Development Economics 1st Edition Debraj Ray - Solutions

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Manufactures now account for a majority of exports from the developing world. What factors have limited the benefits that developing countries receive from this progress?
In what ways is the emergence of China as the“workshop of the world” an opportunity for other developing countries, and in what ways is it a threat?
Explain the distinction between primary and secondary inward- and outward-looking development policies.
Briefly summarize the range of commercial policies available to developing countries, and explain why some of these policies might be adopted.
What are the possibilities, advantages, and disadvantages of export promotion in developing nations with reference to specific types of commodities(e.g., primary food products, raw materials, fuels, minerals, manufactured goods)?
Most less developed countries in Latin America, Africa, and Asia pursued policies of import substitution as a major component of their development strategies. Explain the theoretical and practical arguments in support of import substitution policies.What have been some of the weaknesses of these
Explain some of the arguments in support of the use of tariffs, quotas, and other trade barriers in developing countries.
What issues form the basis of the debate between trade optimists and trade pessimists? Explain your answer.
What are the basic static and dynamic arguments for economic integration in less developed countries? Briefly describe the various forms that economic integration can take (e.g., customs union, free-trade areas). What are the major obstacles to effective economic integration in developing regions?
How do the trade policies of developed countries affect the ability of less developed countries to benefit from greater participation in the world economy?How do nontrade domestic economic policies of rich nations affect the export earnings of developing countries?
What factors do you think are most important in implementing a successful, outward-looking industrialization strategy?
Draw up a balance of payments table similar in format to Table 13. 3 using the most recent data from any developing country (consult the IMF’s International Financial Statistics at imfstatistics.org/imf, or for broader coverage see links in imf.org/external/data.html for the most recent data).
Describe the basic-transfer mechanism. Using the list of credits and debits in Table 13. 2, identify which ones would fit into the basic-transfer equation.How does the basic transfer help us analyze developing-world debt problems?Table 13. 2 TABLE 13.2 Credits and Debits in the Balance of Payments
Trace the evolution of the developing-country debt problem during the 1970s and 1980s. What were the key ingredients? Explain your answer.
Why was the problem of capital flight so serious in some highly indebted countries? What causes capital flight, and what do you think can be done about it?
What is petrodollar recycling, and how did it contribute to the debt crisis of the 1980s? Why were developing countries so eager to borrow money from international banks? Explain your answer.
What is the significance of the debt service ratio?Can indebted countries do anything to lower this ratio? Explain your answer.
Describe the typical IMF stabilization package for severely or heavily indebted countries. What are the objectives of these policies, and why do you think international banks are so eager for IMF negotiations to precede their discussions with these countries? What are the economic and social costs
Do you think a full-fledged developing-country debt crisis might reemerge in the future? If so, why and under what conditions? If not, why not?
What has been proposed to resolve the problem of odius debt? How effective a solution do you think this will be for averting future problems involving developing-country debt?
In what ways was the recent global financial crisis similar to past crises, and in what ways did it differ?
Prepare a brief update on longer-term impacts of the 2008 global financial crisis. Have any of the later developments proved unexpected (or previously considered unlikely)? Where problems have lessened, do you think they could return?
The emergence of giant multinational corporations is said to have altered the very nature of international economic activity. In what ways do these MNCs affect the structure and pattern of trading relationships between the developed world and the developing world?
Summarize the arguments for and against the role and impact of private foreign investment in less developed countries. What strategies might developing countries adopt to make private foreign investment fit their development aspirations better without destroying all incentives for foreign investors?
What are private portfolio flows? What factors do you believe are most important in determining the amount and direction of such flows?
To what extent do private portfolio investments in developing countries benefit the recipient countries?What are the potential costs and risks to both investors and recipients? Explain your answer.
How important is foreign aid for low- and middleincome developing economies in relation to their other sources of foreign-exchange receipts? Explain the various forms that official development assistance can take, and distinguish between bilateral and multilateral assistance. Which do you think is
What is meant by tied aid? Most nations have increasingly shifted from grants to loans and from untied to tied loans and grants. What are the major disadvantages of tied aid, especially when this aid comes in the form of interest-bearing loans?
Under what conditions and terms do you think developing countries should seek and accept foreign aid in the future? If aid cannot be obtained on such terms, do you think developing countries should accept whatever they can get? Explain your answer.
What are the differences between official development assistance (public foreign aid) and private development assistance from nongovernmental organizations (NGOs)? Which type of aid is more desirable from the perspective of recipient countries?Explain your answer.
