Final exam 17/1 Flashcards
1
Q
What does the proximate causes look at?
A
They look at the closest possible explanations to economic growth and uses the production function for it. So it tries to explain it through K, L and A, where A is the most important one as it increases when tech and innovation increases and hence higher the returns of the K and L.
2
Q
The convergence hypothesis, 3 parts:
A
- Decreasing returns of all production factors.
- Exogenous tech-change, no resource accumulation (as there are no returns).
- Tech as a free access good.
Leading economies can only grow through exogenous tech-change and the decreasing returns lead to steady-state situations.
Followers in contrast, can grow through imitation and the increasing K-endowments until reaching the same K/L as the leaders.
3
Q
Main takeaway from the proximate causes:
A
That the factors such as innovation, economies of scale, education and capital accumulation etc are not causes of growth, they ARE growth. So we must look deeper to find the real causes of growth. What does affect the human capital level and R+D??
4
Q
The three proximate causes:
A
Physical capital (K), Human capital (H), Technological innovation (A).
5
Q
The three deep causes:
A
Geography, Institutions and Culture.
6
Q
Are there big differences in geographical characteristics between for ex Africa and Europe?
A
Yes, there are large disparities. For ex the % land in tropics are huge in A and super low in E, and the closeness to a market is much better in E etc. Also the density of population situated along the coasts vs interior are very different.
7
Q
Montesquieu’s proposal of the effect of geography:
A
Hot climate –> sloth –> poverty.
8
Q
The six mechanism of the geographic factor:
A
- Low productivity in tropical agriculture.
- Diseases
- Transport costs
- Timing of agriculture.
- Natural resources
- Environmental shocks.
9
Q
When data shows that temperate economies have had much higher growth than tropical, what does this conclude?
A
That geography interacts with technology. And as we have learned by now, A is the most important factor when it comes to growth. Better technology also help to keep the transport costs low.
10
Q
Why does the timing/occurance of NR matters for development? And what affected the timing of the NR?
A
Because the technology adapted back then will often persist over time and a high stock of technology will also attract more tech (as they are often complementary, and as it means higher returns).
Its timing was dependent on:
- Biodiversity: amounts and type of arts and species.
- Orientation of continents - vertical vs horizontal affected the diffusion of tech.
11
Q
Mechanism behind the diseases: why does it affect development?
A
In many ways, the mortality increases, the malnutrition is reinforced, the education lower due to lost school time, FDI and tourism lower etc… All of these will affect economic growth in obvious ways.
12
Q
Describe how environmental schocks will affect growth:
A
Environmental schock can for example be the massive variations in rainfall that Africa is victim of. These will directly affect the economy and a recession will start. Even if it is temporary, the people have less to lose and will demand more from the government and hence the leaders must democratize the country. This is statistically approved by data showing that in times of drought, the polity score increases.
13
Q
Transport costs:
A
fattade ej slidesen…
14
Q
What about natural resources?
A
Data shows a negative relation with GDP. This is true for the countries having bad institutions. But for ex Norway, the oil is good. For the bad institutionalized countries, the natural resources make the government corrupt and less interested in investing in growth-sectors such as manufacturing and export.
15
Q
Is geography destiny?
A
Not according to the theory of reversal of fortune, which emphasize the data showing that highly populated and relatively rich regions back in 1500 will be poor today, while the low density regions that were relatively poor in 1500 are rich today. There has been a reversal due to the colonization. The Europeans built good institutions in the regions where they settled (sparsely populated regions) and bad extractive institutions in the rich/populated areas.
16
Q
What are institutions?
A
The rules of the game. Humanly devised constraints that structure human interactions. It can for example b eproperty rights, the form of government, labor institutions, taxation, market regulations, legal system etc.
They shape incentives!
17
Q
Two problems with institutions:
A
- Conceptual problem - the definition is very ambiguous.
- Methodological problem - they are endogenous to economic growth. -This problem means that when you plot institutions and GDP in a diagram, you will find a correlation, but what about the causation? It goes both ways and we cannot know which one is the first one affecting the other.
18
Q
Four views of institutions:
A
- the efficient insitutions view
- the ideology view
- the incidental institutions view
- the social coflict view
19
Q
The social conflict view
A
The economic and political institutions are not always chosen by the entire society (neither for the best of them), but by and for the groups controlling the political power. Looking to maximize their rents.
