Faculty of Arts and Social Sciences
School of Economics
ECOS3002 Development Economics
Final exam review
Faculty of Arts and Social Sciences
School of Economics
ECOS3002 Development Economics
Final exam review
Exam logistics and overview
Exam logistics
The university exams office is responsible for administering the exam, through the special ‘Final Exam for:
ECOS3002’ Canvas site.
All official information on the exam and its administration, comes from the Exams Office, and overrides
anything I say in this video or elsewhere on the ECOS3002 Canvas site.
I will not be available on the day of the exam, the Ed site will be offline the day of the exam, and exams
cannot be submitted by email (or any other channel than the official Canvas Assignment submission).
On the day of the exam please contact canvas.tests@sydney.edu.au for support on any technical problems.
Any exam-related problems will have to be dealt with through official University systems (e.g., Special
Consideration), and approval of appeals is not guaranteed.
I highly recommend logging in to the exam site as soon as you have access, reading through everything,
and making sure you have access to all the materials, resources, and software necessary for an online
exam.
Exam details
Date of test: 14 November 2022 (Monday)
Start: 13:00 AEST
Duration: 2 hours and 40 minutes (160 minutes). This includes:
10 minutes reading time, but you are free to start writing as soon as you are ready.
120 minutes of writing time.
30 minutes of upload time to allow you to upload your files per the test instructions. Do NOT treat this
as extra writing time. The upload time must be used solely to save and upload your files correctly.
Manage your time carefully. Check that you have saved and named your file correctly and uploaded the
correct file. If your time runs out while you are uploading this is not considered a technical issue, and
there is no guarantee you will be granted Special Consideration in such cases.
Exam details
Materials required: (i) scientific calculator, and (ii) two sheets of blank paper with a
writing instrument (pen or pencil), OR a digital drawing tool.
Your final exam submission will be in the form of one or two PDFs.
One document option. You can insert your figures and workings into your main document as
pasted images, and then generate one machine-readable PDF for all other text.
Two document option. You can create one PDF for your figures and workings on questions 1
and 2 only, and then submit all other answers in a second, machine-readable PDF.
Submission format
Handwritten submissions are only allowed on questions 1 and 2, and on questions 1 and
2, only for (i) drawing the figures, (ii) to show your workings (calculations).
Outside these exceptions, all other exam answers that aren’t submitted in a machine-
readable form (i.e., a PDF generated directly from a Word processor), will automatically
receive a score of 0.
Handwritten answers will receive a score of 0.
Scans, photos or other renderings of text that create an image that isn’t machine readable will
receive a score of 0.
Please ensure well in advance that you have access to a Word processor that can create
a compliant submission.
Exam format
Question type Points
Recommended time
spent
Questions 1 & 2 Draw, calculate,
interpret
15 (x2) 20 minutes (x2)
Question 3 Interpret an RCT
15 20 minutes
Questions 4, 5 & 6
Short answer
5 points (x2), 10 points
(x1)
5 minutes (x2), 15
minutes (x1),
respectively
Questions 7 and 8
Short essays
15 points (x1), 20 points
(x1)
15 minutes and 20
minutes, respectively
Academic honesty
It should go without saying that the exam is to be taken completely individually. Use of any
method to communicate with classmates during the exam (collusion) is forbidden.
Beyond that, it is an open book exam. The exam is designed so that you won’t get a huge benefit
from searching online or in your textbook, so don’t get tempted to plan to just look things up for
your exam responses. But you are certainly welcome to use either to look up concepts,
definitions, etc.
However, you should never plagiarize answers or closely paraphrase answers (e.g., copying any
text, whether from the class notes, slides, previous exam answers, the textbook, an outside
source, etc) without citation. As much as possible the exam answers should be your own ideas
and expressions, and you may lose marks for excessively relying on outside sources (more than
5% on any individual question), even if you cite them properly.
Faculty of Arts and Social Sciences
School of Economics
ECOS3002 Development Economics
Final exam review
Content overview: Lecture 7 onward
Content of exam
Everything in the course is fair game: lectures, tutorials, and textbook chapters.
In practice the exam has about 2/3 weight on material since the mid-sem exam (Lecture 7
onward), and about 1/3 weight on the material in the mid-sem exam (Lecture 6 and prior).
For mid-sem exam material, please see the previous review video.
