1

The Family and Economic Development

David Canning, Marc Mitchell, David Bloom, and Erin L. KleindorferHarvard Institute for International Development

When people make decisions, they seldom think in terms of national or global consequences. However,they also seldom act entirely as individuals. Most often the family or household acts in light of likelyconsequences and perceptions of how they will affect the family unit.1 Economic decisions on where towork, how much to save and invest, and what education to acquire are most frequently made at thefamily level. Demographic decisions are essentially family decisions. Few families choose to limit thenumber of children they have because of a national or global "population problem." Rather, householdsact on the basis of the family’s best interests. Thus as countries have tried to understand the factors thatinfluence fertility, labor force participation, education enrollment rates, and saving, they have begun tolook more closely at how the household makes its decisions and what factors influence this process.

A family’s place in society depends, to some extent, on the economic functions it performs, and thesefunctions follow the needs of the prevalent mode of production. Economic development leads to abreakdown of the family as a production unit. This change essentially follows the increased division oflabor and of specialization within societies as economies move away from a predominantly agriculturalbase. The family cannot match the size and flexibility of the modern corporation. Family size usually fallsdramatically during economic development, and this reduction in size tends to reduce its ability toprovide a safety net to family members in the event of temporary setbacks. In addition, the increasingmobility of the labor force undermines those long-term relationships that cement the family together.

This paper explores the family’s role in countries in the midst of an economic and demographic transitionbased on the experience of other countries. It will also discuss some of the policy implications thatcountries should consider in the face of smaller, more isolated, families, an aging population, and aneconomy increasingly based on production outside the home. These countries will also need to take intoaccount the consequences of increasing education rates, female labor force participation, andoccupational mobilityOften, the implications include ensuring that other institutions are in place to takeover the functions that the family can no longer perform. However, institution building is difficult andcreates a fundamental tension between security and flexibility. Institutions that provide security to theirmembers, come what may, often lack the flexibility to take full advantage of rapidly changing economicconditions, while institutions that are more efficient often achieve this by dismissing people as soon asthey can no longer make a net contribution, thereby creating insecurity. In addition, institutions can havefar-reaching consequences, for example, building institutions to take over the family’s function when itfails may reduce the family’s usefulness and hasten its demise. These factors mean that institutionbuilding needs careful consideration before being implemented.

1 This paper will use the terms family and household more or less interchangeably. While the authors recognize thatthese terms are not synonymous, for the purpose of the discussions in this paper, they will not be differentiated.

2

Theories of the Family

Households are the central decision making units in most societies. While demographers tend to focuson aggregate fertility rates and economists on gross national product, the family, not the nation, makesdecisions about spending, number of children, migration, education, and the roles assigned to parentsand children within the household. Thus an understanding of household decision making is critical to anunderstanding of the relationship between economic development and demography.

In economic terms, the concept of a household is an economic unit that lives together and sharesresources for the common benefit. In general, the assumption is that the household contains a nuclearfamily plus additional members of the extended family, such as parents and unmarried siblings. Thenuclear family consumes together, gaining the benefits of economies of scale in consumption because, onaverage, two can live more cheaply than one. The family raises children and cares for the old and sick.It allocates its capital resources between its members, generating investment in both enterprise and ineducation. It allows risk sharing between its members, ensuring that temporary bad luck does notpermanently damage an individual member’s prospects. In some cases the family is also a productionunit and organizes the division of labor, often based on gender. The extended family, because of itslong-term relationships based on trust, allows risk sharing and the efficient allocation of capital betweenits members. It can also serve as an important source of information flows. An example of this is whenone branch of an extended family migrates and acts as a magnet for other parts. Finally, the family actsas a mechanism for social inclusion, ensuring that individual members are not permanently alienatedfrom society. It satisfies a psychological need for belonging. It represents commitment and security in anuncertain world.

Despite its importance, economists often try to avoid dealing with the family. The most commonapproach in economic theory has been to treat the family, or household, as a single economic unit, the“agent.” This implies that the household acts as if it were an individual, in particular, that it has well-defined preferences for outcomes. Economists justify this by arguing that everyone in the family has thesame interests, or if their interests differ, that the family has a dominant member and follows thatmember’s wishes. This unitary view of the family works well in considering many functions that thefamily provides. The problem with this approach, however, is that it says nothing about whether conflictswithin the family are resolved and whether such intra-family dynamics influence the behavior of familiesas a whole.

