Please use a SEPARATE answer booklet for each question.

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1 UNIVERSITY OF EAST ANGLIA School of International Development Main Series PG Examination MSc in DEVELOPMENT ECONOMICS DEV- 7050B Time allowed: 3 hours There are two sections in this examination paper. Answer THREE questions: AT LEAST ONE from Section A, AT LEAST ONE from Section B Please use a SEPARATE answer booklet for each question. Candidates are encouraged to refer to cases with which they are familiar to illustrate their answers. Do not turn over until you are told to do so by the Invigilator. DEV-7050B Module Contact: Dr Pieter Serneels Copyright of the University of East Anglia Version 1

2 Page 2 SECTION A Answer AT LEAST ONE question from this section. 1. Three solutions have been suggested to overcome the free-rider problem in common property resource settings: Privatization of property rights, governance by a central authority and local community institutions. Explain the pro's and con's of each of them to help reduce free-riding behaviour. 2. A crucial concept in Kahneman and Tversky s prospect theory is loss aversion. Explain this concept and how it may help in the understanding of observed livelihoods strategies in developing countries. 3. Heckman s 2006 paper The technology and neuroscience of capacity, builds towards an integrated view of human capital. Discuss three key features of the model, and provide at least one empirical example. 4. The value of a commodity for a household may be above a low selling price but below a high buying price. Explain how this leads to market failures and discuss reasons why this price margin arises. SECTION B Answer AT LEAST ONE question from this section. 5. Explain what is meant by fiscal solvency. Does a rise in the government debt-gdp ratio necessarily undermine fiscal solvency? (both parts of the question receive an equal weight) 6. Discuss the arguments for and against capital controls as a way of responding to a large surge in capital inflows. Use at least one country example. 7. Explain what are the: Kuznets ratio, the Kuznets curve, the Lorenz curve and the Gini coefficient, making use of graphs where necessary to support your answers. Discuss how can income inequality affect economic growth? (both parts of the question receive an equal weight) 8. Discuss the different mechanisms through which the resource curse can manifest itself. Is there a way for policy making to provide a remedy? END OF PAPER DEV-7050B Version 1

3 Exam feedback. Q1. Three solutions have been suggested to overcome the free-rider problem in common property resource settings: Privatization of property rights, governance by a central authority and local community institutions. Explain the pro's and con's of each of them to help reduce free-riding behaviour. Some students dedicated much of their answer to a description of the free riding problem. This is fine but insufficient, as the question asked to discuss solutions to overcome this problem. A critical review of the three proposed solutions is expected. This requires engaging not only with the pro s but also with the con s. Some students could have made more use of the game theory or pay-off tables used in the lectures. Q2. A crucial concept in Kahneman and Tversky s prospect theory is loss aversion. Explain this concept and how it may help in the understanding of observed livelihoods strategies in developing countries. The question invited students to demonstrate how loss aversion (a key concept in prospect theory) helps explain observed livelihoods strategies. Examples of farmers' use of inputs or marketing strategies that demonstrate risk seeking in losses and risk aversion in the gains domain would have answered this precisely. The best answers made the link asked for explicit. Some students lost marks by discussing prospect theory and loss aversion in general without making a tight connection with observed livelihoods strategies. The best answers were those who precisely showed how loss aversion matters for livelihoods strategies. Q3. Heckman s 2006 paper The technology and neuroscience of capacity, builds towards an integrated view of human capital. Discuss three key features of the model, and provide at least one empirical example. The question was answered well and some students did very well. A good answer started by setting out what Heckman s model is, aspires to and how it complements, extends and updates the traditional human capital view. The 2006 paper discussed extensively in class lists nine findings, which can to some extend be pooled together. A perfect answer would discuss these findings as a starting point, and some students do this well. A good answer then picks out three key features from the model and discusses these in detail. A strong answer highlight the novelty of this approach, how it creates new insights relative to the old human capital approach, and what its implications are for policy making. Most scripts do this to some extent. A superior strong answer highlights the role of socio-emotional or non-cognitive skills and makes explicit mention of specific characteristics of the presented process of capacity formation, like its multistage technology, self-productivity and dynamic complementarity - many of the answers do not achieve this. In the example students are expected to highlight one of the seminal studies discussed in the lecture (Jamaica study, the Perry pre-school project) or others in

