This Version -- October 28, 2013

Econ 118: Development Economics

Instructor: Pascaline Dupas (pdupas@stanford.edu) Lectures: MW, 9-10:50 AM, Location TBA Office hours: TU 9:30-11 AM, Landau 238

Winter 2014

TA: TBA Sections: F 10 & 11 AM, Location TBA TA office hours: TBA

More than half of the worlds population is extremely poor living on less than $700 per person per year. The goal of this class is to study why extreme poverty, along with child mortality, low-levels of education, gender inequality, high fertility, child labor, and other woes are pervasive in the developing world. What distortions, market failures and institutional failures, hinder households quest to improve their wellbeing? What can be done about it? Is there scope for policy to help the worlds poor? We will focus on microeconomic issues: we will not study countries but instead seek to understand the factors and constraints influencing individual-level, household-level, or firm-level decision-making in developing countries. Development economics is a large field that includes much more than can be covered in one quarter, so the class wont be exhaustive, but we will try to cover the major issues. There will be four main parts to the course. The first and longest part will concern human capital. Health and education are desirable in and of themselves, but they are also important determinants of productivity and of fertility levels (and of each other). What prevents poor households from becoming healthier and to acquiring more education? Why are girls often at a disadvantage within the household? What policies can improve health and education levels in developing countries? The second part will concern financial capital. Most people in developing countries are self-employed earning highly irregular income, either a daily profit in the informal sector when business is good or only realizing income once or twice a year in farming when the harvest is good. How do households deal with such irregular income? Can they borrow and save, and if not why not? How and how well do informal insurance networks work? Is microfinance the solution to all problems? (Note: we will make sure to minimize overlap with the material covered in 125) The third part will concern physical capital. Since the majority of poor households live in rural areas, agricultural productivity is central determinant of income for most of the world poor. How do the land distribution, property rights and access to technology matter for agricultural productivity? The fourth part will concern governance. Poor households often rely on the public sector for delivery of vital services, such as education and health services. But social service delivery in developing countries is often plagued by ineciencies and corruption. What innovations in the governance of social services can help improve their quality and effectiveness?

We will not study these issues with anecdotes. Rather, we will consider possible economic theories and test whether they can explain the data. We will look at policies that have been attempted and evaluated scientifically. The empirical evidence we will consider will be mostly from sub-Saharan Africa and Southern and Southeast Asia, where the majority of the worlds poor live and where the bulk of the recent development economics research has been conducted. Who Should and Shouldnt Take this Class This class is designed for sophomores, juniors and seniors majoring in Economics, or with a strong quantitative background. The prerequisites are Econ 52 and 102B. The problem sets will require data analysis with a statistical software package called Stata. A Stata tutorial will be provided by the TA early on in the quarter. 1

Requirements and Grading

The class meets MW 9-10.50. You are expected to prepare for class, and to attend and participate in class. Prepare The first requirement is to do the starred readings for each lecture listed below in the Schedule" section. While I cannot directly enforce this requirement, the problem sets and exams will assume knowledge of the readings. You'll also understand lectures better if you have done the reading. Ill ask about them in class and reserve the right to cold-call on you. Specific questions on the readings will be included in the exams. Attend and participate I want students to ask questions, and I will ask questions myself. A key rule for class is that I wont permit laptops, iPads, iPhones, etc. I understand that you may prefer to take notes on your laptop, but I also think participation and the classroom experience as a whole is seriously diminished when someone is not listening and hammering away on their keyboard, even if they are not texting, facebooking, or checking email. All my slides will have page numbers on them and Ill post the slides after each lecture so if you indicate the slide number next to each of your notes, you should be fine. Your grade for the course will be determined as follows: 35%: Problem Sets There will be 5 problem sets during the quarter, due at the beginning of lecture on the set due date (see calendar below). They will each carry equal weight toward your grade. The assignment will be posted one week or more before the due date. The data analysis problems will require you to use Stata software. During the first section (the Friday of the first week of class), the TA will give a 1hour Stata tutorial. Laptops will be allowed in sections. 25%: Midterm Exam There will be an in-class midterm exam on Wednesday, February 5. 25%: Final Exam The final exam will be held on Thursday March 20, 8:30 - 11:30AM, as scheduled by the registrar. 15%: Class Participation Class participation in lecture and section is highly encouraged.

