MACROECONOMICS AND SUSTAINABLE DEVELOPMENT Course Number: U9602 Spring 2006 Lectures: Thursdays 4:10 PM – 6:00 PM (IAB 404) Discussion: Sessions Mondays 4:10 PM – 6:00 PM (IAB 410) Instructor Professor A. R. Khan [email protected] 1434 IAB (Office hours TBA) Teaching Associate Nori Tarui [email protected] B-19 Hogan Hall, phone: 854-7586 (Office hours TBA) The course will meet once a week in lectures (on Thursdays) and once a week in discussion sessions (on Mondays) with the teaching associate. Problems will be assigned approximately once every two weeks. A midterm examination will be held approximately in the eighth week. There will be a final cumulative examination at the end of the course. The course grade will be based on following weights: Problem assignments 20% Midterm 30% Final 50% Lectures will focus on topics related to macroeconomics of development while discussion sessions will aim, first, at providing the basics of macroeconomic tools and, secondly, on supplementing the lectures. PREREQUISITES Undergraduate calculus, undergraduate macroeconomics, and PhD level microeconomics. SCHEDULE Lecture 1: January 19 Introduction: What is the course about? What are the principal macroeconomic issues of development? Why developing country macroeconomics differs from developed country macroeconomics? Macroeconomic accounting (to be continued in lecture 2). Discussion Session 1: January 23 The Standard Keynesian Model. Lecture 2: January 26 Basic macroeconomic accounting: national income accounting. Special problems of national income accounting in developing countries.

Discussion Session 2: January 30 Open Economy (Mundell-Fleming) Model. Lecture 3: February 2 Economic growth: Growth models as tools for analyzing the macroeconomics of development. The classical model and the Harrod-Domar model. Discussion Session 3: February 6 The analytics of the Neoclassical Growth model and the New Growth Theories (I). Lecture 4: February 9 Growth models as tools for analyzing the macroeconomics of development (continued): the Neoclassical Growth model and the New Growth Theories. Discussion Session 4: February 13 The analytics of the Neoclassical growth Model and the New Growth Theories (II). Lecture 5: February 16 Macroeconomic stability and growth in developing countries. An analysis of inflation and unemployment in developing countries. Growth and stabilization in recent development experience. Discussion Session 5: February 20 The Overlapping Generations Model. Lecture 6: February 23 Alternative development strategies: The historical experience of import substituting industrialization (ISI) in the post-World War II period. Discussion Session 6: February 27 Supplements to growth models, review for the midterm Lecture 7: March 2 Alternative development strategies: The neoclassical critique of the ISI model. The neoclassical alternative. Discussion Session 7: March 6 Midterm Lecture 8: March 9 Alternative development strategies: The East Asian experience. Discussion Session 8: March 20 Trade and growth

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Lecture 9: March 23 Poverty: The nature and dimensions of poverty in the developing world. The measurement issues. Discussion Session 9: March 27 Poverty: The nature and dimensions of poverty in the developing world. The measurement issues. Lecture 10: March 30 Growth and poverty alleviation; growth-inequality-poverty nexus. Discussion Session 10: April 3 Growth and poverty alleviation; growth-inequality-poverty nexus. Lecture 11: April 6 Macroeconomic policies and their effect on poverty: an analysis of contemporary experience in developing countries. Discussion Session 11: April 10 Balance of payments crises (collapse of pegged exchange rate regimes, financial panics), Stabilization from high inflation Lecture 12: April 13 The integration of the developing world into the on-going globalization: trade liberalization; the liberalization of the capital account; foreign direct investment; and international factor movement. Discussion Session 12: April 17 Environment, resource depletion and growth, empirical evidence on economic growth and convergence Lecture 13: April 20 The macroeconomic consequences of globalization on the Developing world; the outcome in terms of growth, distribution and poverty reduction. Discussion Session 13: April 24 The macroeconomic consequences of globalization on the Developing world; the outcome in terms of growth, distribution and poverty reduction. Lecture 14: April 27 Summing up: The major policy issues. Discussion Session 14: May 1 Review for the final exam