New material for final exam (focus of the remainder of these slides):
Week Week Beginning Lecture Lecture Topic(s) / textbook chapter(s)
7 12 Sept Lecture 7 Chapter 13: financial services for the poor
10 10 Oct Lecture 8
Chapter 14: social programs and targeting; chapter 21:
political economy and the role of the state
11 17 Oct Lecture 9 Chapter 17: human capital: education and health
12 24 Oct Lecture 10 Chapter 15: sustainable development and the environment
13 31 Oct Lecture 11 Chapter 19: development aid and effectiveness
Chapter 13: Financial Services for the
Poor
One of the most failures of formal markets for the poor in developing countries is in financial services:
payments, savings, credit, insurance.
A key reason is due to asymmetric information: moral hazard and adverse selection.
Key reasons why credit markets fail:
1. Selection problem (adverse selection)
2. Monitoring problem (moral hazard in effort)
3. Insurance problem (moral hazard in dealing with exogenous shocks)
4. Enforcement problem (moral hazard in repayment)
Some institutions have evolved to address these sources failures, addressing each of the four through a
unique combination of institutional innovations: Commercial banks, Local moneylenders (“usurers”), Trade
and value chain credit, Informal saving and lending institutions, Village banks and self-help groups,
Microfinance institutions (MFIs). E.g., extending credit without collateral.
Chapter 13: Financial Services for the
Poor
Microfinance has been the major financial innovation for the poor for most of recent
decades (recently being overtaken by mobile money and digital financial services).
A series of RCTs on microfinance in the last decade shows that the effects of microfinance are relatively
muted for most borrowers.
A lot of the literature on savings draws on insights from behavioural economics – how to
deal with procrastination, social pressure, etc.
A major insurance innovation in the developing world has been index insurance, which
conditions insurance payouts on easily-measurable events like weather, rather than
individual loss. However consumers are still highly price elastic toward insurance, so it’s
hard to sell at full market prices, better thought of as social protection.
Chapter 14: Social Programs and
Targeting
Developing countries face a negative double whammy in social spending: they have
lower GDP, and collect a lower % of GDP in tax. This leads to drastically lower social
spending per head, in places where it is most needed.
Tend to spend much higher proportion of these budgets on baseline staffing levels.
Social spending falls into two broad categories:
1. Income generation (e.g., asset transfers, fixed context in which assets are used, change
productive behaviors).
2. Social assistance.
a. Equity for chronic poor (e.g., cash transfers, food subsidies, school feeding, etc).
b. Risk coping for poor (asset and productivity protection, so don’t fall into chronic poverty).
Chapter 15: Human Capital: Education
Early-life education and health investments are critical; summarized in Heckman curve.
Across countries, a 1-year increase in average education attainment correlates with
about a 4% increase in GDPpc.
This doesn’t address causality, however other studies do, e.g., Duflo (2001).
To understand educational attainment, we can think about trade-offs on:
Demand side: + 1 > 0 + 0
Demand side: temporal nature of the choice (see tutorial question)
Supply side: factors behind quantity and quality of schooling services.
Chapter 15: Human Capital: Health
Our health measurement focuses both on quantity (e.g., life expectancy, infant
mortality), and quality of life (burden of disease, DALY, HALE).
Health supply is plagued by many of the challenges in education – low-quality services,
absence (of health workers), asymmetric information problems.
In terms of health service demand, people tend to be price sensitive, and markets can
easily fail due to familiar factors like asymmetric information, liquidity constraints, etc.
Nutrition is a subset of health, and Bennett’s Law provides good guidance: people prioritize quality, not
just quantity, even at low income levels.
The potential market failures for education and health are a good potential for subsidization or
government intervention.
Chapter 19: Development Aid and Its
Effectiveness
Foreign aid is a huge industry — $100 billion+ USD per year – but still rapidly declining as a share
of developing countries’ budgets.
Most relevant in the least-developed countries in sub-Saharan Africa, Asia, and the Pacific.
Does foreign aid work For most aggregate aid we don’t really know (and never expect to),
because the way aid is administered doesn’t lend itself to high-quality impact evaluations.
The credibility revolution / RCTs allow us to evaluate many individual aid projects, but aggregate effects
are harder to evaluate.
Nature of aid is evolving – as countries develop, it becomes less focused on relief and support
basic social programs, and more about knowledge transfer – governance, building new systems,
etc.
Chapter 19: Development Aid and Its
Effectiveness
The “Great Aid Debate” is one of the most prominent development debates in the public
sphere. Between:
Aid proponents like Bill Gates and Jeffrey Sachs, who argue that well-designed aid is effective and rich
countries have a moral obligation to contribute.
