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Econ 490A wi 2013

Course:TTh 1:30-3:20, Sav 166

Office Hours: 3:30 -5:30 and by appointment, Office: Savery 332

Department Web Site: (click on Courses) or

Governance and Misgovernance

The goal of this course is to investigate how institutional arrangements impact the ability of the members of a society to better their lives and to achieve rising economic welfare. We look at the process of economic growth, the efficiency of economies and the resulting welfare of their people. Our text, Economic Growth by David Weil, introduces a production function framework to examine the underlying changes in productive resources that are associated with higher per capita income. These changes in physical and human capital, in resource availability, and in input productivity are closely associated with growth in economic output.

At the same time, we seek to explore how institutional changes impact economic incentives and the ability of members of society to save, invest, and improve their well being.The analysis of the institutional foundations of economic growth has flourished since the publication of a seminal article by Hall and Jones in 1999, “Why Do Some Countries Produce So Much More Output Per Worker Than Others?”

We seek to understand the institutional foundations of growth by examining real world cases. The first set of cases examine the poorest countries in Africa, surveyed in Paul Collier’s The Bottom Billion, asking what characteristics of these countries impede their growth and what the implications of poverty are for their citizens. The final case contrasts the experience of China, a giant nation that has enjoyed rapid economic growth for the past thirty years. In the Chinese case, we ask what institutional changes seem to be the sources of China’s economic rise, what China’s future prospects are, and what, if any lessons, other developing countries can learn from China’s growth.

In many cases, the evidence of problems—poverty, poor health, inflation, crime, and corruption—suggest hypotheses about the determinants of good performance and the sources of poor performance. Many of these lessons are relevant to the health of modern industrial economies as well as to developing countries.

Course Goals:

1. Applied Goals: The goal of the course is to survey the historical experience of a sample of developed and developing economies undergoing rapid economic change. First, we model economic growth, applying a production-function framework. Then we explore how economic institutions and policies impact economic growth, productivity, and welfare and how economic performance influences formation of institutions.

To understand how individuals and firms make choices subject to market and administrative constraints.

To understand how government policies affect the allocation of resources, productivity, and growth.

To understand how prices in a market system inform the decisions about what to produce, how to produce it, and who gets it.

To explore how administrative decision-makers make resource allocation decisions in the absence of market competition.

2. Problem-Solving Goals

We model the processes of economic growth, applying a production function framework to examine how increases in the quantity and quality of productive inputs are associated with rise in income and economic well being.

Then we seek to understand the role of economic institutions and policies in fostering improved economic performance.

To understand how economic arrangements influence the behavior of decision-makers, focusing on incentives, constraints, and sources of uncertainty.

To understand how institutional constraints and incentives impact the economic environment faced by individuals.

To use the theory of risk to understand how individuals respond to uncertain economic outcomes.

To understand how market structure and regulatory policies influence the allocation of resources.

Course Requirements

Class lectures and discussions follow the syllabus, below. Grades are based on threehour tests, each of which includes a short essay. Each hour test receives one-third of the weight in the final course grade.

Texts:

David N. Weil, Economic Growth. (You may use either the second or third edition of this text. The third edition is expensive.) Prentice Hall.

Paul Collier. The Bottom Billion. Oxford University Press (paperback)

Nicholas Lardy. Sustaining China’s Economic Growth after the Global Financial Crisis.

You may supplement the course readings with material from other sources, such as:

Economist Intelligence Unit, Country Report, Country Commerce, ViewsWire

World Bank, Doing Business

United Nations Development Program, Human Development Reports

OECD, Economic Survey of China (UW Library, Source OECD)

Reading List

  1. Why are some countries rich and others are poor?
  2. “Goals” on class web site; Weil Ch 1
  1. Institutions, welfare, and growth (Weil, Ch 2)
  • Hall, Robert and Charles Jones (1999) “Why Do Some Countries Produce So Much More Output Per Worker Than Others?” Quarterly Journal of Economics, February, 83-116.

Acemoglu, Daron, Simon Johnson, James Robinson (2005) “The Rise of Europe: Atlantic Trade, Institutional Change,and Economic Growth” American Economic Review, June.

