Answer 4 questions. Two questions MUST be A questions (political science; IA, IIA, or IIIA) and two questions MUST be B questions (economics, IB, IIB, or IIIB). In answering these questions students should demonstrate an ability to integrate material from different courses and across disciplines. The answer to each question, however, should be only 4 to 5 typewritten pages, excluding graphs.
 

PART I: ECONOMIC AND POLITICAL ANALYSIS
 

I.A. INTRODUCTION TO POLITICAL ANALYSIS

If you choose to answer question I.A., do ONLY Section 1 OR Section 2.

SECTION 1 -- COMPARATIVE POLITICAL ANALYSIS

Choose ONE question
(1) What is comparative politics and why should we study it?
(2) What theoretical approach to comparative politics best explains the collapse of authoritarianism and the rise of democracy? Justify with examples.
(3) Does economic development precede or succeed democracy? Why? Why not? Provide examples throughout.

SECTION 2 -- ANALYSIS OF INTERNATIONAL POLITICS

Analyzing an individual nation’s foreign policy might require that we understand how security concerns contribute to the motivation behind policymaking.  It might also require that we understand how concerns about capital accumulation affect that motivation.  
What method (or procedures) would you follow, as an outside analyst:  both to show how these official concerns interact, and to explain why individual foreign policies so often lead to aggression and conflict (avoidable or not).

I.B. ECONOMIC ANALYSIS

If you choose to answer question I.B., do ONLY Section 1, Section 2 OR Section 3.

SECTION 1 -- ECONOMIC THEORY

Assume our company is the sole producer of an electronic sensor used in several applications including crash testing in the automobile industry and formula racing.  We hold the patent for this electronic sensor and have been the sole producer for a number of years.  This patent will expire on December 31, 2008.  Our electronic sensor has no close substitutes but is used widely throughout the industry in many of the standardized crash tests required by industry and government safety experts as well as others interested in design and development.  We believe that the demand for our good is price elastic.
(a) Establish the price charged and the quantity supplied by our company prior to year end 2008.  Is the company earning economic profits?  If so, explain why and establish the amount.
(b) What price and quantity would you expect to prevail after the patent expires, assuming no barriers to entry and constant returns to scale?  Would your answer differ if there were financial barriers to entry?  How?
(c) Establish consumer surplus before and after expiration of the patent.
(d) Would your answer to (b) and (c) change when this is a (1) a constant cost industry; (2) an increasing cost industry?

SECTION 2 -- FINANCIAL ANALYSIS

A basic principle of finance says that “Diversification improves the trade-off between return and risk.”, often (over)simplified to “Diversification reduces risk.”  This idea has been used to argue that investors should diversify their portfolios internationally, and both US and non-US investors have significantly increased their cross-border holdings of financial assets in the past decades.  Over the past year, as the US stock market has fallen dramatically, most other major developed and emerging stock markets have also fallen substantially.
a) Discuss the general concept of diversification, and the limits to the benefits of diversification.  Apply the Markowitz and/or CAPM and/or Arbitrage Pricing Theory (APT) models in your answer.
b) Discuss the extent to which international diversification could potentially extend the benefits of diversification beyond those available to purely domestic investors.
c) Discuss how globalization, the growing popularity of international investing, and other aspects of financial integration may affect the potential benefits of international diversification, and may also distort our perceptions of risk-return tradeoffs (see for instance Campbell Harvey, “Asset Pricing in Emerging Markets”).  If correlations between national stock markets rise sharply during this period of global financial turmoil, would you expect these high correlations to continue in the medium term future?
d) Most investors have experienced substantial losses over the past year and perceive the financial markets as much riskier than they did a couple of years ago.  A number of commentators conclude from these facts that “investors should expect an extended period of low returns in the future.”  Discuss this statement in terms of CAPM or Arbitrage Pricing Theory.  If many investors are not rational, discuss whether and why this should change the expectations of a rational investor.

SECTION 3 -- ECONOMETRICS

One of the World Bank’s goals is improving banking and financial systems in developing countries.  They justify this goal in the following statement from the World Bank webpage:
"Our efforts to promote the growth and development of banks is intended to encourage the provision of a broader array of products and services by the industry so as to support the corresponding growth and development of the economy, and to expand the reach of banks to broader customers segments, including the middle and lower classes, small- and medium-size enterprises, and rural markets."
This statement points to a link between the growth of banking and finance and economic growth.  You are studying the Philippines and decide to test to see if this link exists between either the banking system or the bond market and economic growth.

(a)  Access the International Financial Statistics from the Fordham Library Webpage at (this must be done on campus or through the Fordham dialup): <http://avoserv.library.fordham.edu/login?url=http://imfstatistics.org> and collect quarterly data for the Philippines from the first quarter of 1981 to through the second quarter of 2002.
Retrieve the following four variables:
    ·     Gross Domestic Product (GDP)
    ·    Quasi-Money (this is the amount of money in the banking system)   
    ·    Bonds (this is the size of the bond market)
    ·    GDP deflator
(b)  Put the first three variables in real terms by dividing by the GDP Deflator, and transform all variables into growth rates (percentage change per quarter).  Why do we do this?
(c)  Run and interpret the following regression:
   (GDP growth)_t  = a + b₁ (Money growth)_t  + b₂ (Bond growth)_t + e_t
(d)  Does the regression show signs of multicollinearity?
(e)  What other problem(s) might the regression from part (c) have?
(f)  Test for, and if present fix, the problem(s) from part (e).
 

