Free «Developing Economies» Essay Sample

Question 1

One of the strategies advocated for getting a country out of the low level income trap is a huge injection of capital into the system. Describe two reasons why this approach may not work in reality. What are some of the alternative approaches that may be used instead? (Refer to the lecture slides about low level equilibrium trap and chapter 5 from the book)

The Lewis model describes the development of economies with virtually unlimited supplies of labor. According to it, the low-level income trap in the developing economies can be overcome by growing the modern sectors of the economy, as opposed to the traditional low-productivity sectors. The capital injection is considered the means to facilitate structural changes in the economy. Capital accumulation and technical progress are supposed to increase the share of profits in the national economy. Consequently, they will enhance reinvestments while keeping the wages at about the same level until the surplus of the labor is not present anymore.

However, these assumptions do not always hold true. The first reason is that the modern sector, despite the investments made, often maintains low productivity levels due to low incentive of private entrepreneurship, large urban unemployment caused by rapid migrations, and the union pressure towards higher wages in certain industry sectors. The second reason is that the profits earned in the modern sectors are not always reinvested back into the domestic economy.

In order to tackle these issues, institutions can play a major role. The availability and development level of capitalist institutions forms the prerequisite for the growth of the economy. Financial institutions can stimulate savings, hence contributing to the increase of the per capita income levels. Government institutions serve to develop the infrastructure to increase labor productivity, facilitate the development of social capital, and improve standards of living, including schools, public health systems, irrigation facilities, etc. Additionally, the government can specifically incentivize migration of work labor to modern sectors and the development of innovations via tax policy and special economic zones. In plan economies, price liberalization and decentralization (or privatization), combined with law enforcement and mechanisms of the property rights protection, serve to stimulate entrepreneurship and boost output.

Question 2

Describe the arguments for and against international aid as a strategy for development. Which side would you take and why? Put clear arguments with proper references and quotes wherever necessary. Feel free to use materials you may find on the subject apart from those posted as readings.

The differences in economic development of the countries are explained by the wide range of factors. Besides the geography, natural resources, and long-rooted historical and cultural conditions, there are also the issues of institutions development, economic inequality, structural crisis, and development of human capital. While international aid can be used to improve some of the factors, it cannot serve as a single measure for all obstacles to the economic development. Most of the international aid focuses on Africa as the poorest region of the world. The set of 2015 UNO goals includes “cutting poverty in half, reaching universal primary enrollment, sharply reducing mortality of infants and mothers, achieving gender equality, dramatically increasing access to clean water and other social indicators” (Easterly, 2008).

On the one hand, the local or one-time efforts to fight lethal diseases, combat natural disasters, help with medicine, food or improve the welfare of individual communities are easier to evaluate. On the other hand, it is difficult to judge whether the efforts of international governments and global corporations give a sustainable result. In fact, the humanitarian help intended to help the countries that exhibit frequent local conflicts is often misappropriated and can even induce rebellions and promote conflicts, as suggested in the study by Nunn and Qian (2012) and in the work of Collier (2007).

In his book, Paul Collier (2007), who had worked as a director of development research at the World Bank, defines four types of “traps” that can lock the economic development of the poor countries. These are the traps of conflict, natural resources, the trap of being landlocked with slowly developing neighbors, and a poor governance trap. Obviously, international aid cannot change the endowment of natural resources. International funding is used quite frequently to support political and economic reforms in the developing countries. However, whether it is effectively directed towards the goal is subject to many factors, such as corruption, bureaucracy or often a lack of regulation, control, and even proper measurement. Collier (2007) argues that international aid could be used to develop infrastructure to mitigate the effect of the “landlock” trap. However, in practice the successful budget development is often overridden with a large number of remaining political and economic issues if judging by the macroeconomic figures. The ability of international agencies to promote peace and solve internal military conflicts is a controversial issue. Unfortunately, the aid efforts are too often practiced as a PR tool; besides, they often lack performance evaluation. William Easterley (2008) shows that Western programs in Africa are prone to “escalation” and cyclical in nature, when the previously failed projects are repeated again over time, and sometimes scaled up. “Feedback loops”, proper measurement, and continuous effort to enhance the public sector and strengthen local procurement are named as major success factors of the international aid (Farmer, 2013).

Apparently, the international aid can serve as a tool to solve local problems or add budget to the existing national programs subject to strict control. However, the sustained growth is primarily achieved by the internal effort.

