Week 2 and 3

Political Economy Tutorial

October 11, 2013

Ola Kasneci Session 2: Theories of the political economy of development Adam, C and S. Dercon, 2009. Oxford Review of Economic Policy, special issue titled The political Economy of Development, Volume 25 Issue 2 Summer 2009 1. Short Summary

In this paper Adams gives an overview of what political economy of development is, what types of research is being done, and how are the case studies along with theories being applied to real-world issues. The following papers are meant to analyze what the effect of institutional structures; forms of government; and political choices have on economic growth. The purpose is on focusing more on modern economic methods and policy-making. 2. Theoretical/Conceptual Framework The main theories discussed in the paper are economic theories. Due to the fact that the paper is an introduction to the rest of the journal, the authors briefly mention the types of theories that the other authors cover. There are topics from modern-economic theories, Pigouvian paradigm, institutions and relation to government, and transparency. 3. Empirical Evidence The types of studies being done include, country-comparisons, focus on household, district and village comparisons, along with natural experiments. In country-comparisons most of the data is generated from the World Bank, Afrobarometer and the World Value Surveys. The household, district and village comparisons give more details on topics like election, legal systems, conflicts, etc. In natural experiments the purpose is in the randomness of the experiment, and looking to find out how that randomness changes the outcomes. 4. Argument Knitting Theory/Empirics (Insights on contributed papers) Since the paper covers a wide range of topics and their research, the author begins by stating the different theories and empirical projects that could occur. The topics which are split into two groups: one being which analyzes countries in country-comparisons by figuring out the link between political economy and economic development in rapid growing countries, failed states, natural resources depend and transition of classes; the second focusing more on proving the theories through empirical means such as using the examples of Norway in the resource dependent nations, qualities of a good leader in the corruption etc. 5. Critique The paper is a general overview of what is included in the journal. The authors would glance at the topics and then delve deeper in the insights, which was one of the reasons it was difficult to understand the overview examples. When they explained more about the papers, it became a little clearer. The authors covered a wide range of subjects and tried to present them in a manner that would provide more insight and clearer ideas about political economy and development. They did highlight the fact that all of these researches should propose some policy making ideas and how to address the issues put forth. 6. Extensions/Suggestions The text was well written; the only improvement would be on the examples to be bit simpler in their explanation. 7. Discussion Questions -Whats the best way to study political economy of development? -How useful are Natural Experiments and where could they be used?

Week 2 and 3

Political Economy Tutorial

October 11, 2013

Damjan Denkovski Joseph A. Schumpeter - The Creative Response in Economic History The Journal of Economic History Vol 7 No 2 (Nov 1947) pp 149-159 1. Short Summary Economic factors do not act in uniformly determined ways. Economies, sectors or individuals can respond to changes in their conditions in an adaptive way or a creative way. The creative response can only be understood ex post and Schumpeter uses the example of innovative entrepreneurs to support his argument. 2. Theoretical/Conceptual Framework Schumpeter defines the entrepreneur as one doing new things or old things in a new way and coping with the social resistance that inevitably follows. He makes certain to differentiate between the entrepreneur and the capitalist or manager or inventor. He argues that entrepreneurial activity is not isolated and creative responses affect their surroundings, he posits that this activity is the fundamental factor in booms and depressions. Schumpeter also clarifies the special, temporary nature of profits from innovation (see below).