PART II: INTERNATIONAL ECONOMIC RELATIONS

II.A THE POLITICS OF GLOBAL ECONOMIC RELATIONS

Answer ONE of the following two questions:

II.B. INTERNATIONAL ECONOMIC POLICY

Frequently analysts characterize the Bush Administration as having a hegemonic view of US power, implying that the United States should and must act unilaterally in many situations.  The new Obama Administration is often characterized as having a multipolar view of US power implying that the United States should and must act multilaterally in many situations. Suppose that these analysts are correct.  We have been living in a multipolar world, but the US Administration has determined its foreign policy convinced that it has hegemonic power.
(a) Using both offer curves and a two by two payoff matrix, determine the optimal foreign economic policy between free trade and protectionism of the Bush Administration if it considers itself a hegemon. 
(b) Now supposed that we really live in a multipolar world.  Using the correct offer curves and payoff matrix determine the consequences of a hegemonic policy when played out incorrectly within the context of a multipolar world.  Are we able to achieve the pareto optimun through a cooperative equilibrium or do we achieve the pareto worse outcome through a non-cooperative equilibirum?
(c) Are these results consistent with actual experience.  Is this analysis more consistent with past US military policy rather than US foreign economic policy?
(d) Will the Obama Administration face an equally dismal situation if it acts as a multilateral power in those situations where the United States actually has hegemonic power?
 

PART III: DEVELOPMENT ISSUES

III.A. POLITICAL ECONOMY OF DEVELOPMENT

Critically analyze the following four theoretical frameworks of development: modernization, dependency, post-structural, and capabilities. In so doing, explain the theories, discuss the strengths and weaknesses of the frameworks, and explain which theoretical framework you find most helpful in your attempts to understand development in the global south.

If you choose to answer question III.B., do ONLY Section 1 OR Section 2.

SECTION 1 -- ECONOMIC DEVELOPMENT POLICY

(a) Using graphical analysis, describe the Lewis model and derive its policy implications favoring capital formation, industrialization, and urbanization. (b) Using a graphical analysis of the Harris-Todaro model, summarize some of the theoretical literature that critiques the Lewis approach to development.  (c) Summarize some of the empirical literature that critiques the Lewis approach to development. (d) Critique Lewis' contribution to the debate over growth versus equity.

SECTION 2 -- STABILIZATION POLICY

.  A large surge in foreign assistance following a new peace accord, a natural disasters or HIV/Aids related foreign assistance can be larger that 10% of GDP and can have negative and unintended side effects.

(a) Discuss why aid can lead to inflation, especially with a fixed exchange rate (use the traded non-traded goods (TNT) model or financial programming to discuss how this might happen.
(b) Discuss the options that aid receiving governments have for “saving” aid inflows using the “spend” and “absorb” terminology of the aid effectiveness literature  (see for example Gupta, Powell and Zang (2006)  Box 1 or Elbadawi et al., 2007, pp. 1-5). Most donors want aid spent on projects or direct budget support immediately. Why would governments want to save rather than spend or absorb all aid as it arrives?
(c) One risk of large aid inflows is the Dutch Disease or a sharp appreciation of the real exchange rate: show this impact of aid inflows using the standard TNT diagrams. Why is this potentially a problem for the rural poor in many Central America and African countries for example?
 (d)  Why is the Dutch Disease less likely to be a serious problem with HIV-Aids targeted aid (especially aid oriented toward ART) or aid that is spent on key infrastructure such as roads and ports. Show how aid inflows might cause an exchange rate depreciation using the standard TNT diagram. Referring to (b), why is this sort of aid spending likely to reduce poverty directly and indirectly? [hint: What types of aid-spending or any foreign exchange inflow such as remittance to El Salvador generally cause an real exchange rate (REF) appreciation? Tornell, Westerman and Martinez (2004) suggest some types of capital inflows are less likely to cause an RER  appreciation. A similar argument regarding the impact of some types aid flows is the answer to this question.]
 (d OPTIONAL SECTION) What has been the actual experience of African countries with the Dutch Disease? (see Elbadawi et al., 2007, pp. 17-18 and Figure 3)  Note that Mozambique did not experience an RER appreciation, but El Salvador did (though it was caused remittances not aid). What has been the consequence for economic growth and poverty reduction in these two countries? (see for example Hausmann and Rodrik, 2003 and Arndt et al. 2006 below).     

 References

Gupta, Sangeev, R. Powell and Y. Yang (2006) Macroeconomic Challenges of Scaling up Aid to Africa, A checklist for Practitioners, IMF, Washington DC. http://www.imf.org/external/pubs/ft/afr/aid/2006/eng/aid.pdf

Haacker, M. (2004) The Macroeconomics of HIV/AIDS, IMF, Washington D.C.http://www.imf.org/external/pubs/ft/aids/eng/

Tornell, Westerman and Martinez (2004) http://www.gdsnet.org/classes/TornellWestermanMartinezNBER10293.pdf

Elbadawi, I. A., Kaltani, L & K. Schmidt-Hebbel (2007) “Post-Conflict Aid, Real Exchange Rate Adjustment, and Catch-up Growth”, World Bank Policy Research Working Paper 4187,  http://go.worldbank.org/PI1GZKJ2B0

Hausmann, R and D. Rodrik (2003) Discovering El Salvador’s growth potential http://ksghome.harvard.edu/~drodrik/elsalvador.pdf

Arndt, C., Sam Jones and Finn Tarp (2006) “Aid and Development: The Mozambican Case” University of Copenhagen, Department of Economics, Discussion Paper 06-13.

 
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