Why Are So Many Countries Poor, Volatile and Unequal?

PED-130

Why are so Many Countries Poor, Volatile and Unequal?

Fall 2013

Course Description

Why are so many countries poor, volatile and unequal? This course will describe these three salient and interrelated characteristics of developing countries, study their proximate and deeper causes and discuss the policies that have been proposed to deal with them. The first part of the course discusses the current state of development across the world and its evolution. It then discusses the different approached that have been developed to account for these facts, including factors such as geography, demography, institutions and the obstacles to structural transformation and puts them in a diagnostic framework. We also review the evidence on the magnitude and causes of inequality and discuss the causes and consequences of macroeconomic volatility and crises in the developing world. The emphasis throughout is to inform the discussion on development policy.

Audience

This course is envisioned for the student who may one day be involved in economic policymaking, in business, or in finance in developing, emerging or transition countries as well as in international financial institutions. The course is taught in a fairly non-technical manner, but previous exposure to macroeconomics and microeconomics is strongly recommended. Students without previous exposure to economics need permission from the instructor. This course is appropriate for students who want a broad introduction to the themes and issues that are currently at the center of the policy debate in countries that have yet to achieve the status of developed countries. The theoretical literature will be presented with an emphasis on the conceptual and policy implications. Classes will be a combination of lectures with discussion. Students will be expected to have done the readings before each class, and to come to class prepared. Students will work in teams and follow two countries of their choice throughout the course.

Grading

Students will be required to work on four individual problem sets, take a mid-term multiple-choice exam, and produce a group final project. Problem sets require that the student apply the material discussed in class to the two countries they will follow throughout the semester. Students will select countries based on their own particular interests, provided that the necessary data is available.

The grading breakdown is as follows:

Problem Set 1: 10%

Problem Set 2: 20%

Mid-term exam: 20%

Problem Set 3: 10%

Problem Set 4: 10%

Final Paper: 30%

There will be no final exam.

Materials

The course does not have a single organizing textbook, It is based mostly on a collection of papers. However, the following books are very good references and are available at the COOP and Harvard Libraries:

-  David N. Weil, Economic Growth, Pearson Addison Wesley.

-  William Easterly, 2001, The Elusive Quest for Growth, Cambridge, MA. MIT Press.

-  Oded Galor, 2011, Unified Growth Theory. Princeton University Press.

-  Elhanan Helpman, The Mystery of Growth, Cambridge, MA. MIT Press.

-  Banerjee, Abhijit and Esther Duflo (2010) Poor Economics

-  Kling and Schulz (2009) From Poverty to Prosperity

Most of the readings are accessible through the Internet, and you can find them either through the course webpage or through any Web search engine. There is also hyperlinks to these readings in the electronic version of this document (follow the underlined titles of the readings).

Here are some additional links that you may find useful:

-  The online service provided by the library is at http://lib.harvard.edu/e-resources/type/electronic_journals/

-  National Bureau of Economic Research (NBER): http://www.nber.org

-  International Monetary Fund http://www.imf.org

-  World Bank: http://www.worldbank.org

-  Inter-American Development Bank: http://www.iadb.org/res/

-  Older published papers are available through http://www.jstor.org, many recent working papers are also available at http://www.ssrn.com. Good resources are available at The Economic Growth Resources at http://growth.blogs.ilrt.org/ and the World Bank at http://www.worldbank.org.

-  The most up to date resources for recently published papers are Google Scholar and Primo Central. They both can be accessed through the Harvard Kennedy School Library webpage at: http://www.hks.harvard.edu/library/ (you will be asked for your PIN number and password to be able to access the Harvard University account, which gives you free access to these services). At the library webpage you can also find several very useful data sources in the “Research Guide” section.

-  The Observatory of Economic Complexity: www.cid.atlas.edu

1.  Friday, September 6. The Short History of Long-Term Development

·  Maddison, Angus 2001. The World Economy: A Millennial Perspective, OECD Development Centre Studies, Introduction, Summary and Ch. 1. (Also skim Appendix A).

2.  Monday, September 9. The Malthusian Equilibrium: Is Malthus still alive?

·  Easterly (2001), The Elusive Quest for Growth, Cambridge, MA. MIT Press. Chapter 1.

·  World Bank, Economic Growth in the 1990s: Learning from a Decade of Reform (2004). Part I: Facts of the 1990s.

·  Weil, David. Economic Growth, Pearson Addison Wesley (2005), Chapter 4 (without the Appendix).

3.  Wednesday, September 11. The Escape from the Malthusian Trap, Geography and Diversity

·  Galor, O. (2011). Unified Growth Theory. Chapter 2: “From Stagnation to Growth”

·  Diamond, J. 1997. Guns, Germs, and Steel. New York: W.W. Norton and Co., Ch. 4-6.