20
Q
De facto vs de jure political power:
A
De jure is the people having the governmental power according to the documents. In contrast, the facto is the ones having political power thanks to their control over economic resources and their capacity to solve the collective action problem.
21
Q
The commitment problem
A
This is the problem that make dictatorship persistent = why it is hard to change into a democracy. Even if the profits of the dictator will increase in absolute terms if they change into a democracy, they loose the power and this is threatening them.
22
Q
Which of the ‘Economic performance’ and ‘Distribution of resources’ is the most crucial to change for achieving a democratic ruling?
A
Distribution of resources. If you change the economic institutions, only the economic performance will change, but the distribution of resources wills till go to the facto political power/elite. So we have to change the distribution to break the cycle and persistency.
23
Q
Can we just tell bad institutions’ states to implement better ones?
A
No, because as we have learned now, we have two problems: the first one is the commitment problem where it is hard to make a reliable commitment to the leaders and therefore they will not change into a democratic ruling. And the second is that we have to change the distribution of resources to break the cycle - this can be made if the de jure politicians become rich and the poor can solve the collective action problem.
24
Q
Example of how the insitutions matter for the rise of Europe?
A
Clear when looking at England vs France/Spain. Eng and its glorious revolution made a big institutional change. Now better government who raised the public spending, secured the property rights, crown less to say, predictability of the government and falling interest rates –> incentives to invest etc.
25
How can the colonization . play a role when explaining underdevelopment by institutions?
Because it is a clear actual experiment where ENG and FR implemented different institutions in different countries and the outcomes are obviously also different.
26
Two fundamental parts of the colonization theory:
1. Identity of colonizers - Eng vs Fr implemented different institutions.
2. Condition in the colonies - the settler mortality plays a huge role and also the resources.
27
How is the identity of colonizers affecting the development?
The origins of the settlers will affect the type of institutions implemented. For example the legal system that the GBR vs FR settler brought with them was critical for the growth. The British common law was much more efficient and more secure system than the French civil law. So investors were more likely to invest in the british colonies --> better economic performance.
28
Conditions in the colonies affect the development, how? (settler mortality)
Settler mortality --> settlements --> early institutions --> current institutions --> current performance. If high mortality, less will be settled and then the institutions implemented will probably only protect the few settlers, not the majority, expropriative institutions....not good. But if a lot settlers come, the institutions will more likely benefit the majority - better!
29
The conditions concerning the resources, how can it affect economic development?
The resources when it comes to the types of factor endowments you have will affect the economic performance. Two different types:
1. Plantation crops (sugar)
2. No plantation crops (wheat)
The plantation crop farms were much more efficient so to use the economies of scale the incentives to expand was big --> slavery --> inequality --> poor.
This created a reversal of fortune between the north and south america.
30
What is culture?
Beliefs, preferences, values and rules of thumb which helps us behave and make decisions without thinking much.
31
How can culture be measured? (3)
1. Survey data - ask people what they think is important when raising a child.
2. Second-generation immigrants: you survey only these people. bc their behaviour cannot have changed due to institutions, only culture. Diff from the domestic population.
3. Experimental evidence: ultimatum game for ex. Create lab or real life situations and see how people put different values to different things such as fairness. (critics: external validity).
32
Most studied trait:
Trust. Correlates with economic development, individual performance, financial development, participation in stock market, trade, producitivut, innovation etc..... So it is a very good trait to study.
33
Individualism vs collectivism:
Individualism correlates positively with economic performance and it puts emphasis on personal achievements and the right to choose own affiliations rather than focusing on lifelong groups.
34
How can the family ties affect the economic performance?
Having very strong family ties will often mean that you promote good conduct within your small circle but consider selfish behaviour acceptable outside this network. This in turn, will lead to lower trust on external people and hence a lower growth.
35
Generalized morality:
Related to family ties - you should behave in a good way no matter who you are interacting with, same code of conduct to everyone. Better performance if behaving good to all people.
36
Attitudes toward success: how can this affect economic outcome?
If you think that hard work pays off vs if you think that luck/destiny is the determinant of success --> big differences. Ex in Us the beliefs are that hard work is the key, that everyone can reach success if putting enough effort into it.
