University of Wisconsin-Madison
Department of Agricultural and Applied Economics
Development Economics Preliminary Examination
January 2002
Answer any three questions. All questions have equal weight. Please type your answers.
Your answers must be submitted no later than noon on Tuesday, January 22.
1.
Foster and Rosenzweig (1995) develop an argument for why larger farms might be more likely to adopt a new technology sooner and faster. They also consider how learning from others can shape technology choices of farmers. Thus, the presence of larger-scale operations can potentially influence the adoption paths of smaller-scale ones by speeding up their learning processes. a.
First, discuss carefully the way in which the learning mechanism between larger and smaller farmers in this model works. b.
Next, consider how else farmers might learn from one another about technologies. Describe in detail at least two other learning mechanisms. c.
Choose one or two of these alternative learning mechanisms and consider how they affect the way in which the presence of larger-scale operators is likely to interact with and impact the adoption decisions of smaller-scale ones. d.
Finally, consider other endogenous or unobserved processes these types of adoption models might be overlooking and comment on how these might reinforce or cut against their results regarding the dynamics of learning externalities between larger and smaller-scale operators.
2.
Consider an economy of n people for which we define a standard money-metric poverty line p. Let y i denote the income of the i th person in this economy. Let H denote the standard headcount ratio poverty measure, I denote the income gap ratio defined as:
I
 y i

 p
( p
 y i
)
; pnH and, P
2
denote the degree two Foster-Greer-Thorbecke poverty measure defined as:
P
2

1 n y i

 p


( p
 p y i
)


2

H [ I
2 
( 1

I )
2
C p
2
] , where C
2 p is the squared coefficient of variation of income among the poor.

a.
Explain why on axiomatic grounds P
2
is preferable to H and I as a measure of poverty? b.
Suppose that inspired by the literatures on industrialization and income distribution (and growth and income distribution) you want to econometrically explore the impact of poverty on industrialization and growth. Which of the above poverty measures ( P
2
, H or I ) would you want to use for your empirical analysis? Put differently, why might your econometric results be sensitive to which poverty measure you use?
In answering this question, please sketch out a formal theory that links either industrialization or growth to income distribution. Please be sure to discuss your theory’s implication for the expected relationship between either growth or industrialization and the different poverty measures.
3.
T.J. Lybbert et al.
(2001) report the following non-parametric estimates of the impact of herd size in year t on herd size in year t+j among Ethiopian pastoralists:
30
20
E(H t+10
| H t
)
E(H t+1
| H t
)
H t
= H t+j
10
0
0 10 20
Herd Size This Year, H t
30
(Source: Lybbert T.J., C.B. Barrett, S. Desta, and D.L. Coppock. 2001. “Pastoral
Risk and Wealth-Differentiated Herd Accumulation Patterns in Southern Ethiopia.”
Cornell University mimeo.)
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a.
Briefly describe and interpret the results in the above graph. What are the primary patterns and puzzles that you see? b.
How would you account for the patterns that you see? Drawing on relevant literature, sketch out a theory that might account for these patterns. c.
Do the patterns in the graph (and your proposed explanation of them) justify a public policy intervention? Explain why and what if any intervention you might recommend.
4.
A decade ago, seeking to bring an end to hyperinflation, Argentina adopted a
“currency board” in which the exchange rate of the peso was fixed at parity with the
US dollar. During the mid-1990s, however, a rise in the US dollar relative to the
European and Japanese currencies, and big devaluations in the currencies of
Argentina’s major South American trading partners, brought about a revaluation of the Argentine currency. The outcome, in the absence of other adjustments, was a current account deficit. This was for a time accommodated by capital inflows from the IMF and other foreign lenders. As the willingness of foreigners to lend diminished, however, Argentina entered a period of rapidly rising unemployment and falling output. This ultimately so impaired the country’s ability to service its foreign debt that Argentina was forced to default on its foreign debts in late 2001, leading to the country’s current economic and political crisis.
While the real Argentine situation is of course very complex, this question asks you to think through the fundamentals of the current crisis by reference to some basic macroeconomic relationships. a.
Using a simple open-economy macroeconomic model, elucidate the links between external imbalances (the current account deficit), accommodating capital inflows, and the level of unemployment. What domestic conditions, other than a fixed nominal exchange rate, are required if a cessation of foreign borrowing such as occurred over the past two years is to produce such a rise in open unemployment? The model you use may be either mathematical or geometric, so long as you fully explain its logic. b.
Using the model, show why as the Argentine crisis deepened in 2000-01, the economy experienced deflationary pressures. Explain why, without foreign capital inflows, the fixed exchange rate policy became increasingly untenable, in both economic and political senses. c.
In the wake of the Argentine collapse, economists appear to be divided over whether the country’s long-term development is now best served by some kind of flexible exchange rate regime, or by the opposite extreme of
“dollarization” (abolition of the domestic currency and its replacement by the
US dollar). Which currency regime, in your view, is likely to be best for long-
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run growth in the Argentine economy? Explain your answer.
5.
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?
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