1. Global Economics and Development
Long-Run: Centuries
Medium Run: Decades
Human Development Index/Inequality Adjusted HDI
Purchasing Power Parity Income Per Capita
Health
Education
Short Run: Shocks  Fluctuations
ECON 403 Topics in Macroeconomics
Fall 2013 TR 1 – 2:15 pm

2. Elusive Quest for Growth Graham: Measuring Happiness
Why Nations Fail
Exorbitant Privilege
Elusive Quest for Growth
Graham: Measuring Happiness
Talvi/Lombardi:
New International
Monetary Architecture
Antholis:
China/India
Federalism
McMafia:
Global
Crime
Reinhart:
Debt and Crisis
Kimenyi:
Educational Reform
Can It Scale?
Gaddy:
Virtual Economy
Bear Trap
Crisis:
Is This Time
Different?
Soviet Extraction:
Ukrainian Famine

3. Thinking Long-Run
Extractive institutions  Vicious circles
Critical Junctures
Contingency/Reversal of fortune
Inclusive institutions  Virtuous circles

4. Endowments – Institutions - Endowments
Inequality, cause and effect: Political power  Economic power
Reinforce status quo? Promote progress?
Why nations fail:
Geography hypothesis/Culture hypothesis/Ignorance hypothesis
 Prescriptions:
Authoritarian growth/Modernization Theory/Washington Consensus
Acemoglu and Robinson: Institutions hypothesis
Extractive Institutions  Vicious Circles
Economic institutions
Insecure property rights
Slavery/Plantation system
Encomienda
Mita/Repartimiento
Reversal of fortune
Monopoly: La Serrata
Dual economy
Crony capitalism
Marketing boards
Political institutions
Absolutism
Infighting/Failed state
Ethnic fractionalization
Iron Law of Oligarchy
Elites: Libro d’Oro
Indirect rule
Patronage networks
Apartheid/Jim Crow

5. Why Nations Fail: Institutions Hypothesis
Inclusive Institutions  Virtuous Circles
Economic institutions
Enforced property rights
Patent protection
Rule of law
Open Markets
Commenda
Political institutions
Pluralism
Constraint on executive
Secret ballot/Wide suffrage
Free media: Muckrakers
Creative Destruction
(pursuit of transient rents)
Theory of Development
Institutional Drift
Critical Juncture
Contingency
Preconditions
Centralized State
Constraint on executive
Pluralistic coalition
Critical junctures we have known
Neolithic Revolution
Fall of Rome
Black Plague
Atlantic Trade
Glorious Revolution
Industrial Revolution
French Revolution
Colonialism
The Great War
Energy Crisis

6. The Medium-Run Cumulative Causation: Stuck in a Trap
Lack of social infrastructure
Low payoff to skill
 Little skill acquisition
 Lack of social infrastructure
Lack of skills/lack of means to employ knowledge
 Primary production
 Primitive techniques
 Stagnation
 Poverty Trap

7. Cumulative Causation Escaping the Trap: The Elusive Quest for Growth
Build social infrastructure
Subsidize targeted industries/Tax consumption
Coordinate...industrial complex development...assure critical mass
Foster “Great expectations”  Self-fulfilling optimism
Exploit Technology LEAPS
Creation without destruction...when there’s nothing to destroy
Take Advantage of Demography
Age and vested interest
Immigration: the future of the West
Harness Creation without Destruction...Pursue Increasing Returns
Complementary inventions and technologies
Railroads and the steam engine/The internet and PCs
 Increasing Returns

8. Development (per capita income): What Matters?
Sala-i-Martin: 2 million regressions testing 59 suspects
Rule of law, accumulation, initial education, openness help
War, political instability, primary goods specialization hurt
Government stance, price distortion, ethnic fractionalization don’t matter
Easterly and Levine
Africa’s Growth Tragedy: Ethno linguistic fractionalization
Tropics, Germs, Crops
Institutions: protection of property rights index
Endowments—geography: Settler mortality, latitude, landlocked, crops, minerals
Policies: Openness to trade, overvaluation, inflation
Other variables: Ethnic fractionalization, religion, legal origin
FINDINGS: Endowments  Institutions  Economic Development
Engerman & Sokoloff/Acemoglu, Johnson and Robinson get the ring
What about policies?
Once per capita income is explained by institutions, policy variables individually and together are insignificant
CONCLUDE: Policies may affect growth over a decade, as found by other studies
Bad policies are symptoms of bad institutions
INSTITUTIONS MATTER FOR LONG-RUN DEVELOPMENT

