Transcript Development Economics

Development Economics
VII
Prof. Dr. Hans H. Bass
Jacobs University, Spring 2010
Development Economics
Agenda March 18
III. Production and Sector Issues
1.
2.
Saving and Investment*
1.1 Saving
1.1.1 Taxonomy
1.1.2 Stylized facts of saving in a cross-country comparison
1.1.3 Theoretical approaches to explain saving behavior
1.2 Investment
Primary Production: Agriculture (and Minerals)
*) Source: Perkins/ Radelet / Lindauer 2006, pp. 365-428
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1.1 Saving
Taxonomy
Sacrifice consumption from current income to provide resources
necessary for investment for future gain
= SAVING:
1.
1.1
1.2
1.3
2.
2.1
2.2
Domestic saving
(averages.: 20 % of GDP in LICs, 27 % in LMICs, 20 % in UMICs + HICs)
Private domestic saving (from individuals / households):
formal savings institutions or by purchasing investment goods (jewelry,
livestock, building materials ...)
From corporations (<3 % of GDP in HICs, very small in LICs/MICs)
From government (<2% of GDP in LICs – 10 % in HICs)
Foreign saving (< 2 % of GDP in LICs/MICs)
Official development assistance (ODA)
Private (external commercial borrowing and equity finance)
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1.1 Saving
Taxonomy
1. Domestic saving
1.1 Private domestic saving
(until recently neglected in development policy)
1.2 From corporations
1.3 From government
(until recently focused in development policy)
Government revenues from taxes and tariffs = Government consumption
(all current expenditures such as salaries, subsidies, maintenance costs,
interest payments plus outlays for military hardware) + Government
saving (to finance public investment)
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1.1 Saving
1.
2.
3.
Stylized facts
of household saving
Within a particular country, higher-income households tend
to save larger fractions of their income than lower-income
households;
Within a particular country, household saving ratios tend to
be roughly constant, more so in HICs than in LICs;
Across countries, household saving ratios vary with no clear
relationship to income.
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1.1 Saving
Household saving
Reasons for household saving:
1. to generate higher future income by saving and investing
2. to protect themselves from the risk of unexpected falls in
income in the future (drought, livestock diseases ...)
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1.1 Saving
1.
2.
3.
4.
Explanations
of household saving
Absolute-income hypothesis (Keynes)
Relative-income hypothesis (Duesenberry)
Permanent-income hypothesis (Friedman)
Life-cycle hypothesis (Modigliani)
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1.1 Saving

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
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
Absolute-income
hypothesis (Keynes)
Autonomous consumption Ca
constant marginal saving rate s
S = – Ca + s Yd
Increasing disposal income results in an increasing average
saving rate S/Yd
Only very weak empirical support (only for very short term)
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1.1 Saving
Relative-income
hypothesis (Duesenberry)
Two time lines:
1. Short term: consumers adjust their savings up or down with
little change in consumption
2. Medium term: consumers adjust their consumption but
maintain a basic share of previous high level of
consumption regardless of their current level of income
(“ratchet effect”).
In DCs a “demonstration effect” (Nurkse) operates to cause
consumption to ratchet upward as incomes grow
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1.1 Saving
Permanent-income
hypothesis (Friedman)
Two components of income:
1. permanent income (i.e. stable over time)
2. transitory income (i.e. non-recurring income)
S = - Ca + sp Yp+ st Yt
extreme version: sp = 0, st = 1  no empirical support
less extreme version: 0 < sp < st < 1  some empirical support

in DCs: Saving is a method of smoothing consumption in the
face of volatile income! (Saving reason # 2)
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1.1 Saving

Life-cycle hypothesis
(Modigliani)
Household income-expenditure life-cycle:
young age: low income, high expenditures  de-saving or
low saving ratio
middle age: high income, decreasing expenditures  high
saving
old age: lower income, rising expenditures  de-saving
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1.1 Saving

