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Poverty Traps, Aid, and Growth
Abstract
This paper examines the empirical relevance of the poverty trap view of underdevelopment. We calibrate simple aggregate growth models in which poverty traps can arise due to either low saving or low technology at low levels of development. We then assess the empirical relevance of these specific mechanisms and their consequences for policy. We find little evidence of the existence of poverty traps based on these two mechanisms. When put to the task of explaining the persistence of low income in African countries, the models require either unreasonable values for key parameters, or else generate counterfactual predictions regarding the relations between key variables. These results call into question arguments in favour of a large scaling-up of aid to the poorest countries that are premised on the existence of such poverty traps.
... While the multi-dimensional nature of poverty traps has recently informed models that go beyond a focus on physical capital alone (Kraay and Raddatz, 2005), these studies generally only model a trap and trap mechanisms at one level. For example, recent work has studied: the relationship between asset dynamics and biophysical properties of the environment (Barro and Sala-i Martin, 2004;Smulders, 2000;Xepapadeas, 2005); the effects of human health and disease dynamics on poverty (Ngonghala et al., 2017); the interactions between environmental, social and cultural aspects of a rural agricultural system (Lade et al., 2017); the effects of technology on poverty traps (Mirza et al., 2019); and the effects of productivity, nutrients, water and soil quality on poverty traps in agro-ecological settings (Radosavljevic et al., 2020). ...
... The household level is represented by interlinked dynamics of assets and nutrients, such as water, phosphorus, nitrogen or any other element that is necessary for crop growth. The dynamics of household assets is often based on standard neoclassical economic theory (Barro and Sala-i Martin, 2004;Kraay and Raddatz, 2005;Smulders, 2000;Xepapadeas, 2005), which assumes that a fraction of household assets is consumed and the rest (determined by usually nonlinear savings rate) is invested in agricultural production. Household assets can improve productivity in different ways e.g. by purchasing fertilizers, seeds or tools, by improving production technology or by improving farmers health and ability to work. ...
... The S-shaped response of the savings rate is the key factor that allows creating poverty trap on the household level (Kraay and Raddatz, 2005). ...
Recent research has demonstrated the multidimensional nature of poverty and the multi-level organization of social-ecological systems that display poverty traps. The traps on these different levels can reinforce each other, and therefore multi-level traps pose particular challenges for poverty alleviation. Yet, poverty trap models rarely consider more than one level of organization and only a few attributes of the system at each level. These limitations constrain our understanding of the mechanisms that generate poverty traps and may hinder or even mislead development efforts. Here, we present a series of two-level dynamical system models of poverty traps and use these models to investigate the combined influences of biophysical and economic factors, farmers’ habits and community decisions on creating and alleviating persistent poverty. Our results indicate that neglecting key interactions can lead to incorrect assessments and potentially inadequate alleviation strategies. Moreover, we obtain necessary conditions for the existence of fractal poverty traps, and show that (i) cross-level interactions can open possibilities for escaping from poverty, (ii) that farmers’ behavioral changes may create or impede a way out of poverty, and (iii) that the effectiveness of development interventions depends on the combined influences of biophysical and economic dynamics, farmers’ behavior and community spending on agricultural and social activities.
... How poverty and environmental degradation are conceptualized and represented in models can inform development interventions and thereby influence the effectiveness of those interventions (Lade et al., 2017). Previous poverty trap models have focused on environmental quality or pollution (Barro and Sala-i Martin, 2004;Smulders, 2000;Xepapadeas, 2005), neglecting social-ecological interactions; have illustrated how positive feedback between wealth and technology can increase inequality and result in poverty traps through resource degradation (Mirza et al., 2019); have investigated relations between human health and poverty (Ngonghala et al., 2017); have used one-dimensional models that can lead to simplified conclusions and inappropriate policy outcomes (Kraay and Raddatz, 2005); have been static models that cannot capture dynamic phenomena such as traps and feedbacks (Barrett and Bevis, 2015); or have been highly abstracted (Lade et al., 2017). ...
... We extend standard neoclassical dynamics of assets in which profit can be consumed or saved for investment in future production. Specifically, we implement a 'savings trap', in which households have a lower savings rate at low asset levels, leading to a trap in which they are unable to accumulate enough assets to escape poverty (Kraay and Raddatz, 2005). ...
... In the economic literature, it is common to consider different forms of physical capital, such as infrastructure or machinery, but here we include per capita assets k a , phosphorus k p , water k w and soil quality k q . Like previous works on poverty traps (Lade et al., 2017;Kraay and Raddatz, 2005) we use a Solow model (Barro and Sala-i Martin, 2004) to model asset dynamics, ...
Most of the world's poorest people come from rural areas and depend on their local ecosystems for food production. Recent research has highlighted the importance of self-reinforcing dynamics between low soil quality and persistent poverty but little is known on how they affect poverty alleviation. We investigate how the intertwined dynamics of household assets, nutrients (especially phosphorus), water and soil quality influence food production and determine the conditions for escape from poverty for the rural poor. We have developed a suite of dynamic, multidimensional poverty trap models of households that combine economic aspects of growth with ecological dynamics of soil quality, water and nutrient flows to analyze the effectiveness of common poverty alleviation strategies such as intensification through agrochemical inputs, diversification of energy sources and conservation tillage. Our results show that (i) agrochemical inputs can reinforce poverty by degrading soil quality, (ii) diversification of household energy sources can create possibilities for effective application of other strategies, and (iii) sequencing of interventions can improve effectiveness of conservation tillage. Our model-based approach demonstrates the interdependence of economic and ecological dynamics which preclude blanket solution for poverty alleviation. Stylized models as developed here can be used for testing effectiveness of different strategies given biophysical and economic settings in the target region.
... How poverty and environmental degradation are conceptualized and represented in models can inform development interventions and thereby influence the effectiveness of those interventions (Lade et al., 2017). Previous poverty trap models have focused on environmental quality or pollution (Barro and Sala-i Martin, 2004;Smulders, 2000;Xepapadeas, 2005), neglecting social-ecological interactions; have illustrated how positive feedback between wealth and technology can increase inequality and result in poverty traps through resource degradation (Mirza et al., 2019); have investigated relations between human health and poverty (Ngonghala et al., 2017); have used one-dimensional models that can lead to simplified conclusions and inappropriate policy outcomes (Kraay and Raddatz, 2005); have been static models that cannot capture dynamic phenomena such as traps and feedbacks (Barrett and Bevis, 2015); or have been highly abstracted (Lade et al., 2017). ...
... We extend standard neoclassical dynamics of assets in which profit can be consumed or saved for investment in future production. Specifically, we implement a 'savings trap', in which households have a lower savings rate at low asset levels, leading to a trap in which they are unable to accumulate enough assets to escape poverty (Kraay and Raddatz, 2005). While each of these variables has its own dynamics, they also interact in complex ways ( Figure 2A). ...
... In the economic literature, it is common to consider different forms of physical capital, such as infrastructure or machinery, but here we include per capita assets k a , phosphorus k p , water k w and soil quality k q . Like previous works on poverty traps (Kraay and Raddatz, 2005;Lade et al., 2017) we use a Solow model (Barro and Sala-i Martin, 2004) to model asset dynamics, ...
Most of the world's poorest people come from rural areas and depend on their local ecosystems for food production. Recent research has highlighted the importance of self-reinforcing dynamics between low soil quality and persistent poverty but little is known on how they affect poverty alleviation. We investigate how the intertwined dynamics of household assets, nutrients (especially phosphorus), water and soil quality influence food production and determine the conditions for escape from poverty for the rural poor. We have developed a suite of dynamic, multidimensional poverty trap models of households that combine economic aspects of growth with ecological dynamics of soil quality, water and nutrient flows to analyze the effectiveness of common poverty alleviation strategies such as intensification through agrochemical inputs, diversification of energy sources and conservation tillage. Our results show that (i) agrochemical inputs can reinforce poverty by degrading soil quality, (ii) diversification of household energy sources can create possibilities for effective application of other strategies, and (iii) sequencing of interventions can improve effectiveness of conservation tillage. Our model-based approach demonstrates the interdependence of economic and ecological dynamics which preclude blanket solution for poverty alleviation. Stylized models as developed here can be used for testing effectiveness of different strategies given biophysical and economic settings in the target region.
... Easterly (2006, p. 299) noted that, between 1950 and 2001, the initially poorest one-fifth of countries grew almost as fast as the richer four-fifths. Later work by Kraay and Raddatz (2007) and Kraay and McKenzie (2014) gave further reasons for skepticism about aggregate poverty trap narratives. Like Bauer and Easterly, they point out that many countries that were once poor have successfully grown and developed, challenging the general relevance of a trap. ...
... For example, using recent trade theory, Atkin et al. (2022) model a development ladder in which some countries may fall behind under globalization. In the older literature, there are many theoretical models of aggregate poverty traps; for extended discussions see Azariadis and Stachurski (2005), Kraay and Raddatz (2007) and Kraay and McKenzie (2014). These models could sometimes be adapted to deliver either a relative or an absolute trap. ...
... Economic growth is a necessary condition of development in every country including Indonesia. Sufficient economic growth will have the ability to create economic prosperity through increased on employment rate and thus reduced poverty rates (Acemoglu & Robinson, 2012;Todaro & Smith, 2012;Kraay & Raddatz, 2007;Beinhocker, 2006). However, when economic growth continues to increase, the country will experience a warming economic situation triggered by an overall increase in prices known as inflation (Blanchard, 2017;Romer, 2012;Binyamini & Razin, 2008). ...
... The persistence demand of labor in real business sectors would produce a continuous business derivative effect, then increasing wage, consumption, stimulating the real business sectors to continue increasing their output and so on. This situation would be a positive leverage for reducing unemployment rate (Acemoglu & Robinson, 2012;Kraay & Raddatz, 2007;Beinhocker, 2006). ...
