Economic Development / 9 a.m. - 12 noon
University of Wisconsin
Department of Agricultural Economics
This exam consists of two parts. Answer one question from Part I and one question from Part II. All questions are of equal value.
PART I
1.In a 1994 article in Foreign Affairs Paul Krugman surveyed a growing body of evidence on the growth of East AsiaÕs ÒtigerÓ economies and concluded that
The newly industrializing countries of Asia, like the Soviet Union of the 1950s, have achieved rapid growth in part through an astonishing mobilization of resources. Once one accounts for the role of rapidly growing inputs in these countriesÕ growth, one finds little left to explain. Asian growth ... seems to be driven by extraordinary growth in inputs like labor and capital rather than by gains in efficiency. ... [For example] SingaporeÕs growth has been based largely on one-time changes in behavior that cannot be repeated...Singapore is unlikely to achieve future growth rates comparable to those of the past.
Although KrugmanÕs argument is couched only in terms of growth accounting, the deeper theoretical foundation for his remarks is a series of models in which sustained economic growth is driven not by factor accumulation but by a range of phenomena that we might group under the title of ÔexternalitiesÕ, including economies of scale and the production and application of new knowledge.
a. Choose two examples of such models and identify the growth mechanisms they posit. Use the models to restate KrugmanÕs argument in terms of growth theory (you need not develop a formal model for this purpose; a clear and concise description will do).
b.In your view, how well do the structure and assumptions of this class of model fit the the process of economic development in general, and the experience of the small open developing economies of East Asia in particular?
c.On the basis of your answer to (b), evaluate KrugmanÕs prediction about future growth rates of countries like Singapore. How empirically robust is his argument?
d.Building on (b) and (c), what industrial policy lessons for other developing countries are to be found from the East Asian experience if Krugman and the models behind his argument are right? If they are wrong?
2. In the late 1980s Colombia discovered apparently large reserves of oil on its territory. Such events can be mixed blessings, even for countries (such as Colombia) with high debt-service ratios and persistent current account deficits. In this question you are asked to analyze potential impacts of the exploitation of this new resource for a developing countrry and to propose some policies for managing the resulting foreign exchange gains.
a. Construct a stylized model of the economy. Assume that in addition to oil the country also produces agricultural exportables, manufactured importables and non-traded services. Analyze the likely impacts of the growth of the oil sector on aggregate economic welfare, the structure of production and trade. In doing so, make (and clearly state) some reasonable assumptions about sectoral factor intensity and intersectoral or international factor mobility.
b.Consider the impact of the boom on the distribution of real incomes of laborers and owners of factors specific to different sectors. Which groups in the economy are more likely to gain from the boom? Which are more likely to lose? In constructing your answer, make and state such assumptions as may be necessary about relevant parameters, e.g. budget shares and demand elasticities. How would this distributional analysis change if nominal wages were rigid and the labor market cleared through quantity, rather than price adjustments?
d. The Colombian government is concerned about the long-run Ôdutch diseaseÕ effects of the development of its oil sector. Using the model developed above identify, analyze and compare policy options for maximizing the long-run economic development opportunities presented by the oil discovery. Consider macroecnomic as well as purely sectoral issues. Give particular attention to the case in which the oil reserves are not expected to produce sizeable export revenues for more than a few years.
PART II
3.Assume that a low income, household production unit allocates resources to solve the following problem:
Max pfTf(lf) + w(lm- ld)
lh,lm
ld
s.t.
lh under family labor
lf = {
lh + g1ld - g0 if labor is hired-in
L0³ lh+ lm
ld³ 0
where pf is the price of output, T is the household's area cultivated (assumed to equal its area owned), f is a per-acre production function which depends on the input of efficiency labor, lf; L0 is the total family labor stock which must be divided between on-farm (lh) and off-farm (lm) work, and ld is hired labor; the parametrically given wage is w, and the fixed cost of supervision, g0 > 0 and 0< g1 <1.
a.Analyze and discuss the different solution or class regimes associated with this model. For later sections of this question, it may be useful to graphically portray the solution regimes along the land endowment continuum.
b.Does this model exhibit separability, meaning that a household's allocation of resources to production is independent of its wealth and other household characteristics? How do yield, efficiency labor per- acre and supply response vary with household wealth in this model?
c.Suppose that you had data on a sample of household production units and you were interested in testing whether or not their behavior conformed to the model shown above or whether their behavior was better described by a standard (perfect markets) separable model. Please describe the econometric approach you would take to this problem.
d.Finally, suppose that household labor market choices are also constrained by a working capital-constraint:
R0 - w(lm- ld) ² W0
where R0 are costs of subsistence, and W0 is the household's liquid savings. Briefly explain how the presence of this capital constraint would affect your proposed econometric testing of separability.
4.A self-proclaimed "popular" government proposes to eliminate share tenancy contracts on the grounds that they are both inefficient and exploitative. This question asks you to critically employ the share tenancy literature in order to evaluate the characterization of share contracts as inefficient and exploitative.
a.Are sharecropping contracts inefficient in the sense that a redistribution of land from owners to tenants would enhance the production of an agrarian economy? To answer this question, please lay out what you see to be a compelling theoretical model of sharecropping. What does your model indicate would be the implications of an owner to tenant land redistribution?
b.According to the model you advanced in part a., are sharecropping contracts exploitative? Please clearly define what you mean by exploitation.
c.Briefly discuss the empirical evidence on sharecropping as it relates to the model you put forward in part a. Would you be confident enough in your model to recommend its implications to the above mentioned popular government? What additional empirical research would you want to undertake (assuming a elastic supply of RA's!) in order to test your theory?
8/96 p.1