Question 1

Explain the main theoretical and empirical findings surrounding the impact of

inequality on the process of growth.

In the paper of Alesina (1994) proposes a model to test an inverse relationship

between economic growth and the levels of income and wealth inequality. He uses the

median voter theory, where the government preferred by the median voter, selects the tax

rate. The measures of wealth distribution are hard to find, therefore he focused on the

measure of land distribution. The measure of wealth inequality used in the paper is a

simple Solow model of growth, it is:

y=A*K*G*L*

g=T(k) where t= taxes

Alesina (1994) findings indicate an interesting result, that inequalities in income

and land distribution are negatively connected with consequent growth. Accordingly, the

issue is not the inequality itself but how poor is the poor. However, in the paper they do not

address the issue of how unequal is unequal. Another important contribution is the

empirical research of Banerjee and Duflo (2003) on inequality and growth correlation. It

explains that the argument of why inequality should have an effect on growth is the

premise that it exist a relationship between the present and the future wealth. Benerjee

and Duflo (2003) find that once the economy achieved being rich enough, the inequality

does not play an important role. In the estimation of the inequality, the results show that

the economy becomes more equal as it grows. Furthermore, it tends to generate a positive

relation between growth and inequality. Based on these significant researches, there is not

evidence that inequality has a negative impact in the process of growth.

Why is poverty relevant in explaining the empirical findings? In addition,

considering the reality of the large size informal sector in many developing

countries, does it suffice for this type of analysis to measure only the official GDP?

Explain.

In the theories and empirical findings reviewed above, the role of poverty is relevant

in order to explain the economic growth in the context of developing countries. In many

developing countries, inequalities can lead to poverty, however, the low economic growth

in these countries is not linked to it. On the other hand, it has not been demonstrated it in

the literature that economic growth, in this instance GDP, is an appropriate measure of

poverty. Benerjee and Duflo (2007) research on the economic lives of the poor presents an

overview of the different informal markets that los income people tend to use, such

informal credit, informal insurance, and informal social networks. All these are components

at the microeconomic level of people living in poverty that are not reflected in the official

GDP. The reduction of income inequality is not a condition of growth. Therefore, we have

to propose solutions that promote active and inclusive participation in the economy to

overcome poverty.

How do institutions affect or not this relationship and what are some of the means

used in the literature to measure the institutional dimension? (Please enumerate at

least 5 components and how in the literature they have been measured.)

The measurement of institutions has been extensively studied, and we learned some

of them during the course. One important contribution to the critique of how to analyze

development is North (1994), who at that time made the observation of two erroneous

assumption in the economic models: one, that institutions are not taking into account; and

two, that time does not matter. In this research paper North (1994) argues that institutions

are “designed to achieve efficient outcomes”, nevertheless they are ignored in the economic

analysis since they do not have an independent role in performance. He proposes an

understanding in the interaction between institutions, technology and demographics in the

process of economic change.

Alesina (2014) research on culture and institutions, it questioned if the there is

inter-dependence between culture and institutions, and it provides conclusions about the

different mechanisms that have been used to measure institutions. According to Alesina

(2014) one of the most common measures of formal institutions is an index of protection

against expropriation. Another measure of formal political institutions, mentioned in the

paper, are the constraints on the executive and indices of democracy, which have also

measure the quality of government. As well it mentions the measure of the legal system by

using the legal rules that protect the investors in many countries. And last, the measure of

regulatory institutions, as the labor market regulations. One of the important aspects in the

causality between cultural, institutions and development is the cultural perception of

poverty, and it is a factor that influence in the policies developed in these institutions.

Question 2

a. Please analyze the findings. Is there support in the literature for the choice of

variables in the regression?

