University of Wisconsin-Madison
Department of Agricultural and Applied Economics
Development Economics Preliminary Examination
July 16-21, 1999
Answer any three questions. All questions have approximately equal value. Please type
or neatly write your answers.
This is a take-home exam. You may collect it from Ian Coxhead's office any time after
9:30 a.m. on Friday, July 16 and return it not later than the same time on Wednesday,
July 21.
1.
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 literature to inform, extend and or critique
the analysis of your basic model.
2.
Dual economy models of development were long used to explain theoretically
what was perceived as one of the grand empirical regularities of economic
growth, namely the so-called Kuznets inverted-U shaped relationship between
income inequality and the level of per-capita income. Relying on the dual
economy literature, please explain why and under what assumptions the Kuznets
relationship would exist.
Despite its prominence in the earlier economic development literature, recent
empirical work has been most unkind to the Kuznets relationship (e.g., see
Deininger and Squire in the 1998 . J. Dev. Economics 57(2):259-287). While
empirical regularities have been hard to spot in the more recent literature, some
authors suggest that the rapid growth in the East Asian countries has been
characterized by consistently diminishing inequality, while the slower growth in
the initially richer Latin American economies has been characterized by
increasing inequality.
2
Recently, the endogenous growth literature suggests new ways in which
inequality and growth might be interrelated. Develop a simple but formal model
of endogenous growth that makes this linkage explicit and shows how reductions
in inequality might enhance growth. Contrast this model with the more classical
dual economy account of growth and inequality that you discussed in your answer
to the first part of this question.
3.
Fig. 1.17 in Robert Barro and Xavier Sala-i-Martin's book Economic Growth
(McGraw-Hill, 1995) depicts what the authors refer to as a growth model with a
poverty trap. In this model, in contrast with the neoclassical Solow model, the
fundamental idea is that production involves a pattern of decreasing returns,
followed by a range of increasing returns. Note the theoretical justifications that
the authors offer for such a pattern, and their comment that "we do not know,
however, of empirical evidence that supports the underlying pattern...". Consider
the Barro and Sala-i-Martin arguments as well as any others that might
conceivably generate this type of poverty trap. Is this model a useful theoretical
or analytical tool for development economics?
4.
The 1997-98 East Asian economic crisis precipitated substantial currency
depreciations in several developing Asian economies. Several countries
negotiated balance of payments support plans with the IMF. Among other
conditions, these plans initially required deep cuts in public expenditures and a
general tightening of monetary policy. Briefly summarize the main expected
economic effects of such measures in a developing economy facing a balance of
payments crisis and loss of investor confidence, and answer the following
questions.
(a)
Assuming that the expenditure reductions are sufficient to allow the real
effects of currency depreciation to persist, evaluate the consequences of
the adjustment policies for (a) economic structure, and (b) employment
and wages. In constructing your analysis, clearly state and briefly
rationalize your assumptions about technology, market structure and trade.
(b)
What are the probable distributional effects of the above adjustments, (a)
when the labor market clears across all sectors; (b) when labor migration
from agriculture (assumed exportable) to industry (assumed importcompeting) exhibits a short-run rigidity, such as a Harris-Todaro
structure?
(c)
Building on your answers to (a) and (b) above, discuss the political
economy of the IMF proposals in light of the fact that the losers from
adjustment policies are unlikely to be the same groups that benefited most
from the asset bubbles.
3
5.
‘Natural resource accounting’ methods (e.g. Repetto et al. 1989: Wasting Assets)
are based on the reasoning that the value of natural resources depleted in the
course of producing income should be counted as a component of ‘net’ national
income and ‘net’ aggregate investment— just as is conventionally done for
depreciation of man-made capital. If agricultural growth results in the depletion
of a scarce resource (say, at a rate proportional to sectoral output growth), what is
the contribution of agricultural growth to ‘net’ aggregate income growth, and
what policies are implied for a government seeking to maximize growth defined
in this way?
A good way to answer this question is to set up and analyze a simple model
capable of capturing changes in the value of agricultural output, the value of
associated natural resource depletion, and a suitable measure of changes in
aggregate economic welfare. Give careful consideration to the assumptions made
in establishing the model. In interpreting your results, include some discussion of
ways in which the results you obtain depend on the assumptions, and briefly
discuss the merits and drawbacks of this modeling strategy for the question at
hand.