There was tradeoff between inflation and economic growth in Indonesian economy over the last three decades, from 1990 to 2021. When economic growth tended to increase, inflation would also increase. The increasing scale of business sectors due to the increasing of economic growth shifted price and wage setting in the same direction, then increasing labor demand, and decreasing poverty. This study used a VAR model to estimate tradeoff between inflation and economic growth, and OLS model to estimate the relationship between economic growth and the poverty, and also between inflation and poverty. A VAR model explained that there was a positive bi-direction causality between inflation and economic growth, however, there was uncertainty whether economic growth caused inflation, or whether inflation caused economic growth. Although economic growth had a positive effect on reducing poverty, but due to the tradeoff between inflation and economic growth, then economic policies had to be designed to fully controlling inflation during the persistence of economic growth to prevent an increasing of poverty. Expected inflation and long run inflation target should always be a major concern when setting monetary policy to avoid higher economic fluctuation that could stimulate increasing of inflation and poverty.
... Nelson theory is somewhat reminiscent of Malthus views is the sense that population growth resulting from increased wages will cause more poverty and therefore competition and violence for resources. In similar fashion, several studies seem to corroborate Nelson's theory by lending their support to the poverty trap theory advanced by Robert Solow in 1956(Azariadi, 2005Kraay & Raddatz, 2007;Bowles et al., 2006). For example, Azariadi (2005:305) argues that the increase of wealth for the past century has resulted in population growth. ...
... For example, Azariadi (2005:305) argues that the increase of wealth for the past century has resulted in population growth. But Kraay & Raddatz (2007) lend little support to the poverty trap theory. However, according to many development economists, the eradication of the trap will require a "big push" from foreign aids (Snowdon, 2009). ...
The evolution of the literature on natural resource and conflict is surveyed and broadly divided it into two categories: the resource scarcity conflict and the resource abundance conflict. The primary question which asks if natural resource endowment causes conflict is discussed. The civil war conflict related to the paradox of plenty is reexamined , and a new perspective to assessing conflict motivated by economic incentives is provided. The result of 2
... In an important research field in development economics many researchers have carried out both theoretical and empirical research on poverty traps. Kraay and Raddatz (2007), Barrett and Carter (2013) and Janzen et al. (2016) have provided a detailed review of those studies. ...
... Other researchers believe that segmentation of saving or consumption behaviours is the reason for multiple equilibrium in the economy. Kraay and Raddatz (2007) and Ghatak (2015) have established a simple model of poverty traps by setting up segmented saving behaviours whereby higher capital level individuals maintain higher saving rates, and lower capital level individuals maintain lower saving rates. Similarly, Kovacevic and Pflug (2011) have set segmented consumption behaviours to develop another multipleequilibrium model. ...
This paper considers a risk poverty trap model in which technology adoption depends on the individual’s capital level. Agricultural insurance and premium subsidies are then introduced to analyse poverty alleviation resulting from agricultural insurance. For individuals with capital above a threshold, insurance can be helpful, since it lets them stay above the threshold. Agricultural insurance does not help peasants escape deep poverty, because premiums keep them below the threshold. Moreover, premium subsidies would strengthen the poverty reduction resulting from insurance, as the increased income and the risk elimination would move some peasants above the critical threshold.
... A su vez algunos autores presentan evidencias relevantes para esta investigación de los efectos poco significativos de las variables externas en estudio los cuales mencionan, que una proporción de la actividad del PIB es mínima por variaciones de factores externos que se puedan presentar y que la mayor parte de la variación generada es por factores domésticos. Hoffmaister and Roldós (1997), Dancourt et al. (1997), Hoffmaister et al. (1998, Ahmed et al. (2005), Kraay and Raddatz (2007), Boschi andGirardi (2011) y Blanco et al. (2007), concluyeron que las variaciones del PIB domestico solo se ven influenciadas por alteraciones externas en menos del 5 % en países en desarrollo. Sin embargo, también se mencionó lo siguiente: "No se puede abstraer el rol de los shocks externos cuando se busca explicar el comportamiento de la economía peruana durante . ...
... clara influencia de variables locales, esto desplaza importantemente el grado de significancia de factores externos en la región de estudio, pero haciendo un análisis comparativo de los efectos encontrados se puede concluir a la vez que los países de América Latina son más susceptibles a "shocks externos" que los países del medio asiático. Kraay and Raddatz (2007), en una de sus investigaciones confirman las palabras de Hoffmaister and Roldós (1997), y sostienen que los factores externos pueden intervenir en la variabilidad interna, concentrados solamente en una pequeña fracción porcentual. ...
Resumen: El presente trabajo tiene como objetivo contribuir a la evidencia empírica, explorando las implicancias que generan variables externas en las oscilaciones que presenta el Producto In-terno Bruto en países emergentes con las siguientes características: economía pequeña, abierta y en desarrollo. Las variables macroeconómicas externas consideradas para el estudio son: PIB externo (China), términos de intercambio, inflación externa (Estados Unidos) y tasa de interés internacional. Para ello se utilizó un modelo de vectores autorregresivos estructural (SVAR), el cual mediante shocks (Funciones Impulso-Respuesta) sugieren que las variables externas lle-gan a representar en promedio poco más del 45 % de la variabilidad total del PIB peruano, esto debido principalmente por alteraciones que pueda presentar el ciclo productivo de China, con una velocidad de recuperación interna no transitoria a corto plazo, así también los shocks de términos de intercambio presentan un efecto rebote aproximadamente de 1 a 1 en el largo plazo y convergencia transitoria. Finalmente, si bien es cierto que la tasa de interés internacional repercute sobre la tasa doméstica en magnitudes proporcionales, el mayor impacto lo presenta la brecha del producto con una velocidad de recuperación en niveles más lenta.
... Although this aspect is widely debated, the IMF and World Bank promoted economic liberalisation policies that have been generally associated with increased economic growth and poverty reduction in some countries (Kraay & Raddatz, 2007). In recent times, the World Bank & IMF has also stepped up to help LDCs during the time of the COVID-19 pandemic (Setser, 2023) and provided assistance to Ukraine in the ongoing Ukraine-Russia War (World Bank, 2022). ...
In the aftermath of World War II, two institutions, the World Bank and the International Monetary Fund (IMF), played a pivotal role in shaping the post-war economic order. These institutions evolved in parallel with the changing political and economic landscape of the world. And while the World Bank and IMF play crucial roles in global finance, they rely on collaboration with other international organisations such as the United Nations (UN) and World Trade Organization (WTO); world trade and peace are interdependent and one cannot exist without the other. This paper discusses the impact of the World Bank and IMF on the global economic order and their synchronous development alongside other post-World War II institutions and programs.
... In spite of the deficient positive association of aid and growth, the economists and officials emphasized the straight influence of foreign aid on poverty and income inequality in beneficiary nations. Amongst the works that emphasize the influence of aid on poverty are Collier and Dollar (2002) and Kraay and Raddatz (2007). However, underprivileged financial enactment and unsatisfactory poverty-lessening practices in chief aid beneficiaries compared with states that have been able to attain noteworthy development lacking foreign assistance. ...
Over the decades, there has been much-observed income disparity in poor and developing countries. For this, donor countries provide aid for disbursement in some specific sectors to alleviate poverty and disparity. Considering the severe issue of income disparity in Asian economies, this research has focused on the role of sector-specific and foreign aid in lessening income disparity in these economies. We have used panel data from 10 selected Asian countries and found that aid for the education and health sectors. This research has utilized the data drawn from 10 selected Asian economies such as Bangladesh, India, Indonesia, Malaysia, Sri Lanka, Pakistan, Philippines, Iran, Jordan and China. The data has been considered from 2003 to 2018 due to data deficiency of important variables. The data has been taken from World Bank Development Indicators. The Gini coefficient income inequality) was considered a dependent variable. Education aid commitments (total number of commitments for education from donor countries), health aid commitments (total number of commitments for aid for the health sector from donor countries), official development assistance ($US million) and total population have been used as independent variables. The study used the fixed effect method to indicate an association of dependent and independent variables. Results of the study revealed that official development assistance has played a key role in lessening income disparity in these economies. Findings suggest its transparent allocation to both sectors for high growth, attracting more aid from the donor countries. There is a serious need for a stable political environment. Finally, measures should be taken to control the population in these countries.
... Perugini and Martino (2008) analyzed the relationship between inequality and growth in Europe, concluding that inequality can have negative effects on long-term growth. Other interesting studies on these topics are provided by Ravallion (2001), Lopez and Servén (2006), Kraay and Raddatz (2007), and Chen and Ravallion (2010). ...
We study the dynamics of inequality and poverty across 17 Spanish regions during 2008–2021. Through a club convergence approach, the results show noticeable differences in both indicators, income inequality (S80/S20) and poverty rate: two clubs are endogenously derived from inequality, while the analysis of the poverty was conducted in four clubs. In addition, the results are complemented with the outcomes for the GDP per capita, where more heterogeneity is detected, with three clubs, but with six divergent regions. The ordered logit model allows to identify the driving factors of such clubs. Finally, policy implications are discussed: the findings recommend the need for specific public policies to address regional differences in terms of economic and social growth also considering the trajectories—convergence or divergence—in inequality and poverty and their determining factors.
... Acemoglu and Zilibotti (2001),Easterly (2003),Kraay and Raddatz (2005),Rajan and Subramanian (2011), Ravallion (2012), Yang et al. (2013), Kraay and McKenzie (2014).Content courtesy of Springer Nature, terms of use apply. Rights reserved.Sustainability Traps: Patience and Innovation ...
This paper argues that the joint relation between long-term orientation, environmental quality and innovation plays a key role in explaining the economic and the environmental dimension of sustainability. In our model multiple equilibria of economic development and environmental quality can arise due to a trade-off between the demand for innovation that promotes sustainability, and the ephemeral pleasure from polluting manufacturing that impedes it. Additional to traditional policies such as aid and technology transfers, policies that target behavioral changes through environmental protection may provide a double-dividend of economic and environmental sustainability through an environment-patience-innovation channel.
