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5/23/2017
Development Economics
Lecture 3.
Poverty, Population,
Unemployment & Agriculture
Lecture 3
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I. Poverty
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A priority in its own right?!
Many other problems are povertyrelated
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pop. growth
rural unemployment
resistance to change by peasant farmers
city slums
poor educational standard
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Poverty
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Absolute poverty
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2/5 of LDC pop. live under absolute poverty
Who are the poor?
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Avg. income vs. income distribution
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70-80% of the poor live in the countryside
women are the poorer of the poor
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
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Poverty and growth: Goals in conflict?
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One school: trickle-down theory
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Inequity accepted or encouraged to raise avg.
income; greater equity will follow.
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Income inequality increases first, but then
decreases
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Growth requires investment
investment requires saving
The rich has higher propensity to save
based on experience of DCs
Once economy is rich, can redistribute through taxes
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Poverty
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Other: Equity is the aim, NOT the
consequence of growth
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Growth can happen without improving equity
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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
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Equity is pre-requisite for sustained growth
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The rich may not save and invest
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Raising the living standard of the poor helps growth
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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)
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
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Policies to reduce poverty & inequality
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“Getting the prices right”
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Inappropriate tech. is often result of distorted
relative prices between labor and capital
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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
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Redistributing land and capital ownership
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Improving access to education
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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)
Breaks the vicious circle of poverty
also improves productivity and growth
good for both equality and growth
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Poverty
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Increasing taxation progressively
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Increasing transfers to the poor
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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
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may not be politically viable - the rich controls
decision-making
encourage local appropriate R&D
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II. Population
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Population and development
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What is the effect of population growth on
development?
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What is the effect of underdevelopment on
population growth?
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Controversial - good or bad.
General agreement - Poverty causes rapid pop.
growth
Reduction of poverty crucial to reduction of
pop. increase
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II. Population
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Some facts:
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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
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Four Stages of DC demographic
transition
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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
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Today’s LDCs
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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
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Why do poor families have more
children?
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Costs of children
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Benefits of raising children
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direct cost of raising children (food, clothing,
education)
opportunity cost of raising children for mother
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
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Policies
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General development policies
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Direct family planning policies
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reducing absolute poverty
reduce income inequality
expand education and jobs (esp. for women)
expand social security
persuasion
economic incentives
DCs have a role to play.
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III. Unemployment
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An immense problem for LDCs
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Open unemployment 10-20%
Disguised unemployment
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Underemployment
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MPP = 0
More people doing one person’s job
part-time, temporary, seasonal jobs
If added together, very high rate
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III. Unemployment
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Rural-Urban Migration
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Huge influx from the country to the city
Many unemployed in the city
Why do the migrant workers still come?
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Policies to reduce unemployment
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wage differential between city and country
“getting the prices right”
appropriate tech.
small-scale labor-intensive industries
reduce pop. growth
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IV. Agriculture
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Many developments problems are
related to agriculture
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Poverty, population, unemployment
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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
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Nature of agri. in LDCs
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Farm is run like a business in DCs
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In LDCs, farming is survival, a way of life ”subsistence farming”
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Goal is profit-maximization
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
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Resistence to change
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Goal of subsistence farming is riskminimization, not profit-maximization
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Subsistence farmers are less interested in innovation - too
risky!
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So poor farmers keep to old and less productive methods,
but rich farmers can afford to modernize
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This leads to increased income inequality!
Unequal land ownership means that land is
often farmed by tenants
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Modern method requires reliance on others for inputs: fertilizer, etc. as
well as investment & borrowing
They are less willing to invest in land improvement
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IV. Agriculture
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Agriculture Policies
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Anti-developmental policies
Land reform
Improved infrastructure
Integrated policies - since agriculture is
only part of the development challenge.
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