Additional Optional Readings:

·  Weil, David. Economic Growth, Pearson Addison Wesley (2005), Section 9.1.

4.  Monday, September 16. The Neo-Classical Growth Model

·  Helpman, E. (2004), Chapter 1-4.

Additional Optional Readings:

·  Easterly, W. (2001), The Elusive Quest for Growth, Cambridge, MA. MIT Press. Chapter 2.

5.  Wednesday, September 18. Endogenous Growth, the Diffusion of Knowledge, and Self-Discovery

·  Jones, Charles I., and Paul M. Romer. 2010. "The New Kaldor Facts: Ideas, Institutions, Population, and Human Capital." American Economic Journal: Macroeconomics, 2(1): 224-45.

·  Hausmann, Ricardo, et al. "The Atlas of Economic Complexity." Boston. USA (2013). Section I: “What do we mean by economic complexity?” (pgs. 15-18)

Additional Optional Readings:

·  Hausmann, Ricardo, and Dani Rodrik. "Economic development as self-discovery." Journal of development Economics 72.2 (2003): 603-633.

6.  Monday, September 23. Knowledge, Institutions and Development

·  North, Douglass (1993) Nobel Prize Lecture.

·  Rodrik, D. 2000 “Institutions for High-Quality Growth: What they are and How to Acquire them”, NBER Working Paper No. W7540.

Additional Optional Readings:

·  Helpman, E. 2004 “The Mystery of Economic Growth” Chapter 7

7.  Wednesday, September 25. Structural Transformation I

Problem Set 1 due in class

·  Hausmann, Ricardo, et al. "The Atlas of Economic Complexity." Boston. USA (2013). Sections 2 and 3 (pgs. 20-33)

·  Hausmann, Hwang, Jason and Rodrik, Dani “What You Export Matters” CID Working Paper No. 123, March 2006.

Additional Optional Readings:

·  Hidalgo, César and Ricardo Hausmann (2009) “The building blocks of economic complexity”, Proceedings of the National Academy of Sciences10610570–10575.

8.  Monday, September 30. Structural Transformation II – The Product Space

·  Hausmann, Ricardo, et al. "The Atlas of Economic Complexity." Boston. USA (2013). Section 4: “How is Economic Complexity Different from Other Approaches?” (pgs. 35-49).

·  Hidalgo, Klinger, Barabasi and Hausmann “The Product Space Conditions the Development of Nations”, Science317(5837)482-487.

Additional Optional Readings:

·  Hausmann, Ricardo and Klinger, Bailey Structural Transformation and Patterns of Comparative Advantage, CID, KSG. June 2006.

9.  Wednesday, October 2. Navigating the Product Space

·  Hausmann, Ricardo, et al. "The Atlas of Economic Complexity." Boston. USA (2013). Section 5: “How does Economic complexity evolve?” (pgs. 51-63).

·  The Observatory of Economic Complexity: http://www.atlas.cid.harvard.edu

10.  Monday, October 7. High-Bandwidth Policy Making

·  Hausmann, Ricardo (2008) “The Other Hand: High Bandwidth Development Policies”, CID WP # 179.

·  Hausmann R. and Rodrik, D. (2006) Doomed to Choose: Industrial policy as predicament.

11.  Wednesday, October 9. Inequality: Definitions and Stylized Facts

·  Agenor, Pierre-Richard (2004). The Economics of Adjustment and Growth. Second Edition. Chapter 10: “Growth, Porverty and Inequality: Basic Facts”. Cambridge: Harvard University Press.

Additional Optional Readings:

·  Sen, A. (1992). Inequality Reexamined, Cambridge: Harvard University Press. Chapter 1-2.

Monday, October 14. Holiday (Columbus Day)

12.  Wednesday, October 16. Inequality: Deeper Determinants

·  De Ferranti, David; Perry, Guillermo E.; Ferreira, Francisco; and Walton, Michael. “Chapter 3: Group-Based Inequalities: The Roles of Race, Ethnicity, and Gender” in Inequality in Latin America: Breaking with History?. World Bank, 2004. Washington, D.C.

Additional Optional Readings:

·  Nunn N. Shackled to the Past: The Causes and Consequences of Africa's Slave Trade. In: Diamond J, Robinson JA Natural Experiments of History. Cambridge: Harvard University Press; 2010. p. 142-184.

13.  Monday, October 21. Inequality: What Policies?

Problem Set 2 due in class

·  World Development Report 2006 “Equity and Development.” Part II, Equitable Public Action in the Domestic Arena: Broadening Opportunities. Chapter 6-8.