... One consequence of multiple equilibrium is that a poor country cannot escape poverty unless policy initiatives are taken to change the initial conditions, so that the country can 'leapfrog' out of its initial low, stable equilibrium into another, equally stable equilibrium, characterised by a higher level of income. The notion of multiple equilibrium, which is of growing interest, is now known as the 'poverty trap' hypothesis (Kraay & Raddatz, 2005). ...
The aim of this research is to assess the effects of income inequality and globalization on economic growth in Sub-Saharan Africa. The analysis is based on a panel VAR model of 42 countries. This approach was chosen because of the presence of endogenous variables in the model. The results show that the countries in the sample are not converging at the same pace, but are distinguished by different growth dynamics. Income inequality and economic growth are driving globalization in Sub-Saharan Africa. Income inequality favours economic growth and globalization in sub-Saharan Africa. A globalization shock has a negative impact on income inequality in the short term, but this effect begins to diminish after three years. We recommend that Sub-Saharan African countries take strong policy initiatives to break out of the "poverty trap" and create conditions conducive to higher growth rates in order to reap the benefits of globalization.
JEL Classification: C33, F02, D30, O57
... 1) Aid is frequently incorrectly placed (specified to wrong recipients), 2) Foreign aid is not correctly used in the recipients and 3) Gross domestic product is not the accurate estimator for foreign aid efficacy. The aid ineffectiveness is directly linked to the improper utilization(Kraay et al, 2005).Literacy: By providing quality of education a country can improve their economy, personal growth and income. According toDzingai Mutumbuka, (2004) Education and literacy offer to break out poverty through directly contributing to growth and by increasing fairness and social justice which, in turn, brings about solidness and improves the investment climate. ...
University of Lahore> Lahore Pakistan, Ehsan Aslam 4 (meaklectures@gmail.com) University of South Asia> Lahore Pakistan, Qasim idrees 5 (qasimidress@gmail.com) University of Lahore> Lahore Pakistan, Muneeb iqbal 6 (muneebiqbal@kemu.edu.pk) University of Sargodha> Lahore Pakistan, Waqar Afzal 7 (waqarafzal621@gmail.com) University of Lahore> Lahore Pakistan, Farooq Islam 8 (Farooqislam47@gmail.com) University of Lahore> Lahore Pakistan. ABSTRUCT-The aim of the study is to explore the impact of foreign aid on poverty in Pakistan during 1986-2015 through the channel of foreign loans, foreign grants, literacy rate, unemployment and industrialization. To measure poverty researcher used per capita income and to measure foreign aid researcher used foreign grants and foreign loans. The empirical results discovered that foreign aid, specifically foreign loans, have negatively related with per capita income. Researcher also fined that unemployment has negative relation with per capita income in Pakistan. This relation would not only increase unemployment but also increase poverty in Pakistan. Through other empirical finding that is industrialization has positively related with per capita income which shows that industrialization really decreased poverty in Pakistan. Researcher also concludes that grants have positive relation with per capita income. It indicates that grants actually decreased poverty in Pakistan. Another interesting finding of this study is the negative impact of literacy on per capita income. The impact could be due to unemployment because many literate persons are without job and due to this per capita income decreases.
... To his notion, aid 'is probably not a fundamentally decisive factor for development, not as important, say, as domestic savings, inequality, or governance' (Roodman, 2007, p.275). Kraay and Raddatz (2007) empirically test for the existence of poverty traps as they are understood for means of theoretical justification for aid provision. Their 'results call into question arguments in favour of a large scaling-up of aid to the poorest countries that are premised on the existence of such poverty traps' (Kraay and Raddatz, 2007, p.315). ...
Based on an overall rather weak theoretical foundation, the role of foreign aid in economic development remains a matter of debate in the public as well as the academic discourse. A detailed review of primary empirical studies on aid effectiveness could neither prove nor rule out the relevance of monetary and material foreign assistance for economic development in recipient countries. Positively as well as negatively associated priors shape the view on aid of the general public just as much as they influence ‘objective’ research. Considering the results of the meta-analysis, the true value for the genuine empirical effect of aid on growth should lie at a partial correlation of between 0.0183 and 0.0218. This effect is likely to be different from zero, even though the effect size is relatively small in statistical terms.
... To reveal the U-shaped evolution of human capital inequality, we introduce Stone-Geary preferences into their model. This utility function was originally developed by Geary (1950) and Stone (1954) and has subsequently been widely applied within theoretical work (e.g., Koskela & Puhakka (2007), Kraay & Raddatz (2007), Ravn et al. (2008), Steger (2000, Strulik (2010)). With Stone-Geary preferences, individuals get utility from that part of consumption which exceeds the subsistence level. ...
This paper analyzed the evolution of human capital inequality in an overlapping generations model that incorporates Stone–Geary preferences with subsistence consumption. Many studies have revealed an inverted U-shaped relationship between human capital inequality and economic development, namely the human capital Kuznets curve. However, this curve is inconsistent with empirical evidence in a US context, where the data suggest a U-shaped evolution of earnings inequality. We show that the utility function has an increasing elasticity of substitution, and the time allocated to human capital investment decreases in the early stages of human capital accumulation and increases afterward. Thus, we obtain a U-shaped curve for human capital inequality if the elasticity of substitution is large. Eventually, decreasing returns to human capital accumulation reduce inequality.
... ACT is related to a growing body of research that exploits the fact that if the underlying utility function is homogeneous in its relevant arguments, the aggregate economy can be summarized by a representative agent, as a result of which aggregate behavior becomes independent of the economy's distributional characteristics. Rather, the distributions of income and wealth reflect the evolution of the aggregate economy as in Caselli and Ventura (2000), Kraay and Raddatz (2007), and Carroll and Young (2009). Awareness of this aggregation property dates back to Gorman (1959) and it has received renewed attention by researchers as the class of utility functions to which this aggregation applies includes the constant elasticity utility function that dominates contemporary growth theory. ...
Covid-19 has dealt a devastating blow to productivity and economic growth. We employ a general equilibrium framework with heterogeneous agents to identify the tradeoffs involved in restoring the economy to its pre-Covid-19 state. Several tradeoffs, both over time, and between key economic variables, are identified, with the feasible speed of successful re-opening being constrained by the transmission of the infection. In particular, while more rapid opening up of the economy will reduce short-run aggregate output losses, it will cause larger long-run output losses, which potentially may be quite substantial if the opening is overly rapid and the virus is not eradicated. More rapid opening of the economy mitigates the increases in both long-run wealth and income inequality, thus highlighting a direct conflict between the adverse effects on aggregate output and its distributional consequences.
... Some found statistical results that suggest that aid is growth-enhancing with the results often conditional on good policies or geographic factors (Durbarry et al., 1998;Svensson, 2000;Dollar, 2000, 2004;Tarp, 2000, 2001;Lensink and White, 2001;Collier and Dehn, 2001;Dalgaard and Hansen, 2001;Collier and Dollar, 2002;Dalgaard et al., 2004;Clemens et al., 2004;Heckelman and Knack, 2009;Bearce and Tirone, 2010). Other scholars conclude that neither a positive nor a negative statistically significant relationship exists between aid and growth (Boone, 1996;Easterly 2003a, b;Easterly et al., 2004;Kraay and Raddatz, 2007;Rajan and Subramanian, 2008;Williamson, 2008;Ekanayake and Chatrna, 2010). Some papers reveal statistically significant evidence that aid inhibits growth (Brumm, 2003;Subramanian, 2005, 2011). ...
Purpose
This paper examines the relationship between foreign aid, institutional democracy and poverty. The paper explores the direct effect of foreign aid on poverty and quantifies the facilitating role of democracy in harnessing foreign aid for poverty reduction in Sub-Saharan Africa (SSA).
Design/methodology/approach
The paper attempts to address the endogenous relationship between foreign aid and poverty by employing the two-stage least squares instrumental variable (2SLS-IV) estimator by using GDP per capita of the top five Organization for Economic Co-operation and Development (OECD) countries sending foreign aid to SSA countries scaled by the inverse of the land area of the SSA countries to stimulate an exogenous variation in foreign aid and its components. The initial level of democracy is interacted with the senders’ GDP per capita to also instrument for the interaction terms of democracy, foreign aid and its components.
Findings
The results suggest that foreign aid reduces poverty and different components of foreign aid have different effects on poverty. In particular, multilateral source and grant type seem to be more significant in reducing poverty than bilateral source and loan type. The study further reveals that democratic attributes of free expression, institutional constraints on the executive, guarantee of civil liberties to citizens and political participation reinforce the poverty-reducing effects of aggregate foreign aid and its components after controlling for mean household income, GDP per capita and inequality.
Research limitations/implications
The methodological concern related to modeling the effects of foreign aid on poverty is endogeneity bias. To estimate the relationship between foreign aid, democracy and poverty in SSA, this paper relies on a 2SLS-IV estimator with GDP per capita of the top five aid-sending OECD countries scaled by the inverse of land area of the SSA countries as an external instrument for foreign aid. The use of the five top OECD's Development Assistance Committee (OECD-DAC) countries is due to the availability of foreign aid data for these countries. However, non-OECD-DAC countries such as China and South Africa may be important source of foreign aid to some SSA countries.
Practical implications
The findings further suggest that the marginal effect of foreign aid in reducing poverty is increasing with the level of institutional democracy. In other words, foreign aid contributes more to poverty reduction in countries with democratic dispensation. This investigation has vital implications for future foreign aid policy, because it alerts policymakers that the effectiveness of foreign aid can be strengthened by considering the type and source of aid. Foreign aid and quality political institution may serve as an important mix toward the achievement of the Sustainable Development Goals 2030 and the Africa Union Agenda 2063.
Social implications
As the global economy faces economic and social challenges, SSA may not be able to depend heavily on foreign partners to finance the region's budget. There is the need for African governments to also come out with innovative ways to mobilize own resources to develop and confront some of the economic challenges to achieve the required reduction in poverty. This is a vision that every country in Africa must work toward. Africa must think of new ways of generating wealth internally for development so as to complement foreign aid flows and also build strong foundation for welfare improvement, self-reliance and sustainable development.
