1. P.V. Viswanath Development Economics FIN 680V/ FIN 360 The Practice of Microfinance in India Fall 2015

2. What is Development? Poverty Reduction Economic growth Ability to support citizens using tax revenue, to provide continuing improvements in living standards Social Improvement Better education and health Achievement of Basic Capabilities (Amartya Sen’s definition) Ability to participate fully in society Democracy is Public Discussion and Deliberative Decision-Making Agency and Well-Being: Agency freedom is one’s freedom to bring about the achievements one values and which one attempts to produce.” Development is not passive

3. What is Development Economics? Development economics is that branch of economics that studies questions of development: Why are some people and countries so much poorer than others? How did some countries become prosperous? What can governments and philanthropic organizations do to reduce poverty and encourage the spread of prosperity?

4. Economic Inequality Why are some people and countries so much poorer than others? Why is there economic inequality in the world – between countries and between people in the same country? How much inequality is there in the world? How do we measure inequality? How has inequality changed over time? What are some theories of why inequality exists? Is there a connection between inequality and economic growth?

5. What causes economic growth? How did some countries become prosperous? What causes economic growth? What are some of the theories of economic growth? How has the world economy grown over time? Why have different countries grown at different rates over time? Why have different parts of the same country grown at different rates?

6. Economic Policy What can governments and philanthropic organizations do to reduce poverty and encourage the spread of prosperity? What is the connection between economic growth and other measures of well-being? How is health connected to economic growth? What about education? Is this an indicator of well-being or is it a tool to bring about economic growth? Do economic institutions matter in promoting economic growth? Do political institutions matter?

7. Economic Inequality

8. The world is growing richer, on average Branko Milanovic, Global Inequality and the Global Inequality Extraction Ratio, World Bank Policy Research Working Paper 5044, September 2009

9. Greater Unequal Across Countries Daron Acemoglu, “The world our grandchildren will inherit”

10. Measuring Inequality: Gini Coefficient The Lorenz curve is the cumulative percentage of income can be plotted against the cumulative percentage of the population. The Gini Curve is the ratio of the area between the curves to the area below the line of equality. Does Tax Policy Increase Inequality?

11. Growing Global Inequality Branko Milanovic, Global Inequality and the Global Inequality Extraction Ratio, World Bank Policy Research Working Paper 5044, September 2009

12. The rich get richer Inequality Branko Milanovic, Global Inequality and the Global Inequality Extraction Ratio, World Bank Policy Research Working Paper 5044, September 2009

13. Wealth Inequality https://jeanurquharthighlandsandislandsmsp.files.wordpress.com/2014/01/oxfam_85_richest.jpg 2014

14. Inequality in 2015

15. Extreme Inequality Daron Acemoglu, “The world our grandchildren will inherit”

16. Poverty over time and regions

17. Economic Growth

18. Adam Smith’s Key to Wealth According to Adam Smith, specialization, division of labor and increased scale led to higher returns. Increasing Specialization Average Cost Scale

19. Adam Smith: Returns to Scale Scale Output

20. Increase in International Trade Daron Acemoglu, “The world our grandchildren will inherit”

21. Geographical Gains from Trade http://moritz.stefaner.eu/projects/global-trade-flows/

22. Better Health Over Time Daron Acemoglu, “The world our grandchildren will inherit”

23. GDP and Life Expectancy Is there a relationship between income and life expectancy?

24. Economic Growth: The Classic Development Model Production was assumed to be increasing in labor and capital. Early models assumed that there was a large supply of labor. So the sticking point was capital. Capital could be obtained either by saving or through aid. Either way, growth could be achieved almost proportionately to the infusion of capital.