14.  Wednesday, October 23. The Volatility Puzzle: Facts and Theoretical Approaches

·  Wolf, Holger (2005). “Volatility: Definitions and Consequences”, in Aizenman, J. and B. Pinto: Managing Economic Volatility and Crises: A Practitioner’s Guide. New York: Cambridge University Press.

·  HnatkovskaV. and N. Loayza (2005). “Volatility and Growth”, in Aizenman, J. and B. Pinto: Managing Economic Volatility and Crises: A Practitioner’s Guide. New York: Cambridge University Press.

15.  Monday, October 28. Volatility and commodity prices

·  Hausmann and Rigobon “An alternative explanation of the resource curse: theory and policy implications” http://www.nber.org/papers/w9424.

·  Devlin, J. and M. Lewin (2005): “Managing Oil Booms and Busts in Developing Countries”, in Aizenman, J. and B. Pinto: Managing Economic Volatility and Crises: A Practitioner’s Guide. New York: Cambridge University Press.

16.  Wednesday, October 30. Volatility: Fiscal Risk, Fiscal Pro-cyclicality and the “Original Sin”

Problem Set 3 due in class

·  Eichengreen, Hausmann and Panizza (2004) “The Pain of Original Sin”.

Additional Optional Readings:

·  Hausmann R. (2003) “Good credit ratios, bad credit ratings: the role of debt denomination” http://ksghome.harvard.edu/~rhausma/paper/GCRBCR-3.2003.pdf.

17.  Monday, November 4. MIDTERM EXAM (in class)

18.  Wednesday, November 6. Growth Diagnostics I: Motivation and strategy

·  Rodrik, D. Diagnostics before prescription. (2010) Journal of Economic Perspectives, Vol 24, No. 3

·  Hausmann, R., Rodrik, D. and Velasco, A, (2005) “Growth Diagnostics” Harvard University.

Additional Optional Readings:

·  Rodrik “Goodbye Washington Consensus, Hello Washington Confusion?” Harvard University, January 2006.

Monday, November 11. Holiday (Veteran’s Day)

19.  Wednesday, November 13. Growth Diagnostics II: Method

Problem Set 4 due in class

·  Hausmann, Klinger, Wagner (2008) “Doing Growth Diagnostics in Practice: a Mindbook”, CID WP No. 177.

Additional Optional Readings:

·  Rodrik, D. “Growth Strategies”. Working draft for the Handbook of Economic Growth. John F. Kennedy School of Government. Cambridge, MA September 2003.

20.  Monday, November 18. Growth Diagnostic in Practice I: Finance

·  Hausmann, R. (2008) “In search of the chains that hold Brazil back”, CID Working paper No. 180.

·  Mishkin, F. (2000) “Prudential supervision: Why is it important and what are the issues?” http://www.nber.org/papers/w7926

Additional Optional Readings:

·  Pritchett, Lant and Preya Sharma (2008) “Implementing Growth Analytics: Motivation, Background, Implementation”

21.  Wednesday, November 20. Growth Diagnostic in Practice II: Low appropriability or Low Social Returns

·  Pritchett, Lant. 2009. “Does Schooling Help Explain any of the Big Facts About Growth?”

·  Mauro, Paolo (1996) “The Effects of Corruption on Growth, Investment and Government Expenditures: A Cross-Country Analysis”

22.  Monday, November 25. Growth Diagnostics in Practice V: Examples

·  Hausmann, Ricardo, and Dani Rodrik. "Self-Discovery in a Development Strategy for El Salvador." Economía - Journal of the Latin American and Caribbean Economic Association 6(1): 43-101, 2005.

·  Hausmann, Ricardo and Bailey Klinger. (2007) “Growth Diagnostics: Belize”.

23.  Wednesday, November 27. BBNN: External and Internal Balance

·  Rigobon, Roberto (2012) “Managerial International Macroeconomics BB-NN”. MIT Sloan.

·  Additional Optional Readings:

·  Caves R., J. Frankel and R.W.Jones (2007). World Trade and Payments: An Introduction. 10th Edition. Chapter 15: “The Balance of Payments Accounts”. (pgs. 273-288). Chapter 18: “Spending and the Exchange Rate in the Keynesian Model” (pgs. 327-344). Chapter 20: “Developing Countries and Other Small Open Economies with Non-traded Goods” (pgs. 391-407)

24.  Monday, December 2. Why Are So Many Countries Poor, Volatile, and Unequal?

25.  Wednesday, December 4. Final Lecture: A policy makers view

Wednesday, December 11. FINAL PAPER DUE (drop box outside of Prof. Hausmann’s office)

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