How do you think the current orientation of military and diplomatic policy in potential donor nations toward combating international terrorism is likely to affect the pattern of development assistance?
What do you think would persuade the public to get over its “donor fatigue” and support more aid for the least developed countries?
Why do you think conflicts within developing countries increased so much from the 1950s to the 1990s? Why do you think they then began to decrease?
What lessons can be learned for low-income countries from the successes of Botswana?
Explain the distinction between organized and unorganized money markets.
In the context of development priorities, what are the relative roles of central banks, commercial banks, development banks, informal and unorganized sources of credit, and microfinance such as the Grameen Bank of Bangladesh?
What is meant by financial repression, financial liberalization, currency substitution, and unorganized money markets, and how do they relate to financial policy in developing countries?
List and briefly discuss the seven market failures that, Stiglitz and his colleagues say, justify a strong government role in developing-country financial sectors. Do you agree or disagree with this assessment?Explain.
What are the principal sources of government revenues in developing countries? Why are many taxes so difficult to collect? Discuss.
In what ways do you think taxation and expenditure systems in developing countries could be improved?Be specific.
If the scarcity of administrative capabilities is a serious constraint on development policy implementation, what can developing countries do to relieve this constraint? What are the options? Discuss.
Summarize the arguments for and against the establishment of state-owned enterprises (SOEs) in developing nations. Do you think that SOEs should be encouraged or discouraged? What are the arguments for and against privatization of the public sector in developing countries? How would you interpret
When privatization picked up pace in Poland, some analysts warned that effective privatization first required more developed domestic financial institutions. Comment.
What are the pros and cons of encouraging the development of stock markets in developing countries?
How have microfinance institutions’ strategies differed from those of other lenders in reaching lower income borrowers?
What are some of the benefits of expanding microcredit programs, and what are some of its potential limits?
Consider the three recent policy debates concerning microfinance (on subsidies, nonfinancial activities, and commercialization). What kinds of evidence would you seek to resolve these at least in a localized context?
Using the data collected by La Porta et al., cited in this chapter, compare shareholder and creditor rights in India and in Brazil. Interpret the differences you observe.
Go to the following World Bank webpage: http://databank.worldbank.org/ddp/home.do In the Database section, select the first row, "World Development Indicators." As a new page appears, click "Select all" for countries. As a new page appears, in the list of series, select "GDP per capita, PPP
Consider the Solow model with a production function Y(t) = A · k(t)αL(t)1 − α, where A is a fixed technological parameter. Explicitly solve for the steady-state value of the per capita capital stock and per capita income. How do these values change in response to a rise in(a) The
Here is a way of seeing why greater input variety in production is akin to technical progress. Suppose that an output Y is produced by n different kinds of machines, X1, X2, . . . , Xn. No machine is necessary in production, and there are diminishing returns to each machine, but the whole process
Suppose that fax machines are made newly available in NeverNeverLand. Companies are deciding whether or not to install a machine. This decision partly depends on how many other companies are expected to install fax machines. Think of a graph that describes how many companies will install fax
Consider a hypothetical economy in which each worker has to decide whether to acquire education and become a high-skilled worker or remain low-skilled. Education carries a cost of C. Assume that interest-free education loans are available to everybody. Let IH and IL denote the incomes earned by a
Complementarities arise in all sorts of situations. Here is a tax evasion problem. Suppose that each of N citizens in a country needs to pay a tax of T every year to the government. Each citizen may decide to pay or to evade the tax. If an evader is nabbed, the law of the country stipulates payment
Here are other examples of coordination problems. Discuss them and think of other situations which can be modeled in this way.(a) International debt: Suppose that a country considers default on its international debt to a creditor country. In case of default, the creditor country can stop trade
You are the minister of planning in a developing country with a poorly developed industrial sector. You would like to create a climate in which industrialists will invest and create economic growth. After much investigation, you realize that you are faced with the following basic problem. I’ll
Why might the presence of “overoptimistic entrepreneurs”—those who systematically overestimate the profits from pursuing new activities—help in getting rid of coordination failures? Relate this observation to relative frequent swings of coordination equilibria in the fashion industry.
