AGEC 340: International Economic Development Course slides for week 1 (Jan. 12-15)

Introduction to AGEC 340

• Review syllabus and handouts from the class website • Fill out background questionnaire • Use quick-feedback forms as needed

• What is “International Economic Development”?

• Why aren’t all countries equally developed?

Why AGEC 340?What is International Economic Development?

– International: across or between countriescomparisons (why the differences?)interactions (do we influence each other?)

– Economic: what happens that is measurable “the economy” is production, consumption, trade

material goods but also health, education…“economics” is our analysis of it

a special way of studying the economy

– Development: what happens over time change, evolution, growth it may be an improvement… or not.

• In economics, we try to… – describe the economy– explain the past so as to forecast change– explain the past so as to recommend actions

• To forecast or recommend, we need theories…– like any way of thinking, but more explicit– in economics, our theories usually start by thinking that

observations are: the result of some balance of forces (an “equilibrium”)

e.g. price results from buyers and sellers… in which people are smart, quick learners (“optimizers”)

e.g. people anticipate each other’s reactions

How is economics different?

• A key change over time is that people get richer–when we talk of “more” or “less” developed, what we usually

mean is “richer” or “poorer”.• In AGEC 340, we explain development using economics

– observed facts result from “equilibrium” among “optimizers”… but this doesn’t mean outcomes cannot be improved:

the equilibrium may be constrained e.g. little communication among buyers & sellers

the optimization may be constrained e.g. not enough income for buyers to buy

– economics tries to identify the constraint!

What about economics of development?

Development involves accumulation of stuff, that economists call “capital”:– physical capital (houses, roads, machines)– human capital (education, health)– institutional capital (“rules of the game”)

The accumulation of capital makes it more abundant and cheaper. – But accumulation doesn’t happen automatically!– …to build up capital, people must save and invest

from one year to the next.

What happens during development?

Development also involves innovation, which economists call “technical change”:– new physical things (seeds, chemicals, etc.)– new ideas (crop rotations, etc.)– new institutions (futures markets, etc.)

Innovation makes it possible to produce more of what people want, from the resources they have.– But innovation doesn’t happen automatically!– …to innovate, people must be able to change what they do!

What else happens during development?

During development, we get richer… but do we get happier?

Maybe not…• People may prefer stability:

“I’m all for progress – it’s change I can’t stand.” (Mark Twain)

• People may experience wealth only in relative terms:I may feel happier if I’m the first to buy a new car, but worse if others buy new cars before me.

Why aren’t all countries equally developed?

First, let’s look at the data:http://graphs.gapminder.org/world

Then, looking across countries, we can ask:Where are the rich countries?

Where are the poor?

Our textbook map of the world:Where are the rich? Where are the poor?

GDP per capita by latitude, 1995

Source: Sachs, JD, “Tropical Underdevelopment.” NBER Working Paper 8119. Cambridge, MA: NBER.

The temperate regions are much richer than tropical areas

Another view of the world…

Country sizes proportional to area

Source: www.worldmapper.org/display.php?selected=1

Temperate regions produce much more income than the tropics

Country sizes proportional to total income

Source: www.worldmapper.org/display.php?selected=170Note: Areas weighted by 2002 total GDP in PPP US dollars.

What about the tropics might slow growth? • Lack of natural resources?

maybe—but many tropical areas have more resources, not less• Culture or religion?

maybe—but migrants who leave the tropics often get rich, and many cultures have a rich temperate part and a poor tropical part

• History? (“The rich get richer & the poor get poorer”?)maybe—but some parts of tropics got rich early, then fell behind

• Local institutions and government policy?yes—places stay poor until they develop the laws and institutions

needed for markets to work, promoting accumulation and innovation. But what explains where market institutions arise?

• Technology, especially for health and agriculture?yes—places need locally-appropriate technology, and tools to

improve agriculture and public health emerged first and were easier to adopt in temperate countries

For next week…

Ethiopia (Ch. 2, p. 30)Colombia (Ch. 1, p. 1)

What is “poverty”? How can we measure and compare its severity, over time or across countries?