9. Development, One Schoolhouse at a Time Kimenyi: Can Contract Teacher Results be Scaled Up?
In randomized experiment implemented by NGOs, low-paid “contract teachers” performed better than higher paid civil service teachers in Western Kenya.
But can the result be scaled up, i.e., when implemented on large-scale by government agencies?
Another randomized experiment performed: half the contract teachers worked for NGOs, half for government agencies.
Government hired somewhat more “qualified” contract teachers
Government hires more likely related to someone in system  cronyism
Other things equal, only NGO contract teachers performed better than civil service teachers
Payroll delays significantly affected performance/Paym’t by gov’t more delayed
Kimenyi concludes: Don’t leave education reform to government
Alternative conclusion: Clean up the payroll system and public education will do fine
Equal fractions of NGO and gov’t teachers did well enough to be hired full time

10. Gaddy: Russia, Before and After
Soviet growth under extractive institutions
The Easy Part: Move resources from low productivity agriculture to higher productivity manufacturing
The Hard Part: Spur innovation/Creative Destruction
Perverse quotas and prices
The Post-Soviet Virtual Economy
Loss-making manufacturing ought to shut down
Unemployment/Social discontent
Siberian industries and cities ought to be downsized
Extreme cold/high transport costs  uneconomical settlement
Primary producers/fictitious prices maintain the status quo
Oligarchs keep export earnings
Putin maintains power: A “protection racket”
Required subsidy grows with time
 Unsustainable Bear Trap

11. Antholis: China and India – The Political Realities
China and India are not monolithic states
Regions and provinces matter
India: 35 states/China: 22 provinces + Taiwan
Local issues  Beijing and New Delhi can’t easily lead
Migration
Land acquisition for industry and urbanization
Infrastructure provision
Fiscal federalism: Center bail-out of sub-national entities
China: GDP Monotheism/Fragmented Authoritarianism
Central Ministry – Provincial Government Matrix
Global Coast vs. Protectionist Interior
Special Enterprise Zones/Environmental sustainability issue
India: Secessionist Threat/Ethnic Conflicts/Caste Conflicts
Regional parties critical for Congress or BJP coalitions
Advanced States: Benefit from high-tech diaspora
Backward States: Cronyism
Legacy of socialist subsidies: Unreliable power/shoddy infrastructure

12. The Short-Run in a Floating Age
Managed float: intervention  $ reserves  $ privilege
Currency misalignments  Currency crises
Latin America’s “Lost Decade”
Tequila/East Asia
Global demand for $s  Capital inflows to US
US International Debt  Threat of “Bank Run”
The US Housing Bubble  (Developed) World in a Slump
Dysfunctional US Finance/Dysfunctional US Politics
 Dawn of a new international monetary architecture?

14. The Euro: An Alternative to the $?
Why a €?
Euro economics: Transactions costs/CAP/German Discipline
Euro politics: Integration  Peace/Tie Germany to West Europe
Eurozone Imbalance
Early 2000s: German wage discipline
 German competitiveness  Current account surplus
Capital inflows to peripheral countries
 Financial bubbles/Housing bubbles/Fiscal bubbles
Iceland/Cyprus/Ireland/Spain/UK/Greece/Italy/Portugal
Iceland: When fishermen become investment bankers
Crash  Brit and Dutch Screwed
Cyprus: Oligarch/Mafiya Laundry
Crash  Russians Screwed

15. Talvi: New Economic Geography
Latin American and other emerging economies not dragged down by the crisis
Chinese expansion  commodity boom
Latin American countries with relatively high net commodity exports advantaged by rising commodity prices
Advanced country deleveraging
 capital inflows to emerging economies
 growth of emerging economies

16. Carmen Reinhart’s Remarks: Carmen bemoans debt
Emerging economies had reduced debt
Deleveraging followed crises
Advanced countries (and Emerging Europe) entered crisis with high Public + Private Debt
Deleveraging has been and will continue to be prolonged ~ Decade
 Downward pressure on demand, output, & employment
Massive monetary easing lightens debt burden
Stemmed debt deflation spiral
But private saving eaten up by public borrowing
Vulnerabilities for emerging economies
Build up of domestic debt
Brazil: private debt and non-federal government debt
Reinhart: For a banking crisis, don’t need external debt, just debt
China slowdown  commodity price collapse

17. This Time Ain’t Different Reinhart and Rogoff
“Excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.”
“Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced.”
Highly leveraged economies “can seem to be merrily rolling along for an extended period, when bang! - confidence collapses, lenders disappear, and a crisis hits.“
Eight centuries of experience suggests this time is not different.

18. U.S. Debt History

19. This Time Ain’t Different (but it’s not another Depression, ECON 403)
Consequences of banking crises
Real GDP down – Unemployment up
Government revenue down
Government bailout of banks
Government debt/GDP UP
But 90% is not a ratio to be particularly feared
Austerity sucks...and doesn’t spur recovery
“A recession is no time to cut spending”
Prolonged slump
Deleveraging
Zero lower bound  Monetary policy weakened
Fiscal policy would work, given the chance: STIMULUS NOW

20. Aggressive Policy Response  No Depression