lecture 3 9/12/2015 1 development economics lecture 3. poverty, population, unemployment &...
TRANSCRIPT
Lecture 3
04/19/23
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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