37
What is the problem with trying to determine the factors affecting economic growth?
That culture and institutions have a two way causal relationship. They are in many aspects the same thing, for ex "humanly devised constraint" is both institutions and culture. We need better definitions!
38
How can we solve the problem with institutions and culture being the same thing?
We can limit the institutions to only contain formal institutions and culture being the values and beliefs forming the informal institutions.
39
Ex of how institutions can affect culture:
For example the earlier slavery-institutions have affected the people to be very suspicious, not trusting other people. WHich in turn lead to lower economic growth.
40
Ex of how culture shapes institutions: famous example Greif
Study that showed how the agency problem culd be dealt with in diff ways:
1. In the individualist society, the trader hired any agent and developed formal codes and business organization.
2. In the collectivist society, the trader only hired those who had never cheated before, and therefore didn't established any formal institutions.
41
How is culture and formal institutions interacting?
For example through the perception of being a cooperative player or not: If there are many cooperative players, the returns to cooperation will rise, hence the parents will teach their children coop. Additionally, well-functioning legal inst. can facilitate this + less strain on the judicial system so also that inst. will work better.
42
Weber's theory of culture affecting economic growth:
He thought that the protestant reformation made people more protestantic and therefore also better work ethics (that he argued they had). This would in turn accumulate more wealth. BUT data can't find relation to higher income/growth, only to the ethics.
43
If not ethics can be linked to income, what other factor has been proved to have this relation?
Literacy! As the protestants believe in literacy and that every human should be able to read the Gospel for himself, more people learned how to read. And this investment in human capital is then increasing income.
44
Can we explain the low growth in Africa by just one factor?
NO. It is the interaction between all three factors that are needed to explain it. The slavery itself was an institutions that came to Africa due to its geography and the fact that the low trust etc is persistent even after the abolish of the slavery is due to the culture. So all are interacting.
45
Golden Age, three difficulties to deal with:
1. The Great depression still had impact on the society.
2. The WW2 just ended and big reconstructions were needed. Many people have died.
3. The Cold War was happening. Tensions between capitalists and communists.
46
Why Golden age specific for Europe?
All growth rates in the world were positive but the growth in Europe was very specific for this point in time, didn't persist after and was the highest ever experienced in Europe.
47
What about the catching up opportunities during the golden age?
The US had much better tech and larger capital stock. So when the destroyed Europe started to adopt their tech, the growth was rapid and we gained a lot by adopting - we didänt need to invest in R&D and we didn't needed to do the mistakes that US already had made.
48
But why could Europe gain from catch-up and not Africa for example?
Because we had the prerequisities needed: appropriate institutions, conditions encouraging investments, abundance of L etc.
49
The labour supply hypothesis:
Another explanatory factor to why golden age took place: the labour supply were abundant and inefficient in the agrarian sector, so when labor could move to the industry the total output increased. This movement will smooth out the wage differences between the sectors.
50
Which two main factors do we mean when we say that the role of institutions were critical for the golden age?
We mean the wage moderation which was possible thanks to the social pact, and also the export growth which was enabled though BW and GAtt for example.
51
Describe the wage moderation:
Wages was kept lower than the corresponding production. So the production increased while the wages were kept low. This was possible due to the social pact where the people agreed on low W in exchange for the companies promising to invest the surplus.
52
What if we were closed economies at this time of the golden age?
The economies demand will be fully determined by the internal/domestic market, which is often very inefficient because the country can then not focus in their comparative advantages. By having this openness, the exports stimulated growth.
53
The prisoner's dilemma that arose with the wage moderation:
Once the wage restriction had occured, investors might have an incentive to pay themselves the resulting profits instead of reinvesting them, leaving workers no reason to restraint their wages and vice versa.
54
Institutions/rules solving this wage moderation dilemma?
Wage bargaining, union representatives in company boards and conditional access to government programs.
55
How did the institutions during the Golden Age affect the inequalities?
They reduced. The new social contract included welfare state ( high taxes but bigger public spending and access to the welfare), regulations and neo-corporatist industrial relations.
56
How did GATT promote trade/export?
Through its free trade policies. When countries could be sure that the openness and free trade will last, they could invest in the export sector and make it grow. (If not GATT established --> no investment in export sectors because scared that tariffs were to be put on the trade).