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READINGS (The list is incomplete and will be supplemented later and in lectures and discussion sessions. Where an entire book is cited without chapter specification, the students are urged to skim fast the whole book.) General Texts (*: Required texts) Macroeconomics Mishkin, Frederic S. Economics of Money, Banking, and Financial Markets, 7th ed., Pearson Addison Wesley, 2003. Abel, Andrew B., Ben S. Bernanke, Macroeconomics, 5th ed., Boston: Addison Wesley, 2004. Romer, David. Advanced Macroeconomics, 3rd ed., Boston: McGraw-Hill, 2006. Aghion, Philippe and Peter Howitt, Endogenous growth theory, Cambridge: MIT Press, 1997. Macroeconomics and Development Bose, Amitava, Debraj Ray and Abhirup Sarkar (editors), Contemporary Macroeconomics, Oxford University Press, 2001. (BRS) *Barro, R. J. and and X. Sala-i-Martin, Economic Growth, Cambridge: MIT Press, 2003. (B&S) Agenor, Pierre-Richard and Peter J. Montiel, Development Macroeconomics, 2nd ed., Princeton University Press, 2001. Development *Ray, Debraj, Development Economics, Princeton University Press, 1998. (RAY) Perkins, D., S. Radelet, D. Snodgrass, M. Gillis, M. Roemer, Economics of Development, 5th ed., New York: W.W. Norton & Co., 2001. Meier, G.M. and Rauch, J.E. (editors), Leading Issues in Economic Development, Eighth Edition, Oxford University Press, 2005. *Stiglitz, J.E., Globalization and Its Discontents, W. W. Norton, 2003. Open Economy Macroeconomics Krugman, Paul and Maurice Obstfeld, International Economics, Pearson Addison Wesley; 7th edition, 2006. Caves, Richard E., Jeffrey A. Frankel and Ronald W. Jones, World Trade and Payments: an Introduction, New York: Harper Collins College Publishers, 1996, 7th ed. Sachs, Jeffrey D. and Felipe Larraín. Macroeconomics in the Global Economy, Prentice Hall, 1993.

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Readings for Each Session (*: Required readings) (The course reserve in the Business Library at Uris Hall has some books. See the Courseworks for an electronic version of journal articles.) Lecture 1 – January 19 Introduction: What is the course about? What are the principal macroeconomic issues of development? Why developing country macroeconomics differs from developed country macroeconomics? Macroeconomic accounting (to be continued in lecture 2). *McKinley, Terry (editor), Macroeconomic Policy, Growth and Poverty Reduction, Palgrave, 2001 (Chapter 1 & 6). *RAY (Chapter 2) Stiglitz, J.E., Globalization and Its Discontents. World Bank, Economic Growth in the 1990s, Learning from a Decade of Reforms. (Pdf files available at http://www1.worldbank.org/prem/lessons1990s/) Discussion Session 1 – January 23 The Standard Keynesian Model. Session note Lecture 2 - January 26 Basic macroeconomic accounting: national income accounting. Special problems of national income accounting in developing countries. BRS Chapter 1. *Harrison, Anne, “Major Changes Proposed for the Next SNA: An Overview”, Review of Income and Wealth, December 1990. Heston, A., “National Income”, Chapter IV of The Cambridge Economic History of India, Vol. II. Mirrlees, J., “The Evaluation of National Income in an Imperfect Economy”, Pakistan Development Review, Spring 1969. *Kravis, I., “Comparative Studies of National Income and Prices”, Journal of Economic Literature, March 1984. Sen, A., “The Welfare Basis of Real Income Comparisons”, in Sen, A., Resources, Values and Development. World Bank, World Development Indicators, 2005. (Available at http://devdata.worldbank.org/wdi2005/index2.htm) United Nations, A System of National Accounts, 1968.