Other Course Policies

Students with Documented Disabilities: Students who may need an academic accommodation based on the impact of a disability must initiate the request with the Office of Accessible Education (OAE). Professional staff will evaluate the request with required documentation, recommend reasonable accommodations, and prepare an Accommodation Letter for faculty dated in the current quarter in which the request is made. Students should contact the OAE as soon as possible since timely notice is needed to coordinate accommodations. The OAE is located at 563 Salvatierra Walk (phone: 723-1066, URL: http://studentaffairs.stanford.edu/oae). Missed exam: The Department of Economics has a common policy across courses that governs exam attendance. Students must take each exam on the scheduled date. Exam dates will not be changed for individual students to accommodate job interviews, family events, etc. Exceptions will be made only for 2

serious medical reasons or in the event of a death in the family. In the case of a medical problem, you must provide a letter from a doctor stating explicitly that the medical problem prevents you from taking the exam. If a student-athlete must be off-campus the day of an exam, he/she must take the exam on the scheduled exam date and supply his/her answers by fax on that date. Please read the guidelines at http://economics.stanford.edu/undergraduate/economics-common-syllabus. Requests for re-grading: The department common syllabus also lays out the process that must be followed to request re-grading of an assignment or exam. All re-grade requests should be submitted in writing, to the professor, copying the director of undergraduate studies (Professor Pete Klenow, klenow@stanford.edu, within a week from when we return your work. Students must not approach either instructor or TA with an oral request before making their written request. Please read the full department policy carefully, as we will only re-grade problem sets and exams if the request complies with it. Late assignments: Late assignments will be penalized.

Textbook, Online Readings, and Software

Required textbook: Understanding Poverty, A. Banerjee, R. Benabou, and D. Mookherjee, editors, Oxford University Press: March 2006. ISBN: 978-0195305203. This is a non-technical description of research by economists on many of the topics covered in the class. The book costs $33.60 new on Amazon. There is a reasonable amount of recommended reading for each class. Besides chapters from the textbook above, the readings are mostly economics journal articles, or sometimes popular press articles, that provide some context for the class. The papers are available online. The hyperlinks provided below should all work (if not please notify the TA) but they often require that you access them from the Stanford network. Only readings marked with a shamrock () sign preceding them are required. All other listed readings are recommended but not required. It is essential that you do all of the required readings, and it would be to your benefit to at least skim the recommended ones as well. All of the listed papers (at least large parts of them) should be readable. Some of these papers include a fair amount of math you are not responsible for all of those equations. Rather, I expect you to make an effort to understand the tables and results. The textbook Development Economics by Debraj Ray is an excellent reference if you are interested in development, but is not required. Two popular books published recently that you might enjoy it if you read them: o The Great Escape by Angus Deaton o Poor Economics by Abhijit Banerjee and Esther Duflo The problem sets will ask you to use Stata, a statistical software package. Student versions at a discounted rate are available through the Stata Grad Plan". You will need Intercooled Stata (Stata IC) rather than Small Stata. You can order through the Stata Grad Plan online: http://www.stata.com/order/new/edu/gradplans/direct-ship-pricing. Be sure to include your .EDU email address when ordering. Stata is also available at several computer clusters on campus.

Overview of Class Schedule

Mondays Jan 6 1- INTRO The challenge of world poverty 3- HUMAN CAPITAL Disease and development **PS1 DUE ** NO CLASS ** MLK Day 6-HUMAN CAPITAL Demand for education, Child labor **PS2 DUE 8-HUMAN CAPITAL Gender gaps 9-FINANCIAL CAPITAL Credit ** NO CLASS ** Presidents Day 12-PHYSICAL CAPITAL Property rights 14-PHYSICAL CAPITAL Technology 16- GOVERNANCE Service delivery **PS5 DUE Wednesdays Jan 8 2- POVERTY TRAPS? Theory and implications Jan 15 4-HUMAN CAPITAL Improving health outcomes in developing countries 5- HUMAN CAPITAL Effect of education on income 7-HUMAN CAPITAL Fertility ** MIDTERM **

Jan 13

Jan 20

Jan 22

Jan 27

Jan 29

Feb 3

Feb 5

Feb 10

Feb 12

Feb 17

Feb 19

10-FINANCIAL CAPITAL Savings **PS3 DUE 11-FINANCIAL CAPITAL Coping with risk 13-PHYSICAL CAPITAL Land, Agricultural Productivity **PS4 DUE 15-GOVERNANCE Corruption 17- WRAP-UP

Feb 24

Feb 26

March 3

March 5

March 10

March 12

Schedule of Lectures: Readings

UP=Understanding Poverty, DE=Development Economics, PE=Poor Economics indicates REQUIRED readings Readings may change during the term. Check class website regularly for updated syllabus LECTURE 1- Introduction (January 6) What is economic development (or the lack thereof?) How to measure it? What can be we learn from recent success stories in development? UP Chapter 1 (Angus Deaton): Measuring Poverty (12 pages) Joseph E. Stiglitz (1996). Some Lessons From The East Asian Miracle World Bank Research Observer 11 (2): 151-177 doi:10.1093/wbro/11.2.151 (26 pages)

