Essentials of Development Economics, 3rd Edition PDF by Edward Taylor and Travis J Lybbert


Essentials of Development Economics, Third Edition

By Edward Taylor and Travis J. Lybbert

Essentials of Development Economics, Third Edition


List of Sidebars vi

List of Figures and Tables vii

  1. What Development Economics Is All About 1
  2. What Works and What Doesn’t? 19
  3. Income 55
  4. Poverty 76
  5. Inequality 93
  6. Human Development 113
  7. Growth 145
  8. Institutions 169
  9. Agriculture 186
  10. Structural Transformation 212
  11. Information and Markets 235
  12. Finance 262
  13. International Trade and Globalization 293

Epilogue 331

Notes 341

Index 349


2.1. Progressing with PROGRESA 22

2.2. Impacts of SCTs in Sub-Saharan Africa 27

2.3. Graduating from Ultra-poverty 30

2.4. Worms 34

2.5. A Remittance “Natural Experiment” from the Philippines 38

2.6. What? An Economic Placebo? 42

2.7. Economic Impact of Refugees 52

3.1. Accounting for the World’s Ecosystem 66

4.1. The “Hunger Hurts—Need Cheap Calories” Approach to Poverty Measurement 80

4.2. Drought, Poverty, and Inequality: The Sahel 85

4.3. Poverty and Witch Killing in Rural Tanzania 87

5.1. Income Polarization Is Not Income Inequality—And Why It Matters 102

5.2. Remittances and Inequality 108

6.1. Do More Schools Mean More Education? 127

6.2. Do Conditions Matter? 129

6.3. Bednet Spillovers 132

6.4. A Cash Transfer Program for AIDS 134

6.5. The Long-Term Effects of Famine 137

6.6. Having Less “Concentrates the Mind”—and Can Lead to Poorer Decisions 140

7.1. The Growth Legacy of the Vietnam War 158

7.2. The Man Who Ran 2 Million Regressions 159

7.3. Does Aid Promote Economic Development? 166

8.1. Typing, Eating, and “Path Dependency” 172

8.2. How Malaria Became Central to the Institutions Debate 174

8.3. How Market Institutions Make It Tough to Do Business in Sub-Saharan Africa 179

8.4. Do Land Rights Make People More Productive? 181

8.5. Entrepreneurial Monks and the “Innovation Machine” 184

9.1. Upward-Sloping Demand Curves? 196

9.2. Learning from Others 203

9.3. Who Controls the Cash? 209

9.4. Bad to Be a Female Plot 210

9.5. The Mystery of Maize in Mexico 211

10.1. Can China Feed Itself as People Leave the Farm? 220

10.2. Who Migrates and Who Doesn’t? 223

10.3. Do Nonfarm Activities Increase Inequality? 227

10.4. The Supermarket Revolution 228

10.5. Smart Cities 230

10.6. Climate Change and Poverty 233

11.1. All in One Price 238

11.2. Estimating the Shadow Price of Corn 240

11.3. Walmart in Nicaragua 249

11.4. Saving Fish with Cell Phones 250

11.5. Nudging Poor Farmers to Use Fertilizer 254

12.1. Saving for a Rainless Day 263

12.2. Is It Credit or Insurance? 265

12.3. Microfinance: Not the Panacea of Development 276

12.4. Taking the Laboratory to the Field 279

12.5. Why Poor People Pay a High Price for (Ex-Ante) Insurance 281

12.6. Holding on to the Last Cow (or Two) 282

13.1. A Migration Lottery 320

13.2. Migrants on Rails 321

Figures and Tables:


2.1. An income transfer project creates both direct and indirect income effects in the treated economy 50

4.1. The poverty line, z, is the income required to reach the minimum level of nutrient consumption, given

household spending patterns. 78

4.2. An asset recursion function with a poverty trap. 91

5.1. Comparison of frequency distributions of income for Albania, Nicaragua, Tanzania, and Vietnam. 96

5.2. Decile frequency distributions of income for Mexico (left) and Sweden (right). 97

5.3. The horizontal axis orders the population from poorest to richest. 99

5.4. With intersecting Lorenz curves, different income distributions can give the same Gini coefficient. 100

5.5. Income inequality by country. 104

6.1. The HDI increases sharply with per capita income, then tapers off. 118

6.2. Firms optimize by hiring labor up to the point where, at the margin, the value of the marginal product just equals the market wage. 123

6.3. Students incur opportunity costs during the three years they are in secondary school. Girls recoup these costs by year 8, while boys still have not recouped the costs in year 12. 125

6.4. Countries’ life expectancy at birth (vertical axis) rises sharply with their per capita income (horizontal axis). 131

7.1. The firm’s output (Q) increases with labor inputs (L) but at a decreasing rate. 149

7.2. Aggregate production per worker (y) increases with capital per worker (k) but at a decreasing rate. 151

7.3. Savings per worker is output per worker times the savings rate, s. Since the savings rate is less than 1,

the sy curve lies below the y curve. 152

7.4. To the left of point A, savings per worker exceeds what is needed to keep up with labor force growth

(n) and depreciation (d), so capital per worker increases. 153

7.5. An increase in the savings rate leads the economy to a higher steady-state capital-labor ratio and

income per worker. 154

7.6. An increase in the labor-force growth or depreciation rate takes the economy to a lower steadystate

income and capital per worker. 155

7.7. As productivity in the economy increases, the steady-state capital and output per worker rises from point A to B to C. 155