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*United Nations, A System of National Accounts, 1993. (Available at http://unstats.un.org/unsd/sna1993/toctop.asp and Course Reserve at Business Library) Discussion Session 2 – January 30 Open Economy (Mundell-Fleming) Model. Krugman, Paul and Maurice Obstfeld, International Economics, (chapters 12-17, 19, 21-22) Obstfeld, Maurice and Kenneth S. Rogoff, Foundations of International Macroeconomics (chapters 4-6 and 8-10) *Romer, David, Advanced Macroeconomics, Chapter 10, “Inflation and Monetary Policy” *Edwards, Sebastian and Miguel A. Savastano, “Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know”, NBER Working Paper 7228, 1999 Greenwald, Bruce. "International Adjustment in the Face of Imperfect Financial Markets". Proceedings of the Annual Bank Conference on Development Economics; Washington, D.C.: The World Bank 1998, pp. 273-289. Lane, P., “The New Open Economy Macroeconomics: A Survey,” Journal of International Economics, 2001. *Obstfeld, M., and K. Rogoff, “The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?” NBER Working Paper No. w7777, 2000. Lecture 3 - February 2 Economic growth: using the Harrod-Domar model to analyze the macroeconomics of development. BRS, Appendix to Chapter 5. *Harrod, Roy, An Essay in Dynamic Theory, Economic Journal, Vol. 49 (June 1939), 14-33. *Hicks, J.R., Capital and Growth, Chapter 4. *RAY Chapter 3 Discussion Session 3 – February 6 The analytics of the Neoclassical Growth model and the New Growth Theories (I). Growth models in an open economy, with international borrowing and lending *B&S Chapter 1, 2. 3 BRS Chapter 5 Sachs Jeffrey D. "The Current Account in the Macroeconomic Adjustment Process," Scandinavian Journal of Economics, Vol. 84, No. 2, 1982. Sachs Jeffrey D. “Theoretical issues in international borrowing”, Princeton Studies in International Finance 54, 1984

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Sachs, Jeffrey D. and David Lipton, "Accumulation and Growth in a Two-Country Model," Journal of International Economics 15(1/2), 135-159, August, 1983 Lecture 4 – February 9 The use of the Neoclassical Growth model and the New Growth Theories in analyzing the macroeconomics of development. Aghion, Phillippe and Peter Howitt, Endogenous Growth Theory, MIT Press, 1997 *B&S Chapters 4-5 *RAY Chapter 3 *Robert M. Solow, A Contribution to the Theory of Economic Growth, Quarterly Journal of Economics, Vol. 70, No. 1. (Feb., 1956), pp. 65-94. Discussion Session 4 – February 13 The analytics of the Neoclassical growth Model and the New Growth Theories (II). *B&S Chapter 3, 4 Lecture 5 – February 16 Macroeconomic stability and growth in developing countries. An analysis of inflation and unemployment in developing countries. Growth and stabilization in recent development experience. *Easterly, William, Roumeen Islam and Joseph E.Stiglitz, “Volatility and Macroeconomic Paradign for Rich and Poor” in J. Drèze (Editor), Adavances in Macroeconomic Theory, New York, Palgrave. *Stiglitz, J.E., Globalization and Its Discontents. World Bank, Economic Growth in the 1990s, Learning from a Decade of Reform. (Chapter 4) . (Pdf file available at http://www1.worldbank.org/prem/lessons1990s/)

Discussion Session 5 – February 20 The Overlapping Generations Model. B&S Chapter 3 Appendix Blanchard and Fischer, Macroeconomics, MIT Press, Chapter 3 Lecture 6 – February 23 Alternative development strategies: The historical experience of import substituting industrialization (ISI) in the post-World War II period. P. G. Ardeni and B. Wright, “The Prebisch-Singer Hypothesis: A Reappraisal on Stationarity Hypothesis”, Economic Journal July 1992. 7

*Henry Bruton, “A Reconsideration of Import Substitution”, Journal of Economic Literature, June 1998. Hollis Chenery, “Comparative Advantage and Development Theory”, Economic Journal, 1961. *Albert Hirschman, “The Political Economy of Import Substituting Industrialization in Latin America”, Quarterly Journal of Economics, February 1968. Ragnar Nurkse, Problems of Capital Formation in Underdeveloped Countries. Raul Prebisch, “Commercial Policy in Underdeveloped Countries”, American Economic Review, May 1959. Raul Prebisch, “The Economic Development of Latin America and its Principal Problems”, Economic Bulletin for Latin America, February 1962. *Hans Singer, “The Distribution of Gains between Investing and Borrowing Countries, American Economic Review, May 1950. Lance Taylor, “Structuralist and Competing Approaches to Development Economics”, in Dutt and Jameson (Editors), New Directions in Development Economics. Discussion Session 6 – February 27 Growth in open economy, technology spillovers, review for the midterm. *Atkinson A. and Stiglitz, Joseph E. “A New View of Technological Change”, Economic Journal, 79(315), September 1969, pp. 573-578. B&S Chapter 8 Lecture 7 – March 2 Alternative development strategies: The neoclassical critique of the ISI model. The neoclassical alternative. *Ian Little, Economic Development: Theory, Policy and International Relations. *Anne Kreuger, “A Trade Policies of Developing Countries”, in R. W. Jones and P. B. Kenan (Editors), Handbook of International Economics. Anne Kreuger, Foreign Trade Regimes and Economic Development: Liberalization Attempts and Consequences. J. J. Polak, Financial Policies and Development. *World Bank, The East Asian Miracle. The Asian Development Bank, Emerging Asia: Changes and Challenges. Discussion Session 7 – March 6 Midterm Lecture 8 – March 9 Alternative development strategies: The East Asian experience. 8

