Development Economics SOCSC13 PDF

DEVELOPMENT ECONOMICS SOCSC13 R.LANCE CHUA, MA PPT4 Market Fundamentalism & Population Growth  #1 The Demographic Transition #1 THE DEMOGRAPHIC TRANSITION FR The process by which fertility rates eventually decline to low and stable levels has been portra...

DEVELOPMENT ECONOMICS SOCSC13 R.LANCE CHUA, MA PPT4 Market Fundamentalism & Population Growth  #1 The Demographic Transition #1 THE DEMOGRAPHIC TRANSITION FR The process by which fertility rates eventually decline to low and stable levels has been portrayed by the demographic transition It attempts to explain why all contemporary developed nations have more or less passed through the same three stages of modern population history STAGE#1 Before their economic modernization, these countries for centuries had stable or very slow-growing populations as a result of a combination of 1.) high birth rates and almost equally 2.) high death rates #1 THE DEMOGRAPHIC TRANSITION FR STAGE#2 Began when modernization, associated with: 1. better public health methods, 2. healthier diets, 3. higher incomes, 4. and other improvements led to a marked reduction in mortality – - that gradually raised life expectancy from under 40 years to over 60 years However, the decline in death rates was not immediately accompanied by a decline in fertility #1 THE DEMOGRAPHIC TRANSITION FR STAGE#2 As a result, the growing divergence between high birth rates and falling death rates led to sharp increases in population growth compared to past centuries Stage 2 thus marks the beginning of the demographic transition The transition from stable or slow-growing populations first to rapidly increasing numbers and then to declining rates #1 THE DEMOGRAPHIC TRANSITION FR STAGE#3 Stage 3 entered when the forces and influences of modernization and development caused the beginning of a decline in fertility Eventually, falling birth rates converged with lower death rates, leaving little or no population growth This process implies movement from a relatively high number of births per woman to a population replacement fertility level that can be calculated to reach about 2.05 to 2.1 births per woman – - when nearly all women survive to the mean age of childbearing In developing countries with much lower survival rates, replacement fertility can be well over 3 births per woman #1 THE DEMOGRAPHIC TRANSITION FR The graph depicts the three historical stages of the demographic transition in western Europe HISTORICAL STAGE 1 Before the early nineteenth century, birth rates hovered around 35 per 1,000, while death rates fluctuated around 30 per 1,000 This resulted in population growth rates of around 5 per 1,000, or less than 0.5% per year #1 THE DEMOGRAPHIC TRANSITION FR HISTORICAL STAGE 2 The beginning of western Europe’s demographic transition, was initiated around the first quarter of the nineteenth century by slowly falling death rates – - as a result of improving economic conditions – - and the gradual development of disease and death control through modern medical and public health technologies #1 THE DEMOGRAPHIC TRANSITION FR HISTORICAL STAGE 3 The decline in birth rates did not really begin until late in the nineteenth century – - with most of the reduction many decades occurring after modern economic growth had begun and long after death rates began their descent But since the initial level of birth rates was generally low in western Europe as a result of either late marriage or celibacy, overall rates of population growth seldom exceeded the 1% level, even at their peak #1 THE DEMOGRAPHIC TRANSITION FR By the end of western Europe’s demographic transition in the second half of the twentieth century – - the relationship between birth and death rates that marked the early 1800s had reversed – - with birth rates fluctuating and death rates remaining fairly stable or rising slightly This latter phenomenon was simply due to the older age distributions of contemporary European populations #1 THE DEMOGRAPHIC TRANSITION FR With regard to stage 3, we can distinguish between two broad classes of developing countries As per the graph, modern methods of death control, combined with rapid and widely distributed rises in levels of living, have resulted in death rates falling as low as 10 per 1,000 and birth rates also falling rapidly, to levels between 12 and 25 per 1,000. These countries, including Taiwan, South Korea, Costa Rica, China, Cuba, Chile, and Sri Lanka, have thus entered stage 3 of their demographic transition and have experienced rapidly falling rates of overall population growth #1 THE DEMOGRAPHIC TRANSITION FR But some developing countries fall into case B the given graph After an initial period of rapid decline, death rates have failed to drop further, largely because of the persistence of widespread absolute poverty and low levels of living and more recently because of the AIDS epidemic Moreover, the continuance of still quite high birth rates as a result of these low levels of living causes overall population growth rates to remain relatively high #1 THE DEMOGRAPHIC TRANSITION FR These countries, including many of those in sub-Saharan Africa and the Middle East, are still in stage 2 of their demographic transition Though fertility is declining, it remains very high in these parts of the world The important question, therefore, is this: When and under what conditions are developing nations likely to experience falling birth rates and a slower expansion of population? #1 THE DEMOGRAPHIC TRANSITION FR What are the principal determinants or causes of high fertility rates in developing countries, and can these determinants of the “demand” for children be influenced by government policy? To try to answer this critical question, we turn to a very old and famous classical macroeconomic and demographic model, the Malthusian “population trap,” and a contemporary and highly influential