We can observe the results from table 1 on Human Capital and social ills, that family

structure (FAMSTRUC) is statically significant towards others behaviors. Family structure

plays an important role in reducing the chance of suffering bullying (by 17%), being

sexually active (by 9%), use drugs and alcohol (by 8%), be involved in gangs (by 11%). This

reflects that having both parents at home make an impact in their children development,

avoiding them to get involve in negative social activities. Another relevant estimation is the

education level achieve by the parents (EDUCP) is statically significant on the behavior of

suffered bullying, sexually active, use of drugs and alcohol and be involved in gangs. This

tells us that at more years of education and experience the parents have, it can influence

the activity on these social behaviors. It’s not surprising that the combination of family

structure and parents education reduces the chances and is statically significant on

suffering bullying (by 7%), being sexually active (by 14%), use drugs and alcohol (by 6%),

have problems with the law (by 6%), be involved in gangs (by 218%). Similar to family

structure, the frequency of family dinners (FAMDIN) is significant in reducing the chances

of being sexually active, use drugs and alcohol, and be involved in gangs. The frequency

with which family dinners take place in the household is a consideration of children that

respect the family space. A very interesting result is to see the variables that are statically

significant on quality of life, which are family structure, parent’s education, age of the child,

and parent’s occupation.

From the results of table 2 on Social Capital, we found similar results as in table 1,

the variable of family structure, the combination of family structure and family dinner have

a significant impact on the behaviors presented. We also find in these results that other

variables become important, such as race, gender of the children and the gender of the

household head. For the ethnic group (RACE) that belongs to the response of indigenous

ethnic, we find that it is statically significance and it has a positive correlation to family

violence and sexual abusive; same (RACE) with community violence it is statically

significant but a negative correlation, meaning that it reduces the community violence

among indigenous population. Gender of the child (SEXC) reduces the chances of family

violence, verbal abuse, and sexual abuse. This can be explained by the fact that there are

social differences between boys and girls, and most of the time there are fewer victims of

the male gender in these issues. Gender of the head of the household (SEXHEAD) it is

statically significant and with a negative relationship, in other words, reduces the effect of

family violence, verbal abuse, sexual abuse, and community violence. Assuming that gender

reflected in these results is male, it means that the male figure as head of the household is

positive on only for the family structure but also for the community development.

Three important contributions to the analysis of family structure, Aguirre (2006, 2013,

2015) and they support the choice of these variables used for this exercise. Aguirre (2006)

research on family and economic development, emphasis the importance of healthy

families as it has a direct impact on human, moral, and social capital, and consequently on

economic activities and economic structures1.( 1 Aguirre, Maria Sophia. “The Family and Economic Development: Socioeconomic Relevance and Policy Design”, in The Family in the New Millennium, ed. Scott Love and Thomas Holman, London: Praeger Perspectives, 2006. She states that children living in a stable family structure, mother and father, have a better academic and social performance, and this is essential for the quality of the human and social capital. On the other hand, broken families, divorced or single parents, bring social problems that constrains the efficient use of the government’s financial resources, such as security spending. The empirical evidence mentioned in this paper tells us that children from broken families tend to have a higher probability to live in poverty. Aguirre (2013) finds that the family structure, affects the society as a whole, thus, “the breakdown of the family is a symptom of a sick and a weak society” 2. (2 Aguirre, Maria Sophia and Reza Saidi, “Family Structure and Wealth in the Muslim World”, Doha International Institute for Family Studies and Development, Dubai, 2013)

As we know a marriage represent a long-term commitment, it promotes positive

values that are transmitted to the society, and it creates a difference in the development of

human capital. Therefore, the variables used in the regressions previously analyzed can

provide us with substantial information about the socio-economic development of a

country.

b. Table 3 presents the estimations. Please analyze the findings.

Based on all the findings, if you were to recommend some strategy to improve

the educational intervention efforts, what would you recommend?

