millennium
Development Goals Report 2005, an interim survey launched by Secretary-General Kofi today … [however]…
contrary to global trends, extreme poverty had actually increased in sub-Saharan Africa since the 1990s. And while
about one billion people in the developing world still live on less than a dollar day, in Sub-Saharan Africa, that
income actually fell, from 62 cents a day in 1990 to 60 cents in 2001… By 2015, the poorest countries in Africa are
likely to have a rising proportion of those living in extreme poverty, lacking a primary school education and dying
before the age of 5, the MDGs report says. (http://www.undp.org/)
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(e) In conclusion, return to the question posed above: what will it mean, for world poverty
and welfare, to halve the numbers of those earning less than $1/day?
2. Consider the following statement: “To be poor is a matter of a low income. To be
chronically or permanently poor is a matter of income variability.”
Please evaluate this statement by preparing an essay that addresses the question of whether
and under what circumstances risk creates a poverty trap for low income, low wealth
households. A good answer to this question will assemble a basic household model that
highlights the impact of risk on household decisions and welfare. Please also draw on
relevant theoretical and empirical literature to inform, extend and or critique the analysis of
your basic model.
3. In many developing countries, a history of protectionism for import-competing
industrial sectors means that reduction of trade barriers leads to large and sustained
changes in domestic relative prices—part of the process of “globalization”. Given
that such reform measures are normally seen to be reducing sources of distortion in
the economy, it is often concluded that their adoption will stimulate economic
growth.
(a) Briefly review the empirical evidence on this assertion. Is there robust evidence
that a more open trade regime acts as a stimulus to faster economic growth? Does
this literature contain any useful analytical insights for development economists?
(b) Now consider the analytical case in which domestic demand plays a role in
growth, as in the 1990 QJE article by Murphy, Schleifer and Vishny. Sketch a
simple model in which trade policy reforms, by altering the returns to factors and
thus the distribution of household incomes, either accelerate or retard economic
growth. To do this you will need to make some assumptions about the
distribution of factor ownership and the impact of trade policy reforms on relative
factor prices (other assumptions may also be necessary, depending on the path
your model takes).
(c) Although the model you have constructed in (b) is of course highly stylized, some
comment on its empirical realism is still appropriate. Does the pattern of factor
ownership by households of different initial wealth—and thus the distribution of
income gains and losses from trade policy reform—seem to match with
developing country ‘stylized facts’? Discuss.
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4. Following the lead of the Mexican Progressa program, a number of countries have
begun to initiate conditional cash transfer programs designed to combat poverty while
encouraging poor families to achieve higher rates of schooling and child health
investments. One design feature of most of these programs is that the cash transfer is
specifically assigned to the mother or primary care provider of the child. This
question asks you to think about this design feature of conditional cash transfer
programs.
(a) Do you think that this specific assignment of cash transfer matters? To answer
this question, write down a formal model of household resource allocation that
you find compelling and analyze the conditions under which the specific
assignment of the cash transfer will (or will not) boost investment in child human
capital.
(b) Drawing on the relevant empirical literatures, how important do you think the
specific assignment of cash transfers has been to the generally successful
outcomes of CCT programs?
(c) Suppose that you were invited to design an experiment to test the implications of
your model. Please what you would do and how you would do it.
5. Bolivia is currently being torn asunder by a highly polarized struggle over who will
control its natural resource (mostly natural gas) riches. Below you will find excerpts
from a New York Times article that provides some background (including a map)
which should help to motivate your response. This question, however, asks you to
draw carefully on relevant readings from the field exam reading list to develop a
theoretical and historical analysis that addresses the following questions:
(a) First, what is it about natural resource boom sectors that tend to make achieving
development goals of growth with equity so challenging? Be explicit about market
mechanisms and government policies associated with resource booms that tend to
undercut equity outcomes and comment on how natural gas exports from Bolivia might
or might not be likely to correspond to the mechanisms and policies that you point out.
(b) Second what is it about the political-economic logic of resource booms that tends to make
it hard for governments to do the right thing?
(c) Finally, if you were asked to advise the Organization of American States on what core
economic principles might be used by an interim Bolivian government to guide their
policy toward natural gas, what would you propose and why?
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June 9, 2005
No. 1 Quits in Bolivia, and Protestors Scorn Nos. 2 and 3
By JUAN FORERO
LA PAZ, Bolivia, June 8 - A worsening five-year political crisis in Bolivia reached a precarious
impasse on Wednesday, with left- and right-wing adversaries so polarized that the departing
president, Carlos Mesa, warned his country to step back from the brink of civil war. With Mr.
Mesa's government collapsing and surging indigenous protesters demanding early elections and
more say in economic policy, Bolivia, a country of nine million people, stands at a perilous
moment. Five years of instability have already forced two presidents to quit.
In Santa Cruz, the eastern lowland province where much of the country's energy sector is
located, peasants pressing for expropriation of private oil companies occupied installations
belonging to Repsol YPF of Spain and British Gas, forcing the companies to shut down
production. Here in the western Andes, Indians marched by the thousands and blocked key
roads, keeping La Paz short of fuel and food and prompting two international airlines, American
and LanChile, to cancel flights.
Two days after Mr. Mesa offered to leave office to defuse mounting protests, demonstrators
vowed to topple the new government if it is led by the next in line to the presidency, the Senate
president, Hormando Vaca Díez. Congress is preparing to accept Mr. Mesa's resignation on
Thursday and anoint Mr. Vaca Díez as successor in a special session in Sucre, the judicial
capital.
Leaders of Bolivia's powerful indigenous movement vehemently oppose Mr. Vaca Díez, a
wealthy land owner and long-time politician who has the support of the influential business elites
in Santa Cruz, his home province. The conservative business class there wants more autonomy,
giving it control over the natural gas reserves that the Indians in the highlands want to
nationalize.
Mr. Mesa, who remains president, warned the nation that Mr. Vaca Díez must stand down and
permit early elections to prevent bloodshed. "Let us avoid lost lives, let us avoid a violence that
devours us all," Mr. Mesa, who has been in office less than 20 months, said in a televised address
late Tuesday. "This is an exhortation for a country that is on the verge of civil war."
Protest leaders have vowed to stop Mr. Vaca Díez and the man who is next after him in line to
the presidency, Mario Cossío Cortez, president of the lower house of Congress. Mr. Mesa and
many others say the solution is for the two to step aside and permit the third in line, the Supreme
Court president, Eduardo Rodríguez, to call elections.
But Mr. Vaca Díez signaled to reporters that the military could be used to restore order. He also
warned that the protests could lead to a crackdown from the right.
In a poll published Wednesday in La Prensa, 55 percent of respondents said they would support
Mr. Rodríguez, while only 16 percent said they would support Mr. Vaca Díez.
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"The country cannot play with the possibility of breaking into a thousand pieces," President
Mesa said in his address. Speaking directly to Mr. Vaca Díez, Mr. Mesa called on him to "resign
his privilege to the constitutional succession." "It is in your hands to show the country a
generosity that will make history," Mr. Mesa said, "that will make you closer to the people than
to continue insisting on the impossible."
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