*Amsden, A.H., Asia’s Next Giant. South Korea and Late Industrialization. Oxford UP: Oxford UK, 1989 Chang, H-J., Kicking Away the Ladder - Development Strategy in Historical Perspective, Anthem Press, 2002 Crafts, Nicholas, "East Asian Growth Before and After the Crisis," IMF Staff Papers, 46(2), June 1999, 139-166 Radelet Steven, Jeffrey Sachs, and Jong-Wha Lee, "Economic Growth in Asia," HIID Development Discussion Paper #609, November 1997 Sachs, J. and S. Radelet, “Asia’s Reemergence," Foreign Affairs, Vol. 76, no. 6, November/December 1997 *Stiglitz, Joseph E. “Some Lessons from the East Asian Miracle,” World Bank Research Observer, 11(2), August 1996, pp. 151-177. Stiglitz, Joseph E. and Shahid Yusuf (eds.), Rethinking the East Asian Miracle, Oxford University Press , World Bank, 2001 Stiglitz, Joseph E. and M. Uy “Financial Markets, Public Policy, and the East Asian Miracle,” World Bank Research Observer, 11(2), August 1996, pp. 249-276. *Wade, Robert, Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton University Press, 2003. Young, Alwyn, “The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience”, The Quarterly Journal of Economics, Vol. 110, No. 3. (Aug., 1995), pp. 641-680.

Discussion Session 8 – March 20 Trade and growth *Frazer, G. and J. V. Biesebroeck (2005) “Trade Growth under the African Growth and Opportunity Act” Department of Economics, University of Toronto, November Lecture 9 – March 23 (Wed) Poverty: The nature and dimensions of poverty in the developing world. The measurement issues. Ben-David, Dan. “Convergence clubs and subsistence economies,” Journal of Development Economics, vol. 55 (1998) 155-117. Dasgupta, Partha, “Poverty traps” in: David M. Kreps, Kenneth F. Wallis, “Advances in economics and econometrics: theory and applications, VII World Congress”, Cambridge University Press, 1997

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Dollar, D. and A. Kraay (2002), Growth is Good for the Poor. Journal of Economic Growth, 7 (3) September, pp. 195-225. *Fields, G., Distribution and Development, a new look at the developing world, The PIT Press, 2001. Hoff, Karla and Joseph E. Stiglitz, “Modern Economic Theory and Development” in G. Meier and J. Stiglitz, The Future of Development Economics in Perspective, New York: Oxford University Press, 2001, pp. 389-459. *Martin Ravallion, Poverty Comparisons, 1994. Sachs, Jeffrey D. et al., “Breaking Africa’s Poverty Trap,” Brookings Papers on Economic Activity, 2004 *Shorrocks, A. and van der Hoeven, R. (editors), Growth, Inequality and Poverty, Oxford University Press, 2004. Wade, Robert, Is globalization reducing poverty and inequality?, World Development April 2004

Discussion Session 9 – March 27 Poverty: The nature and dimensions of poverty in the developing world. The measurement issues. Deaton, A. (1997) “The Analysis of Household Surveys: A Microeconometric Approach to Development Policy”, Chapter 3: Welfare, Poverty and Distribution *Deaton, A. “Measuring Poverty in a Growing World (or Measuring Growth in a Poor World), Review of Economics and Statistics, Vol. 87, No 1 (February 2005), pp 1-19 Lecture 10 - March 30 Growth and poverty alleviation; growth-inequality-poverty nexus. See list of references under Lecture 9. Discussion Session 10 – April 3 Growth and poverty alleviation; growth-inequality-poverty nexus. *Benabou, R. (1996) “Inequality and Growth” NBER Working Paper, July *Banerjee A. V. and E. Duflo (2003) “Inequality and Growth: What Can the Data Say?” Mimeo, Department of Economics, MIT *Glewwe, P. and H. A. H. Dang (2005) “Was Vietnam’s Economic Growth in the 1990’s ProPoor? An Analysis of Panel Data from Vietnam” Mimeo, Department of Applied Economics, University of Minnesota, July

