Development Policy. 1. Measuring inequality Comparing distributions of income directly is difficult, so we rely on summary indicators

Transcription

1 Development Policy Lecture 3 Inequality (cont ) Theories of economic growth September 21, Measuring inequality Comparing distributions of income directly is difficult, so we rely on summary indicators There are two most widely used indicator of inequality Begin with a distribution ib ti of income shares by percentile of the population A plot of the income shares by percentiles is called a Lorenz Curve Perfect equality: the Lorenz Curve is the 45 line The Lorenz Curve bows away from the 45 line the more unequal the income distribution The Gini coefficient is defined as a ratio between: The area between the 45 line and the Lorenz curve, and The whole area under the 45 line 2. Lorenz curve 3. Lorenz curve in some countries Source: Ray, D. [1998]; Development Economics, p. 185

2 4. Lorenz curve in some countries 5. Lorenz curve in some countries Source: Ray, D. [1998]; Development Economics, p. 185 Source: Ray, D. [1998]; Development Economics, p Lorenz curve in some countries 7. Lorenz curve in some countries Source: Ray, D. [1998]; Development Economics, p. 186 Source: Ray, D. [1998]; Development Economics, p. 186

3 8. The Ginii coefficient i 9. The Ginii across the world Source: UN [2008]; World Development Report 10. Gini imap 11. How is the world s Ginii evolving? Source: Sala i Martín [2006]; The World Distribution of Income, p. 385

4 12. WorldGini i (excluding some countries) 13. Inequality and development Simon Kuznets [1955] conjectured that, as a country started out on its path to development, inequality would first rise and then decline - Historical i episodes, such as the British Industrial Revolution, clearly followed Kuznets hypothesis Source: Sala i Martín [2006]; The World Distribution of Income, p. 387 Ample debate on whether the Kuznets hypothesis applies to modern economies - A moderate consensus indicates that it is still valid - Still, difficult to see in the data because of confounding factors The graphical representation of the Kuznets hypothesis is called the Kuznets curve. 14. Kuznets curve 15. Thinking about inequality Sources of economic inequality - Heterogeneity of people Human capital, location, physical capital, luck - Differences in mapping from characteristics to income Changes in the mapping and evolution of distribution Technological advances, international trade, etc.

5 16. Thinking about inequality (cont) How does inequality affect economic growth? - Positive effect on accumulation of physical capital? - Negative impact on accumulation of human capital? - Income redistribution and efficiency - Sociopolitical unrest Political instability Crime - Trust Theoriesof of growth Economic mobility 17. The development problem Why are some countries developed, and others less so? - What accounts for the disparities in living standards around the world? 18. Humanity s history in one picture Will developing countries eventually catch up? If not, why not? If yes, how long will it take? Does policy have an important role in the process, or can development be left to the market? Source: Clark [2007]; A Farewell to the Alms, p. 2

6 19. The economy as a whole 20. The economy as a whole Market for goods and services Revenue Market for goods and services Spending Goods and services sold Goods and services bought Firms Flow of goods and services Households Firms Flow of money Households Inputs of Labour, land, production and capital Market for factors of production Wages, rent, and profit Market for factors of production Income 22. Other actors, other markets 23. The economy as a whole A more realistic picture of what actually happens must include other elements There is at least another important actor in the economy Government Also, there is at least another important market where transactions take place Financial i market kt Firm Revenue Firms Factor payment Investment Market for goods and services Financial markets Government purchases Government Government deficit it Market for factors of production Private saving Taxes Consumption Households Income

7 25. Demand dfor goods and services 26. Classical l theories of development We had the following identity: Y = C + I + G + NX Consider a closed economy (NX=0) Y C G = I (Y C G) is national saving What you don t consume S = I Purchase of new capital If we call T the amount of taxes collected by the government: S = (Y T C) + (T G) private saving public saving > 0 budget surplus < 0 budget deficit Harrod Domar model dl Rostow sstages model dl Structural change theory - Lewis two sector model International dependence theory Traditional neoclassical growth theory - Solow model 27. The Harrod Domar growth model New additions to the capital stock (investment) will bring about corresponding increases in the flow of national output => growth 28. Implications i from Harrod Domar The most basic strategy t for growth is to increase the proportion of national income saved A simple model: - S = sy - I = ΔK, and K/Y = k - S = I => ΔY/Y = s/k The growth rate (ΔY/Y) is positively related to the saving ratio (s) what is able to invest and negatively related to the capital output ratio (k) The main constraint to development is relatively low levels of capital formation => Fill the saving gap with foreign aid In this model: - Labour force growth is not described, because it is assumed abundant in developing country context - Technological change can be described as a fall in the level of the capital output ratio

