ECON 390 ISSUES AND PROBLEMS IN DEVELOPING ECONOMIES

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ECON 390 ISSUES AND PROBLEMS IN DEVELOPING
ECONOMIES

• Lecture 11 Poverty measurement and impact
  Population growth and economic development

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Goals for today

• Class update?
• How do we measure poverty?
• Connection between growth and poverty
• Policy options for poverty reduction
• Population growth and economic development

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How do we measure poverty?

• Poverty measurement in the United States
• Example for family of four for 2004 19,157
• Criterion for setting the poverty threshold
• Economy food plan, provided an even chance of a
  fair or better diet
• Poverty threshold set to 3 times cost of food
  plan

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What is poverty like in the U.S?

• Poor households
• 46 own their own homes. Average home 3
  bedroom house with 1.5 baths, garage and porch
• 76 have air conditioning
• More than 67 have more than 2 rooms per person
• 75 own a car
• Most receive childhood vaccinations
• Children are likely to receive 12 years of
  education

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Poverty in Bangladesh

• Landlessness 48 of the rural population are
  effectively landless
• 56 of population completed grade 5
• 55 of Bangladeshis are considered illiterate
• 92 of children receive vaccinations, but 13-19
  of children are severely underweight or stunted
  in growth
• 2 of the poor have access to tapped water
  supplies
• 38 live in dwellings with proper toilet
  facilities
• 17 in dwellings with electricities
• Average dwelling size 287 sq. feet, just under
  2 rooms

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How do we compare poverty across countries?

• Most nations have their own poverty lines, based
  on a minimum daily intake of 2,112 calories.
  Criterion
• Bangladesh upper poverty line households meet
  minimum food requirements, afford some non-food
  expenditures
• Mexico 3 poverty lines ranging from ability
  to have basic nutrition, to ability to pay for
  all necessary costs of living

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Alternative single international poverty line,
1 a day

• Global poverty line of 1 a day, based on 1990
  World Development Report
• 1990 WDR found that poverty lines rose with
  income levels
• Low-income nations poverty lines ranged between
  275 - 370
• Using 370 or 1 a day as the poverty line, found
  that 1/3 of the world population in 1985 lived in
  absolute poverty

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Update 2001 World Development Report

• Again looked at country-specific poverty lines
• Result 1.08 per person per day, in 1993 PPP
  dollars
• In 2001 1.09 billion people lived below 1 a
  day

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How can we measure the extent of absolute poverty?

• Headcount index
• H number of people below the poverty line
• Headcount index H/N
• Total poverty gap

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How much poverty is there?
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Characteristics of the poor

• Rural poverty
• 80-90 of poor in Asia/Africa, 50 of the poor in
  Latin America
• Women and poverty
• Lower wages, may be barred from higher-paying
  occupations
• Lesser levels of education
• Ethnic minorities Indigenous people in Latin
  America

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Couldnt we just focus on economic growth?
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Is growth enough?

• Exceptions
• Bottom quintiles income may fall despite
  increases in GDP per capita
• Very poor countries even growth in income of
  poor may still not allow them to cross poverty
  line
• Distributional changes reduce the amount of
  poverty alleviation generated by economic growth

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Policy solutions?

• Improving functioning of markets
• Macroeconomic policies
• Reducing budget deficits and debt
• Reducing inflation
• Allowing poor increased access to markets
• Helping the poor to take advantage of these
  opportunities
• Education and health services
• Improvements in rural infrastructure
• Redistribution land reform

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Why should we focus on poverty?

• Most people give more weight to the well-being of
  the poor than of the rich
• Interventions aimed at helping the poor may help
  raise average incomes
• Focusing on poverty helps lead to a broader
  approach to development

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Population growth and economic development
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Demographic transition
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Thomas Malthus the great pessimist

• Lived 1766-1834
• 1st British professor of political economy
• Essay on the Principle of Population
• Universal tendency for population to double every
  30-40 years
• Checks on population growth moral restraint,
  vice and misery

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Malthusian population trap

• What happens when wages rise above subsistence?
  Orgy of procreation
• People marry earlier and have more children
• Population growth depresses wages to subsistence
  level
• Nations will only raise above subsistence income
  levels if there are limitations on population
  growth
• Positive checks wars, famines, epidemics
• Preventive checks fertility reduction

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Criticisms of Malthusian approach

• Theory not verified by history
• Improvements in agricultural productivity
• Industrial revolution
• Do we observe a positive relationship between
  population growth and per capita income?

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Thinking back to Harrod-Domar and Solow

• Harrod-Domar
• Populative growth has a negative effect on
  growth.
• Solow
• Population growth has no effect on long-run
  growth
• Negative effect on level of steady-state

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Population growth and savings

• Population growth eats into aggregate income
• Positive relationship between savings and
  aggregate income
• What is savings at subsistence level income?
• What happens to savings as income increases?
• Effect of population growth on aggregate savings?

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Age distributions

• Dependency ratio The proportion of youths
  (under age 15) to economically active adults
  (ages 15-64)
• Effect on savings children consume more than
  they produce, higher dependency ratio tends to
  lead to lower savings rates

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What determines how many children people have?

• Modern theories of fertility choice rationally
  made by couples
• Benefits of having children
• Pleasure derived
• Economic benefit
• Costs of having children
• Loss of leisure-time, anxiety
• Economic costs

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Microeconomic theory of fertility

• Demand for children, given costs and benefits