ECON 441: Development Economic Theory

Instructor: Khalid Mir

Office: Room: 252
E-mail: kmir@lums.edu.pk
Office Hours: Friday: 10.00-12:00.
Lecture: MW: 2.30- 4.10

Course Objectives:

To develop an understanding of the role of formal and informal institutions in

the development process as well an appreciation of the inter-linkages between
different markets.

Evaluation:

Five Quizzes (unannounced): 50%

Final Examination: 50%

Reading:

The core reading for this course will be Debraj Ray’s Development Economics,
Princeton University Press, 1998 (henceforth “Ray” in the course outline).
However, in addition, a number of journal articles are required reading.
Articles marked with an asterisk are optional.
1. What is Development? Issues and Concepts

An overview of some of the central concepts, perspectives, and issues. Development

in an historical context: theories and trends; Development strategies; Principal-agent
theory.

Reading:

Besley, T. and T. Persson, (2013). Taxation and Development, CEPR Discussion Paper
9307, C.E.P.R. Discussion Papers pp. 1-16.

Besley, T. and T. Persson, (2013). Pillars of Prosperity: The Political Economics of

Development Clusters, chapter 1.

Easterly, W. (2001). The Political Economy of Growth without Development: A Case

Study of Pakistan, in In Search of Prosperity: Analytical Narratives on Economic Growth,
ed. D. Rodrik.

Mullainathan, S. (2004). Development Economics Through the Lens of Psychology,

Working Paper 28974, World Bank.

Qizilbash, M, (1996). Ethical Development, World Development, 24

Ray,D., Chapters 1&2

Ray, D. (2000), What’s New in Development Economics?, The American Economist,

vol. 44, no. 2

*Stiglitz, J, (1998). Towards a New Paradigm for Development: Strategies, Policies,

and Processes, 1998 Prebisch Lecture at UNCTAD.

Sen, A. (2009), The Idea of Justice, Allen Lane, Chapters 11-13.

For an overview of how thinking on development has changed over time you may
consult:

*Sen, A, (1983) Development: Which Way Now?, The Economic Journal,93

*Sen, A, (2000). Development as Freedom, Anchor Press

 2. Markets in Agriculture: Land

An overview of the relation between markets (land, labour, credit). Land distribution
and tenancy contracts. Agricultural productivity, class structure, and farm size. Land
Reform.

Reading:

Basu, K. (1986), One Kind of Power, Oxford Economic Papers, 38, 2.

Eswaran, M. and A. Kotwal, (1986). Access to Capital and Agrarian Production

Organization, Economic Journal, 96.

Hallagan, W (1978). Self-Selection by Contractual Choice and the Theory of

Sharecropping, The Bell Journal of Economics, 9,2.

Ray, D. Chapters 11 & 12.

For an interesting insight into land relations and inter-linkages see:

*Hobsbawm, E, (1996). ‘Land,’ in The Age of Revolution, Vintage Books.

*Baverman, A. and J. Stiglitz (1982). Sharecropping and the Interlinking of

Agrarian Markets, The American Economic Review, 72,4.

On land reform, see:

*Besley, T. and R. Burgess, (2000). Land Reform, Poverty Reduction, and Growth:
Evidence From India, The Quarterly Journal of Economics, 115,2.

*Mahmood, M, (1999). ‘Reforming the Agrarian Land Market’ in Strategic

Reforms for Agricultural Growth in Pakistan, ed. Faruqee, R, WBI Learning
Resources Series,World Bank, Washington.

3. Poverty, Undernutrition, and Labour Markets

Poverty: concepts, extent and measurement. One aspect of poverty is the lack of food.
We look at this in relation to the functioning of the labour market, and in the extreme
cases of social breakdown: famine.

Reading:

Banerjee, A. and E. Duflo (2007). The Economic Lives of the Poor, Journal of
Economic Perspectives, 21,1.

*Besley, T and R. Burgess (2003). Halving Global Poverty, Journal of Economic

Perspectives,17, 3

Bose, G (1997). Nutritional Efficiency: A Policy Framework, Journal of Development

Economics, 54.

Dasgupta, P, (1997). The Economics of Food, The Development Economics Research

Programme, no.4, STICERD, The London School of Economics.

Hussein, A., (2003), National Human

Development Report: Poverty, Growth and Governance, chapter 3

Ray, D, Chapters 8 & 13.

