Development EconomicsIV

Prof. Dr. Hans H. Bass

Jacobs University, Spring 2010

Feb. 24, 2010 2

Development Economics Agenda Feb. 24

1. Historical and recent population trends1.1 World population growth trends1.2 The demographic transition: past and present

2. Explaining high fertility in developing countries2.1 A macroeconomic model (neo-Malthusian)2.2 A microeconomic model (neo-classical)

3. Policy options to influence size and growth of population

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1.1 World population trends World Population,

1750-2050

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1.1 World population trends Population growth and

development

97 % of present net population growth is in DCs.(1) Population explosion is the major crisis facing humankind today.(2) Population growth impedes development (income, health, education, self-esteem, freedom to choose ...) by challenges to food supply, education and health systems, ecological carrying capacity.(3) Population growth isn’t a real problem. The real problems are underdevelopment, world resource depletion and environmental destruction, population distribution, and the subordination of women.(4) Overpopulation is a deliberately contrived false issue.(5) Population growth is a desirable phenomenon.

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1.2 The Demographic Transition Stages

Stage I: High birthrates and death ratesStage II: Continued high birthrates, declining death

ratesStage III: Falling birthrates and death rates, eventually

stabilizing

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1.2 The Demographic Transition Western Europe

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1.2 The Demographic Transition Western Europe

I. Pre-transition stagehigh and volatile death rates (famines, diseases, wars ...)high, but not very* high birthrates

II. The demographic transitiondeclining death rates, esp. infantshigh birthrates (“hidden momentum“)high net emigration (to settler colonies)

III. Post-transition stagelow and stable death ratesdeclining birth rates

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1.2 The Demographic Transition Contemporary DCs

II. The demographic transitionvery rapidly declining death rates, esp. infantsvery high birthrates (“hidden momentum“)very low net emigration (“Fortress Europe“ ...)

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1.2 The Demographic Transition Contemporary DCs

Poverty, AIDS

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Development Economics Agenda Feb. 24

1. Historical and recent population trends1.1 World population growth trends1.2 The demographic transition: past and present

2. Explaining high fertility in developing countries2.1 A macroeconomic model (neo-Malthusian)2.2 A microeconomic model (neo-classical)

3. Policy options to influence size and growth of population

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Thomas Malthus (1798): unchecked population growth at geometric rates (1,2,4,8)diminishing returns to fixed factor (land) food suplies (proxy

for income) expand only at arithmetic rate (1,3,5,7)stable population at subsistence level (low level equlibrium trap)

by positive checksalternative: preventive checks (birth control)

2 Explaining high fertility in DCs2.1 A macro-economic model Malthus

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2 Explaining high fertility in DCs2.1 A macro-economic model Neo-Malthusians

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2 Explaining high fertility in DCs2.1 A macro-economic model Criticisms

technological progress not consideredno clear correlation between population increase and per capita

income, especially on the < $ 1,000 p.c. income level:fertility rates vary widely (rather a function of distribution)death rates due to overall increased public health standards not strongly dependent on income p.c.

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2 Explaining high fertility in DCs2.2 A micro-economic model

Household theoryof fertility

children: a special kind of consumption (and in LDC: investment)fertility: a rational economic response to family’s demand for children relative to other goods, depending on household income net price for children (benefits such as potential child

income minus costs such as education and opportunity costs for mothers) price of other consumer goods tastes

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3 Policy options to influence size and growth of population

Rising the net price of children

feesmore employment opportunities for women increase

opportunity costs of having childrenminimum-age child labor lawsexpanded schooling opportunities and employment chances for

the better-educatedprovision of publicly financed old-age social security schemeshowever: rational behavior assumptions applicable only to

number of children beyond social norm

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Development Economics Opinions

97 % of present net population growth is in DCs.(1) Population explosion is the major crisis facing humankind today.(2) Population growth impedes development (income, health, education, self-esteem, freedom to choose ...) by challenges to food supply, education and health systems, ecological carrying capacity.(3) Population growth isn’t a real problem. The real problems are underdevelopment, world resource depletion and environmental destruction, population distribution, and the subordination of women.(4) Overpopulation is a deliberately contrived false issue.(5) Population growth is a desirable phenomenon.

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Appendix Some equations

Human beings in the economy areproductive factor: L(15-65) Yconsumers: Y L(65+) + L0 + L(<15) = POP

Dependency Ratio: [L(65+) + L(<15)] / L(15-65)

Population Growth = Natural Growth + Net Migration= Fertility – Mortality + Net Migration

Development EconomicsV

Prof. Dr. Hans H. Bass

Jacobs University, Spring 2010

Feb. 24, 2010 21

Development Economics Agenda Feb. 24

1. Urbanization2. The Urban Informal Sector3. Rural to Urban Migration

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1. Urbanisation Trend

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1. Urbanisation Projections

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1. UrbanisationStructure of urban population growth

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2. The Urban Informal Sector The Lewis Model Revisited

Two sectors: agriculture and modern urban sector in agriculture MPL = 0 agricultural wage rate = average product institutional inflexibility of wage rate in the modern sector:

(a) trade unions, (b) employment strategies of TNCs agricultural wage rate < modern sector wage rate

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2. The Urban Informal Sector The Lewis Model Cntd

rural to urban migration exceeds employment opportunities in the modern sector

rationing of modern sector employment according to formal education

short-term reaction: all sorts of odd jobs long-term reaction: investment into formal education increased growth potential by accumulation of human

capital however: employment rate increases only if

industrialization more rapid than population growth

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2. The Urban Informal Sector Characteristics

Why is, in spite of the continuous flow of migrants, urban unemployment still low?

IS “discovered” 1973 by Keith Hart (Accra) and ILO mission to Kenya:(1) ease of entry(2) reliance on indigenous resources(3) family ownership (4) small scale of operation(5) labour intensive and adapted technology(6) skills acquired outside the formal school system(7) unregulated and competitive markets

(Source: ILO 1973)

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2. The Urban Informal Sector Definitions of the IS

"a mode of organisation different from the unit of production most familiar in economic theory, the firm or corporation. These activities are also likely to be unregulated by the state and excluded from standard economic accounts of national income" (Swaminathan/WIDER, 1991, p.1)

"units of production, services and commerce whose management method differs from that of the modern sector (in particular the absence of standardized accounts)" (Lachaud/ILO 1994, p. 94)

units engaged in the production of goods and services with the primary objective of generating employment and incomes to the persons concerned; low level of organization (= small scale: 1-n) with little or no division between labour and capital as factors of production; activities not necessarily performed with the deliberate intention of evading the payment of taxes or infringing labour or other legislation (vs. underground economy) (15th International Conference of Labour Statisticians: ILO Official Bulletin 1993)

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2. The Urban Informal SectorImportance of informal

Employment

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3. Rural to Urban Migration Harris-Todaro Model

migration proceeds in response to urban-rural differences (returns minus costs) in expected income rather than actual earnings

i.e.: migration responds positively to bothhigher urban wages andhigher urban employment opportunities (= probabilities)

migration rates in excess of urban job opportunity growth rates are rational

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3. Rural to Urban MigrationConsequences of the

Todaro model

Which would be the result of the creation of more urban modern-sector jobs?

Which would be the result of an expansion of formal education in the country? “Government overinvestment in postprimary educational facilities thus often turns out to be an investment in idle human resources.” (Todaro/Smith)

How about wage subsidies to increase labor-intensity of production?

How to overcome the “urban bias”* of governments and aid agencies?