Aid skeptics like Bill Easterly and Dambisa Moyo, who see a role for humanitarian aid, but see the aid
industry overall as having perverse effects on developing countries, by disempowering and providing
wrong incentives for local leaders.
Aid moderates like Aneel Karnani, who see a role for aid, but in different places, e.g., focusing more on
providing people with a steady job in the formal sector.
Chapter 20: Institutional Innovations and
Development
The New Institutional Economics (NIE) places institutions at the center of understanding
economic development.
Conceptual literature championed by Douglass North in 1970s-1990s, followed by empirical
and more rigorous theoretical focus in 2000s and 2010s (e.g., Acemoglu, Johnson, Robinson).
Institutions are “the rules and conventions that codify social interactions, and in so
doing, constrain individual behavior,” whether formal (i.e., written down) or informal.
NIE assumes (i) imperfect information, (ii) methodological individualism, to show how
institutional realities can lead to market failures.
Sometimes institutions emerge to address these market failures (e.g., sharecropping).
But how and why do institutions themselves change (or fail to do so)
Chapter 21: Political Economy and the
Role of the State
The sub-field of political economy is the area of economics focusing on the interaction between
economics and politics.
Couple leading models of the state: (i) functionalist, (ii) pluralist.
Is there a natural resource curse Key interaction between economy, institutions and politics.
Rent-seeking can occur through official, legal channels (e.g., lobbying), or through de jure illegal
ones, e.g., corruption.
Rent-seeking tends to redistribute resources from broad societal benefit toward specific sub-groups.
Fighting corruption can involve lowering the expected benefit, or raising the expected cost.
Chapter 15: Sustainable Development
and the Environment
Envirodevnomics argues that the central paradox at the intersection of development economics
and the environment is that low environmental quality tends to have the highest costs in
developing countries, yet those countries have the lowest willingness to pay for environmental
improvements.
Environmental protection raises a number of challenges: now vs later (discounting),
environmental Kuznets curve (should developing countries give up development ), rampant
market failures because environmental benefits are often complex, non-market goods with
widespread externalities.
Figure 15.1 illustrates how these failures can operate, and how to fix them, by moving MPC
toward MSB.
E.g., polluter-pays principle, output-reduction subsidy, output or pollution quota, market-based solution
(e.g., cap-and-trade), institutional changes in organization of production, private negotiations to create
a market (Coase).
Chapter 15: Sustainable Development
and the Environment
Another failure, particularly in developing countries, is weak property rights regimes.
Many key environmental amenities – air, sea, atmosphere, forests, etc – are open-
access.
Ostrom and others show how Common Property Resources can stand in for formal property
rights.
Many environmental amenities are public goods: non-rival and/or non-excludable.
In general private actors under-invest in public goods, because their private benefit from doing
so is below the overall social benefit (externality).
Interventions like PES (e.g., REDD) attempt to shift the incentives.
Faculty of Arts and Social Sciences
School of Economics
ECOS3002 Development Economics
Final exam review
Exam preparation
Exam prep
See the module under Canvas/Modules/Final exam prep. Provides:
Exam overview and logistics (similar content as this video).
Study tips
Sample final exam questions.
I highly recommend posting any exam-related queries on Ed Discussion (or PMs to
instructor or tutors) before 3 pm on Friday 11 November. Ed will be unavailable the day
of the exam.
Study tips and good answers
See end of Mid-sem review video.
Bloom’s taxonomy describes different levels of learning.
Exams in 3000-level courses, especially open book
exams, are required to test critical thinking skills more at
the top of this hierarchy, rather than at the bottom.
It is not enough just to know where to find information,
(think you) comprehend material, or apply it in
straightforward ways. For a high score, you need to be
able to analyze, synthesize and evaluate the concepts
and knowledge in the course.
Study tips and good answers
Hence preparation techniques such as making your own summary of the material can be a good
way to force yourself to put “order” to the content. Testing yourself to answer tutorial, end-of-
chapter, and other open-ended questions again forces you to go beyond passively reading
content or re-watching lecture videos and thinking “I understand that” to really proving that you
do. If this feels excessively hard, it’s a good signal you might not have learned the material as well
as you think. To really digest the material, it can be helpful to discuss/debate the concepts with a
classmate or other partner, to “make them your own.”
Good exam answers display this higher-level knowledge: they are accurate, concise, and to the
point.
Such answers show you understand what’s important and can think critically about how the
information fits together and relates to new ideas. Sometimes you show your understanding as
much by what you don’t write, as what you write. It shows a level of judgment, in terms of what
you include, emphasize, and argue.