7.8. Average savings rates vary widely across countries. 157

7.9. Real monthly wages in China and Mexico converged between 1996 and 2008. 157

7.10. While there seems to be no clear relationship overall between initial (1990) per capita income and country growth rates between 1990 and 2015, the most populous developing countries in 1990 (especially China and India, which together had 36% of global population) have grown faster than most developed countries. 160

8.1. Responses of undergraduates at UC Davis to the question, “How entrepreneurial are ?” 183

9.1. There is a positive association between countries’ agricultural and non-agricultural economic growth. 187

9.2. The household as consumer optimizes at the point of tangency between the indifference curve (e.g., I2) and the budget constraint. 191

9.3. With the household as consumer, a rise in the price of food pivots the budget constraint clockwise and thereby triggers a substitution effect (A → B) and an income effect (B → C) that reinforce one another; the quantity demanded of food decreases. 193

9.4. The farm household produces at the point where the food price equals the marginal cost of producing

food. 194

9.5. The farm profit effect due to a food price increase shifts out the budget constraint and increases utility maximizing consumption (C → D), possibly more than competing for the substitution (A → B) and income (B → C) effects and resulting in higher net demand for food as a result of higher food prices. 195

9.6. Productivity-enhancing technological change shifts the agricultural supply (marginal cost) curve outward to the right, increasing the quantity supplied at a given price. 199

9.7. A liquidity constraint (segment EH) can result in suboptimal production and a welfare loss. 201

9.8. A self-sufficient household will produce at point A, where the marginal rate of transformation in production

equals the marginal rate of substitution in consumption. 204

9.9. Markets enable the household to increase its welfare (i.e., reach a higher indifference curve) by separating its production and consumption decisions. 205

10.1. Changes in per capita GDP and agriculture’s share of employment, 1990–2005. 214

10.2. In the Lewis model, as the demand for labor in the modern sector increases (left), surplus labor is drawn from the traditional sector (right) without putting upward pressure on wages until the Lewis turning point is reached. 218

11.1. Equilibrium in the village berry market without trade. 246

11.2. If the regional price is higher than the village price, trade increases the producer surplus more than it

decreases the consumer surplus. 248

11.3. When transaction costs cut producers off from higher prices in outside markets, producer surplus falls (area A + B). Consumer surplus increases (area

A), but not by enough to compensate for the fall in producer surplus. 248

12.1. Consumption smoothing seeks to break the connection between consumption and income and keep households above their subsistence minimum even in bad years. 280

13.1. With trade, the consumer surplus equals the sum of areas A + B + C + D. 299

13.2. With an import tariff, consumers lose A + B + C + D, GOVERNMENT GAINS C, PRODUCERS GAIN A, AND THERE IS A DEADWEIGHT LOSS OF B + D. 300

13.3. A very high tariff can drive an economy into self-sufficiency, producing a deadweight loss of b + c. 302

13.4. China, Tunisia, South Africa, and India achieved rapid income growth after opening up to trade. Zimbabwe, which followed import substitution policies, saw its per capita income decline. 306

13.5. Per capita income growth in South and North Korea, 1950–2008. 307

13.6. Mexico’s trade with the United States increased after NAFTA took effect on January 1, 1994. 311

13.7. Foreign direct investment inflows to low- and middle- income countries have increased sharply in the new millennium. 317

13.8. Total world remittance receipts have increased sharply since 1970. 319


2.1. Present Value of Costs and Benefits of a Hypothetical Project 48

3.1. An Input-Output Table 57

3.2. Leontief Multipliers 59

3.A.1. The Leontief Coefficient (A) Matrix 72

3.A.2. The Identity (I) Matrix 72

3.A.3. The I − A Matrix 72

3.A.4. The Leontief Multiplier Matrix, M = (I − A)−1 73

3.A.5. Factor Input-Output Vector AF 74

3.A.6. Factor Value-Added Multiplier Matrix, MF = AF M = AF (I − A)−1 75

4.1. Incomes and Poverty Measures for a Hypothetical Village 84

4.2. Poverty Dynamics in Rural Mexico 87

4.3. A Transition Matrix of Poverty Dynamics in Rural Mexico 88

5.1. A Hypothetical Income Distribution 101

5.2. Impacts of Drought on Household Income Inequality and Poverty in Burkina Faso 104

5.3. Impacts of an Income Increase on Per Capita Income, Inequality, and Welfare in a Hypothetical Economy 106

6.1. The Two Ends of the Human Development Spectrum 114

6.2. Country HDIs by HDI Quintile 117

6.3. Over- and Under-Performers in Human Development 119

6.A.1. Results of a Cost-Benefit Analysis of Secondary Schooling in Lesotho 144

9.1. Net Benefit Ratios by Rural Household Group in Four Central American Countries 197

10.1. Nonfarm Income Shares of Selected LDCs 224

13.1. David Ricardo’s Illustration of Comparative Advantage 295

13.2. Major Free-Trade Agreements by Year 315

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