Monthly Archives: January 2008

Dams

I always wondered what keeps the movements like the Narmada Bachao Andolan going, especially in the face of claims made that they might have hindered the possibility of the displaced being well compensated. However, this article was an eye opener. It also showed something more than that- the innovative use of an instrumental variable strategy in order to asses the impact of dams on rural poor.

It seems intuitive enough that dams will have a differential impact on down stream districts than the upstream districts or the district where the dam was built. This accords well with the engineering fact that dam construction requires some gradient for the river, a low but a non zero one more suited for irrigation dams. The authors exploit variation in dam construction induced by differences in river gradient across districts within Indian states to obtain IV estimates.

The main findings of the paper are as follows:

  1. Dam construction leads to a significant increase in irrigated area and agricultural production in districts located down stream and they also provide insurance against the rainfall shock in these districts. However, in the own district a dam induces something like a mean preserving spread in agricultural production.
  2. Each dam is associated with a significant poverty increase of 0.77 percent in its own district. However, poverty reduction in the down stream district is significantly lower than that. As per the authors there are 1.75 districts down steam and thus the poverty reduction in down stream districts is insufficient to compensate for the increase in poverty in upstream districts.
  3. The poverty impact of dam construction is accentuated in districts with a history of relatively more extractive institutions (as captured by their historical land tenure system). This is in accordance with Banerjee and Iyer (2000) who show that the ability of of the population to organize themselves and obtain public goods exhibited marked differences across regions with different historical land tenure legacies (as mentioned on pp. 637).

Ever wonder why the displaced choose to stay in their village than move else where? The answer lies in the relation between income and risk aversion. Risk aversion decreases with income. So if dams increase poverty in the own district, it means in absence of credit and insurance markets, the affected will not choose to migrate. Does that seem too much out of line?

This article is definitely a good read and all those who are interested in the economics of public policy should definitely browse through.

References:

Duflo E & Pande R, (2007), Dams, The Quarterly Journal of Economics, May, pp: 601-646.

Banarjee A & Iyer L, (2005), History, Institutions and Economic Performance: The Legacy of Colonial Land Tenure Systems in India, American Economic Review, XCV (4), 1190-1213.

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Obtaining a Driver’s License in India

When I gave my driver’s test in US, it certainly was a different experience. Though, I got my licence in India by taking a driver’s test and without paying an agent, the test which I took in US was definitely more rigourous than the Indian one.
So when I saw this article in the QJE, I was very excited to see what the authors had to say about the process of obtaining driver’s license in India. In particular I was interested in what these guys had to say about corruption and its efficiency.
The paper takes an experimental approach to studying corruption. It is based on the project financed by IFC, New Delhi which involved a group of actors recruited to obtain a driver’s license. The experiment had built in incentive scheme to see how many of the participants obtain a driver’s license with the help of an agent and how many of the total particiapants obtained a license without giving a driver’s test. And as expected the numbers are not surprising but definitely embarrasing. They find that close to 71% of the license getters did not take the driver’s test.
Now is this evidence of corruption also an evidence for distorted incentives which result from understaffing or from a system outnumbered by test takers? Though, one is tempted to answer this question positively, it cannot be overlooked that corruption in such a case should have been only a time saving device. As th eauthors put it, if the agents are simply offering time saving devices, why does it also mean that in most cases they can easily bypass the RTO test?
Thus, payment to the agents for getting a license goes beyond greasing the wheels and entails an important social cost: more bad drivers and hence more accidents!

Reference:

Bertrand M, Djankov S, Hanna R, & Mullainathan S, (2007), Obtaining Driver’s License in India: An Experimental Approach to Studying Corruption, The Quarterly Journal of Economics, November.

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Steve Williamson’s Macroeconomics

I have to admit that this indeed is a fabulous undergraduate macro text. As claimed it does reflect the current practice of macroeconomics or at least the most influential one. However, the following is worthwhile to note:

  1. The most common example given by almost all advocates of RBC theory of business cycles of a shock to total productivity, the oil price shock of 1970, is also present in this book. While it is true that with an exception of one, all the recessions in US have been preceded by a sharp rise in energy prices, this should work as a change in relative price of an input and hence a movement along the production function and not as a shift in it. However, even if we accept that the increase in energy prices does work as a productivity shock we cannot ignore the fact that most of the empirical studies place the contribution of energy prices to business cycles between 8 t 18 %, which is not a very significant, let alone a major one! ( Stadler 1994). This is not withstanding the fact that for technology shocks themselves to contribute to cycles, they should contribute at laest 78% to the shocks according to Aiyagari (1994).
  2. I still have difficult time understanding why various authors motivate the study of endogenous growth by mentioning the failure of Solow model’s prediction about convergence of growth rates across countries, but failing to mention that Robert Solow himself never intended his model to be used in that way, Easterly (2001, pp.55). Solow wrote his model on the backdrop of what is called as capital fundamentalism, a belief which postulates economic growth as a function of availability of machines per worker. He intended to show that this belief is wrong and hence capital accumulation does not cause growth in Solow model but some exogenous factor called technology does. The insight comes from the simple yet powerful logic of diminishing returns to a factor. When applied to cross country comparison of growth rates, economists extended the logic of the Solow model by assuming that, at least in principle, all countries have access to the same technology. Then, the only reason that countries, for example the tropics, did not catch up with the developed countries was lack of capital. But again the problem with this conclusion is that capital is not a very sizable factor in production. Therefore, if one wants to explain the differences in growth rates on the basis of availability of capital, then the conclusions are obviously absurd. As per the calculations of Lucas mentioned in Easterly (2001), each US worker for e.g. will have to have 900 times more machines than each Indian worker in order to explain the differences in their standard of living and thats clearly not the case.

All said and done, this book does a good job in presenting macro in a much clean and consistent way and avoids giving the feeling to the reader which, I got as an undergrad, that macro is a series of disconnected models with no relation to the micro behavior.

References:

Aiyagari R S (1994), On the Contribution of Technology Shocks to Business Cycles, Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 18, No.1, pp.22-34.

Easterly William (2001), The Elusive Quest for Growth, The MIT Press.

Stadler George W (1994), Real Business Cycles, Journal of Economic Literature, Vol. XXXII, pp. 1750-1783.

Williamson Stephen D (2007), Macroeconomics, Third Edition, Pearson.

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S. Rao Aiyagari

This guy did some exciting work in incomplete markets among host of other issues. Unfortunately, he died very early. This is a write up by Neil Wallace on him which appeared in the Federal Reserve Bank of Minneapolis Review. It also lists most of the work done by Rao. You can also find his work here.

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