GATT promoted trade and treated all countries equal, not favouring anyone.
57
3 main characteristics of BW system?
1. FEX - the dollar was fixed to gold at fixed rate and other currencies were pegged to dollar.
2. IMF could finance temporary foreign deficits.
3. Capital controls when necessary.
58
What was the trilemma?
The three main characteristics that a monetary system want to achieve, but in fact you can only have two of them.
So in the gold standard you had FEX + free capital movements, but then changed into BW with FEX and independent monetary policy. Now needed to restrict the capital movements so they did not put pressure on the rate.
59
The last factor explaining golden age: the role of demand:
The demand increased in both the private and public sector due to higher real wages (wages increased relatively more than the inflation) and the new role of governments (welfare state).
60
Which are the five causes for the stagflation period?
1. No catch-up anymore
2. No structural change - labor supply efficiently located.
3. Social pact broken.
4. Collapse of BW
5. The oil crises.
61
Stagflation =
High inflation and low growth - stagnation.
62
The problem with Phillips curve in the stagflation period?
That the relationship described by the curve didn't held. It says that you can choose between high inflation/low unemployment or low inflation/high unemployment... But now we had both high inflation and high unemployment.... So if we tried to lower the unemployment, the inflation will increase even more...
63
Why the social pact could be broken down?
Because the workers were efficiently employed and the employment was high at the end of the Golden Age - so the workers had mush say and power. Strikes and protests increased and they demanded higher wages. Social pact broken and they got higher wages.
64
Why was it a problem that the BW system fell?
Because it was the anchor against inflationary speculations - people demanded higher wages because they wanted to get compensated for the inflation risk and expectations of higher inflation.
65
Problem with higher wages?
Higher wages, that increases in real terms (when wages increases more than production/prices) will cause higher inflation.
66
Triffin Dilemma:
The use of dollar as the reserve currency was attractive only as long as there was no question about its convertibility to gold. But as the gold reserves decreased and the US' foreign liabilities increased, the convertibility became questioned.
67
The oil crisis:
It was another factor explaining the stagflation, the oil crisis started in 1973 when OPEC stopped their exports and raised the oil price massively. This was then transmitted into the real economy - high inflation caused lower consumption, fewer investments, increased unemployment etc...
68
First response to the stagflation?
The most CB's used expansionary policy where they lowered the i and invested in public spending to focus on the employment. They argued that the price increase might be temporary and will go back by itself.
69
The second oil crisis and changes in economic policies:
After the second oil crisis, inflation accelerated sharply. Now countries changed their strategies - prioritized the inflation target. Price stabilization was the main goal.
70
Consequences of the new policies? Short run
Falling prices, rising unemployment (which they accepted) and stagnation in output.
71
Consequence of the new policies? Long run
Economic growth resumed, but disappointing figures of unemployment, real wages and income inequalities...
72
Inflation and unemployment today:
Because of these policies implemented back in 1980's, we have arrived at a situation where the unemployment equilibrium is higher (structural change) about the inflation rate is much more controlled and stabilized around the world.
73
The worst outcome of the policies after the stagnation?
That income inequalities increased and are still high today. It is a bad situation for all economies, no country will be better off by having these inequalities...
74
Deregulation and globalization era took place...
...Between 1985-2007. It was the second globalization as there had already begun one in the beginnin gof 20th century but got interrupted by the WW2. Now it took off again.
75
Three signs of that international trade increased?
1. The spread of the industry outside the western world.
2. The process of vertical disintegration (offshoring) nd intermediate products.
3. The growth of trade in services.
76
What explains globalization? (causes)
1. Technological change - transport and communication costs reduced due to ex larger ships, containerization etc.
2. Elimination of barriers to economic relations - ex the fall of Souvjet, Marshall plan, liberalization of China etc.
77
The main benefit and the main drawback of the globalization?
Positive that underdeveloped countries could imitate and adopt the richer countries' tech and grow from catch up at a larger extent. The drawback was that inequalities increased as trade grew.
78
Did all countries grew in the era of globalization?
No, the relationship is mainly for the open economies. These will grow from the catch-up effects, no such relationship for closed economies.
79
How did the globalization affect financial crises?
They became more frequent and larger as the removal of financial controls made countries integrate their capital flows and economies.