In the table 3 we analyzed the impact alone of the married households, and from the results

we can see that the impact of married households is not significant to the quality of life and

civic responsibility, although it has a positive relationship with both; but married

households and social responsibility have a positive relationship with an increase of 12

points and it is significant. The educational intervention alone has a significant impact and

a positive relationship with quality of life (by 17%), civic responsibilities (by 9%) and

social responsibilities (by 8%). These results show that the program is giving positive

results and it is working as intended. However, a more interesting fact is that when we

observed the interaction between the program intervention and the married household

working, it gives us an even greater impact. The effect of this interaction on quality of life

(20%), civic responsibility (12%) and social responsibility (12%) it is a positive indicator

that tells us that the family structure does make a difference in the scope of intervention for

development.

There is no doubt that families are the core component of the society, providing a

human and social capital. Consequently, to improve the educational interventions we

would recommend a work scheme that has the family structure as a factor that can be

controlled. That is to say, those with the households of broken families could have an extra

accompaniment that can level the impact of the intervention in married households.

Question 3

The role of networks and social capital has been extensively addressed in the

literature studying microcredit. Why is this particular issue so relevant in the

context of microcredit and informal saving schemes?

The role of networks and social capital has been questioned in many previous

researches. In Benerjee, Abhijit and Duflo (2010) provides a discussion of the effects of

microcredit on social capital. Based on this paper the social capital and trust are important

components for the functioning of microcredit. Group liability has demonstrated that it

works because people value the relationship with other members of their groups, and they

are more willing to help those who are in risk of defaulting³(³ Banerjee, Abhijit and Esther Duflo, “Giving Credit Where is Due?”, Journal of Economic Perspectives, 24:3, 2010.).

The social embarrassment, being judged or being excluded are consequences that are exposed if they do not behave accordingly. The empirical evidence tells us that frequent meeting contribute to social capital, since people participating in these dynamics are more likely to know each other well so they generate trust. For the analysis of microcredit it is possible to use social capital as a proxy for trust.

The main concerned about microcredit can be outlined in the context puzzle when

people are in the presence of adverse selection, they do not have access to formal credit,

they do not have other choice than accept the high interest rate, and they tend to borrow

more and more money. People are willing to pay high interest rate because they know that

they will pay regardless the interest rate. Also, they are in the presence of moral hazards

and they do not have collaterals, but the framework of microcredit is to make sure that

even in the presence of these factors people will pay the loans. The research has shown that

saving schemes are better than microcredit.

Based on the literature findings, is attendance the same as participation and/or

accompaniment? How can an IED approach further enrich the measurement and

discussion of the role attendance/participation/accompaniment play in microcredit

and informal saving groups?

Based on the evidence provided by the research paper of Feigenber (2013) on

economic return to social interaction, we can say that attendance is not only about

participation. Feigenber (2013) finds that the frequency with which a participant meet

with other participants, plays an important role in the effectiveness of microcredit. As one

of the findings in this paper is that an increase in the social interaction can contributes to a

higher participation, higher willingness to pool risk and it also generates trust among the

community members that are participating.

From the point of view of the Integral Economic Development approach it is

possible to measure not only the immediate effects of microcredit but also the long-term

effect. For instance, the integral approach would take into account other issues behind the

unmistakably affect that individuals participating in this intervention have to confront, for

example men abusing women, that clearly can be capture by the quality of life. Therefore it

is necessary to introduce the mechanics and bring the dimension of the institutional factor.

As well, in this context is essential to include the analysis of “the alternative” as an

abusive factor. The long-term relationship developed in paying the loans in order to

understand why they are high. The situation regarding the high interest of microcredit is

originated by the “abusers” that offer credit to people without access to formal credit.

These abusers set the interest high, therefore the interest rates of microcredit isn’t that

high comparing to the alternative.

Another issue that is not measured appropriately is the fact that microcredit has

included in its scope other social agendas, such as gender issues, birth control, training, etc.

Therefore they become highly to maintain when covering all these other agendas, and

eventually the microcredit organization cannot self-support since they are using the money

in other things, rather to work only with microcredit. As a consequence, we can see

microcredit organizations that have become microfinance entities instead. When

evaluating these programs is really important to differentiate that a microcredit institution

is not the same as a financial institution.