neoclassical microeconomic model, the household theory of fertility  #2 Malthusian Population Trap #2 MALTHUSIAN POPULATION TRAP FR More than two centuries ago, the Reverend Thomas Malthus put forward a theory of the relationship between population growth and economic development that is influential today In his 1798 Essay on the Principle of Population and drawing on the concept of diminishing returns, Malthus postulated a universal tendency for the population of a country, unless checked by dwindling food supplies, to grow at a geometric rate, doubling every 30 to 40 years #2 MALTHUSIAN POPULATION TRAP FR At the same time, because of diminishing returns to the fixed factor, land, food supplies could expand only at a roughly arithmetic rate In fact, as each member of the population would have less land to work, his or her marginal contribution to food production would actually start to decline Because the growth in food supplies could not keep pace with the burgeoning population, per capita incomes (defined in an agrarian society simply as per capita food production) would have a tendency to fall so low as to lead to a stable population existing barely at or slightly above the subsistence level #2 MALTHUSIAN POPULATION TRAP FR Malthus therefore contended that the only way to avoid this condition of chronic low levels of living or absolute poverty was for people to engage in “moral restraint” – and limit the number of their progeny Hence, we might regard Malthus, indirectly and inadvertently, as the father of the modern birth control movement Modern economists have given a name to the Malthusian idea of a population inexorably forced to live at subsistence levels of income: Malthusian population trap It can be illustrated by comparing the shape and position of curves representing population growth rates and aggregate income growth rates when these two curves are each plotted against levels of per capita income #2 MALTHUSIAN POPULATION TRAP FR On the vertical axis, we plot numerical percentage changes, both positive and negative, in the two principal variables under consideration (total population and aggregate income) On the horizontal axis are levels of per capita income The x-axis shows: the level of income per capita The y-axis shows: two rates—of population growth and of total income growth Per capita income growth is, by definition, the difference between income growth and population growth—hence the vertical difference between these two curves #2 MALTHUSIAN POPULATION TRAP FR Thus, as we saw in the Harrod-Domar (or AK) model, whenever the rate of total income growth is greater than the rate of population growth, income per capita is rising; this corresponds to moving to the right along the x-axis Conversely, whenever the rate of total income growth is less than the rate of population growth, income per capita is falling, moving to the left along the x-axis When these rates are equal, income per capita is unchanging #2 MALTHUSIAN POPULATION TRAP FR First consider population growth When income is very low, say, below $250 per year at purchasing power parity: 1.) nutrition is so poor that people become susceptible to fatal infectious diseases 2.) pregnancy and nursing become problematic 3.) ultimately, outright starvation may occur But after this minimum level of income per capita is reached, population begins to grow, eventually reaching a peak rate (perhaps at 3% to 4% per year); and then the population growth rate begins to fall until at last a fairly stable population is reached (a growth rate close to zero) #2 MALTHUSIAN POPULATION TRAP FR Note that this pattern of population growth first increasing and then decreasing as per capita income rises corresponds to the pattern of the demographic transition Total income growth becomes greater as the economy develops (and income per capita rises) An economic reason for this positive relationship is the assumption that savings vary positively with income per capita Countries with higher per capita incomes are assumed to be capable of generating higher savings rates and thus more investment #2 MALTHUSIAN POPULATION TRAP FR Again, given a Harrod-Domar-type model of economic growth, higher savings rates mean higher rates of aggregate income growth Eventually, however, growth levels off at a maximum Incomes of middle-income countries might grow fastest as they borrow technology to catch up, but these higher rates cannot be continued once the technology frontier is reached #2 MALTHUSIAN POPULATION TRAP FR As drawn, the curves first cross at a low level of income, labeled S (for subsistence) This is a stable equilibrium: If per capita income levels become somewhat larger than (to the right of) S, it is assumed that population size will begin to increase in part because higher incomes improve nutrition and reduce death rates But then, population is growing faster than income, so income per capita is falling, and we move to the left along the x-axis #2 MALTHUSIAN POPULATION TRAP FR The arrow pointing in the direction of S from the right therefore shows per capita income falling back to this very low level On the other hand, if income per capita were a little less than S, the total income curve would be above the population growth curve and so income per capita would be rising This corresponds to a move to the right along the x-axis Thus, our conclusion is that point S represents a stable equilibrium #2 MALTHUSIAN POPULATION TRAP FR This very low population growth rate along with a very low income per person is consistent with the experience of most of human history prior to the modern era According to modern-day neo-Malthusians, poor nations will never be able to rise much above their subsistence levels of per capita income unless they initiate preventive checks (birth control) on their population growth In the absence of such preventive checks, Malthusian positive checks (starvation, disease, wars) on population growth will inevitably provide the restraining force #2 MALTHUSIAN POPULATION TRAP FR However, if per capita income can somehow reach a threshold level, labeled T, from that point population growth is less than total income growth - - and thus per capita income grows continually, at a rate such as 2% per year Countries or regions in such a population trap can also escape it by achieving technological progress that shifts the income growth rate curve up at any level of per capita income #2 MALTHUSIAN POPULATION TRAP FR And it may be able to achieve changes in economic institutions and culture (“social progress”) that shifts the population growth curve down In this way, the population trap equilibrium is eliminated altogether, and the economy is able to proceed with self-sustaining growth An example of such a result is depicted in Figure 6.8 Total income growth is now greater than population growth at each level of per capita income As a result, income per capita now grows steadily #2 CRITICISMS OF MALTHUSIAN TRAP FR Unfortunately, it is based on a number of simplistic assumptions and hypotheses that do not stand the test of empirical verification The Malthusian population trap provides a theory of the relationship between population growth and economic development We can criticize the population trap on two major ground #2 CRITICISMS OF MALTHUSIAN TRAP FR FIRST CRITICISM The model ignores the enormous impact of technological progress in offsetting the growth-inhibiting forces of rapid population increases The history of modern economic growth has been closely associated with rapid technological progress in the form of a continuous series of scientific, technological, and social inventions and innovations Increasing rather than decreasing returns to scale have been a distinguishing feature of the modern growth epoch #2 CRITICISMS OF MALTHUSIAN TRAP FR FIRST CRITICISM While Malthus was basically correct in assuming a limited supply of land, he did not anticipate the manner in which technological progress could augment the availability of land by raising its quality (its productivity) even though its quantity might remain roughly the same In terms of the population trap, rapid and continuing technological progress can be represented by an upward shift of the income growth curve so that at all levels of per capita income, it is vertically higher than the population growth curve As a result, per capita income will continue to grow over time All countries therefore have the potential of escaping the Malthusian population trap #2 CRITICISMS OF MALTHUSIAN TRAP FR SECOND CRITICISM It focuses on its assumption that national rates of population increase are directly related to the level of national per capita income At relatively low levels of per capita income, we should expect to find population growth rates increasing with increasing per capita income But research indicates that there appears to be no clear correlation between population growth rates and levels of per capita income #2 CRITICISMS OF MALTHUSIAN TRAP FR SECOND CRITICISM As a result of modern medicine and public health programs, death rates have fallen rapidly and have become less dependent on the level of per capita income Moreover, birth rates seem to show no rigid relationship with per capita income levels Fertility rates vary widely for countries with the same per capita income, especially below $1,000 It is not so much the aggregate level of per capita income that matters for population growth but rather how that income is distributed It is the level of household income, not the level of per capita income, that seems to matter most  #3 The Microeconomic Household Theory of Fertility #3 HOUSEHOLD THEORY OF FERTILITY FR Economists have begun to look more closely at the microeconomic determinants of family fertility to provide a better theoretical and empirical explanation for the falling birth rates They have drawn on the traditional neoclassical theory of household and consumer behavior for their basic analytical model – - and have used the principles of economics and optimization to explain family size decisions The conventional theory of consumer behavior: Assumes that an individual with a given set of tastes or preferences for a range of goods tries to maximize the satisfaction derived from consuming these goods subject to his or her own income constraint and the relative prices of all goods #3 HOUSEHOLD THEORY OF FERTILITY FR In the application of this theory to fertility analysis: children are considered as a special kind of consumption good (for low-income countries = seen as investment) so that fertility becomes a rational economic response to the consumer’s (family’s) demand for children relative to other goods The usual income and substitution effects are assumed to apply If other factors are held constant, the desired number of children can be expected to vary directly with household income – - inversely with the price (cost) of children, and inversely with the strength of tastes for other goods relative to children This direct relationship may not hold for poor societies; it depends on the strength of demand for children relative to other consumer goods and to the sources of increased income, such as female employment #3 HOUSEHOLD THEORY OF FERTILITY FR The economic theory of fertility assumes that the household demand for children is determined by family preferences for a certain number of surviving (usually male) children by: 1.) the price or “opportunity cost” of rearing these children 2.) and by levels of family income Example: in regions of high mortality, parents may produce more children than they actually desire in the expectation that some will not survive Children in poor societies are seen partly as economic investment goods in that there is an expected return in the form of both child labor and the