Nobel Laureate Amartya Sen has pointed out that one way to prevent starvation during droughts in the poorest countries is to just pay peasants to build roads, sewer lines, and other public goods during these droughts. In the poorest countries, these peasants have no savings accounts, and almost no way to borrow money.

In rich countries by contrast, most people have savings accounts and credit cards.

a. Is the poor-country “multiplier” probably bigger or smaller than the rich-country multiplier, based on these facts?

b. All countries get hit by shocks, but not all countries have the same automatic stabilizers. Based on these facts, which countries probably have smoother GDP growth: poor countries or rich countries?

(Note: The answer that is true in theory is also true in practice, a point emphasized in a 1995 paper in the American Economic Review by Garey and Valerie Ramey,

“Cross- Country Evidence on the Link between Volatility and Growth.”) mk6