3. Empirical Evidence The author does not draw on empirical evidence as such, but he does provide an example of a hypothetical case study: he uses the example of an entrepreneur managing to produce caviar from sawdust, which is obviously a much cheaper raw material than the natural material. Hence, the innovative entrepreneur is able to produce caviar at a lower unit cost than his competitors who use natural raw materials and will be able to gain what Schumpeter refers to as entrepreneurial profit (the special kind of profit resulting from innovation: a combination of personal exertion and monopoly gains in the early stage). 4. Argument Knitting Theory/Empirics Having defined the key terms he is using (entrepreneur, profit, innovation), the author produces his theoretical framework, which he then supports with a hypothetical case study example. The argument flows into an differentiation of the results of adaptive and creative responses: adaptive responses lead to cyclical, static economies whereas creative responses break the pattern and introduce dynamism into an economy. Finally, the author wonders whether the increased mechanization of business means the decline of the importance of the entrepreneur and what the possible consequences of that would be. 5. Critique Realizing that the article was written in the late 1940s, it is nonetheless relevant to point out that: The author seems to acknowledge and then not deal with the fact that innovation and the dynamism of the economies that results is not equally distributed and there are losers beyond the competing firms. This is not a problem as such, but Schumpeter appears to prefer innovation to adaptation, yet he does not provide explicit explanation of why/if this is better for everyone in the long run. Schumpeters prediction of the declining relevance of the entrepreneur has proven to be incorrect. Innovative approaches and technologies constantly evolve in business. He does not clarify why mechanization would lead to less entrepreneurship. 6. Extensions/Suggestions I would suggest that the text tackles the distributive consequences of innovation, maybe clarify his concept of creative destruction in this paper. 7. Discussion Questions Why did Schumpeter believe that the relevance of the entrepreneurial class would decline? Is there a possibility this will happen in the future? What are the political/social implications? What factors might influence the entrepreneurs choice to innovate or adapt?

Week 2 and 3

Political Economy Tutorial

October 11, 2013

Saskia Perrin Ravallion, Martin, 2001, Growth, Inequality and Poverty : Looking Beyond Averages , in World Development , vol. 29(11), pp.1803-1815 1. Short Summary

Does growth at a national level really help the poor, or does it, on the contrary, reinforce income disparities? There are actually differences between and within the countries, and the answer to this question also depends on whether we consider the notion of relative or absolute poverty. Indeed, in relative terms, the poverty rate decrease with growth, but the rich people beneficiate a lot more from growth than the poor people, and, in adopting a microeconomic level, one can see that there are still people suffering from situations of extreme poverty. 2. Theoretical/Conceptual Framework

The theoretical framework matches with the debate on whether growth does, in our globalized world, improve the economic situation of poor people or not. In other words, is growth at a national level redistributed within the different layers of the society? Growth (in average living standards), poverty (reduction and increase), income, distribution and inequality are the main concepts related to this theoretical framework. These concepts are connected and impact on each other in variable ways, according to the context they take place in. 3. Empirical Evidence

The data used by the author are obtained from household surveys and cross-country correlations. The household surveys are based on structured questionnaire and random samples of households; primary data is used for the measures of poverty and inequality and the indicator of economic welfare is either the income or the expenditure per person. The growth is understood as the growth in average living standards, whose evaluation is based either on the level of private consumption expenditure (PCE) per capita from the national accounts, or on the average household living standards. Both data are used by Ravallion, who doesnt omit to present the uncertainties they may contain. 4. Argument Knitting Theory/Empirics

Ravallion details its methods, the problems included in the data used, explains how (partly) avoiding some bias, and how to interpret results that can seem contradictory. He doesnt give much concrete example, but the one of India links the theory to the empirical evidence perfectly. Indeed, the analyses of survey data relating to rates of poverty reduction in different states of India since 1960 conduct to believe that economic growth was efficient to reduce poverty in India. But, looking closer and beyond averages, we can see that the response to this growth changed according to the states. The reasons were different initial situations and a nonfarm output growth that didnt beneficiate to all. This example shows how obvious correlations can hide certain realities, the importance of initial situations, and how the concepts mentioned above can be combined in different ways. 5. Critique

More examples would probably help the reader understanding a complex theory in which statements as well as their contrary are true. Besides, Ravallion calls for a microeconomic approach which would better lead policies and help understanding the hidden effects of aggregate pictures, but he only mentions the data that could be used in this context. Moreover, he admits the importance that has been concealed to factors such as physical and human capital, and underlines less considered factors like location, social exclusion or exposure to uninsured risk. But he doesnt use these elements in his work, nor gives tracks on how to include them in the collection of data on which to base further policies. 6. Extensions/Suggestions

I think that more concrete examples at a micro level to illustrate the theoretical framework would be useful, and it would be also very interesting to develop the micro perspective and elements Ravallion advices for more successful policies. 7. Discussion Questions

-In your opinion, how can policies concretely link macro and micro approaches? -How can policy makers include microelements such as physical and human capital? Do you think that they should include these elements?