Originality/value
This existing literature does not consider how democracy enhances the foreign aid and poverty relationship. The existing literature does not explore how democracy enhances grants, loans, multilateral and bilateral aid effectiveness in reducing poverty. This paper provides the first-hand evidence of how institutional democracy enhances the poverty-reducing effects of foreign aid and its components. The paper uses exogenous variation in foreign aid to quantify the direct effect of foreign aid and its components on poverty.
... frequently instituted for, instead of with, the people" it is supposed to support. This can lead to a "poverty trap," where communities are unable to establish flourishing economies independent of support (Kraay & Raddatz, 2007). Critics of the current model of humanitarian aid distribution also argue that reducing the current state of the oPt to a "humanitarian crisis" promotes a cycle of dependency, ignores Palestinian sovereignty, and allows potential human rights violations to persist unchallenged (Tabar, 2016). ...
Food aid is a common response to the food insecurity brought by conflict and inadequate development. Yet the very well-intentioned actions that are meant to stave off immediate humanitarian crises may, in the long-term, serve as tools that promote dependence, decrease the likelihood of sustainable development, and make peace less possible. In this article, I examine food insecurity and food aid in the conflict-affected Palestinian territories. I will describe ways in which Palestinian efforts to localise food production and increase food security are actively hindered, as well as how the system of humanitarian food assistance meant to fill these gaps may in fact perpetuate them. Finally, I discuss policy recommendations for stakeholders in the conflict that can encourage Palestinian food sovereignty in a manner that increases prospects for long-term peace and development, while providing immediate benefits for Palestinian quality of life and well-being.
... Some found statistical results that suggest that aid is growthenhancing with the results often conditional on good policies or geographic factors (Durbarry et al., 1998;Svensson, 2000;Burnside and Dollar, 2000;Tarp, 2000, 2001;Lensink and White, 2001;Collier and Dehn, 2001;Dalgaard and Hansen, 2001;Collier and Dollar, 2002;Burnside and Dollar, 2004;Dalgaard et al., 2004;Clemens et al., 2004;Heckelman and Knack, 2009;Bearce and Tirone, 2010). Other scholars conclude that neither a positive nor negative statistically significant relationship exists between aid and growth (Boone, 1996;Easterly, 2003;Easterly et al., 2004;Kraay and Raddatz, 2007;Rajan and Subramanian, 2008;Williamson, 2008;Ekanayake and Chatrna, 2010). Some papers reveal statistically significant evidence that aid inhibits growth (Brumm, 2003;Subramanian, 2005, 2011). ...
This paper examines the relationship between foreign aid, institutional democracy and poverty. The paper explores the direct effect of foreign aid on poverty and quantifies the facilitating role of democracy in harnessing foreign aid for poverty reduction in Sub-Saharan Africa. The paper attempts to address the endogenous relationship between foreign aid and poverty by employing the Two Stage Least Squares Instrumental Variable estimator by using GDP per capita of the top five OECD countries sending foreign aid to Sub-Saharan Africa countries scaled by the inverse of the land area of the Sub-Saharan Africa Countries to stimulate an exogenous variation in foreign aid and its components. The Initial level of democracy is interacted with the senders GDP per capita to also instrument for the interaction terms of democracy, foreign aid and its components. The results suggest that foreign aid reduces poverty and different components of foreign aid have different effects on poverty. In particular, multilateral source and grant type seem to be more significant in reducing poverty than bilateral source and loan type. The study further reveals that democratic attributes of free expression, institutional constraints on the executive, guarantee of civil liberties to citizens and political participation reinforce the poverty-reducing effects of aggregate foreign aid and its components after controlling for mean household income, GDP per capita and inequality. The methodological concern related to modelling the effects of foreign aid on poverty is endogeneity bias. To estimate the relationship between foreign aid, democracy and poverty in Sub-Saharan Africa, this paper relies on a two-stage least squares instrumental variable (2SLS-IV) estimator with GDP per capita of the top five aid-sending OECD countries scaled by the inverse of land area of the SSA countries as an external instrument for foreign aid. The use of the 5 top Organization for Economic Cooperation and Development's Development Assistance Committee (OECD-DAC) countries is due to the availability of foreign aid data for these countries. However, non OECD-DAC countries like China and South African may be important source of foreign aid to some Sub-Saharan African countries. The findings further suggest that the marginal effect of foreign aid in reducing poverty is increasing with the level of institutional democracy. In other words, foreign aid contributes more to poverty reduction in countries with democratic dispensation. This investigation has vital implications for future foreign aid policy, because it alerts policymakers that the effectiveness of foreign aid can be strengthened by considering the type and source of aid. Foreign aid and quality political institution may serve as an important mix towards the achievement of the Sustainable Development Goals 2030 and the Africa Union Agenda 2063. This existing literature do not consider how democracy enhances the foreign aid and poverty relationship. The existing literature do not explore how democracy enhances grants, loans, multilateral and bilateral aid effectiveness in reducing poverty. This paper provides the first-hand evidence of how institutional democracy enhances the poverty-reducing effects of foreign aid and its components. The paper uses exogenous variation in foreign aid to quantify the direct effect of foreign aid and its components on poverty. JEL classification-F35, F63, O11
... Among many others, Kraay and Raddatz (2007) contradict the existence of poverty trap in SSA on the one hand. On the other hand, other development researchers argue that ODA distorts the economic and political institutions that SSA needs to consolidate in order to accelerate the pace of economic growth and (income) poverty reduction (see, for instance, Easterly, 2002 andMoyo, 2009). ...
Sub-Saharan Africa (SSA) is a key region for the success of the 2030 Agenda for Sustainable Development. However, there is no consensus about the contribution of Official Development Assistance (ODA) in the promotion of economic growth and the reduction of extreme poverty in this region. We build its analytical framework and make the subsequent estimations during the period 1991–2014. We find four main results: i) ODA to SSA has exerted both distorting and stimulating effects on growth but the latter effects were larger than the former; ii) increasing both aid grants and aid loans, and increasing the ratio of loans to grants, may induce higher growth; iii) however, such a reallocation may only be positive in countries with sustainable debt burdens; and iv) although ODA was effective in aggregate terms, it did not significantly boost the income of the poorest citizens, which reveals a grave distributional deficiency.
... In a Solow model with two exogenous saving rates, there are two steady states which are locally stable.Kraay and Raddatz (2007) indicate that in such a model, if the saving rate is low, foreign aid could help the recipient to accumulate capital. Saving rate might jump to the higher level, and then, the economy would converge to the high steady state. ...
We introduce an infinite-horizon endogenous growth framework for studying the effects of foreign aid on the economic growth in a recipient country. Aid is used to partially finance the recipient’s public investment. We point out that the same rule of aid may have very different outcomes, depending on the recipient’s circumstances in terms of development level, domestic investment, efficiency in the use of aid and in public investment, etc. Foreign aid may promote growth in the recipient country, but the global dynamics of equilibrium are complex (because of the non-monotonicity and steady state multiplicity). The economy may converge to a steady state or grow without bounds. Moreover, there are rooms for the divergence and a two-period cycle. We characterize conditions under which each scenario takes place. Our analysis contributes to the debate on the nexus between aid and economic growth and in particular on the conditionality of aid effects.
... Similarly, some aid proponents have suggested that aid may yield very large economic returns when used to escape poverty traps. As Kraay and Raddatz (2007) note, however, these hopes appear not to have materialized. Observed reality, which is consistent with our simulation results, is that the journey from low to middle income status typically remains long and arduous, even when supported by effective aid inflows. ...
... These differences appear striking at first, as neo-classical growth theory would suggest higher investment shares in poorer countries, all else equal. One possible rationalization is again structural transformation: proximity to subsistence limits the ability to set resources aside for the future, and can result in a higher consumption share at the expense of lower investment (Kraay and Raddatz, 2007). Similarly, the lower share of government consumption can be explained by the lower demand for "public" goods in an environment of relative near-subsistence (Mourmouras and Rangazas, 2008). ...
We compare business cycle fluctuations in Sub-Saharan African (SSA) countries vis-à-vis the rest of the world. Our main results are as follows: (i) African economies stand out by their macroeconomic volatility, which is is reflected in the volatility of output and other macro variables; (ii) inflation and output tend to be negatively correlated; (iii) unlike advanced economies and emerging markets (EMs), trade balances and current accounts are acyclical in SSA; (iv) the volatility of consumption and investment relative to GDP is larger than in other countries; (v) the cyclicality of consumption and investment is smaller than in advanced economies and EMs; (vi) there is little comovement between consumption and investment; (vii) consumption and investment are strongly positively correlated with imports.
... First, in the absence of external capital, savings support economic growth (see Domar 1946;Harrod 1939;Aghion et al. 2016). The majority of developing countries have remarkably low saving rates, which has entrapped them in a vicious cycle of low investment (Kraay and Raddatz 2007;Loayza and Raddatz 2010). As a result, the prevailing capital scarcity constrains their ability to accumulate human capital or build physical capital required to induce investment and promote growth. ...
Over the last three decades, there has been increasing disparity in savings across regions and income groupings globally. In this paper, we investigate whether the quality of institutions explains the saving disparities in Sub-Saharan Africa (SSA). Utilizing comprehensive panel data and spanning the period 1980–2015, we estimate a savings model using the two-step instrumental variable generalized method of moment (2SIV-GMM) estimator. Our results show that the impact of institutions on savings behaviour differs across regions and income groupings, and in SSA, in aggregate. We find that the level and growth of per capita income and terms of trade enhance savings whereas government consumption expenditure, financial sector development and the elderly dependency rate are savings impeding. The findings are robust to alternative model specification and highlight the importance of institutions in influencing savings behaviour in SSA.