Sen, A (1981). Ingredients of Famine Analysis: Availability and Entitlements,

Quarterly Journal of Economics, 95.

Sen, A. (1997), “Family and Food: Sex Bias in Poverty” in Resources, Values,
and Development, Harvard University Press.

“Repositioning Nutrition as Central to Development”, World Bank (2006),

Overview and chapter 1:
http://siteresources.worldbank.org/NUTRITION/Resources/281846-
1131636806329/NutritionStrategy.pdf

Students interested in some of the political issues raised with regard to famine can see:

*Davis, M, (2001), Late Victorian holocaust: El Nino Famines and the Making of the
Third World, Verso, London.

*De Waal, A, (2000) Democratic Political Process and the Fight Against Famine,
IDS, Working Paper 107
 4. Credit Markets and Insurance

Why credit markets are important and why there can be credit rationing. We
look at a simple example of the relation between credit and human capital
investment/child labour. Informal insurance arrangements and enforcement.
Informal credit arrangements and credit as insurance.

Reading:

On child labour:

Basu, K. and P.Van (1998), The Economics of Child Labour, American Economic Review,
88.

*Cigno, A and F. C. Rosati, (2005) “The Supply of Child Labour” in The Economics of Child
Labour, Oxford: OUP.

Lahiri, S and S. Jafarey (2001), Child Labour: Theory, Policy, and Evidence.
World Economics, volume 2.

Lahiri, S and S. Jafarey (1999). Will Trade Sanctions Reduce Child Labour? The
Role of Credit Markets, Discussion Paper Series, No. 500, University of Essex.

On credit markets and rationing:

Ray, D. Chapter 14.

*Stiglitz, J and A. Weiss (1981). Credit Rationing in Markets with Asymmetric

Information, American Economic Review, 71.

On Insurance:

Coate, S and M. Ravallion, (1993). Reciprocity Without Commitment.

Characterization and Performance of Informal Insurance Arrangements,
Journal of Development Economics,40.

*Platteau, J-P., (1997), Mutual insurance as an Elusive Concept in

Traditional Rural Communities, The Journal of Development Studies, 33,6.

Ray, D. Chapter 15.

On informal credit and credit as insurance:

Irfan, A, (1993). ‘Imperfect Information, Screening, and the Costs of Informal

Lending: A Study of a Rural Credit Market in Pakistan’, The Economy of Rural
Organization: Theory, Practice, and Policy, edited by, Hoff, K., A. Baverman,
and J. Stiglitz, World Bank, Washington.

*Morduch, J, (1999). The Microfinance Promise, Journal of Economic Literature,

37, 4.

*Munshi, K, and M. Rosenzweig, (2005). Why is Mobility in India so Low? Social

Insurance, Inequality, and Growth, CID Working Paper, No. 121

*Udry, C, (1991). Credit Markets in Northern Nigeria. Credit as Insurance in a

Rural Economy, World Bank Economic Review, 4,

5. Economic Inequality and Development

A recurrent theme in this course is the role of history (land organization (2);
entrenched poverty (3); dynamic insurance (4); colonialism and institutions
(7)). Here, we look at the persistence of inequalities and the role of human capital
and credit markets in generating them.

Reading:

*Aghion, P and P. Bolton, (1997). A Theory of Trickle-Down Growth and

Development, Review of Economic Studies, 64

Banerjee, A.V., and A.F. Newman, (1993). Occupational Choice and the Process
Of Development, The Journal of Political Economy,101, 21.

Birdsall, N., (2005), “The World is Not Flat: Inequality and Injustice
in Our Global Economy,” World Institute for Development Economics Research
Annual Lecture 9.

Galor, O, and J. Zeira, (1993). Income Distribution and Macroeconomics, The

Review of Economic Studies, 60, 1

Atkinson, A., T. Piketty, (2013), The Top 1 Percent in International and Historical
Perspective, NBER Working Paper, 19075
 Ray, D. Chapters 6 & 7.
World Bank Development Report (2006).

Students interested in the way in which slight inequalities can generate long-term
divergences (in the presence of increasing returns) can see:

Krugman, P, (1994) ‘Trade, Accumulation and Uneven Development’ in

Rethinking International Trade, MIT Press.

6. Social Capital and Development

What is social capital? Why are social networks (informal, non-market institutions)
important? We look at how networks can help solve the enforceability problem but
also at the costs of social networks, first in a dual economy setting, then in the context
of a labour market.