Week 2 and 3

Political Economy Tutorial

October 11, 2013

Lisa Zimmerman Globalising Inequality: Centrifugal and Centripetal Forces at Work

Palma, J. B. (2006). Globalising Inequality: Centrifugal and Centripetal Forces at Work. DESA Working Paper No. 35. Retrieved from United Nations website: http://www.un.org/esa/desa/papers/2006/wp35_2006.pdf

1. Summary In this paper, data from the World Bank (WB) and the Inter-American Development Bank (IADB) is used to assess national income inequalities in the world. Income distribution, income shares and income per capita are compared, with a particular focus on the top and bottom deciles of the population, as well as on the situation in Latin America (LA) which is explored via examples from Chile and a Case Study on Mexico. Conclusions include that two opposite forces are taking place, a centrifugal one leading to an increased disparity of incomes by the top and bottom four deciles, as well as a centripetal one, which increases the homogeneity of incomes for deciles 5 to 9. 2. Theoretical/Conceptual Framework This paper takes an economic and social approach in analysing new data on national income inequalities. Samuelsons (1950) hypothesis was that an increase in trade would improve income distributions nationally and internationally. However, today the increase in international trade is associated with worsening income distributions globally. The data by the WB and IADB is used in this paper for a worldwide comparison with a focus on LA and a cross-section framework is applied (several problems within the data sets are recognised). Other concepts that are drawn upon are the Gini Index as well as Kuznets U curve. 3. Empirical Evidence & Argument Knitting Theory The first part uses the Gini Index to show inequality rankings. Comparison shows the difference in the range of income share of deciles 9 (small range) and 10 (large range) for both the whole data set & for Chile as an example. This indicates the importance of looking at data sets in deciles and not in quintiles; it is when looking at the top and bottom ends of income share that polarisation is evident (particularly in LA). The second approach compares income distribution in relation to income per capita level. When looking at decile 10 as well as deciles 1-4, results show that income shares for the top are very high in LA, and very low for the bottom four deciles. The middle deciles 5-9 show homogeneity and little variability in all regions idea of a distributional safety net. It is also tested for regional effects in the Kuznets inverted U framework. With regards to LA there is no evidence for the inverted U, with increasing inequality happening. A case study on Mexico, laying out the countrys historic background and analysing wages as a share of GDP between 1950 & 2000, serves as an example for unequal income distribution in LA. 4. Critique Only limited comparison with other world regions is given, there are no detailed examples for other than Latin American countries. Even though the paper criticises that the Gini does not give the whole picture as it only represents top and bottom ends, there is no further assessment of the middle deciles, so what is happening in deciles 5-9? Evaluation of Kuznets U curve is not self-explanatory, leaving a reader, unexperienced in this area, puzzled. The view of the author seems Eurocentric, as a comparison of life in LA with European lifestyles and progress in Europe is made. 5. Suggestions The text would be improved by including examples not only from LA to show how income distribution can be different across regions. Furthermore, it should at least give a hint on what might be happening in the middle deciles, also providing a frame on how this could be analysed further. 6. Discussion Questions -What other factors influence inequality other than economic ones? Should these be taken into account when measuring inequality? -Should the Gini Index be abandoned since it does not give the whole picture?

Week 2 and 3

Political Economy Tutorial

October 11, 2013

Lisa Zimmerman, Damjan Denkovsi ,Saskia Perrin, Amanda Senger, Ola Kasneci Torvik, Ragnar, 2009. Why do some resource-abundant counties succeed while others do not? Oxford Review of Economic Policy, special issue titled The political Economy of Development, Volume 25 Issue 2 Summer 2009 1. Short Summary