LECTURE 2- Poverty traps (January 8) What is the economic theory behind the often used concept of a poverty trap? What are the policy implications of the presence of such traps? Understanding the underlying theory is key to understanding how to look for such traps empirically. This lecture will set the stage for much of the following lectures. Sachs, Jeffrey (2007), Breaking the Poverty Trap. Scientific American, August 17. Easterly, William (2007), Africas Poverty Trap. Wall Street Journal, March 23. For the intuition of the theory: PE, 9-16. For more details on the theory: DE, pp.272-279 & 489-504

SECTION 1 --- HUMAN CAPITAL

LECTURE 3- Disease and Development (January 13) The deadliest diseases are tropical: malaria, dengue, etc. Poor countries are disproportionately found in the tropics. Does that correlation reflect a causal impact from disease to underdevelopment? Hoyt Bleakley (2003). Disease and Development: Evidence from the American South. Journal of the European Economic Association, April-May 2003 1(2-3):376-386. (10 pages) Malaney P, Spielman A, Sachs J. (2004). The malaria gap. Am J Trop Med Hyg. 2004 Aug; 71(2 Suppl):141-6. (5 pages) Marcella Alsan, David Bloom and David Canning (2006). The effect of population health on foreign direct investment among low- and middle-income countries, World Development, 2006, Vol. 34(4), pp 613-630. (long paper, focus on introduction) Marcella Alsan (2012). The Effect of the TseTse Fly on African Development. Working paper. (very long paper, focus on introduction)

LECTURE 4- Improving health outcomes in developing countries (January 15) If tropical diseases are so costly in terms of development, what prevents their eradication? What prevents the market from developing drugs and health products tailored for the needs of poor countries? When they do, what prevents households from using them? UP Chapter 21 (Michael Kremer), Public Policies to Stimulate Development of Vaccines for Neglected Diseases (18 pages) Jessica Cohen and Pascaline Dupas (2010). Free Distribution or Cost-Sharing? Evidence from a Malaria Prevention Experiment. Quarterly Journal of Economics 125 (1), pp.1-45, February 2010. (45 pages; focus on the intro, conclusion and graphs/tables). Kremer, Michael (2002). Pharmaceuticals and the Developing World, Journal of Economic Perspectives 16(4). (25 pages) Dupas, Pascaline (2011). Health Behavior in Developing countries. Annual Review of Economics Vol. 3, pp. 425-449, September 2011.

LECTURE 5- Effect of education on income (January 22) You are in college, Im a teacher we all agree education matters. But how much? What are the returns to education in terms of labor market outcomes? What other benefits does education have? First 6 pages of UP Chapter 18 (Anne Case), The Primacy of Education (pp. 269-275) Owen Ozier (2011). The Impact of Secondary Schooling in Kenya: A Regression Discontinuity Analysis. Working paper. (24 pages)

LECTURE 6- Demand for education, Child Labor (January 27) How do parents choose how much to invest in their childrens education? How can we end child labor and should we? JPAL briefcase (2005) Primary Education for All (4 pages) UP Chapter 16 (Chris Udry), Child Labor (16 pages) UP Chapter 17 (Kaushik Basu), Policy Dilemmas for Controlling Child Labor (10 pages)

LECTURE 7- Fertility (January 29) Why do the poor have so many children? Does poverty cause them to have more children? Or are they poor because they have so many children? UP Chapter 10 (Mukesh Eswaran), Fertility in Developing Countries Ashraf, Nava, Erica Field, and Jean Lee. Household Bargaining and Excess Fertility: An Experimental Study in Zambia. Working paper. December 2012.
6

LECTURE 8- Gender gaps (February 3) Relative to developed countries and some parts of the developing world, there are far fewer women than men in India and China. It has been argued that as many as a 100 million women could be missing. There are other dimensions of discrimination against women as well, but the differential mortality is the most striking. We will study potential economic explanations for such discrimination and think of possible policies to reduce it. Amartya Sen, More Than 100 Million Women Are Missing, New York Review of Books 37(2), December 20, 1990 Lori Beaman, Esther Duflo, Rohini Pande and Petia Topalova (2012). Female Leadership Raises Aspirations and Educational Attainment for Girls: A Policy Experiment in India Science, January 2012. Shorter policy write-up available here. Elaina Rose (1999). Consumption Smoothing and Excess Female Mortality in Rural India. Review of Economics and Statistics 81, no. 1: 41-49. Nancy Qian (2008). Missing Women and the Price of Tea in China: The Effect of Sex-Specific Income on Sex Imbalance, The Quarterly Journal of Economics, 123(3), August 2008.

SECTION 2 --- FINANCIAL CAPITAL

Poor households make very little money and this money usually comes in at irregular intervals. Given this, the poor need to be especially careful in planning how to meet their daily needs, weather unexpected shocks, save for lump-sum expenditures, or invest in a business. What financial tools are available for them to do so, and are they adequate? How and by how much does microfinance improve poor households financial capital and welfare?