... Cooperatives work in a similar way to fight poverty (Simmons & Birchall, 2008). An individual or society could also be trapped in poverty due to wayward neighbours, associations with conflict/violence, inefficientgovernance, the natural resources trap, the health trap and the weapons and goods or products trap, but it is always the internalisation of all the weights that makes a person poor (Carter & Barrett, 2005;Kraay & Raddatz, 2007;Matsuyama, 2005). ...
Poverty, particularly in developing countries, is endemic and has attained a crisis stage. It is compounded by conflicts, corrupt/inefficient governments and other manmade issues that seem to keep people in perpetual deprivation and want. Although serious, this poverty trap is fixable. This paper reports on an ongoing research about poverty reduction strategies. It is based on the proposition that the first step in poverty reduction is understanding what makes an agent trapped. Therefore, this paper conceptualises poverty traps as fractal, self-perpetuating conditions when individuals are caught in a vicious cycle of poverty and continue to suffer from undesirable hardships for a long period of time. Using the neo-classical economic development theory and data obtained from the United Nations Development Programme, this paper argues that current poverty reduction strategies, which have been in use over the last five decades, have been ineffective. From the experiences of one of the authors in poverty reduction over the last two decades, a new poverty reduction strategy that focuses on individuals is thus proposed. This strategy uses the synergetic concept that indicates the simultaneous causation of poverty through the interaction between the individual and the context. This paper demonstrates that individuals in poverty are caught between externalisation and internalisation of conditions that are nonetheless transient and removable. Based on this new understanding, a four-stage interactive model called Learn, Relate and Adapt (LERA) is proposed for use in poverty research and the poverty reduction implementation strategy.
... The concept of poverty trap generally considers the transmission of intergenerational socioeconomic status and it may operate at household, regional or national level (Barrett & Carter, 2013;Vauhkonen et al., 2017). Therefore, a household, region or country may be poor for multiple periods because of "any self-reinforcing mechanism which causes poverty to persist" (Kraay & Raddatz, 2007). 4 Whereas, most of the self-reinforcing mechanisms that underlie individual poverty traps provide micro-foundations for the poverty traps at national levels (Banerjee & Newman, 1993). ...
The research on economic growth and poverty has largely considered poverty as an outcome of lower growth performance. In contrary to this commonly held belief that growth is necessary to reduce poverty, in this study we argue that poverty traps create self-perpetuating mechanisms that impede long-run economic growth. Poverty results in forgone growth opportunities because of higher transaction cost. Moreover, the poor people who are financially distress and also distrustful are likely to be excluded from the active and efficient participation in economic activities. This study investigates the impact of poverty on economic growth in Pakistan using annual data for the period 1975 to 2016. The empirical analysis for the effect of poverty on economic growth is based on ARDL approach to cointegration, generalized method of moments, fully modified OLS, and dynamic ordinary least square estimation techniques. The main finding suggests that poverty inhibits economic growth performance of Pakistan and this finding is robust to diverse estimation methods. Therefore, growth policies should be designed not only to enhance economic growth but also should exert an independent influence on poverty reduction, thereby reducing the drag of poverty on growth.
... BP is a Branch Point and H is either a Hopf of a neutral saddle Hopf point. The parameter values are provided by Kraay & Raddatz (2007) Barro & Sala-i-Martin (2004). ...
In this paper, we review dynamical systems in general and the Ramsey-Cass-Koopmans economic model with exponential growth as well as the one with logistic growth developed by Brida and Accinelli. We then study the qualitative behaviours of these models in terms of stability analysis and bifurcation analysis employing continuation method. Finally we compare the results of two models for both the developed and developing countries. The bifurcation diagrams of the various model was by Matlab package MATCONT and the Phase Plane by PPLANE8.
We study the psychological costs of financial constraints and their economic consequences. Using a representative survey of U.S. households, we document the prevalence of financial stress in U.S. households and a strong relationship between financial stress and measures of financial constraints. We incorporate financial stress into an otherwise standard dynamic model of consumption and labour supply. We emphasize two key results. First, both financial stress itself and naivete about financial stress are important components of a psychology-based theory of the poverty trap. Sophisticated households, instead, save extra to escape high-stress states because they understand that doing so alleviates the economic consequences of financial stress. Second, the financial stress channel dampens or reverses the counterfactual large negative wealth effect on labour earnings because relieving stress frees up cognitive resources for productive work. Financial stress also has macroeconomic implications for wealth inequality and fiscal multipliers.
The well-known Solow growth model is the workhorse model of the theory of economic growth, which studies capital accumulation in a model economy as a function of time with capital stock, labour and technology-based production as the basic ingredients. The capital is assumed to be in the form of manufacturing equipment and materials. Two important parameters of the model are: the saving fraction s of the output of a production function and the technology efficiency parameter A , appearing in the production function. The saved fraction of the output is fully invested in the generation of new capital and the rest is consumed. The capital stock also depreciates as a function of time due to the wearing out of old capital and the increase in the size of the labour population. We propose a stochastic Solow growth model assuming the saving fraction to be a sigmoidal function of the per capita capital k p . We derive analytically the steady state probability distribution P ( k p ) and demonstrate the existence of a poverty trap, of central concern in development economics. In a parameter regime, P ( k p ) is bimodal with the twin peaks corresponding to states of poverty and well-being, respectively. The associated potential landscape has two valleys with fluctuation-driven transitions between them. The mean exit times from the valleys are computed and one finds that the escape from a poverty trap is more favourable at higher values of A . We identify a critical value of A c below (above) which the state of poverty (well-being) dominates and propose two early signatures of the regime shift occurring at A c . The economic model, with conceptual foundations in nonlinear dynamics and statistical mechanics, shares universal features with dynamical models from diverse disciplines like ecology and cell biology.
Zusammenfassung
Die Lösung der großen Nachhaltigkeitsprobleme wie Klimawandel und Verlust der Biodiversität bedarf der Überwindung eines grundlegenden Dilemmas: Einerseits sollten zentrale Entscheidungen zur Neuausrichtung von Wirtschaft und Gesellschaft rasch und durchgreifend sein, andererseits orientieren sich Entscheidungsträger stark an gewachsenen Strukturen, die große Trägheit mit sich bringen. Anspruch und Wirklichkeit liegen in der Nachhaltigkeitspolitik oft noch weit auseinander. Beim Schließen dieser Lücke können Kipppunkte eine entscheidende Rolle spielen. Sie treten in ganz unterschiedlichen Bereichen wie Technologie und Politik auf. Der Begriff beschreibt generell eine nichtlineare Entwicklung, bei der nach dem Überschreiten einer gewissen Schwelle eine selbsttragende Beschleunigung eintritt. Die zielgerichtete Förderung des Überschreitens wichtiger Schwellen kann damit zu einer erfolgreichen Strategie für die Nachhaltigkeitspolitik werden. Damit die wichtigen nichtlinearen Entwicklungsprozesse besser gesteuert werden können, sind spezielle institutionelle Vorkehrungen anzustreben. In diesem Beitrag analysieren Lucas Bretschger und Matthias Leuthard die Bedeutung von Kipppunkten und entwickeln einen integrativen formalen Ansatz zu den verschiedenen Kippdynamiken. Sie erläutern die Eigenschaften von Kippdynamiken in Natur, Technologie, Politik und Gesellschaft, und sie vertiefen dies anhand zweier Fallbeispiele. In einem letzten Abschnitt diskutieren sie Folgerungen für die Gestaltung der Politik beim Vorliegen von Kipppunkten.
This paper theoretically examines trade liberalization’s effects on workers’ human capital for a high-wage economy. Using an evolutionary game theory approach (EGT), we examine whether liberalization affects workers’ education, perhaps making them fall into a poverty trap. We find that, on average, workers increase their investment in human capital. We extend the investigation to include that, due to ex-ante historical and institutional circumstances, trade liberalization exerts heterogeneous effects on different types of workers and that the circumstances enabling them (or not) to educate differ. We find that liberalization makes some workers increase their human capital while other workers do not, leaving the latter more likely to fall into a poverty trap. By extending this investigation to the issues of trade liberalization and heterogeneous workers, we contribute to the EGT literature on poverty traps. Furthermore, unlike existing theoretical literature, which has ultimately argued that people’s different natural abilities are the reason behind their heterogeneous education responses, our analysis brings to the forefront the role of ex-ante historical and institutional factors. The paper also offers a novel theoretical foundation for empirical findings related to globalization’s effects on Americans’ education.
We study the growth process among a large group of economies where consumption relative to a reference group determines the discount factor of the household agents. We characterize all possible balanced growth paths and their stability properties. The model can explain why two economies having similar production technologies, preferences, and total factor productivity growth rates can differ in labor supply behavior and have diverging growth paths depending on their initial conditions. Numerical analysis of the model suggests that growth path divergence is plausible based on cross‐country differences in savings rates. History dependence on time preference also generates realistic transitional dynamics.
Different types of poverty traps can reinforce each other, and consequently, multiple traps pose challenges for poverty alleviation, especially in rural areas. There remains a lack of understanding of social and ecological poverty traps and their relationship with one another. We considered the Selinco area in the Tibetan highlands of China and investigated social and ecological poverty, for an understanding of the poverty trap through the land‐human relationship lens. We found that ecological and social poverty differ between various townships due to their poor ecological and social environs. We affirmed reinforcing feedback between ecological and social poverty, and that the relative importance of social and ecological poverty differs at various thresholds. These results advance our understanding of different poverty traps and their feedback process. The findings inform the policy‐making process when addressing the land‐human relationship to improve ecosystem stability and promote social equity to foster sustainable development.
We examine the efficiency of the cash transfers on multidimensional extreme poverty in the states of Mexico for 2008-2018. We estimate econometric models with panel data with OLS and 2SLS and with cross-section data with GMM that shield against endogeneity of the determinants of poverty. We prove that there are perverse incentives that have caused that transfers perpetuate poverty in the less developed states. Homicides and informal employment have perpetuated it. Agricultural labor productivity, economic growth, productive export orientation, and a better Rule of Law reduce it.