Life-cycle hypothesis
(Modigliani)
Demographic life cycle:
LICs: pre-transition stage = high young-age dependency per
worker
 low saving rates
MICs: demographic transition stage = low young-age
dependency per worker
 higher saving rates
HICs: post-transition stage = high old-age dependency per
worker
 low saving rates
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1.1 Saving
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Other determinants
Population distribution:
rural households have a higher savings ratio than urban
households (precautionary saving: farmers’ incomes more
variable than those of urban wage earners)
(lack of) access to formal credit and insurance markets:
over-saving on the household level, such as necessity to
accumulate a large share of saving in advance of opening a
business or purchasing a house
culture-specific attitudes to thrift and consumption
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Development Economics
Agenda March 18
III. Production and Sector Issues
1.
2.
Saving and Investment*
1.1 Saving
1.2 Investment
1.2.1 Public Investment
1.2.2 Private Investment
Primary Production: Agriculture (and Minerals)
*) Source: Perkins/ Radelet / Lindauer 2006, pp. 365-428
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1.2 Investment
1.
2.
Public and private
investment
Public investment
- if too large for individual private investors
- if positive externalities
(public goods: no exclusion from consumption possible and
marginal costs near zero (non-rivalry); example lighthouse)
- if generation of economic resources > costs
- if greater return than all of the other available options
- financed by taxes, fees, or new (PPP) finance methods
Private investment
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1.2 Investment
Public and private
investment
2. Private investment
especially catching-up processes need both high levels of
private investment and more-productive investment
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1.2 Investment
Public and private
investment
Governments can encourage private investment by:
 reducing risks of high rates of inflation, volatile exchange
rates, recurring financial crises ... (“macroeconomic stability”)
 providing reliable transport and communication infrastructure
 making imported inputs readily available (opening up the
economy) (danger: import competition!)
 providing internal security
 lowering institutional costs of doing business
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1.2 Investment
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Costs to start a business
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1.2 Investment
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Reducing
costs of doing business
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1.2 Investment
„The Mystery of Capital“
H. de Soto: the poor in DCs have substantial assets that they are
unable to use to leverage investment because of weak
institutions and inadequate rules and procedures
(example: no land titles  no collateral)
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Development Economics
Agenda March 18
III. Production and Sector Issues
1.
2.
Saving and Investment
Primary Production: Agriculture (and Minerals)
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2. Primary Production
The historical experience of
agricultural transformation in
Europe: Stylized facts
(1) Increases in labor productivity in agriculture (agricultural
revolution often preceding an industrial revolution)
(2) Transformation from subsistence production to market
production increases urban domestic consumption or
exports (lower urban wages, more forex)
(3) Rural laborers becoming redundant, farmers accumulate
capital  both transferred to industry (“factor effect”)
(4) Rural population absorbs industrial products (“market
effect”)
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2. Primary Production
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Declining share of agriculture in
labor force and GDP in today‘s
DCs, but exceptions
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2. Primary Production
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Cereal Yields 1960-2005
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2. Primary Production
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
Reasons for the neglect of
agriculture in early
development strategies
Early development economists (e.g. Lewis): agricultural
innovations retarding capital accumulation in the modern
sector by rising the supply price of labor – agriculture as the
“handmaiden of an industrial push”
 at best: passive, supporting role
technology pessimism: science-based, input-intensive
agriculture (HYV) scale-neutral; allegedly slow
dissemination of innovations
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2. Primary Production
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Reasons for the neglect of
agriculture in early
development strategies
domestic demand pessimism: low income elasticity of
demand for food (Engel’s Law) in addition to low price
elasticity of demand
trade pessimism (Prebish-Singer Hypothesis)
linkage pessimism: agriculture an unlikely growth pole
institutional pessimism: too powerful landowners
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2. Primary Production
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Towards a new sector strategy
a shrinking agricultural sector supplying a growing industrial
sector needs innovations in agriculture!
scale-neutrality of agricultural innovations is a strength 
egalitarian growth!
income elasticity of demand for grain rises (low income
levels: more varieties, middle income levels: meat)
linkage pessimism factually unjustified (Irma Adelman)
institutional reforms needed towards owner-operated,
medium size farming
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2. Primary Production
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”Integrated rural development”
or...
accelerated output growth through technological,
institutional, and price incentive changes designed to raise
the productivity of family farms
rising domestic demand for agricultural output derived from
an employment-oriented urban development strategy
diversified, non-agricultural, labor-intensive rural
development activities
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2. Primary Production
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... Agricultural-demand led
industrialization strategy (ADLI)
Improve productivity of food-agriculture on small/medium
farms,
invest in agricultural infrastructure,
disseminate appropriate technology, and
generate induced demand for industrial output through
increased demand for industrial inputs and consumption of
manufactures by farmers
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