In response to the concern that the family does not always act as a unitary whole, recent studies havelooked at how resources are shared within a household. The classic model of the unitary household isthat resources are shared equitably among household members and that no conflicts of interest arise.However, recent literature indicates that in most households this is not the case. Instead, family membersconstantly negotiate over resources, including food, parental attention, access to external benefits suchas school, and allocation of work within the household.

This view is captured in the bargaining model, which assumes that members of a family have differentinterests, and must therefore bargain over family decisions. How much of their way individuals get

3

depends on their bargaining power, and in particular, on the threats they can credibly employ. Forexample, improving women’s potential position in and after divorce can increase the credibility of athreat to dissolve the marriage, and may improve their lot within marriage. With full information, themodel predicts the efficient allocation of resources to maximize family income, with individuals’ rewardsdepending on their bargaining power. In practice, however, bargaining often leads to inefficiency,because individuals may be willing for their families to be worse off if they personally do better. Forexample, parties may hide information to increase their personal share of resources. Household surveysin South Africa have shown that men often hide some of their income from the family to use for theirown ends, while women often have hidden savings. This model seems to reflect many of the elements ofhousehold dynamics quite accurately.

One logical outcome of the bargaining model is that as long as women and children have less powerthan adult males, they will get a smaller share of food and other resources. Indeed, several studies haveindicated that in many countries, female children do get less food, less free time, less education, andfewer inputs from their parents than their male siblings. Furthermore, these discrepancies are evengreater in large families. Children with more siblings suffer differentially a loss in resources relative toadults even after accounting for children's lower consumption needs. Thus larger families mean greaterinequity between the generations in terms of resource distribution (Bauer and Mason(1993), p. 24).

However, bargaining models of intra-family dynamics also have their shortcomings. One of their failingsis that they treat the individual in the family as a strictly selfish person who uses other family membersonly as a source of resources to be exploited. In practice, people in families tend to care about eachother, and the happiness of all influences the happiness of each. While explaining most behavior withinfamilies as the result of selfish goals may be possible, this does not seem to be a good explanation ofhow households actually work. Family members tend to be nice to each other so that other familymembers will be nice to them. In addition, an element of pure altruism seems to be apparent in intra-household relationships, particularly in parents’ relationships toward their children, that the bargainingmodel does not explain.

Another problem with economic theory as it relates to the family is that it does not distinguish muchbetween men and women. We know from sociological and anthropological literature that gender rolesgo well beyond the biological requirements for reproduction and are not explained by physicaldifferences between the sexes. Furthermore, while traditional societies tend to place an enormousburden on women in their role as mothers, modern societies characterized by reduced numbers ofpregnancies and children and the potential of men and women to be equal have managed to retain manyof the traditional divisions of labor related to children and the home. Thus while economists may treatmen and women as equal, most societies do not.

As a way to understand the importance of families to society, let us imagine a world without families.Theoretically, every adult could live alone and gain all the things a family provides from the market, thestate, and other institutions. People could work and consume individually or in groups without any of thecommitments we associate with the family. Risk sharing, old age care, health care, and child care couldall be carried out by the state or through the private sector. Children could, in principle, be born not

4

knowing who their parents were, and could be raised by private firms to start their working lives with adebt, or by the state, in which case they would face a tax liability.

Such a world is possible in theory, and indeed, both Plato and Marx supported such a concept.However, our unease with the prospect of such a world is deep-seated. This is partly a problem of risk.As long as societal institutions continue to function, such a world may work quite well. However, historyteaches us that revolutions occur in both politics and economic institutions, and that we cannot guaranteethe survival of economic institutions. The family is one of the most robust institutions in existence. Itsurvives when all other social relationships disintegrate. However, in addition to the overall fragility of asociety without families, we feel a deeper unease. To some extent it may simply be that we are so usedto families that the prospect of not having them is frightening. More likely, however, is that people need,as a psychological requirement, some stable, long-term relationships of mutual support to functioneffectively. Often the family provides this, although sometimes it fails to do so. Other institutions canprovide such long-term security, but in practice they are often more fragile than the family.