The effectiveness of Aid for Trade (AfT) interventions, including with respect to recipient countries’ trade performance, has now been well explored in the literature. However, in spite of the voluminous literature on the poverty effect of the total official development aid, the effect of AfT flows on poverty has received little attention on the empirical front. This paper aims to contribute to the policy debate on this matter by investigating the effect of AfT flows on poverty in recipient countries. In particular, the analysis explores whether this effect translates through countries’ level of export product concentration, as the latter can influence income inequality, and hence the transformation of economic growth into poverty reduction in recipient countries. The empirical analysis, based on 100[Formula: see text]AfT recipient countries, has shown that AfT interventions are associated with poverty reduction in countries that diversify their export products, including toward manufacturing products. Additionally, AfT flows dampen the positive poverty effect of income inequality, and lead to greater poverty reduction in countries with a great extent of fiscal redistribution. Finally, the analysis has shown that AfT interventions mitigate the positive poverty effect of import product concentration. These results have important policy implications.
We propose a simple theoretical dual economy model to study the dynamics of an economy in which individuals move out of a poverty trap. These dynamics are characterized by growth acceleration. This model implies that poverty reduction could, under some circumstances, cause growth, rather than the other way around. We define a measurement of the growth impulse that could be triggered by independent exits from poverty and correlate it with observed growth ccelerations. This correlation is both positive and significant, and it passes various robustness checks.
Should agriculture or non-agriculture be a priority for development? We revisit this question using a two-sector, three-factor dynamic model with an asymptotic balanced growth path. The model allows a forward-looking assessment of development priorities based on lifetime welfare. A comparison of sector-specific productivity gains indicates that gains in non-agriculture are often more valuable, even when agriculture is initially the largest sector in terms of employment. We discuss the robustness of this result and how international capital mobility, capital intensity, demographics, the discount rate, and taxes on profits influence investment and structural transformation.
The identification of poverty at the county level is the precondition for poverty alleviation by formulating accurate strategies that are targeted for a certain area. Yunnan Province has the largest number of poverty counties in China. The vast number of people living under the poverty-line, and the deep degree of poverty across a wide distribution range, pose major challenges. Based on the rural poverty incidence data, this paper describes the rural poverty patterns in Yunnan Province in 2010 and 2015, and then it explores the main factors which influence the incidence and changes in rural poverty at the county level in Yunnan Province using a stepwise regression analysis method. This study found that the rural poverty in counties of Yunnan Province was deeply affected by natural conditions and the geographical environment. In 2010 and 2015, the rural poverty situation in the middle region of Yunnan Province was relatively light, while it was more serious in the northwest, northeast and south regions. The pattern of county poverty is in good agreement with the topography and landforms of Yunnan Province and the poverty-stricken areas. There are strong correlations between the incidence of rural poverty in Yunnan Province with both the annual per capita net income of rural residents and the degree of agricultural mechanization. These factors are related to the living standards and agricultural production necessary for the peasantry to sustain their livelihood. The change in the incidence of rural poverty at the county level in Yunnan Province from 2010 to 2015 is significantly correlated with changes in the value-added of the primary industries and the degree of agricultural mechanization. These correlations indicate that the development of primary industry plays a key role in the process of lifting rural residents in Yunnan Province out of poverty so they can achieve prosperity. Therefore, improving the annual per capita net income of rural residents and the degree of agricultural mechanization for rural areas in Yunnan Province are still the main points for focused efforts. In the current phase of poverty alleviation, Yunnan Province should emphasize increasing rural residents' income and agricultural production and management in order to formulate effective policies and measures for poverty alleviation.
Purpose
The paper aims to prove that between 1992 and 2016, people in poverty as a proportion of the total population has not been reduced. In particular, food poverty (FP) represented an average of 22%, despite the fact that gross domestic product (GDP) per capita and GDP, social development expenditure and food programme expenditure (both as GDP proportion) grew by 0.96%, 1.9%, 2.7% and −17.4% on an annual average, respectively.
Design/methodology/approach
There are non-linear relationships between economic growth and food poverty expenditure to reduce poverty. Three econometric models were estimated as follows: a linear model [ordinary least squares (OLS)] that addresses the capability of the economic growth to reduce FP (which detects a structural change in 2007) and three models of regime change (Markov–Switching Regression) that prove the existence of two different regimes.
Findings
The author proved that economic growth has lost the capability to reduce poverty and that there are decreasing effects of expenditure in addressing poverty since 2007. These results point out that Mexico is in a poverty trap and suggests that for the economy as for life and even more in the case of social (public) policies, more is not necessarily better than less. Therefore, the author suggests that the resources allocated in response to poverty may well have generated perverse incentives that yielded the opposite results.
Originality/value
There is no official measure of the public expenditure for poverty. Therefore, an accurate series was built to estimate the government effort and do the econometrics that proves the main hypothesis. This is another contribution.
This paper examines the dynamics of ‘technological catch-up’ and its effects in contributing to poverty alleviation, a crucial pillar of the United Nations’ Sustainable Development Goals (SDGs). Using data on 17 sub-Sahara African (SSA) countries and employing the superlative-index number methodology, we first estimate the total factor productivity (TFP) gap between these African nations and both the USA (leader of advanced countries) and China (leader of developing countries) to provide a measure for technological catch-up that is comparable across African countries. We then investigate the contribution of technological dynamics in SSA to poverty alleviation using the System Generalised Method of Moments (GMM) method. Our results show that from 1987 to 2014, many African nations have to some degree reduced technological gap to the USA, whilst only a few of them managed to briefly catch-up with China until the early 2000s and no such catching-up is observed thereafter, due to the exceptional technological advance achieved by China in the past fifteen years. We find that closing technological gap has had significant poverty alleviation effect for African nations, although this effect is weaker vis-à-vis China. Our paper therefore highlights the important role played by technological progress in alleviating poverty.
We consider an autocracy where the ruling elite control both the resource wealth and education policies. Education prompts economic growth and enriches the budget of the elite. However, education also increases the “awareness of citizens” – capturing their reluctance to accept a dictatorship and their labor market aspirations – and forces the elite to expand redistribution or handover the power. A power handover leads to a more democratic regime, where the elite retains (at least partially) its economic power. This trade-off is the backbone of our Lipsetian theory of voluntary power handover. This theory provides new insights on the positive relationship between economic development, education, and democratization, and on the negative relationship between inequality and democratization. Finally, we revisit the resources-curse hypothesis within our setting.
Using the concepts of poverty trap and neighbouring effect, this paper explores whether the economies of low-income regions and high-income regions respond differently to national economic fluctuations. It identifies an asymmetric pattern of regional income change in low-income regions of Korea due to a relatively small population size and weak urbanization economies. These low-income regions could increase their income levels by 3.75% if they succeeded in developing a symmetric relation to national economic fluctuations. Spatial proximity between high- and low-income regions can generate greater backwash (negative) effects on the economic growth of low-income regions than spread (positive) effects.
“Once upon a time there was a field called development economics”—by this Paul Krugman started his review article on development economics a quarter century ago. “That field no longer exists,” he also added. The 1940s and 1950s were the eras of “high development theory” when development economics became one of the top fields in economics armed with a distinctive set of new ideas stressing pecuniary externalities arising from increasing returns technologies and imperfect market competition.
This paper explores Colombian trade policy during 1977-1991, a period of substantial variation in protection across industries, to examine whether increased exposure to foreign competition generates plant-level productivity gains. Using a large panel of manufacturing plants, we find a strong positive impact of tariff liberalization on consistent productivity estimates, controlling for plant and industry heterogeneity. This result is not driven by the endogeneity of protection nor by plant exit. The impact of tariff liberalization on productivity is stronger for large plants and for plants in less competitive industries. Qualitatively similar results are obtained when using effective rates of protection and import penetration ratios as measures of protection. JEL Classification Numbers: F13, D24, C14, O54.
Many analysts decry the lack of sufficient investment in Africa, implying that investment in Africa is ‘too low’. We find no evidence that private and public capital are productive in Africa, either in the cross‐country data or in micro‐data from Tanzania. In this restricted sense, investment in Africa is too high rather than too low.
This paper investigates empirically a model of aggregate consumption and leisure decisions in which utility from goods and
leisure is nontime-separable. The nonseparability of preferences accommodates intertemporal substitution or complementarity
of leisure and thereby affects the comovements in aggregate compensation and hours worked. These cross-relations are examined
empirically using postwar monthly U. S. data on quantities, real wages, and the real return on the one-month Treasury bill.
The estimated values of the parameters governing preferences differ significantly from the values assumed in several studies
of real business models. Several possible explanations of these discrepancies are discussed.
In this paper, we evaluate four explanations for economic stagnation that have been proposed in the literature: coordination failures, ineffective mix of occupational choices, insufficient human capital accumulation, and politico-economic considerations. We calibrate models that embody these explanations in the context of the stagnant economies of sub-Saharan Africa. The methodology of calibration is ideally suited for this evaluation, given the paucity of high-quality data, the high degree of model nonlinearity, and the need for conducting counterfactual policy experiments. In addition to studying how closely and robustly these models capture the African situation, we examine the quantitative aspects of their policy implications. We find that calibrations that yield multiple equilibria -- one prosperity and the other stagnation -- are not particularly robust. This tempers optimism about the efficacy of one-shot or temporary development policies suggested by models with multiplicity. However, the calibrated models indicate that small policy interventions are sufficient to trigger development in stagnant economies.
Using economic rates of return from more than 1,200 public and private sector projects implemented in 61 developing countries, the authors analyze determinants of investment productivity. Results from Tobit estimation demonstrate that the degree of countrywide policy distortions - macroeconomic, exchange rate, trade and pricing - critically affects the productivity of investments. Countries with undistorted policies are likely to be unproductive investments. In countries with distorted policies, investments are likely to be unproductive. And within a country, investments become more productive when economic policymaking improves. The productivity of projects in the tradable sectors are also affected (in a nonlinear fashion) by the size of a country's public investment program. The authors discuss possible selection biases in this data set, present tests of robustness, and highlight policy implications. In particular, donor financing for improvements in the policy climate is likely to pay off. A powerful rationale for supporting structual reform is that it raises the productivity of both public and private investments.