  1. Collier, The Bottom Billion
  2. (Part 1 Falling behind and falling apart)
  3. Collier, The Bottom Billion (Part 2 The traps: the conflict trap, the resource trap; landlocked with bad neighbors; bad governance)
  4. Collier, The Bottom Billion (Part 3: Globalization to the rescue?)
  1. Sources of growth (Weil, Ch 3 and 4)
  2. Factor payments and factor shares
  3. Harrod-Domar model
  4. Solow model, convergence

Hour Test 1: Tuesday January 29

  1. Human capital
  2. Fertility and life expectancy (Weil, Ch 5)
  3. Health and education (Weil, Ch 6)
  1. Productivity
  2. Total factor productivity in the production function (Weil, Ch 7)
  3. Sources of productivity change (Weil, Ch 8)
  4. Research and development; production of technology (Weil, Ch 9 and Ch 10).
  1. Institution reform and growth
  2. Autarky versus openness (Weil, Ch 11)
  3. Property rights and institutions; Hall-Jones again
  4. Governance and misgovernance (Weil, Ch 12)
  5. Corruption and kleptocracy
  1. Poverty and environment (Weil, Ch 13, 15, 16)
  2. Gini coefficient; Kuznets hypothesis
  3. Government taxes and expenditures
  4. Economic mobility
  5. Resources and environment (Weil, Ch 15 and 16)
  1. Collier, The Bottom Billion (Parts 4 and 5: Aid to the rescue?)
  2. Aid
  3. Military intervention
  4. Laws
  5. Trade policy

Hour Test 2: February 21

  1. China: The command era in China
  2. Socialist institutions
  3. Collective farms
  4. The danwei
  5. The great leap and cultural revolution

Wei Li, Dennis Tao Yang, “The Great Leap Forward: Anatomy of a Central Planning Disaster,”Journal of Political Economy, 2005, vol. 113, no. 4

  1. The early reforms 1978 to 1994
  2. Household responsibility system
  3. Town and village enterprises
  4. Special economic zones and international trade

Justin Lin (1992), “Rural Reforms and Economic Growth in China”, American Economic Review, 82.1.

Barry Naughton, “What is Distinctive about China’s Economic Transition? State Enterprise Reform and Overall System Transformation,” Journal of Comparative Economics, 18, 470-490 (1994)

Brandt, Loren, Changtai Hsieh and Xiaodong Zhu. "Growth and Structural Transformation in China". in Loren Brandt and Thomas G. Rawski, ed. China’s Great EconomicTransformation.New York: CambridgeUniversity Press (2008)

  1. Export orientation and foreign direct investment(Nicholas Lardy; China’s Economic
    Growth after the Global Financial Crisis)
  2. Lardy Ch 1 and 2

Whalley, John and Xian Xin, “China's FDI and non-FDI economies and the sustainability of future highChinese growth,” China Economic Review21 (2010) 123–135

  1. China today Nicholas Lardy; China’s Economic
    Growth after the Global Financial Crisis)
  2. Lardy Ch 1 and 2
  3. Imbalances and their implications (Lardy Ch 2)
  4. Policies for rebalancing economic growth (Lardy Ch 3)
  5. Global imbalances (Lardy Ch 4)
  6. The politics of rebalancing (Lardy, Ch 5)

Schedule and Readings
Tuesday / Thursday
8-Jan / 10-Jan
Goals of economic systems / Does growth matter?
Weil Ch 1, "Goals" on class web / Weil Ch 2, Hall-Jones
15-Jan / 17-Jan
Bottom Billion- Falling behind / Bottom Billion - The traps
Collier Part 1 / Collier Part 2
22-Jan / 24-Jan
Bottom Billion - Globalization / Sources of growth
Collier Part 3 / Weil Ch 3 and Ch 4
29-Jan / 31-Jan
Sources of growth - Human capital
HT1 / Weil Ch 5 and Ch 6
5-Feb / 7-Feb
Productivity and efficiency / Governance
Weil Ch 7 and 8 / Weil Ch 11 and 12
12-Feb / 14-Feb
Poverty and environment / Bottom Billion - Aid
Weil Ch 13, 15, 16 / Collier Part 4 Aid
19-Feb / 21-Feb
Bottom Billion - Institutional change
Collier Part 5 / HT2
26-Feb / 28-Feb
China's growth - the Socialist era / Chinese reform 1978-1994
Socialist era in China" on class web
5-Mar / 7-Mar
Chinese trade and FDI / China today
Lardy Ch 1 and 2 / Lardy Ch 3
12-Mar / 14-Mar
China in the world economy
Lardy Ch 4 and 5 / HT3