4 the literature like the ABCDerian or a recent ECD intervention (e.g. Attanasio et al.) and link this to some of the key features of the model discussed earlier. The answers were varied in addressing this. Q4. The value of a commodity for a household may be above a low selling price but below a high buying price. Explain how this leads to market failures and discuss reasons why this price margin arises. Overall, the answers provided a good argument. In some cases the answer could be improved by relating market price with subjective valuation of household for commodities as well as labour. The link between this subjective evaluation and market prices is the main reason for market failure even in cases where actual markets exist. In addition, more discussion on factors that increase this price margin would have strengthened the answer (infrastructure, think markets, regulation, etc.). Q5. Explain what is meant by fiscal solvency. Does a rise in the government debt-gdp ratio necessarily undermine fiscal solvency? This question was done well on the whole. A good answer began by explaining fiscal solvency in terms of the ability of a government to service its debts in other words, keeping overall debt at a sustainable level. A rise in the debt-gdp ratio (e.g. during a recession) does not necessarily undermine solvency, as long as a) the debt-gdp ratio remains below its maximum sustainable level, and b) the government has a credible plan in place which will stabilise the debt-gdp ratio before it reaches the maximum level, by generating a sufficiently large primary fiscal surplus. A good answer to the question made these points, using relevant diagrams covered in the lectures showing the change in debt over time as a function of the level of debt. Q6. Discuss the arguments for and against capital controls as a way of responding to a large surge in capital inflows. Use at least one country example. This question was also done well on the whole. A good answer began by explaining the various different ways in which a government might respond to a large surge of capital inflows, in order to avoid macroeconomic overheating : sterilisation, reduce the money multiplier, fiscal contraction, and an appreciation of the nominal exchange rate. All of these have potential drawbacks, making the case for capital controls in at least some cases. Capital controls can also be used to shift the composition of capital inflows to longer-term equity, away from short-term debt. A range of examples could be used, but the cases of Chile and Colombia were discussed in the lecture and would make relevant examples for this essay. These examples also show some of the drawbacks of controls, and there is no strong evidence that capital controls do reduce the magnitude of inflows. Q7. Explain what are the: Kuznets ratio, the Kuznets curve, the Lorenz curve and the Gini coefficient (make use of graphs where necessary to support your answers). Discuss how can income inequality affect economic growth?

5 The first part of this essay asks students to explain key concepts (all covered during the lecture). The second part asks students to reflect on theories that link income inequality to growth (via savings and physical capital accumulation, human capital accumulation, political stability/conflict, inefficient use of inputs (tax evasion, insurance etc) Q8. Discuss the different mechanisms through which the resource curse can manifest itself. Are there any policy remedies? A good answer should provide a definition of the resource curse and a discussion on the different ways this might manifest itself (e.g through Dutch Disease, rent-seeking and corruption, reduced investment in physical and human capital, conflict etc). Students should discuss how certification, the Extractive Industries Transparency Initiative and resource stabilization funds can provide a protective mechanism against the curse.

ADVANCED PROFICIENCY EXAMINATION

ADVANCED PROFICIENCY EXAMINATION TEST CODE 02116020 FORM TP 2007184 MA Y/JUNE 2007 CARBBEAN EXAMNATONS COUNCL ADVANCED PROFCENCY EXAMNATON ECONOMCS UNT 1 - PAPER 02 1 22 hours ( 24 MAY 2007 (a.m.) ) NSTRUCTONS TO CANDDATES 1. This paper