Lecture 3 9/12/2015 1 Development Economics Lecture 3. Poverty, Population, Unemployment & Agriculture.

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Development Economics

Lecture 3.

Poverty, Population, Unemployment & Agriculture

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I. Poverty

A priority in its own right?! Many other problems are poverty-

related pop. growth rural unemployment resistance to change by peasant farmers city slums poor educational standard

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Poverty Absolute poverty

2/5 of LDC pop. live under absolute poverty Who are the poor?

70-80% of the poor live in the countryside women are the poorer of the poor

Avg. income vs. income distribution Higher avg. income not necessarily means lower poverty Given avg. income, the greater income inequality, the

higher level of poverty Given income distribution, the lower avg. income, the

higher level of poverty

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Poverty

Poverty and growth: Goals in conflict? One school: trickle-down theory

Inequity accepted or encouraged to raise avg. income; greater equity will follow.

Growth requires investment investment requires saving The rich has higher propensity to save

Income inequality increases first, but then decreases

based on experience of DCs Once economy is rich, can redistribute through taxes

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Poverty

Other: Equity is the aim, NOT the consequence of growth

Growth can happen without improving equity Consumer preferences determined by income The rich decide what is produced More luxuries than necessities in LDCs Growth, without redistribution of income, will NOT change

consumption patterns Therefore, growth does not lead to more goods to be

produced for the poor, i.e. living standard of the poor is not improved with growth

Income must be redistributed

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Poverty Equity is pre-requisite for sustained growth

The rich may not save and invest Today’s LDC often see the rich spend on luxury goods, move money

abroad, spend money abroad. (In contrast to the rich in 19th century DCs)

Raising the living standard of the poor helps growth Demand will rise for necessity goods, which are often locally

produced - This helps growth Improved health and education leads to higher productivity Increased political stability

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Poverty

Policies to reduce poverty & inequality “Getting the prices right”

Inappropriate tech. is often result of distorted relative prices between labor and capital

Unions, minimum wages lead to wages being higher than market level

Government policies often subsidize investment in heavy machinery in a drive to “modernize” - This lowers the price of capital

Government should restore prices to market equilibrium

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Poverty

Redistributing land and capital ownership The poor often live in rural areas Land reforms most important However, these policies have led to disastrous

results in the past (see handout on poverty) Improving access to education

Breaks the vicious circle of poverty also improves productivity and growth good for both equality and growth

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Poverty Increasing taxation progressively

may not be politically viable - the rich controls decision-making

Increasing transfers to the poor subsidies on food, basic health services provision of clean water, electricity, roads These policies are also good for both growth

and equality Increasing appropriate technology

encourage local appropriate R&D

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II. Population

Population and development What is the effect of population growth on

development? Controversial - good or bad.

What is the effect of underdevelopment on population growth?

General agreement - Poverty causes rapid pop. growth

Reduction of poverty crucial to reduction of pop. increase

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II. Population

Some facts: 7 out of 10 of the largest countries are

LDCs 40% of world’s pop. live in China and India LDCs have high pop. growth rates (>3%) LDCs have younger pop. (50% are under

15 years of age) -- means even higher pop. in the future

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II. Population

Four Stages of DC demographic transition

Stage 1: High birth & death rates, unstable death rates, relatively stable pop.

Stage 2: High birth, lower death rate (due to increased income, improved diet and basic health conditions), rapid pop. growth

Stage 3: Birth rate starts to decline, death rate continues to fall, pop. growth continues

Stage 4: low birth and death, stable pop.

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II. Population

Today’s LDCs Mostly in stage 2 or 3 However, experienced higher birth and

death rates during their stage 1 Countries with equal income distribution

have falling birth rates (China) The key to lowering pop. is to lower birth

rate

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II. Population Why do poor families have more

children? Costs of children

direct cost of raising children (food, clothing, education)

opportunity cost of raising children for mother Benefits of raising children

a form of investment (labor force, old age security)

To reduce birth rate, must increase cost but reduce benefit of raising children

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II. Population Policies

General development policies reducing absolute poverty reduce income inequality expand education and jobs (esp. for women) expand social security

Direct family planning policies persuasion economic incentives

DCs have a role to play.

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III. Unemployment

An immense problem for LDCs Open unemployment 10-20% Disguised unemployment

MPP = 0 More people doing one person’s job

Underemployment part-time, temporary, seasonal jobs

If added together, very high rate

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III. Unemployment

Rural-Urban Migration Huge influx from the country to the city Many unemployed in the city Why do the migrant workers still come?

wage differential between city and country

Policies to reduce unemployment “getting the prices right” appropriate tech. small-scale labor-intensive industries reduce pop. growth

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IV. Agriculture Many developments problems are related

to agriculture Poverty, population, unemployment

Most of the poor live in rural area Unequal land ownership => inequality of income &

wealth Fixed land & increased pop. => Diminishing returns

in agriculture Disguised unemployment (MPP is zero) +

underemployment (seasonal and occasional work) are related to dimishing returns

Dual economy & rural-urban migration

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IV. Agriculture Nature of agri. in LDCs

Farm is run like a business in DCs Goal is profit-maximization

In LDCs, farming is survival, a way of life -”subsistence farming”

depend on land for own food most of own production for own consumption many family members work on land very low tech. level of production method

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IV. Agriculture Resistence to change

Goal of subsistence farming is risk-minimization, not profit-maximization

Subsistence farmers are less interested in innovation - too risky!

Modern method requires reliance on others for inputs: fertilizer, etc. as well as investment & borrowing

So poor farmers keep to old and less productive methods, but rich farmers can afford to modernize

This leads to increased income inequality!

Unequal land ownership means that land is often farmed by tenants

They are less willing to invest in land improvement

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IV. Agriculture

Agriculture Policies Anti-developmental policies Land reform Improved infrastructure Integrated policies - since agriculture is

only part of the development challenge.