Question 3

Consider the following three factors with respect to their impact on conflict/civil wars in developing economies:

1. Natural resources.
2. Percapita income.
3. Religious or ethnic fractionalization.

For each factor describe what impact you would expect and whether empirical evidence confirms this or not. (Lecture slides on conflict trap, Collier’s book chapter, and text book chapter)

Answer 3a. The competition for natural resources is one of the core roots of the civil conflicts. Natural resources provide both reasons and opportunities to initiate the conflict and the means to support it. First of all, specifics of the territory make some countries prone to initiation of the conflict and its prolongation. Among the natural resource factors that increase the probability and duration of conflicts are the mountainous terrains, a large area of the territory, and the dispersed population. On the contrary, flat territories with high population density are less prone to civil conflicts. Second, the availability of natural resources, combined with the wealth inequality and weak state protection of property rights, is the primary reason to start the conflict.

In particular, the high dependence on exports of primary commodities was empirically confirmed to substantially increase the risk of a civil war. In his 2007 study, Paul Collier found that the dependence between conflict risks is maximal for approximately 32% share of exports in GDP; it is lower for both very high and very low export shares. According to a 2003 model of Fearon and Laitin built on empirical data from 123 countries, the dependence is positive and direct. For instance, the share of fossil fuel exports higher than 33% contributes to a more than twofold increase in the odds. The effect of oil exports is strong, with the additional variables used to explain possible impacts of national or cultural specifics of Middle-East countries. An oil exporter has an estimated probability of 21% to experience a civil conflict during a decade, compared to a 10% chance of a median country.

Additionally, availability of valuable resources can increase the support of conflicts from external parties due to political reasons, which also affects the country’s proneness to maintain civil conflicts.

Answer 3b. The dependence between income level and the likelihood of civil conflicts seems to be evident, as civil conflicts are observed more frequently and with higher magnitude in less developed countries. Indeed, this dependence has been extensively studied in the theoretical and empirical models. The empirical findings are robust and confirm that low level of per capita income, along with the slow economy growth, is associated with the inception of civil conflicts and wars in the developing countries. Furthermore, the lower is the starting income level, the longer last the conflicts. According to a structural model elaborated in Paul Collier’s book (2007), the twofold decrease of the starting income level of the country corresponds to the double growth of the civil war risk. A finding from Fearon and Laitin’s 2003 study shows that $1000 decrease of per capita income is associated with a 42% higher risk of civil conflicts. There is a large number of implications from lower incomes that work towards the higher probability of civil conflicts.

Lower income levels and the weak economy are very often associated with the weak power of financial, administrative, and police capabilities of the state, which makes the organization and sustenance of the conflict easier. Not only the level of income in the long term, but also rapid changes in the income matter: a state of “negative income shock” has been confirmed as a major factor that triggers civil conflicts. Additionally, income volatility could lead to weaker bargaining capabilities and cause a more frequent breach of commitments between the parties. Another implication of the low-income levels is that it is easier to recruit military force among the population. Otherwise, people have no significant sources of income, which in turn increases the probability and magnitude of civil conflicts.

One should note a mutual causality between civil conflicts and income levels: massive cost of wars and prolonged civil conflicts bring countries to poverty. If the effects of the conflicts are not equal among the population, the inequality can further contribute to conflicts. The high risk of civil conflicts detracts investments and contributes to decreasing of income levels.

Answer 3c. An evident hypothesis regarding the ethnic and religious fractions might be that there is a higher level of intragroup conflicts in states with many diversified ethnic or religious groups. Additionally, the size, the existence of prevalent versus minority groups, and the discrimination of specific minority groups in their political, economic, or cultural rights can be important and might lead to higher instability and violence. The researchers and activists who take “perennialist” positions defend the existence of long-term, deep-rooted differences between ethnic or religious groups that supposedly increase their proneness to conflicts compared to groups that differ by other metrics (social, demographic, etc.), and make civil conflicts more likely.

However, according to a number of statistical studies, these arguments have more political nature rather than factual. The level of grievances and the measures of ethnic or religious diversity are not statistically correlated with the frequency or intensity of insurgencies, rebellions, or civil wars. The empirical evidence presented in the 2003 study of Fearon and Laitin does not support the hypothesis that a high number of diverse religious or ethnic groups alone could have a positive correlation with the inception of civil conflicts. In fact, there are other more important factors to facilitate or mitigate conflicts between ethnic groups. For instance, the increase of income levels contributes to lower risk of civil conflicts, regardless of the diversity levels. This tendency is illustrated by the common evidence that multi-national states with a long history and developed economies tend to have a lower risk of civil conflicts between ethnic, religious, or social groups. On the contrary, there were countries with single ethnicity involved in prolonged civil conflicts.