25. The Reality versus the Hype The ghost of financing gap: testing the growth model used in the international financial institutions, William Easterly, J of Dev Econ, 1999

26. The Impact of Aid According to the Financing Gap Approach, increased aid translated into increased growth, due to the Capital/Output Ratio multiplier: Predicted Growth in GDP per capita = [(Beg Inv + Incr Aid)/GDP] ÷ ICOR Less Population Growth Rate The ghost of financing gap: testing the growth model used in the international financial institutions, William Easterly, J of Dev Econ, 1999

27. Economic Policy

28. So what do we do? Aid Institution Building: corruption-free democracy, agency freedoms The Importance of Markets The importance of technology The importance of education The importance of health The importance of access to financial services

29. Economic Development beyond Wealth We have reasons to value many things other than wealth, which relate to the real opportunities to lead the kind of life we would value living Development is the expansion of the real freedoms that the citizens enjoy to pursue the objectives they have reason to value, and in this sense the expansion of human capability can be seen as the central feature of development. Capability is freedom – the range of options a person has in deciding what kind of a life to lead. Poverty is the lack of real opportunity – given by social constraints as well as personal circumstances – to choose other types of living. Economic growth is important for the expansion of human capabilities, but it is important to look at factors such as whether the growth is employment-intensive and whether economic gains are evenly distributed and are channeled into remedying the deprivations of the neediest.

30. Education and Health: An example Intrinsically Important Instrumental in other things, such as getting a job and in making use of economic opportunities. Instrumental socially – education can facilitate public discussion of social needs and encourage informed collective demands e.g. for public health Instrumental in a process sense – e.g. the non-schooling of children is correlated with child labor. Schooling also expands children’s horizons and brings them in contact with other kinds of people – from other regions, castes and economic classes. Education can empower – it can help disadvantaged groups to resist oppression, organize politically and lead to better redistribution of wealth. This is true not only within society, but also within the family – e.g. gender inequality in the family. The education of one group in a region can help and spur development of other groups – the Nairs, Ezhavas in Kerala. People are more able to help each other.

31. Government, State and Market The state is the government, the legislature that votes on public rules, the political system that regulates elections, the role that is given to opposition parties, and the basic political rights that are upheld by the judiciary. Right to Information Act Relatively Free Elections Corruption in Government Inefficiency in Government Slowness of the Judicial System (see Jalan’s articles) The nature of the government is important A democratic system makes it more difficult for governments to be unresponsive (Jalan argues that this is mediated by education.)

32. Nature of Markets under discussion Similarly, the nature of markets is important, as well. We need to consider how easy it is to move to equilibrium – frictions, etc. What is the nature of the performance of markets in non- equilibrium states? Are the participants in markets equally powerful, or are the markets being controlled by particular individuals? The non-competitive nature of political markets can lead to a non-competitive character of economic markets – openness of entry, scope for manipulability, cooptation of regulatory authorities, etc.

33. Markets and Governance The operation and success of markets depend on the nature of government actions that go with it. Markets can hardly function in the absence of legal backing of contracts and particular rights. The government may have a major role in initiating and facilitating market-reliant economic growth. Cf. Japan and Germany. US examples are SEC mandating information disclosure, the existence of Treasury bond markets allowing a base to price corporate bonds. The lack of such markets in India affecting bond markets there negatively. Governments cannot achieve an acceptable social arrangement without markets, e.g. if citizens are not allowed to produce and exchange on their own. Public policy can have a lasting role in the way markets are used and work – e.g. the role of labor markets in India.

34. Market-Complementarity Interventions A market-complementary arrangement allows the state to do things that the market would not do. Example: Markets do not cause famines. However, markets do not always do everything to reduce the impact of a famine. If a group has lower income during a famine (e.g. farmers and agricultural laborers who suffer a drop in the demand for their labor), the market may not do much to regenerate incomes – their access to credit markets might suffer due to lack of collateral. Microfinance may be necessary. The situation is also affected by social realities preventing the quick reorientation of groups in terms of their professions, cf. the slow reduction in the proportion of the population dependent on agriculture. Government involvement in infrastructure development