provision of financial support for parents in old age In many developing countries, there is a strong intrinsic psychological and cultural determinant of family size, so the first two or three children should be viewed as “consumer” goods for which demand may not be very responsive to relative price changes #3 HOUSEHOLD THEORY OF FERTILITY FR The choice mechanism in the economic theory of fertility as applied to developing countries is assumed, therefore, to exist primarily with regard to the additional (“marginal”) children who are considered as investments In deciding whether or not to have additional children, parents are assumed to weigh private economic benefits against private costs, where the principal benefits are the expected income from child labor, usually on the farm, and eventual financial support for elderly parents Balanced against these benefits are the two principal elements of cost: 1.) The opportunity cost of the mother’s time the income she could earn if she were not at home caring for her children 2.) Cost of educating children the financial trade-off between having fewer “high-quality,” high-cost, educated children with high-income earning potential versus more “low-quality,” low-cost, uneducated children with much lower earning prospects #3 HOUSEHOLD THEORY OF FERTILITY FR Using the same thought processes as in the traditional theory of consumer behavior, the theory of family fertility concludes that when the price or cost of children rises as a result of: 1. increased educational and employment opportunities for women 2. rise in school fees 3. establishment of minimum wage child labor laws 4. provision of publicly financed old-age social security schemes Parents will demand fewer additional children, substituting, perhaps, quality for quantity or a mother’s employment income for her child- rearing activities #3 HOUSEHOLD THEORY OF FERTILITY FR One way to induce families to desire fewer children is to raise the price of child rearing by providing: 1. Greater educational opportunities 2. A wider range of higher-paying jobs for young women Recent research on household behavior has led to a major improvement of this theory Households in developing countries generally do not act in a “unitary” manner, depicted with this traditional model Instead, men and women have different objective functions; Example: husbands may prefer to have more children than wives Household behavior is then explained as a result of bargaining between husbands and wives #3 HOUSEHOLD THEORY OF FERTILITY FR Although the broad impacts we have just described continue to hold, the process includes increased bargaining power of women Non-unitary, bargaining-based models of household behavior also improve our understanding of otherwise puzzlingly inefficient household behaviors, such as: higher investment in husbands’ farm plots than wives’ farm plots even when a more even investment could lead to higher family incomes SOME EMPIRICAL EVIDENCE FR Statistical studies in a broad spectrum of developing countries have provided support for the economic theory of fertility It has been found that these factors are associated with significantly lower levels of fertility: 1. High female employment opportunities outside the home 2. Greater female school attendance, especially at the primary and secondary levels As women become better educated, they tend to earn a larger share of household income and to produce fewer children These studies have confirmed the strong association between declines in child mortality and the subsequent decline in fertility IMPLICATIONS FOR DEVELOPMENT AND FERTILITY FR Assuming that households desire a target number of surviving children, increased female education and higher levels of income can decrease child mortality and therefore increase the chances that the firstborn will survive As a result, fewer births may be necessary to attain the same number of surviving children This fact alone underlines the importance of educating women and improving public health and child nutrition programs in reducing fertility levels The effect of social and economic progress in lowering fertility in developing countries will be the greatest when the majority of the population and especially the very poor share in its benefits IMPLICATIONS FOR DEVELOPMENT AND FERTILITY FR Birth rates among the very poor are likely to fall where the following socioeconomic changes come to pass: 1.) An increase in the education of women and a consequent improvement in their role and status 2.) An increase in female nonagricultural wage employment opportunities, which raises the price or cost of their traditional child- rearing activities 3.) A rise in family income levels through the increased direct employment and earnings of a husband and wife or through the redistribution of income and assets from rich to poor IMPLICATIONS FOR DEVELOPMENT AND FERTILITY FR Birth rates among the very poor are likely to fall where the following socioeconomic changes come to pass: 4.) A reduction in infant mortality through expanded public health programs and better nutritional status for both mother and child, and better medical care 5.) The development of old-age and other social security systems outside the extended family network to lessen the economic dependence of parents, especially women, on their offspring 6.) Expanded schooling opportunities so that parents can better substitute child “quality” for large numbers of children IMPLICATIONS FOR DEVELOPMENT AND FERTILITY FR In short, expanded efforts to make jobs, education, and health more broadly available to poverty groups in general and women in particular will not only contribute to their economic and psychic well-being (i.e., to their development) – - but also contribute substantially to their motivation for smaller families (i.e., their freedom to choose), which is vital to reducing population growth rates