Reading:

Banerjee, A.V, and A.F. Newman, (1998). Information, the Dual Economy,
and Development, Review of Economic Studies, 65, 4.

Basu, K., (2009), Altruism, Other-Regarding Behaviour and Identity: The Moral
Basis of Prosperity and Oppression, CAE Working Paper, no. 09-06

*Coleman, J, (1988). Social Capital in the Creation of Human Capital, American

Journal of Sociology, 83, 3

*Durlauf, S.N., and M. Fafchamps, (2004). Social Capital, NBER Working Paper,No.
10485

Greif, A, (1993). Contract Enforceability and Economic Institutions in Early

Trade: The Maghribi Traders’ Coalition, American Economic Review, 83, 3.

*Munshi, K and M. Rosenzweig (2003). Traditional Institutions Meet the Modern

World: Caste, Gender, and Schooling Choice in a Globalizing Economy, MIT
Department of Economics Working Paper, No. 03-23.

Platteau, J.P. (1991), ‘Traditional Systems of Social Security and Hunger Insurance:
Past Achievements and Modern Challenges’ in E. Ahmad, J. Dreze, J. Hills and
A. Sen (eds.), Social Security in Developing Countries, Clarendon Press, Oxford.
 7. History, Power, and Institutions

How important has power been in the shaping of the history of institutional
development (and thereby growth)? We look at the power question in relation to
Africa. Which institutions, then, lead to development, and why might they be
“blocked” ? We then turn to two examples where history plays a role in
development paths via expectations. Finally, we look at the relation between power
and development through the lens of corruption.

Reading:

*Acemoglu, D, S.Johnson and J. Robinson(2004). Institutions as the Fundamental

Cause of Long-Term Growth, NBER Working Paper, No. 10481

Acemoglu, D, and J. Robinson (2000). Political Losers as a Barrier to Economic

Development, American Economic Review, 90, 2.

*Adit, T., (2003), Economic Analysis of Corruption: A Survey, Economic Journal, 113.

Bardhan, P., (1997), Corruption and Development: A Review of Issues, Journal of

Economic Literature, 35, 3.

Blodizzoni, F., (2011), The Poverty of Clio: Resurrecting Economic History,

chapter 2, Princeton University Press.

Bowles, S. (2004), Microeconomics: Behaviour, Institutions, and Evolution,

Russell Sage Foundation, chapter 7.

De Soto, H, (2000), The Mystery of Capital: And Why Capitalism Fails

Everywhere Else, Chapters 1 & 3, Basic Books.

Foucault, M (2000). ‘Governmentality’ in Power, Essential Works of Foucault,

edited by Rabinow, P and J.D. Fanbion, The New York Press, New York.

*Gerschenkron, A., (1962), Economic Backwardness in Historical Perspective, Belknap

Press, chapter 1.

Greif, A, (1994). Cultural Beliefs and the Organization of Society: A Historical and
Theoretical Reflection on Collectivist and Individualist Societies, Journal of
Political Economy, 102, 5.
Herbst, J (2000). States and Power in Africa, Princeton University Press

Platteau, J.P. and T. Strzalecki, (1999). Heterogeneous Loyalties and Collective

Action: micro-evidence from Senegal, Conference on Group Behaviour, WIDER,
Helsinki.

Shleifer, A and R. Vishny, (1993), Quarterly Journal of Economics, 108.

Students interested in the role of ethnicity in development and in governance can look at:
*Easterly, W. and R. Levine(1997). Africa’s Growth Tragedy: Political and Ethnic
Division, Quarterly Journal of Economics, 112, 4.
*Jha, S., V. Rao, and M. Woolcock, (2005) Governance in the Gullies: Democratic
Responsiveness and Leadership in Delhi’s Slums, World Bank Policy Research
Working Paper, No. 3694

8. Industrialization and Co-ordination

The role of the government in industrialization. Multiple equilibria.

Reading:

*Adseia, A and D. Ray, (1998). History and Co-ordination Failure, Journal of

Economic Growth, 3.

Krugman, P, (1991). History Versus Expectations, Quarterly Journal of

Economics,106, 2.

Murphy, K.U., A. Shleifer and R.W. Vishny, (1989). Industrialization and the
Big Push, Journal of Political Economy, 97, 51.

Ray, D. Chapter 5.