Despite the decline in their economic activities, families are important in society because they provideconnections between individuals. A central social problem is the alienation of some individuals and theemergence of an underclass of people who lack connections to mainstream society. The family, the firm,the religious organization, and the club all provide members with constraints, rewards, and opportunities.At the extreme of economic modeling we think of an economy as made up of people who interactthrough the market, with a legal framework in place to resolve disputes. In reality, most people work inorganizations, rather than acting as individuals in a market. The institutions of a society determine itssocial norms and moral standards and channel people into socially desirable behavior. Alienatedindividuals without links to others through these organizations have little love of society and often littlefear of it. Two-tiered societies have emerged in many industrial countries, with most people havingstrong links with others in society and sharing the benefits of economic development, while a marginalunderclass lives its life as if in a different country, except for the inevitable spillovers of crime andpunishment.

In addition, families play a role of insurer of last resort, providing aid and solace when all else fails andpreventing temporary setbacks from becoming permanent.

We could list more roles that the family plays and develop each item much more deeply; however, whilethe family plays a host of functions, it is not essential. Indeed, in almost every case alternative institutionsand mechanisms can supplant the role of the family. The fact that some individuals manage to live fulllives without ever being associated with a family demonstrates that the family is not essential.

Development and Reduced Family Size

The evidence indicates that as countries develop economically, an associated reduction occurs in fertilityand in family size. Rising incomes account for some of the force behind this reduction, but it is mostlydue to increased levels of female education and greater employment opportunities for women outsidethe home. The calculus of advantage changes from children making a net contribution to their parents’

5

incomes to being a net cost. Once people desire children only for altruistic reasons, and not foreconomic reasons, they want small families.

Furthermore, a reduction in family size can contribute to the social and economic development of boththe country and of the individual family. For example, consider a child’s ability to access education, andthus become more productive in a formal economy. Children from large families are more often deniedaccess to schooling, because the family cannot afford to educate so many children purely from theparents’ incomes, and to survive may require the child's current contribution to the household. Ineconomic terms, as the size of the family increases, the costs of schooling, both direct and in terms ofother income forgone, increase, leading to lower school attendance for children from large families. Thisis particularly true for female children, because their traditional role has been to care for their youngersiblings and help their mother with other household chores. Large families have a strong incentive tokeep their older children at home, thereby denying them the future benefits of an education.

This leads to a vicious cycle wherein children from larger families receive less education, play moretraditional roles in the household unit, and have fewer opportunities for either employment or otherforms of social mobility. This pattern leads to earlier marriage and higher fertility for these children in acycle of poverty and high fertility. When the girls from large, traditional families reach adulthood, theywill have been socialized to perform more traditional roles, will be less knowledgeable about the worldaround them, will have fewer remunerative skills, and will be less able to access resources on their own.As a result they will have little bargaining power within the family, be more reliant on their husband andchildren, will be less likely to use modern methods of contraception, and will likely have more childrenthan young women with fewer siblings. Thus high fertility perpetuates itself, shortening the spacebetween generations and increasing the momentum of population growth (Lloyd (1994), p. 23).

Contrast this with the situation of a girl in a smaller family. Females in smaller families often benefit frommore attention and the availability of more resources. They are more likely to go to school, and evenmore important, to complete primary school, and perhaps even secondary school. Their nutritionalstatus is also likely to be better, and because more of their mother's and father's time is available, theyare better able to develop a sense of individual identity rather than simply being "one of the children." Asa result of smaller family size, both male and female siblings will have more time to study and to play,and the likelihood that they will be pushed into nontraditional roles, such as boys helping with thecooking or women going out in the village without a male chaperone, increases. A child from a smallfamily, more educated and with more autonomy, is far more likely to have a small family in the nextgeneration, and consequently contribute to reducing population growth.

Another important finding is that as family size increases, the nutritional status of the younger children ismore profoundly affected than that of the older children. This is because the older children start off life ina small family, and by the time the family has grown significantly in size, they are already past earlychildhood, when sensitivity to nutritional deficits is most critical to development. Even when children areall equally wanted, later children in large families may face differential access to resources.

6

Improving the educational and health status of children in small families provides a positive driving forcefor economic development. However, while both the family and society benefit from smaller families,smaller families also create some major problems. One is the loss of the safety net the family providesfor the elderly, the sick, and the unemployed.