The traditional aid-to-investment-to-growth linkages are not very robust, especially for African economies. Aid does not necessarily finance investment and investment does not necessarily promote growth. Differences in economic policy, on the other hand, can explain much of the difference in growth performances. Furthermore, domestic politics rather than aid or conditionality has been the main determinant of policy reform. Where societies and governments have succeeded in putting growth-enhancing policies into place, aid has provided useful support. The combination of good policies and aid has created a productive environment for private investment and growth. Copyright 1999 by Oxford University Press.
Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core and headline CPI in the United States. Linear trends in the CPI difference allow accurate prediction of the prices at a five to ten-year horizon.
This paper studies cross-country patterns of economic growth from the viewpoint of income distribution dynamics. Such a perspective raises new empirical and theoretical issues in growth analysis: the profound empirical regularity is an "emerging twin peaks" in the cross-sectional distribution, not simple patterns of convergence or divergence. The theoretical problems raised concern interaction patterns among subgroups of economies, not only problems of a single economy's accumulating factor inputs and technology for growth. Copyright 1997 by Kluwer Academic Publishers
The classic narrative of economic development -- poor countries are caught in poverty traps, out of which they need a Big Push involving increased aid and investment, leading to a takeoff in per capita income -- has been very influential in development economics since the 1950s. This was the original justification for foreign aid. The narrative lost credibility for a while but has made a big comeback in the new millennium. Once again it is invoked as a rationale for large foreign aid programs. This paper applies very simple tests to the various elements of the narrative. Evidence to support the narrative is scarce. Poverty traps in the sense of zero growth for low income countries are rejected by the data in most time periods. There is evidence of divergence between rich and poor nations in the long run, but this does not imply zero growth for the poor countries. Moreover, this divergence is more associated with institutions rather than the disadvantages of initial income. The idea of the takeoff does not garner much support in the data. Takeoffs are rare in the data, most plausibly limited to the Asian success stories. Even then, the takeoffs are not associated with aid and investment as the standard narrative would imply.
I. Introduction, 65. — II. A model of long-run growth, 66. — III. Possible growth patterns, 68. — IV. Examples, 73. — V. Behavior
of interest and wage rates, 78. — VI. Extensions, 85. — VII. Qualifications, 91.
Kremer, Onatski, and Stock (KOS) criticize twin peaks dynamics in the evolution of cross-country income dynamics. They suggest instead convergence to a single peak at high incomes, with a prolonged transition when polarization and inequality increase. This article makes three points. First, the data are as consistent with a twin peaks characterization as they are for KOS's preferred description— in KOS's own analysis as well as across other studies. Second, the substantive economic message is identical in both twin peaks and KOS views: the global poor are substantial and will continue so— whether for centuries or for infinity is nitpicking. Finally, getting the empirics right matters greatly for theories of economic growth.
This article introduces a large new cross-country database, the Database of Political Institutions. It covers 177 countries over 21 years, 1975-95. The article presents the intuition, construction, and definitions of the different variables. Among the novel variables introduced are several measures of checks and balances, tenure and stability, identification of party affiliation with government or opposition, and fragmentation of opposition and government parties in the legislature.
This paper reports on the latest update of the worldwide governance indicators, covering 213 countries and territories and measuring six dimensions of governance: voice and accountability political stability and absence of violence, government effectiveness, regulatory quality, rule of law, and control of corruption.
How important are neighbourhood endowments of physical and human capital in explaining diverging fortunes over time for otherwise identical households in a developing rural economy? To answer this question we develop an estimable micro model of consumption growth allowing for constraints on factor mobility and externalities, whereby geographic capital can influence the productivity of a household's own capital. Our statistical test has considerable power in detecting geographic effects given that we control for latent heterogeneity in measured consumption growth rates at the micro level. We find robust evidence of geographic poverty traps in farm-household panel data from post-reform rural China. Our results strengthen the equity and efficiency case for public investment in lagging poor areas in this setting. Copyright © 2002 John Wiley & Sons, Ltd.
This paper asks whether the income gap between rich and poor nations can be explained by multiple equilibria. We explore the
quantitative implications of a simple two-sector general equilibrium model that gives rise to multiplicity, and calibrate
the model for 127 countries. Under the assumptions of the model, around a quarter of the world’s economies are found to be
in a low output equilibrium. We also find that, since the output gains associated with an equilibrium switch are sizeable,
the model can explain between 15 and 25% of the variation in the logarithm of GDP per worker across countries.
This paper presents estimates of indexes of internal returns to scale and external economies for two-digit manufacturing industries in the four European countries for which the requisite data are available in adequate length: West Germany, France, the U.K., and Belgium. Overall, we find very little evidence of internal increasing returns to scale: of the thirteen two-digit industries, only Rubber and Plastic Products, Agricultural and Industrial Machinery, and Mineral Products exhibit any significant internal increasing returns to scale, and for none of the three is internal increasing returns present in more than two of the four countries. Evidence of external economies, on the other hand, exists for all four countries, the effects of which are especially strong in France and Belgium.
The Harrod–Domar growth model supposedly died long ago. Still today, economists in the international financial institutions (IFIs) apply the Harrod–Domar model to calculate short-run investment requirements for a target growth rate. They then calculate a “financing gap” between the required investment and available resources and often fill the “financing gap” with foreign aid. The financing gap model has two simple predictions: (1) aid will go into investment one for one, and (2) there will be a fixed linear relationship between growth and investment in the short run. The data soundly reject these two predictions of the financing gap model.
This paper presents a new method for utilizing the statistical cost technique to measure minimum efficient scale (MES), returns to scale and suboptimal capacity. An application of the duality theory between cost and homothetic production functions leads to justification for ignoring poor quality or unavailable capital data and the pooling of several years observations to improve the efficiency of the estimates. The methodology is applied to 91 four-digit Canadian manufacturing industries to obtain estimates of MES, returns to scale, and suboptimal capacity. For a subsample of industries, we demonstrate that the cost function estimates of MES and returns to scale are more closely related to engineering estimates than are the ad hoc estimates usually found in the industrial organization literature.
Kremer, Onatski, and Stock (KOS) criticize twin peaks dynamics in the evolution of cross-country income dynamics. They suggest instead convergence to a single peak at high incomes, with a prolonged transition when polarization and inequality increase. This article makes three points. First, the data are as consistent with a twin peaks characterization as they are for KOS's preferred description—in KOS's own analysis as well as across other studies. Second, the substantive economic message is identical in both twin peaks and KOS views: the global poor are substantial and will continue so—whether for centuries or for infinity is nit-picking. Finally, getting the empirics right matters greatly for theories of economic growth.
In this paper we highlight a new dimension of the aggregate procyclical productivity phenomenon. We show that estimates of the degree of returns to scale are larger for manufacturing as a whole than for two-digit industries. Since this difference must be due to factors that are only internalized at the most aggregate level, we term it an external effect. This result rules out explanations based on own-input variation —such as true increasing returns and unmeasured factor utilization tied to own-activity —as the sole explanations for aggregate procyclical productivity. We explore several potential explanations of this external effect.
Endogenous mortality is introduced in a two-period overlapping generations model: probability of surviving from the first period to the next depends upon health capital that is augmented through public investment. High mortality societies do not grow fast since shorter lifespans discourage savings; development traps are possible. Productivity differences across nations result in persistent differences in capital-output ratios and relatively larger gaps in income and mortality. High mortality also reduces returns on education, where risks are undiversifiable. When human capital drives economic growth, countries differing in health capital do not converge to similar living standards, ‘threshold effects’ may also result.
International trade economists typically assume that there are no cross-country differences in industry total factor productivity (TFP). In contrast, this paper finds large and persistent TFP differences across a group of industrialized countries in the 1980s. The paper calculates TFP indices, and statistically examines the sources of the observed large TFP differences across countries. Two hypotheses are examined to account for TFP differences: constant returns to scale production with country-specific technological differences, and industry-level scale economies with identical technology in each country. The data support the constant returns/different technology hypothesis over the increasing returns/same technology hypothesis.
This paper focuses on one possible explanation for the empirical evidence of (a) income convergence among the world's poorest countries and among its wealthiest countries, and (b) income divergence among most of the remaining countries. The model incorporates the assumption of subsistence consumption into the neoclassical exogenous growth model, yielding outcomes that are consistent with the convergence–divergence empirical evidence. While subsistence consumption can lead to negative saving and disaccumulation of capital, it can also coincide with positive saving and accumulation of capital. The model predicts that the poorer the country, the lower its saving rate, a result that also appears to be borne out by the evidence provided here.
Using data on gross output for two-digit manufacturing industries, we find that an increase in the output of one manufacturing sector has little or no significant effect on the productivity of other sectors. Using value-added data, however, we confirm the results of previous studies which find that output spillovers instead appear large. We provide an explanation for these differences, showing why, with imperfect competition, the use of value-added data leads to a spurious finding of large apparent external effects.
This paper explores a period of substantial variation in trade policy across industries in Colombia (1977–1991) to examine whether increased exposure to foreign competition generates productivity gains for manufacturing plants. Using an estimation methodology that addresses the shortcomings of previous studies, we find a strong positive impact of tariff liberalization on plant productivity, even after controlling for plant and industry heterogeneity, real exchange rates, and cyclical effects. The impact of liberalization is stronger for larger plants and plants in less competitive industries. Our findings are not driven by the endogeneity of protection. Similar results are obtained when using effective rates of protection and import penetration ratios as measures of protection. Productivity gains under trade liberalization are linked to increases in intermediate inputs' imports, skill intensity, and machinery investments, and to output reallocations from less to more productive plants.