80
If there were no globalization/trade, would the skilled labour still gain?
No, the skilled labour gain only because of the specialization. The country specialize in the sector with the comparative advantages and those skilled labour will gain. Without trade, they wouldn't be able to specialize.
81
Key factor causing the financial crisis 2008?
Housing bubble! The prices of the houses where much higher than the actual value of the asset.
82
How did the housing bubble became created? (3)
1. Subprime loans - the banks loaned to very risky people. --> Demand for houses increased --> prices increased.
2. Securitization - The subprime mortgages where then pooled together and sold at the highest ranking due to insurances and spreading risk and manipulation of the rating.
3. Shadow banking - financial intermediaries acting in the market without the same regulation/supervision.
83
How did the crisis transmit into the real economy?
As interest rates started to increase, the house prices fell and the housing bubble burst. This affected people and banks negative as the value of their assets declined.
- -> Banks afraid to give loans because risk of default --> higher interest rates
- -> Credit crunch - no one got a loan.
- -> The economy stagnates, employment increases etc.
Also the Lehman Brothers went bankrupt which affected people, other banks and the society as a whole.
84
Three main causes of the great recession:
1. Economic policy - deregulation and liberalization of financial markets + low interest rates.
2. Global external imbalances - the emerging economies in Asia made trade surplus while US made deficit, which it had to finance through foreign savings. The capital inflow from asia lowered the i --> this reinforced the housing bubble.
3. Market and government failures - many failures before the crisis, for ex us tried to encourage wider homeownership which entitled all americans to get a mortgage loan... The wrong rating from the credit rating agencies. The banks manage their risk inappropriate due to lack of supervision and regulation from the state...
85
Is the European integration something new and modern?
No, there are traces from these kind of agreements far back in history, ex linked to the christian religion.
86
What happened in 1944 and 1949 concerning the EU?
In 1944, the proposal of a Federal Union of Europe was made and later in 1949 the establishment of the Council of Europe took place.
87
Marshall Plan
An aid-plan from the U.S to help Europe recover from the big damages.
88
Was the Marshall Plan enough?
No, it only contributed with around 0.5 points of growth but it changed the environment in which European politics was made. Gave the governments space to steer the countries without external controls and the reforms agreed in the Marshall plan made the EU-countries liberlize.
89
OEEC
Organisation for European Economic Co-operation, that was implemented 1948 to organise the Marshall plan. This became an important starting point.
90
Schuman Declration
1950, Schuman declared that European integration must and will be built sequentially and that the French-German relationship must improve and suggested that they should share the same authority when it comes to the production of coal and steel.
91
ECSC
European Coal and Steel Community was established 1952.
92
Treaty of Rome
Also called the Treaty on the Functioning of the EU. Built the EEC with the six founding countries = Fr, Ger, It, Belg, Ntl and Lux.
93
The seven enlargements of the EEC and later in 1995 EU:
1. 1973: UK, Ireland and Denmark.
2. 1981: Greece
3. 1986: Sp and Port
4. 1995: Austria, Swe and Finland.
5. 2004: Pol, Hung, CZ, Slvk, Slvn, Est, Latv, Lith, Cyp and Malta.
6. 2007: Rom + Bulg
7. 2013: Croatia.
94
Mention some of the activities done for more european integration:
- 1979 the first direct elections to the EP
- 1986 European Single Act that paved the way for the single market
- 1992 The single market becomes reality, internal barriers abolished.
95
Maastricht Treaty
Treaty in on the EU - increasing power for EP, common foreign and security policies, European citizenship.
96
When was ECB established?
1994
97
1998 convergence criteria was set, the critera for be allowed to adopt the euro, mention them (5)
Low inflation, low interest rates, no exchange rate adjustments, low budget deficits, low public debt.
98
Which countries have chosen no to adopt the euro?
UK, Swe and Den.
99
1998 Stability and Growth Pact
This set out limits for the public finances:
- Deficit 3%
- Debt 60%
100
When started euro circulating?
2002. .
101
Lisbon Treaty
An amending treaty 2009 that changed the way that the EU works.
102
The 3 main institutions in the EU:
* The European commission (promoting the interest of the EU) that proposes legislation
* EP (directly elected by the member states and represents the interest of the EU as a whole) that together with...
* Council of the EU (ministers in 10 configurations) adopt the laws.