Smaller families have an exponential effect on the size of extended families. Let us consider, forexample, two extended families: A and B. In family A, both the mother and father come from familieswith 6 children, and they and their siblings each have 6 children. In family B, the mother and father comefrom families of 2 children, and they and their siblings each have 2 children. Now consider you are achild in family A. You have 5 siblings, 10 aunts or uncles (excluding spouses), and 60 first cousins. Bycontrast, in family B you have 1 sibling, 2 aunts or uncles (excluding spouses), and only 4 first cousins.Now consider that the extended family functions for many as an important source of support, especiallywhen resources are needed quickly and would otherwise be unavailable. This occurs, for example,when a child is sick and needs money for medicines, or when a house burns down or is flooded andmust be replaced. The extended family can provide housing, food, and often temporary employmentduring hard times. Finally, it is the extended family that provides for the elderly, the chronically ill, andthe aged. When an individual has 60 cousins and 10 aunts and uncles, the likelihood that someone willbe able to help him or her out is high. However, with only 4 cousins and 2 aunts or uncles, this safety netmay be much more difficult to find. This is especially true as internal migration increases and familymembers move to the city in search of jobs. Smaller families may be less able to help when they buyfood instead of growing it, when their housing is much more limited, and when their own cash needs fullyconsume their earnings.

A major impact of economic development and health improvements is longer life expectancy and anincreased need for provision for old age. Yet in most societies the children, often the male children, arethose who provide for their parents in their old age. As families become smaller, become more mobile,and rely increasingly on a cash economy, it whether this filial responsibility will continue to be met isunclear. Indeed, in countries such as Japan, where the demands of a modern economy have overtakenthe tradition of parental care, this issue is now posing a considerable problem. If countries wish toaddress the forces that undermine the trend toward smaller families and gender equality among children,they must develop alternative institutions that will provide for saving, insurance, and public provision ofold age benefits.

Thus to counter the loss of the extended family and to meet the new needs generated by development,other structures must be put in place that provide a financial safety net for individuals facing temporaryeconomic setbacks, and that provide access to the small-scale savings and capital that the extendedfamily traditionally offers. In the industrial world, such structures are represented by social securitysystems, pensions, insurance, and banks and credit unions that provide both saving opportunities andcredit for business investments. In developing countries such institutions are typically available only tothe rich, and the poor or near poor who need them most have no way to access these safety nets. Thisis of particular concern, because recent evidence suggests that without this type of safety net, the nearpoor will often suffer from cyclical financial setbacks, such as bad weather or bad luck, and be pushedinto a permanent state of poverty.

7

This same issue arises in raising capital for small business ventures, which is a key component ofeconomic growth. Because sources of investment capital are extremely limited in most developingcountries, people rely on their relatives to lend them money to start small ventures such as shops ortrades. Again, relying on one's family when it is small and scattered around the country is more difficult,thereby limiting opportunities for investment by individuals.

Finally, another threat that comes from reduced family size, and thereby its smaller economic role, is thatfamily links decline in importance, and some individuals do not find other connections to generate linksto society. Once disengaged from society, such individuals can form an underclass with no stake insociety’s success. The family plays a key role in preventing social alienation, because it is the onestructure individuals are part of by birth rather than by choice. Even if all other institutions failindividuals, they can always turn to their family in times of difficulty if the institution of the family isfunctioning. Without the family to fall back on in times of stress, the likelihood that individuals leavesociety and enter the underclass when, for example, they face unemployment, increases.

Policy Implications

So far most of the policy debate on population growth and economic growth has focused on the needfor a lower rate of population growth as a driving force for higher per capita incomes. For societies thathave not yet reached the stage of small families, having policies in place aimed at reducing populationgrowth is important.

Perhaps the most import of such policies is improving the relative position of women. As we learn moreabout the role of individual family members, we have become more aware of the need for women to bein a stronger bargaining position in relation to their husbands and other family members (such as in-laws)to assure equitable distribution of resources for their children and themselves. This has a dramaticimpact on education, nutrition, health, and fertility, and also implies the receipt of direct economic andsocial benefits for women.