All the issues mentioned above, can be detected by the integral approach, and it can

enrich the measurement of microcredit interventions by capturing the quality of life with

the person dignity, the social and civic responsibility.

Question 4

What are some of the salient issues found in the literature that relate to access and

effectiveness of microcredit? Please explain models and incentives used, pros and

cons as well as what relevant findings support the IED approach to economic

development.

One of the issues that stands out in the evaluation of the effectiveness of the

microcredit is shown in the research of Field (2009) evidences expose that when the

participants of microcredit have less pressure to pay, for example a grace period of two

months before repayment begins, it tends to increase the levels of delinquency and default.

It makes us think if the people that are repaying the loans are growing economically or just

subsisting. Although, not all, but some participants in the grace period were able to start a

new business and/or invest in existing business. The overall results tell us that a grace

period could be an incentive for investment but it definitely worseness the repayment.

Another issue found in Gine (2009) is that the research fails under the assumption

that other members of the group will put pressure for the participants to behave.

Therefore, the problem is that microcredit has been studied from its structure, but the

repayments are about relations. And finally Karlan (2009) research on observing

unobservable set an experiment to get the reaction of people when there is a change in the

interest rate, and he finds that due the moral hazard situation people are willing to take a

contract even the interest rate is really high.

Despite the imperfections, microcredit is an important source of development, and it

creates opportunities for those who do not have other alternatives, but the design of it

should improve. We can learn from the literature review that the research analysis the

structure and the dynamic of the microcredit itself, but that does not provide information

regarding how is the microcredit being used. There are two important outcomes, the

microcredit use for investment versus it uses for consumption. When it is for consumption

it does not provide a sustainable scenario, neither for the beneficiary nor for the

microcredit organization. Additionally, the institutions factor is not addressed in the

microcredit studies, which is an important element for a long-term impact. In the research

of de Mel (2008) generates a critical thinking about sustainability, and it differentiate

evaluation and outcomes. It gives us an insight to look at the individual characteristics of

the subject since the outcome is not random, and it makes a difference in sustainability.

All these findings mentioned above are an incentive that encourages the use of the

integral approach methodology. Given the findings we could conclude that microcredit is

not necessarily the solutions, however with an impact evaluation on microcredit using the

integral approach it can provides alternatives to improve the microcredit system. Since the

integral approach could complement the previous findings and give a broader perspective

in its sustainability.

Extra Credit

What are the main theories and policies of economic growth? How does an integral

economic approach to economic development defer from these traditional

approaches and what gap does it fill in economic development implementation and

policy design?

For the first part of this question, I will use material included in the midterm exam, where I

explained the four main theories of economic growth. Economic growth is defined as “the

expansion of production possibilities and an increase in the standard of living.” During the

IEDM 540 course we have studied four main theories for economic growth, explained as

follows:

i. Classical economic growth theory

This theory claims that economic growth will end due to an increasing population and limited

resources. The production function is Q = f (K, L, T), where K is capital, L is labor and T is

technology. The capital-labor ratio decreases as labor increases. One of the economists

behind this theory is Thomas Malthus. In Malthus theory there is an inverse relationship

between population growth and development. As a consequence there is a consumption

effect which means that at more people there are less to consume; a production effect on

private and public goods where the public goods become welfare; an age-distribution effect

where children are seen as a burden since they consume but not produce; and finally a

dilution of capital effect where if there are not savings, there is no reinvest. Therefore,

population is equal to more poverty, “we are poor because we are more”, and it generates the

“poverty trap”. In order to have a successful economic growth Malthus suggests a population

control. The key assumption in Malthus is “ceteris paribus” which means “other things

equal” implying that resources are giving and constant.

ii. Neo-classical theory

In this theory, investment is the principal component in the economic growth and it is focused

on capital (K) and technology (T). The growth adjustment depends on the behavior of

investment in physical capital, including the technological advances that represent a great

influence in the economy. Likewise, this theory makes an emphasis on capital accumulation

and savings as an important determinant of economic growth. Additionally, in this model

human capital has been incorporated and it is the best method in explaining the growth

process when adding human capital. Shocks in the economy play a short-term impact.