103
How is Latin America's economy w/r to the world economy?
It is the average. They have 7% of GDP and population of 8%. So very close.
104
Main countries contributing to the GDP in LA?
Four countries: Brazil, Mexico,Argentina and Colombia. Together they have 60% of tot GDP in LA. Large differences in the distribution of the wealth and development.
105
The growth trend in LA?
It has a positive trend but has decreased since the 1980s. Now only around 1%...
106
The "new" ISI strategy?
ISI stands for import substitution and industrialisation and the policies are for ex:
- protectionism (imports more expensive)
- state-led enterprises
- Subsidies/loans to industries to promote their growth
- invest in infrastructure.
In short, they want to replace imports with domestic production.
107
What is the main problem with the economy of LA?
That they are highly dependent on the prices of raw material and commodities... Correlate strongly with these prices and hence their performance will be good when the prices are high and bad when the prices are low...
108
How did the stagflation period affect LA?
They stagnated as well and became very indebted. Foreign debt crisis due to macroeconomic imbalances generated during ISI, abundance of cheap credit, second oil shock and increase in international interest rates...
109
Consequences of the debt crisis:
- Debt restructuring plans and structural adjustment programs (they were unable to pay back their foreign debts to ex SWE due to very high international rates...)
- Liberalization: more market, less state.
110
LA's development since early 2000?
As China started to grow, their demand also grows ---> prices of commodities increases and hence the LA economy grows.
111
Terms of trade
TOT is the measure of the relative price of exports in terms of imports. This is very important measure for the LA economy as their development is conditional on the prices of their export goods.
112
The three convergence hypothesis?
1. Convergence hypothesis - predicts that all countries will convergence in the long run, but we aren't. So it does not hold.
2. Conditional convergence - that looks att similar countries suggesting that these converge among them - like a club. But it doesn't hold either.
3. New convergence theory (that also explains the divergence we see today) - focusing on the investment and innovation and says that those countries investing most in R+D will grow.
113
Africa's contribution to world GDP and its population?
It has 14% of the world population but contributes only with 3% of the world GDP.
114
Which two countries account for 45% of the economy in Africa?
Nigeria and South Africa.
115
When did Africa start falling behind?
From the beginning it had the same level as the ROW but in year 1000 the started falling behind, so it is a long time ago. Before the slave trade and colonization and everything.
116
Were the African institutions good before the slave trade?
No, they were better but still not good enough for growth. They had domestic slavery, limitations on private enterprises and very little tech...
117
Effects of the slave trade on Africa:
1. Demographic impact: population would have been doubled in 19th century.
2. Switch from productive to non-productive activities.
3. Increased ethnic fragmentation.
4. Political instability and collapse of states.
118
Three views on the effect of colonial rule in Africa:
1. No effect: too short
2. Positive effect: end of slavery, reduced intra-African warfare, modern legal systems, public goods increased.
3. Negative effect: arbitrary borders, undemocratic institutions, extractive institutions.
119
Three kind of colonies:
1. Settler colonies - land
2. Concession colonies - labor
3. Peasant colonies - trade
120
The problem with the African institutions?
That they lack political centralization/state capacity and that they are absolutist and patrimonial. --> ind. do not invest bc of fear of expropriation and the governments are unable/unwilling to provide public goods.
121
Growth in Africa nowadays?
Better! Not declining relative to the ROW anymore, something positive has happened.
122
Does the bad institutions explain both the LR/SR performance of Africa?
No, only the long run situation where Africa is far below the ROW but not the short run fluctuations. These fluctuations are better explained by the prices of the agricultural goods/their exports.
123
Who has de facto political power in Africa?
The colonial government that is now the post-colonial elite. The ones with the money and resources. This will not change if can't change the distribution of resources in the countries. Need external shocks to change the sitution
124
Marketing boards
An example of the persistency of bad instituions - these forced farmers to sell their production at fixed prices and had a good intention of stabilizing the prices. But the outcome was that the colonial state got a source of revenue (which they did not give back in form of public goods...) and these maintained by post-colonial governments... It is inefficient and anticompetitive. Persistance bc the elite is the ones gaining...
125
Inequalities in Africa:
GNI has declined since 1980's so hopefully the institutions are becoming better at distributing the resources more evenly.