LECTURE 9- Credit (February 10) Robert Cull, Asli Demirg-Kunt and Jonathan Morduch (2009). Microfinance Meets the Market. February 2009. Journal of Economic Perspectives 23(1), Winter: 167-192. Ogden, Timothy, and Jonathan Morduch. Beyond Business: Rethinking Microfinance. Foreign Policy, 4 april 2013. Theory Debraj Ray DE textbook, chapter 14 Empirical evidence: Bauchet et al. (2011). Latest Findings from Randomized Evaluations of Microfinance CGAP report. (This (long) report presents recent evidence from randomized studies of microfinance across the world).

LECTURE 10- Savings (February 12) Gugerty, Mary Kay (2007), You Cant Save Alone: Commitment in Rotating Savings and Credit Associations in Kenya. Economic Development and Cultural Change 55 (2007): 251282. Dupas, Pascaline and Jonathan Robinson (2013). Why dont the poor save more? Evidence from health savings experiments. American Economic Review, 103(4), pp. 1138-71. Dupas, Pascaline and Jonathan Robinson (2013). Savings Constraints and Microenterprise Development. American Economic Journal: Applied Economics, January 2013.

LECTURE 11- Coping with Risk (February 19) Dercon, Stefan (2002), Income Risk, Coping Strategies, and Safety Nets. World Bank Research Observer 17 (2): 141-166. Udry, Christopher (1990), Credit Markets in Northern Nigeria: Credit as Insurance in a Rural Economy. World Bank Economic Review 4 (3): 251-269.
Karlan, Dean, Robert Osei, Isaac Osei-Akoto and Christopher Udry (2012), Agricultural Decisions after Relaxing Credit and Risk Constraints. Working paper, Yale. Cole, Shawn et al. (2013), Barriers to Household Risk Management: Evidence from India. American Economic Journal: Applied Economics 5 (1): 104-35. Townsend, Robert (1994), Risk and Insurance in Village India. Econometrica 62 (3): 539-591.

SECTION 3 --- PHYSICAL CAPITAL

LECTURE 12- Property rights (February 24) What are the key theoretical channels through which property rights matter for development? How much evidence is there for these channels?
Woodruff, C. (2001), Review of de Soto's The Mystery of Capital, Journal of Economic

Literature 39(4), 1215-1223. (9 pages) Udry, Christopher (2011). Land Tenure, in Ernest Aryeetey, Shantayanan Devarajan and Ravi Kanbur, eds. The Oxford Companion to the Economics of Africa, 2011 (6 pages). Allendorf, Keera (2007). Do Womens Land Rights Promote Empowerment and Child Health in Nepal? World Development 35(11): 19751988. (13 pages). Field, Erica, and Maximo Torero (2006). Do Property Titles Increase Credit Access Among the Urban Poor? Evidence from a Nationwide Titling Program. Working paper. (longer paper)

LECTURE 13- Land, Farm Productivity (February 26) Agriculture occupies a key place in the economy of developing countries. What determines agricultural productivity? Is land reform a good idea? Banerjee, Abhijit (1999), Land Reform: Prospects and Strategies, MIT Mimeo. (38 pages).

LECTURE 14- Technology (March 3) What are the reasons to think that new technologies such as cell phones can play a role in development? Jensen, Robert (2007). The Digital Provide: Information (Technology), Market Performance and Welfare in the South Indian Fisheries Sector, Quarterly Journal of Economics, 122(3), p. 879 924. (Long but fascinating paper; you can skip the theory section (section II)). The Economist (2009), Mobile Money.

SECTION 4 --- GOVERNANCE

Social service delivery (e.g., the provision of public education and health services) in developing countries is often plagued by inefficiencies and corruption. What innovations in the governance of social services can help improve their quality and effectiveness? LECTURE 15- Corruption (March 5) Reinikka, Ritva, and Jakob Svensson. (2004). Local Capture: Evidence from a Central Government Transfer Program in Uganda, Quarterly Journal of Economics, 119 (2). Ferraz, Claudio and Frederico Finan (2008).Exposing Corrupt Politicians: The Effect of Brazils Publicly Released Audits on Electoral Outcomes, Quarterly Journal of Economics; 123(2): 703745. Shorter policy write-up available here.
LECTURE 16- Service Delivery (March 10)

Chaudhury, Nazmul, Jeffrey Hammer, Michael Kremer, Karthik Muralidharan, and F. Halsey Rogers (2006) "Missing in Action: Teacher and Health Worker Absence in Developing Countries," Journal of Economic Perspectives, 20 (1) pp. 91-116. JPAL Briefcase (2009). Absenteeism: Showing up is the first step. (Review of a number of studies on how to improve service delivery; e.g. top-down vs. top-up, etc.). UP Chapter 19 (Besley and Ghatak). Public goods and Economic Development. LECTURE 17- Conclusion (March 12) TBD
9