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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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.

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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.

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ 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

Lecture 3 9/12/ IV. Agriculture  Agriculture Policies  Anti-developmental policies  Land reform  Improved infrastructure  Integrated policies - since agriculture is only part of the development challenge.