Download 1 - Department Agricultural and Applied Economics, UW

University of Wisconsin-Madison
Department of Agricultural and Applied Economics
Development Economics Preliminary Examination
January 2002
Answer any three questions. All questions have equal weight. Please type your answers.
Your answers must be submitted no later than noon on Tuesday, January 22.
1. Foster and Rosenzweig (1995) develop an argument for why larger farms might be
more likely to adopt a new technology sooner and faster. They also consider how
learning from others can shape technology choices of farmers. Thus, the presence of
larger-scale operations can potentially influence the adoption paths of smaller-scale
ones by speeding up their learning processes.
a. First, discuss carefully the way in which the learning mechanism between
larger and smaller farmers in this model works.
b. Next, consider how else farmers might learn from one another about
technologies. Describe in detail at least two other learning mechanisms.
c. Choose one or two of these alternative learning mechanisms and consider how
they affect the way in which the presence of larger-scale operators is likely to
interact with and impact the adoption decisions of smaller-scale ones.
d. Finally, consider other endogenous or unobserved processes these types of
adoption models might be overlooking and comment on how these might
reinforce or cut against their results regarding the dynamics of learning
externalities between larger and smaller-scale operators.
2. Consider an economy of n people for which we define a standard money-metric
poverty line p. Let yi denote the income of the ith person in this economy. Let H
denote the standard headcount ratio poverty measure, I denote the income gap ratio
defined as:
 ( p  yi )
I
yi  p
;
pnH
and, P2 denote the degree two Foster-Greer-Thorbecke poverty measure defined as:
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 ( p  yi ) 

  H [ I 2  (1  I ) 2 C p2 ] ,

p 
yi  p 
2
where C p is the squared coefficient of variation of income among the poor.
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P2 
n
a. Explain why on axiomatic grounds P2 is preferable to H and I as a measure of
poverty?
b. Suppose that inspired by the literatures on industrialization and income
distribution (and growth and income distribution) you want to econometrically
explore the impact of poverty on industrialization and growth. Which of the
above poverty measures (P2, H or I) would you want to use for your empirical
analysis? Put differently, why might your econometric results be sensitive to
which poverty measure you use?
In answering this question, please sketch out a formal theory that links either
industrialization or growth to income distribution. Please be sure to discuss
your theory’s implication for the expected relationship between either growth
or industrialization and the different poverty measures.
3. T.J. Lybbert et al. (2001) report the following non-parametric estimates of the impact
of herd size in year t on herd size in year t+j among Ethiopian pastoralists:
Expected Future Herd Size, Ht+j
E(Ht+10 | Ht )
30
E(Ht+1 | Ht )
Ht= Ht+j
20
10
0
0
10
20
30
Herd Size This Year, Ht
(Source: Lybbert T.J., C.B. Barrett, S. Desta, and D.L. Coppock. 2001. “Pastoral
Risk and Wealth-Differentiated Herd Accumulation Patterns in Southern Ethiopia.”
Cornell University mimeo.)
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a. Briefly describe and interpret the results in the above graph. What are the
primary patterns and puzzles that you see?
b. How would you account for the patterns that you see? Drawing on relevant
literature, sketch out a theory that might account for these patterns.
c. Do the patterns in the graph (and your proposed explanation of them) justify a
public policy intervention? Explain why and what if any intervention you
might recommend.
4. A decade ago, seeking to bring an end to hyperinflation, Argentina adopted a
“currency board” in which the exchange rate of the peso was fixed at parity with the
US dollar. During the mid-1990s, however, a rise in the US dollar relative to the
European and Japanese currencies, and big devaluations in the currencies of
Argentina’s major South American trading partners, brought about a revaluation of
the Argentine currency. The outcome, in the absence of other adjustments, was a
current account deficit. This was for a time accommodated by capital inflows from
the IMF and other foreign lenders. As the willingness of foreigners to lend
diminished, however, Argentina entered a period of rapidly rising unemployment and
falling output. This ultimately so impaired the country’s ability to service its foreign
debt that Argentina was forced to default on its foreign debts in late 2001, leading to
the country’s current economic and political crisis.
While the real Argentine situation is of course very complex, this question asks you
to think through the fundamentals of the current crisis by reference to some basic
macroeconomic relationships.
a. Using a simple open-economy macroeconomic model, elucidate the links
between external imbalances (the current account deficit), accommodating
capital inflows, and the level of unemployment. What domestic conditions,
other than a fixed nominal exchange rate, are required if a cessation of foreign
borrowing such as occurred over the past two years is to produce such a rise in
open unemployment? The model you use may be either mathematical or
geometric, so long as you fully explain its logic.
b. Using the model, show why as the Argentine crisis deepened in 2000-01, the
economy experienced deflationary pressures. Explain why, without foreign
capital inflows, the fixed exchange rate policy became increasingly untenable,
in both economic and political senses.
c. In the wake of the Argentine collapse, economists appear to be divided over
whether the country’s long-term development is now best served by some
kind of flexible exchange rate regime, or by the opposite extreme of
“dollarization” (abolition of the domestic currency and its replacement by the
US dollar). Which currency regime, in your view, is likely to be best for long-
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run growth in the Argentine economy? Explain your answer.
5. Fig. 1.17 in Robert Barro and Xavier Sala-i-Martin's book Economic Growth
(McGraw-Hill, 1995) depicts what the authors refer to as a growth model with a
poverty trap. In this model, in contrast with the neoclassical Solow model, the
fundamental idea is that production involves a pattern of decreasing returns, followed
by a range of increasing returns. Note the theoretical justifications that the authors
offer for such a pattern, and their comment that “we do not know, however, of
empirical evidence that supports the underlying pattern....” Consider the Barro and
Sala-i-Martin arguments as well as any others that might conceivably generate this
type of poverty trap. Is this model a useful theoretical or analytical tool for
development economics?
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