8 29. WlW Walt W. Rostow sstages of growth Transition from underdevelopment to development can be described in terms of a series of steps (or stages) through which all countries must proceed - Traditional society - Pre conditions for takeoff - Takeoff intoself sustained growth - Drive to maturity - High mass consumption One strategy of development necessary for takeoff is the movilisation of domestic and foreign saving to generate sufficient investment to accelerate economic growth 29. Rostow s stages 30. Lewis structural change model dl Simple two sector model - Traditional (over populated rural subsistence) sector, with zero marginal productivity of labour - Modern (high productivity h ii urban industrial) i sector, into which labour is gradually transferred Speed of expansion depends on the rate of industrial investment and capital accumulation in the modern sector - Investment coming from excess profits over wages, which are assumed to be re invested by the capitalist Self sustained growth and employment expansion 31. Aid to investment to growth The Western world should fill the financial i gap, which will make the required investment happen (making output grow) Association between aid and investment? - Scarce evidence of connection and, when there, relatively lti l small Does investment have a quick growth payoff? - No statistical association

9 32. Enters Solow American (born in Brooklyn, NY) Studied at Harvard and Columbia Became professor at MIT Won Nobel prize in 1987 for his contribution to the theory of growth 33. Solow model dldynamics How output is affected by interaction of The growth of capital stock The growth of the labour lb force The technology Closed economy and a neoclassical production function: Y y f k F K, L Y / L F K / L,1 34. Production function 35. Consumption and savings worker (y) Demand forgoods and the consumption function worker is divided between consumption per worker and investment per worker y ci Positive and diminishing marginal product Constant returns to scale Marg. Prod. of capital (or labour) approaches when capital 0 0 when capital Consumption per worker is what you do not save c 1s y So investment, like consumption, is proportional to income y c i y 1s yi sy i

10 36. Evolution of capital stock Dynamic equation for the capital stock Change in the capital stock is equal to investment, less the depreciation of the capitalyou have Inper worker terms K I K K sf K, L K K F K, L K s L L L K s f k k L 37. Putting everything together How does the ratio of capital per worker change? We have to account for the fact that the labour force grows K k nk L Replacing the values in the previous relationship K k nk s f k k L Sothe dynamics of the capital per worker are determined by k s f k n k 38. Solow model dldynamics (I) () worker (y) k s f k n k 39. Solow model dldynamics (II) worker (y) k s f k n k s s k L k* k H k 0 s f k n k Convergence!

11 40. Solow s steady state We define a steady state that situation where all the variables grow at constant rates k 0 0 s f k n k 41. The steady state worker (y) c* s Hence, in equilibrium: s f k n k k* i* 42. Change in population dynamics What happens at higher worker (y) population growth? (n +δ) k 43. Change in saving dynamics What happens at worker (y) different saving rates? s s 1 s 0 s 2 k* k* k* k*

12 44. Alternative saving rates worker (y) Different savingrates give different levels of consumption s 1 s Ideal saving rate? worker (y) y gold There is a saving rate that maximise consumption This happens when (n+δ)= f (k) Golden rule s 2 c gold s k* k* k* k gold i gold Development Policy September 21, Try it with iha Cobb Douglas Readings for next lesson In the appendix of the Chapter in Ray (pp ) there is a discussion on how to study the Solow model with a specific production function: - Cobb Douglas Easterly [2002]; The Elusive, chapter 4 From the compendium: 1 Y AK L A, 0 1 and 0 Work out the whole model using this by yourself! Glewwea and Kremer [2006]; Schools, Teachers, and Education Outcomes in Developing Countries, in Handbook of the Economics of Education