Compare the backward and forward linkages generated by(a) Software exports,(b) Domestic food production,(c) Transportation,(d) Textile exports, and(e) Heavy industry
Consider a society where people throw garbage on the streets. A person who does so inflicts negative externalities on others: suppose that the (psychic) dollar cost to any one person is an, where a > 0 is a positive constant and n is the number of (other) people who throw garbage on the
You are introducing a new vacuum cleaner design in a tropical society which works well under humid conditions. The vacuum cleaner is produced under increasing returns, so that the unit cost of production declines with the price. Discuss how the following factors affect your likelihood of
Suppose that diamonds can be extracted for the cost of $100 per diamond. Consumers value diamonds according to the following formula, expressed in dollar equivalent units:where x is the number of diamonds extracted.(a) Plot the total cost and value of extracting diamonds on a graph, with x, the
A country is considering the adoption of two different telephone networks. Network A is an older network. It involves initial capital expenditures of $2 million, but will pay off $120,000 per year for a lifetime of fifty years. The newer network B involves a capital expenditure of $5 million, but
Suppose that people’s attitudes can take three possible positions: L, M, and R, where you can think of L as leftist, R as rightist, and M as middle-of-the-road. Consider a society in which it is known that a fraction α are M types, and the remaining fraction 1 − α are divided equally between
Connect and contrast the following concepts:(a) Inequality of current income versus inequality of lifetime income,(b) Functional versus personal income distribution,(c) Efficiency versus equity,(d) Inequality of income versus inequality of opportunities, and(e) Wage inequality versus income
The economy of ShortLife has two kinds of jobs, which are the only sources of income for the people. One kind of job pays $200, the other pays $100. Individuals in this economy live for two years. In each year, only half the population can manage to get the high-paying job. The other half has to be
Draw Lorenz curves and calculate the Gini coefficient and the coefficient of variation for the income distributions (a)–(f). In each situation, the first set of numbers represents the various incomes, whereas the second set of numbers represents the number of people earning each of these
What are the ethical principles that we used in our measurement of inequality? Show that these principles are exactly summarized in the concept of the Lorenz curve. Argue that if there are two income distributions for which the Lorenz curves do not cross, then the Gini coefficient and the
Suppose that there are n people in society, arranged (without loss of generality) in increasing order of income earned. Let x = (x1, . . . , xn) and y = (y1, . . . , yn) be two income distributions (with total incomes the same in the two cases).(a) Show that the Lorenz curve for x must lie inside
In a world in which there are fixed minimum needs for survival, show that an application of the relative income principle runs into problems. How would you try and modify the principle to circumvent this problem?
The Dalton transfer principle may not be a good way to judge increases in polarization (for a definition, see Esteban and Ray [1994] and Wolfson [1994]). To see this, begin with a society in which incomes take all values in $100 increments between $100 and $1000, and in which an equal proportion of
The economy of Nintendo has ten people. Three of them live in the modern sector of Nintendo and earn $2000 per month. The rest live in the traditional sector and earn only $1000 per month. One day, two new modern sector jobs open up and two people from the traditional sector move to the modern
Are the following statements true, false, or uncertain? In each case, back up your answer with a brief, but precise explanation.(a) The Kuznets ratios satisfy the Dalton transfer principle.(b) If the Lorenz curve of two situations do not cross, the Gini coefficient and the coefficient of
Consider an economy of 10 people and two sectors (modern and traditional) with yearly incomes equal to $1,000 and $2,000. Suppose that all growth proceeds by moving people from the traditional to the modern sector.(a) Plot values of the Gini coefficient and the coefficient of variation as
Describe what is known empirically about the relationship between the level of per capita GNP of a country and its degree of inequality. Provide at least two possible reasons why we might empirically observe such a relationship.
If you had a panel data set with several year-wise observations on each country, explain how you would go about testing the inverted-U hypothesis. How would your test change (for pragmatic reasons) as the number of data points per country changed?
Use very short arguments to describe the following possibilities. You may put in a diagram and/or a simple example to illustrate your argument.(a) Over the course of economic development, the pay ratios of skilled to unskilled labor rise and then fall.(b) Studies of different countries over the
Suppose that there are three individuals with three wealth levels in the economy. Denote the wealth levels by A, B, and C, and suppose that A < B < C.(a) Suppose that the person with wealth level A earns an annual income of wA, and saves a fraction sA of it. If the rate of interest on asset
This problem tests your understanding of the effect of the income distribution on savings rates. The economy of Sonrisa has people in three income categories: poor, middle class, and rich. The poor earn $500 per year and have to spend it all to meet their consumption needs. The middle class earn
Explain why a one-time redistribution of land is likely to have less of a negative effect on investment rather than a redistribution of income period after period (but with a similar distribution of present values of assets as the land redistribution).