Club convergence may arise as an empirical prediction from standard neoclassical growth models where the aggregate production technology displays diminishing returns to capital. This requires that the propensity to save from wage income is greater than the propensity to save from capital income. This paper shows how endogenous capital utilization may produce such savings behavior in an otherwise standard Solow model. That is, even if households save a constant fraction of total income multiple stable steady states may arise when capital utilization is endogenously determined.
This article takes a systematic cross-national approach to identifying saving transitions— defined as sustained increases in the saving rate of 5 percentage points or more—to study their determinants and to reexamine the question of causality between growth and saving. Countries that undergo saving transitions do not necessarily experience sustained increases in their growth rates. In fact, growth rates typically return to their levels before the transition within a decade. By contrast, countries that undergo growth transitions—arising from improved terms of trade, increased domestic investment, or other sources—do end up with permanently higher saving rates. Hence saving transitions do not appear to be causal with respect to superior economic performance.
One strand of endogenous-growth models assumes constant returns to a broad concept of capital. The author extends these models to include tax-financed government services that affect production or utility. Growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures, but subsequently decline. With an income tax, the decentralized choices of growth and saving are "too low," but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency. Empirical evidence across countries supports some of the hypotheses about government and growth. Copyright 1990 by University of Chicago Press.
This article analyzes the productivity of economy-wide investment across countries and tries to obtain some insight into the underlying process generating the aggregate results through a case study of the evolution of the manufacturing sector in Tanzania. We find that low investment has not been the major constraint on development in Africa. In Section II, we use cross-country regressions to explore whether public and private investment had a positive and significant effect on aggregate growth in Africa. Regardless of the true underlying production function, investment should be positively associated with growth, although the precise impact would vary with different functional forms. But we are searching for gross correlations that can be obtained from the available data. If a check of the initial screening is positive, we can search for more precise relations. Recognizing that private investment is endogenous, we use the method of instrumental variables (with the level of private investment at the beginning of the period as the instrument). Our basic finding is that public investment is not correlated with growth in Africa. Private investment is also not correlated with growth unless Botswana is included in the sample. A simple scatter plot of the data shows why: Botswana is the only country in Africa to have experienced high private investment rates and high growth. We provide a brief discussion of the experience of Botswana to justify excluding it from the sample.
This paper provides empirical evidence on macroeconomic complementarities, a restriction on the nature of interaction between individuals in a multiagent setting. These models imply that activities across agents will be positively correlated, that discrete decisions will be synchronized, and that disturbances will be magnified and propagated. The paper shows that these implications are consistent with aggregate observations as well as some microeconomic evidence. Further, looking at certain historical episodes, such as the National Industrial Recovery Act, as well as seasonal fluctuations provides additional support for models with macroeconomic complementarities. Copyright 1996 by MIT Press.
Standard one-sector growth models often have the counterfactual implication that economies with access to similar technologies
will converge to a common balanced growth path. We propose an elaboration of the Diamond model that permits multiple, locally
stable stationary states. This multiplicity is due to increasing social returns to scale in the accumulation of human capital.
It is shown that, in a class of models with multiple externalities (one positive and one negative), all stationary equilibria
may be locally stable to perturbations, in the sense that there exist perfect foresight trajectories leading back to the equilibrium.
Thus, scale diseconomies (arising, for example, out of a common resource pool) generally overturn the Liviatan-Samuelson result,
that equilibria are either saddlepoints or sources.
The rate of return on invested capital is a widely used concept in both regulated and unregulated sectors of the economy. It provides a measure of actual performance as well as required or expected performance (the latter is often termed the "cost of capital"). In the utility field, regulatory agencies often focus on the rate of return as a major instrument for assessing and controlling the performance of firms under their jurisdictions. Unfortunately, two altogether distinct units are employed for measuring rate of return: (1) book rate units and (2) discounted cash flow units. Rarely will the two produce the same result, and the use of one measure as a surrogate for the other may prove highly misleading. This paper indicates the relationship between the two measures and shows the impact of some variations in depreciation and expensing procedures, growth rate, etc. The object is to point out the potential hazards associated with the use of measures of different things in a context that requires the use of measures of the same thing.
We test for the existence of poverty traps and distribution-dependent growth using a nonlinear dynamic panel data model of household incomes allowing for endogenous attrition. Our estimates for Hungary and Russia in the 1990s reveal significant nonlinearity in the dynamics, consistent with the claim that income inequality attenuates growth in mean income. However, we do not find evidence of a threshold effect at low incomes, as postulated by models of dynamic poverty traps. Our results indicate that households generally bounce back from transient shocks, though we find that the adjustment process is slower for households who are poorer in steady state.
The manufacturing sectors of less developed countries (LDCs) have traditionally been relatively protected. They have also been subject to heavy regulation, much of which is biased in favor of large enterprises. Accordingly, it is often argued that manufacturers in these countries perform poorly in several respects: (1) markets tolerate inefficient firms, so cross-firm productivity disper-sion is high; (2) small groups of entrenched oligopolists exploit monopoly power in product mar-kets; and (3) many small firms are unable or unwilling to grow, so important scale economies go unexploited. In this paper I assess each of these conjectures, drawing on plant and firm-level studies of LDC manufacturers. I find none to be systematically supported. Productivity dispersion among LDC plants is not obviously higher than it is among plants in industrialized countries. Convincing dem-onstrations of monopoly rents are generally lacking, and unexploited scale economies are modest. Finally, while the evidence suggests that protection increases price-cost mark-ups and dampens productive efficiency, the general movement toward trade liberalization in LDCs has made this less of an issue today than it was 20 years ago. Each of these inferences is based on a limited body of crude evidence. There is substantial scope for improvement in the empirical literature, especially in terms of better measures of productive efficiency and the costs that firms incur to achieve it; better analyses of spillovers, and more at-tention to the effects of volatility and uncertainty on firm behavior. Progress on any of these fronts is likely to require improvements in the quality and quantity of primary data collection.
The paper examines some implications of the wholly reasonable assumption that the elasticity of intertemporal substitution (the EIS) increases with the level of consumption. Then the rich find it easier to substitute future consumption for present consumption than do the poor. In the empirical macro-economics literature the same assumption has been employed and vindicated in cross-section analysis by Attansio and Browning (1995). Here the approach is to build theoretical models of two kinds of poverty traps. A family of explicit direct utility functions that yield the required property is exhibited. Members of this family can give weak b-convergence in a Ramsey-style growth model, or multiple stable solutions in the Diamond capital model. The last finding is in strong contrast to the monograph De La Croix (2002), which leaves the impression that multiple stable solutions are unlikely.
Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core and headline CPI in the United States. Linear trends in the CPI difference allow accurate prediction of the prices at a five to ten-year horizon.
This paper investigates two explanations for why industries might become more productive over time. The first explanation, termed the real productivity case,' is one in which firms become more productive and this leads to more productive industries. The second explanation, termed the rationalization case,' is one in which firm productivity is constant, but productive firms expand while less productive firms either shrink or exit. Each case has very different implications for factor markets, long term growth prospects, and public policy regarding productivity. Further, one can only distinguish between these two cases with plant- or firm-level data. We investigate the empirical relevance of the two cases using the Chilean manufacturing census. We find that the rationalization case explains much of the measured increase in industry productivity. When industry productivity fails, the rationalization case appears much less important. We also contribute to the applied econometric literature on productivity estimation as we show that the value-added production function is especially well-suited to a simple extension of recent methods developed by Oiley and Pakes.
The Time-Elimination Method for solving recursive dynamic economic models is described. By defining control-like and state-like variables, one can transform the equations of motion describing the economy's evolution through time into a system of differential equations that are independent of time. Unlike the transversality conditions, the boundary conditions for the system in the state-like variable are not asymptotic boundary conditions. In theory, this reformulation of the problem greatly facilitates numerical analysis. In practice, problems which were impossible to solve with a popular algorithm - shooting - can be solved in short order. The reader of this paper need not have any knowledge of numerical mathematics or dynamic programming or be able to draw high dimensional phase diagrams. only a familiarity with the first order conditions of the 'Hamiltonian' method for solving dynamic optimization problems is required. The most natural application of Time-Elimination is to growth models. The method is applied here to three growth models.: the Ramsey/Cass/Koopmans one sector model, Jones & Manuelli's(1990) variant of the Ramsey model, and a two sector growth model in the spirit of Lucas (1988). A very simple - but complete - computer program for numerically solving the Ramsey model is provided.
We test the view that the large differences in income levels we see across the world are due to differences in the intrinsic geography of each country against the alternative view that there are poverty traps. We reject simple geographic determinism in favor of a poverty trap model with high- and low-level equilibria. The high-level equilibrium state is found to be the same for all countries while income in the low-level equilibrium, and the probability of being in the high-level equilibrium, are greater in cool, coastal countries with high, year-round, rainfall. Copyright 2003 by Kluwer Academic Publishers
The classic narrative of economic development—poor countries are caught in poverty traps, out of which they need a Big Push involving increased investment, leading to a takeoff in per capita income—has been very influential in foreign aid debates since the 1950s. This was the original justification for foreign aid. The narrative lost credibility for a while but has made a big comeback in the new millennium. Once again it is invoked as a rationale for large foreign aid programs. This paper applies very simple tests to the various elements of the narrative. Evidence to support the narrative is scarce. Poverty traps in the sense of zero growth for low-income countries are rejected by the data in the whole period 1950–2001 and for most sub-periods. The poorest quintile also does not have significant negative growth of the relative income ratio to the world’s richest country over 1950–2001, nor is relative growth for the lowest quintile significantly different than other quintiles. The claim that “well-governed poor nations” are caught in poverty traps is rejected by simple regressions that control for both initial income and quality of government (instrumenting for the latter). The idea of the takeoff also does not garner much support in the data. Takeoffs are rare in the data, most plausibly limited to the Asian success stories. Even then, the takeoffs are not associated with aid, investment, or education spending as the standard narrative would imply. Copyright Springer Science+Business Media, LLC 2006