Nevertheless, these models explain the growth of developing countries but failed to explain

to the rest.

iii. Human capital theory

This theory establishes that human capital is an investment not an expense, and not only an

investment in education but also in creativity. It is considered an investment with returns and

it validates that human can grew capital. The human capital theory proves that Malthusian

theory is wrong and that poverty trap is one of other possible outcomes.

The human capital components are expressed in this function:

Qt = A Kt α Lt β eθ 1ht+ θ2EXPt+ θ3EXPt2+ θ4hlt

Where A is the level of technology, K is capital, L is labor force, h is human capital, exp is

experience, exp2 is experience accumulates, and hl is health.

This theory determines that human capital depends on advances in technology and scientific

knowledge. The resources are not fixed and they may increase as population increases.

iv. Neo-Malthusian theory

This theory brings the topic of environmental degradation issues, and it determined that

humans are the problem not because they are many but because they are polluters. Therefore

the more the land is used, the less food available will be due to the land erosion. The more

people exists, there is less consumption. The Neo-Malthusian theory is expressed in this

function:

Ln Cft = β 0 + β 1 ((1/T) Σ0

T ln (ht))+ β2 AGLANDt + β3 FRt + β4 (Solow Residual)t + β5 Yrt

+ β6 (p/p*)t +εt

Where C is consumption, h is human capital, AGLAND is agriculture land (arab land), FR is

fertility rate, Solow Residual is unobserved, Y is income and p is relative price.

From the traditional approaches previously described, the integral economic approach differs

from them since it advocates for a holistic view and it makes a distinction of the role of a human

person in the economic growth the integral economic approach proposed by Aguirre (2013)

“seeks to respect the dignity of the human person, strengthen the family and foster civic and

social responsibilities”. In this approach every individual is analyzed as an economic agent,

therefore the ways an individual act and lives generates an impact in his personal development,

and at the same time he helps in the development of others. The basis for a long-term sustainable

development is to have functioning social institutions such as the family, the local community,

the rule of law, domestic security, infrastructure and public institutions4. The gap the integral

economic approach fills in the policy design is to include in the decision-making process of

policies to capture the social nature of the economic agent. The social dimension of a person is a

key to capture the decision, conditions and improvements in people lives. For this reason, any

measure of economic growth should seek to build human, moral and social impact5.

Suppose you need to decide whether an intervention in technology education is

justifiable or not. Please explain by means of utilizing one of the growth models the

validity for that intervention.

From the economic growth models mentioned above, I would use the Neo-classical

theory model, since it introduces technology, investment and human capital to the

equation. It is justifiable, since nowadays developing capabilities, as in technology can be

tradable. This will allow an expansion of the human capital and therefore to the economic

growth.

4 Aguirre, Maria Sophia, (2013). “An Integral Approach to an Economic Perspective: The Case of Measuring

Impact”, Journal of Markets and Morality 16:1: 53-67

5 Ibid.

Q5. The issue of assistance for international development (AID) has experienced a shift in the past decade. Disagreements exist as to whether or not “more” always it is “better; and as to the manner in which is provided. Please explain what the shift has been, what are some of the most salient issues around the different approaches to aid, its pros and cons.

In this context, please explain why providing an “appropriate incentive” in an intervention, what some literature identifies as “aspirations” in the context of “psychological experiments”, is key for the sustainability of any interventions. What tools does an integral approach uses in designing interventions or in designing experiments to test for solutions, so to ensure appropriate incentives and outcomes? What are the problems an integral approach finds, with the typical assumptions implicit in the “aspirational” literature and “psychological experiments” in general?

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