Pooh is a country with only two occupations. You can work as a laborer or you can become an entrepreneur, who hires labor and makes profits. To become an entrepreneur, you need a loan of 20,000 pahs (a pah is the unit of currency in Pooh). With 20,000 pahs you can set up a factory that hires ten
There are two ways in which an imperfect credit market manifests itself. One is in the form of a higher interest rate; the other is in the form of a ceiling on loans. Discuss how these two phenomena may come about. In particular, why is it that a higher interest rate cannot always compensate for
Explain carefully why greater inequality in wealth distribution tends to shift the supply curve of labor to the right and the demand curve to the left when there are imperfect capital markets. In the process of doing this, explain how the supply and demand curves for labor depend on the wage rate,
Is poverty an absolute concept or a relative concept? There are clearly some components (such as access to food, clothing, and shelter) that we would consider necessary in any society, but there are other components that are clearly society–specific.(a) Identify some components of “minimum
Evaluate the following statements by providing a brief explanation or analysis.(a) The income gap ratio and the head count, as measures of poverty, may lead to very different uses of antipoverty resources by policy makers.(b) World poverty shows a steadily diminishing trend all through the 1970s
Suppose that you are comparing two economies, A and B. The FGT indices (with α = 2) for the two countries are the same. However, the head-count and the income gap ratio are both higher for economy A than for B. What can you say about the coefficient of variation of income distribution among the
Explain why a moneylender who relies on future credit cutoffs to enforce loan repayment today will be less willing to advance loans to a poor individual for projects that guarantee future income security. Discuss the role of collateral in obtaining such loans.
Discuss the capacity curve and explain why the curve has an initial segment in which work capacity exhibits increasing returns with respect to nutritional input. In Chapter 13, we will discuss the implications of this in more detail, but the following exercise will provide you with some advance
Consider the same capacity curve as in problem (6a). Suppose that a family of five members each have this capacity curve. Assume that this family has access to a source of nonlabor income, valued at $400. Assume furthermore that each unit of capacity can fetch an income of 50 cents, and that all
Review the concepts of birth rates, death rates, and age distributions, and the way in which these notions interact with one another. Construct an example of countries A and B, where A has higher death rates than B in every age category yet has an overall lower death rate.
Why does a young age distribution make it more difficult for a country to slow its rate of population growth? If a country suddenly drops its total fertility rate to two (which makes for a stationary long-run population), describe the path that population will take before settling at this long run
Discuss factors that have altered the carrying capacity of the planet. Explain how such increases in carrying capacity might ultimately affect fertility decisions at the level of the household.
Explain why each country might want to take a pro-natalist stand for military or political reasons, but the combination of all countries taking the same pro-natalist stance may make all countries worse off relative to a neutral stance on population.
In this chapter, we studied a model where a family wants one surviving child to provide old-age security. Let us say that the probability of any one child living to look after its parents in old age is 1/2 (i.e., 50–50). However, the family wants this security level to be higher, say a
Review the concepts of targeting and hoarding. Discuss the various components of the “survival probability” p (see exercise 5 as well as the discussion in the text) that will affect the relative prevalence of these two forms of reproductive behavior.
In a world in which families use the experience of their parents in determining their own fertility behavior, discuss the role of the media (such as television) in affecting fertility.
Why is a well-implemented ban on child labor likely to reduce fertility rates?
Organized social security, health care, etc., will lead to a fall in fertility rates but will lead to a fall in savings rates as well. The net effect on per capita income growth rates is ambiguous. Comment.
In the land of Oz, there are three inputs to production: capital, physical labor, and mental labor. Men in Oz have more physical labor power than women, but both men and women have the same amount of mental labor power.(a) Who earns more in Oz, men or women? What do these differences depend
Studies for many countries have shown that labor force participation by women tends to have a U-shaped pattern with respect to growth in per capita income. Explain why this contrasts with your findings in exercise 10 above. Discuss reasons why such a U-shaped curve of female labor force
Consider the Blanco–Tinto example studied in Section 18.3.4. Describe a case where some individuals in Blanco might object to a free-trade agreement and show that this case must depend critically on the assumption that factor inputs are held unequally by different citizens. Note that even in this

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Development Economics 1st Edition Debraj Ray - Solutions

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