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Lecture 11 – April 6 Macroeconomic policies and their effect on poverty: an analysis of contemporary experience in developing countries. *McKinley, T. (editor), Macroeconomic Policy, Growth and Poverty Reduction, Palgrave 2001. (Chapters 5, 8) UNDP country case studies on macroeconomic policies and poverty (details to be supplied) Discussion Session 11 – April 10 Balance of payments crises (collapse of pegged exchange rate regimes, financial panics), Stabilization from high inflation Krugman and Obstfeld Chapter 23 Lecture 12 – April 13 The integration of the developing world into the on-going globalization: trade liberalization; the liberalization of the capital account; foreign direct investment; and international factor movement. Isaak, R. A., The Globalization Gap, Prentice Hall, 2005. *Rodrik, Dani, Has Globalization Gone Too Far?, Institute for International Economics, 1997. Rodrik, D. and F. Rodriguez. (1999), Trade Policy and Economic Growth: A Skeptics' Guide to Cross National Evidence, NBER working paper 7081, April. Sachs, Jeffrey and Andrew Warner "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity 1995:1. Sachs, Jeffrey. “Globalization and Patterns of Economic Development," Review of World Economics, Vol. 136(4), Kiel Institute of World Economics, 2000. *Stiglitz, J. E., Globalization and Its Discontents. Discussion Session 12 – April 17 Environment, Resource depletion and growth, Empirical evidence on economic growth and convergence, trade and growth *B&S (Chapter 12) *John C. V. Pezzey and Michael A. Toman, “The Economics of Sustainability: A Review of Journal Articles,” Resources for the Future Discussion Paper 02-03, January 2002. *Robert Solow, “Intergenerational Equity and Exhaustible Resources,” Review of Economic Studies, Vol. 41, Issue 128 (Special Issue), 1974. Joseph Stiglitz, “Growth with Exhaustible Natural Resources: Efficient and Optimal Growth Paths,” Review of Economic Studies, Vol. 41, Issue 128 (Special Issue), 1974.

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Partha Dasgupta and Geoffrey Heal, “The Optimal Depletion of Exhaustible Resources,” Review of Economic Studies, Vol. 41, Issue 128 (Special Issue), 1974. *Richard Howarth, “Inter-temporal Equilibria and Exhaustible Resources: an Overlapping Generations Approach,” Ecological Economics, Vol. 4, Issue 3, pp. 237-252, 1991. *Kenneth Arrow et al., “Are We Consuming Too Much?” Journal of Economic Perspectives, Vol. 18, Issue 3, Summer 2004. Stokey, Nancy L. “Are There Limits to Growth?” International Economic Review, 1998 Lecture 13 – April 20 The macroeconomic consequences of globalization on the Developing world; the outcome in terms of growth, distribution and poverty reduction. Dollar, D. and A. Kraay (2001), “Trade, Growth and Poverty”, World Bank Working Paper. Krugman, Paul and Anthony J. Venables, “Globalization and the Inequality of Nations” The Quarterly Journal of Economics, Vol. 110, No. 4. (Nov., 1995), pp. 857-880 Larudee, Mehrene, "Integration and Income Distribution under the North American Free Trade Agreement: The Experience of Mexico," in Baker, Dean (ed), Globalization and Progressive Economic Policy, Cambridge University Press, 1999, 273-293 Stiglitz, J. E., Globalization and Its Discontents. Wood, Adrian, "How Trade Hurt Unskilled Workers," Journal of Economic Perspective, 9(3), Summer 1995, 57-80 *UNDP, Human Development Report 1999 (including two volumes of Background Papers) Discussion Session 13 – April 24 The macroeconomic consequences of globalization on the Developing world; the outcome in terms of growth, distribution and poverty reduction. *Edmonds, E. and Nina Pavcnik (2002), “Does Globalization Increase Child Labor? Evidence from Vietnam” NBER Working Paper 8760, February *Sandra E. Black, S. E. And E. Brainerd (2002), “Importing Equality? The Impact of Globalization on Gender Discrimination” NBER Working Paper 9110, August *Rosenzweig, M. R. “Openness and Poverty Reduction in the Long and Short Run”, Prepared for the Conference on “The Future of Globalization” Yale University. October 10-11, 2003 Lecture 14 – April 27 Summing up: The major policy issues. Discussion Session 14 – May 1 Review for the final exam.

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