The article looks at the different factors that influence the resource curse, and how valid it is. There were many cross-country comparisons, such as Norway and Nigeria. The author looks at many different types of research projects studies that are done in the resource area. He establishes that there is a negative correlation between resource export and GDP growth. 2. Theoretical/Conceptual Framework The author goes over Dutch-disease theory (when there is an increase in the revenue from a good there is a decline in all other sectors); rent-seeking (obtaining an economic gain by using the resource to ones favor but not creating new wealth); white-elephant theory (a valuable possession but contributing to loss in revenue). Other factors that were included in the paper were how civil conflict, competition, corruption, or parliamentary/presidential forms of government affected the management of resources. 3. Empirical Evidence There are several case studies mentioned all conducted by other researchers. Main example used was Norway being a poor country but then investing the profits from its resources in technological inventions. The main concern of the author was in controlling the different variables in the resource studies being done (political influences, institutions, property rights, etc.) to compare what the resource adjusted saving outcome would be. 4. Argument Knitting Theory/Empirics There are many case studies that prove a negative correlation in the resource-revenue, the point is to control these different factors that are involved and pinpoint which one affects the relationship more than the other. The saving resource income is proven by the data of Matsen and Torvik (2005) that state that countries that are in the positive in their resource-adjusted savings rate then have escaped the resource curse. The other argument put forth is that parliamentary governments have higher succession rates in managing their resources as opposed to presidential governments. This is proven through the {resource abundance as compared to institutional quality numbers}. The difference of offshore and onshore oil factor is proven by the many conflicts that arise in countries where there is onshore oil to be obtained, whereas in offshore oil, it is more difficult for a conflict to arise. Early versus late industrialization is portrayed by the studies of Acemoglu (2001, 2002) which stated that countries that industrialized first had the best institutions, whereas in Karl (1997) having resources without developed institutions leads to economic crises. 5. Critique It felt that the article does not really go into details in African countries, it briefly mentions them and their data but does not go into explanation. The only country in which he talks most about, and investigates in more details is Norway. He mentions Nigeria in the introduction but does not explain the situation there. The article appears to be structured in a confusing or misleading way, as for example the theory is not addressed until the end. 6. Extensions/Suggestions From his article there is simply more questioning being done, no real solution to the problem he has put forth. More concrete solutions and examples would help in analyzing the topic. 7. Discussion Questions - Are the resources the problem or are the political and economic policies the issues? - Do we need more protection of resources from the side of international law, in the country in question, from MNCs and other companies investing?

Week 2 and 3

Political economy The Encyclopedia of Public Choice Charles K. Rowley and Friedrich Schneider

October 7, 2013 Amanda Senger

Summary This text is an overall review of the theories of public choice. It identifies the different theories that emerged among times to give us a panorama of the different authors points of view on this subject. Theoretical/ Conceptual Framework The origins of public choice are attributed to the work of Condorcet and Borda. Condorcet was the first person to identify the problem of cycling. He also brought up a theorem that carries his name providing a justification for making collective decision with the majority rule. Borda, on the other hand, didnt totally agree with Condorcet majority rule and proposed a system of weighted vote. Later, theories, which are considered as the Early Classics, were presented by economists such as Black, Arrow Buchanan and Downs (to cite only those ones). These theories were based on the theoretical framework of Condorcet and Borda. For instance, Black provided a proof of the median voter theorem. Arrow defined the impossibility theorem. Downs developed a spatial modelling approach as well as the model of the rational voter. At this period, the concept of free-rider was also discussed. From the 1970s, new approaches emerged and were attributed to the Second Generation. Arrows impossibility theorem was extended and the question of peoples preference for public goods and the one of preference revelation were raised. In the 1980s, the downsian model was reinterpreted and it was established that in a two-party competition within a multidimensional issue space, the two candidates might cycle endlessly. The question of the Political Business Cycle was also addressed and has often been tested empirically. All the early classics were focused on a two-party system. The second generation brought up the problematic of multiparty system and therefore, the question of coalition and utility of a central party. The New Generation researches consist on extending and testing the existing theories. Empirical Evidence The Second Generation ran four sets of experiments: 1. Experiments on the Groves and Ledyard iterative version of the demand revelation process In most experiments the subject chose a public good quantity and set of contributions that was Pareto Optimal (p.42) 2. Hoffman and Spitzer added an externality to the experiments to test the Coase theorem. The subject were able to reach a bargain that was Pareto optimal (p.42) 3. Experiments on the redistributive rule 4. Experiments to test the free-rider concept People do free-ride but to a far smaller degree than one might have expected (p.42) The next generation is focused on testing most of the theories that have been defined until now. There is a constant improvement of the data and a better use of mathematics. Critique This text is a good overview of the different theories of public choice. However, it basically just lists them without explaining them in details. The text is useful to have a general idea of what has been done in this field, but not to understand how public choice really works Questions Are the Second Generation theories applicable today? How does bi-partism or mutlipartism affect effective policy-making?