However, this paper has gone a step further, and focused on some of the changes that will occur as thesize of families decreases because of changing fertility. While many of these changes have positiveimplications for both social and economic development and for the opportunities individual familymembers will have, some roles that the family has traditionally assumed will need to be transferred toother institutions.

In modern societies, the dominant economic institutions are the market, the company, and the state.However, while these institutions provide alternatives to the family, they have their own problems.Market mechanisms can produce efficient outcomes, but pervasive market failure exists in many areas.Companies, in theory, maximize shareholder value. In practice, they often provide job security andother insurance to their workers, since insurance markets often fail. The conflict between these motivesmeans they often fulfill their goals imperfectly. The idea that the state should intervene in such cases iscommonplace, but the state itself is not omnipotent, and state failure, in the sense that it fails to deliver as

8

much as is expected of it, is also common. Other institutions, such as religious organizations, clubs, andcommunity associations, play important roles in the social arena, but usually lack significant economicresources, due to their voluntary nature.

Recognizing that someone must pay the cost of providing services is also important. If the private sectoris used, poorer individuals will tend to be excluded. The private sector cannot redistribute resources,each person gets what he, or she pays for. In addition, marketing costs and commissions often lead tolarge lump sum fees on private services such as insurance, which tends exclude poorer customers whodesire low value contracts. If the public sector is used, this implies an increased tax burden. Ifcompanies are legally obliged to provide services such as health care or pensions to their workers, thishas a cost in terms of higher prices for goods and loss of international competitiveness. The roles thefamily now has difficulty playing include providing a measure of security for the elderly and providing asafety net for periods of unemployment. The extended family has also been the lender of last resortwhen families need money either for bills such as for health care or construction, or for investmentcapital for new economic enterprises. In addition, the family has served as a social unit where customsare preserved, ethics are maintained, and acceptable behaviors are defined. Thus with a decline in thefamily’s role in these areas, developing alternativeinstitutions to fill the gap will be crucial. These institutions will be needed for the following:

• Providing pension schemes for the elderly. Timing in this regard is particularly important. Today,when the number of productive workers far exceeds the number of dependents, more can be paidinto a pension system than needs to be paid out. However, in 40 years that situation will reverse,and both the economic and the political decisions that will be needed then will be far more difficultthan those taken today. A well-planned pension system, either public, or more likely private, canprovide both a safety net for the elderly and a source of capital for the country to invest in its owndevelopment.

• Providing health insurance. In most countries, the government provides health care to the poorwhile the private sector cares for the everyone else. However, as the population ages, as theepidemiological trend moves from acute infectious diseases to chronic diseases, and as the family’sability to pay for catastrophic illness decreases, a more comprehensive approach toward paying forhealth services is urgently needed. Many models for this are available, of which none is perfect, butsome type of national health insurance can provide a measure of security and lead to improvedservices for the country as a whole.

• Providing micro-financing. Families have often provided the start-up capital for small businessesand other family enterprises that enable the development of small-scale enterprises. As familiesbecome smaller, other formal institutions that are willing to provide small loans, small savingschemes, and perhaps advice on managing small businesses must assume this role.

• Developing and supporting social institutions for young people. The role that the familytraditionally plays in defining and maintaining social norms will not be as strong when families moveto the city; when they are subject to inputs from the outside, like television and newspapers; and

9

when parents and children spend more of their time outside the home than inside. Under suchcircumstances the family must be given support, and other institutions, such as clubs, boys’ andgirls’ youth organizations, religious youth organizations, sports teams, and school- based activitiesshould be made available to young people to prevent the influence of gangs, drugs, and othersocially disruptive behaviors.

However, old age pensions, health insurance, and financial institutions for saving, whether public orprivate, provide the individual with security, and may weaken the desire for children and the importanceof the family. The question that remains for policymakers is how to provide the safety net that the familyhas traditionally provided without undermining the values of family support.

ReferencesBauer, John and Andrew Mason (1993), “Equivalence scales, costs of children and poverty in thePhilippines and Thailand”, in Fertility, Family Size and Structure: Consequences for Families andChildren, C.B. Lloyd (ed.), Population Council, New York, pp. 13-39.

Lloyd, Cynthia B. (1994), “Investing in the Next generation: Implications of high Fertility at the Level ofthe Family”, Research Division Working Paper, No. 63, Population Council.