Center for Development Economics                                                        Spring 1997
Williams College                                                                                    Sabot & Pinckney

(Note to Web surfers: Course content will change to some extent in 1998)

Economics 502: Development Economics II

Development Economics I focussed on the “big” questions of development: What is development? What is well-being? What is productivity growth, and where does it come from? What roles do entrepreneurs and institutions play in all this? What can government do to foster a dynamic economy?

Development Economics II pursues these issues of development strategy. In particular, we will examine what government policies are conducive to achieving a labor-demanding growth path which yields rapid growth with low inequality. We begin the course by reading two articles that are helpful “eyeglasses” through which to see the developing world. One of these provides us with a simple, formal model of the response of credit-constrained households to an improvement in investment opportunities. This response -- increased work effort, decreased consumption, and increased savings and investment -- describes accurately what was witnessed in East Asia over the last three decades. The model suggests that focussing attention on providing profitable investment opportunities and improving labor productivity will have considerable payoffs in terms of equitable growth.

These two areas -- investment opportunities and the functioning of the labor market -- provide the organizing principles for much of the rest of the course. Following this outline, the next section aims at improving our understanding of three key areas in which the poor have investment opportunities: agriculture, human capital, and the informal sector/small enterprises. The questions on which we will focus in this section include: What is special about the agricultural sector? How does a dynamic agricultural sector lead to its decline as a share of GDP? How does a dynamic agriculture contribute to labor-demanding growth? What government policies are effective at fostering investment opportunities in agriculture? Which ones are ineffective?

Since policies that have an impact on agriculture are closely related to those that have an impact on exports, we next focus our attention on the export sector. We then ask: Why has the growth of exports been associated with rapid growth of labor demand, productivity, and wages? What policies successfully spur exports? A comparison between East Asia and other areas of the world is key here.

Turning to human capital, we examine questions such as: To what extent does human capital accumulation contribute to economic growth, reduce income inequality and increase intergenerational mobility? Why do some groups in low income economies, e.g. males and children from relatively high income families, tend to accumulate more human capital than other groups, e.g. females and children of the poor? Why have governments intervened in the market for education and what have been the efficiency and equity consequences of intervention?

The next section of the course focuses on labor market performance. The labor market bears the responsibility for melding the changing needs of the economy's productive apparatus with the changing skills and preferences of labor force participants. An efficient, flexible and responsive labor market contributes to the growth process through the creation of an appropriate economic environment. In this respect, labor market policy is like macroeconomic and trade policy. In contrast to the accumulation of physical and human capital and technical progress, a well-functioning labor market is not, in itself, a source of economic growth. Yet, labor market pathologies, like macroeconomic mismanagement, can be extremely costly, severely contraining growth of output and employment, and increasing inequality.

We will focus on an important manifestation of labor market dysfunction: unemployment. We will consider in some detail the nature, causes and costs of unemployment. We will conduct an assessment, within a general equilibrium framework, of the macro-economic implications of public sector surplus labor. Poor labor market performance can contribute to weak labor market dynamics. But superior labor market performance is not sufficient to generate strong dynamics. In conclusion, we will consider the other key elements which contribute to strong dynamics.

This course is built around the findings of applied research and policy analysis that the two of us have been conducting for a total of four decades. The issues we are examining have been our core concern throughout these years. We will attempt to convey to you why they are important, how we designed and implemented empirical research to address them, and the lessons we have learned. We will invite your critiques and reassessment of these lessons. We look forward to a semester of intellectual interchange.