Development Economics IV Prof. Dr. Hans H. Bass Jacobs University, Spring 2010

Feb. 24, Development Economics Agenda Feb Historical and recent population trends 1.1 World population growth trends 1.2 The demographic transition: past and present 2.Explaining high fertility in developing countries 2.1 A macroeconomic model (neo-Malthusian) 2.2 A microeconomic model (neo-classical) 3.Policy options to influence size and growth of population

Feb. 24, World population trends World Population,

Feb. 24, 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.

Feb. 24, The Demographic Transition Stages Stage I: High birthrates and death rates Stage II: Continued high birthrates, declining death rates Stage III: Falling birthrates and death rates, eventually stabilizing

Feb. 24, The Demographic Transition Western Europe

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8 1.2 The Demographic Transition Western Europe I. Pre-transition stage high and volatile death rates (famines, diseases, wars...) high, but not very* high birthrates II. The demographic transition declining death rates, esp. infants high birthrates (“hidden momentum“) high net emigration (to settler colonies) III. Post-transition stage low and stable death rates declining birth rates

Feb. 24, The Demographic Transition Contemporary DCs II. The demographic transition very rapidly declining death rates, esp. infants very high birthrates (“hidden momentum“) very low net emigration (“Fortress Europe“...)

Feb. 24, The Demographic Transition Contemporary DCs Poverty, AIDS

Feb. 24, Development Economics Agenda Feb Historical and recent population trends 1.1 World population growth trends 1.2 The demographic transition: past and present 2.Explaining high fertility in developing countries 2.1 A macroeconomic model (neo-Malthusian) 2.2 A microeconomic model (neo-classical) 3.Policy options to influence size and growth of population

Feb. 24, 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 checks alternative: preventive checks (birth control) 2 Explaining high fertility in DCs 2.1 A macro-economic model Malthus

Feb. 24, Explaining high fertility in DCs 2.1 A macro-economic model Neo-Malthusians

Feb. 24, Explaining high fertility in DCs 2.1 A macro-economic model Criticisms technological progress not considered no 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.

Feb. 24, Explaining high fertility in DCs 2.2 A micro-economic model Household theory of 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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Feb. 24, Policy options to influence size and growth of population Rising the net price of children fees more employment opportunities for women increase opportunity costs of having children minimum-age child labor laws expanded schooling opportunities and employment chances for the better-educated provision of publicly financed old-age social security schemes however: rational behavior assumptions applicable only to number of children beyond social norm

Feb. 24, 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.

Feb. 24, Appendix Some equations Human beings in the economy are productive factor: L (15-65)  Y consumers: Y  L (65+) + L 0 + L (<15) = POP Dependency Ratio: [L (65+) + L (<15) ] / L (15-65) Population Growth = Natural Growth + Net Migration = Fertility – Mortality + Net Migration

Development Economics V Prof. Dr. Hans H. Bass Jacobs University, Spring 2010

Feb. 24, Development Economics Agenda Feb Urbanization 2.The Urban Informal Sector 3.Rural to Urban Migration

Feb. 24, Urbanisation Trend

Feb. 24, Urbanisation Projections

Feb. 24, Urbanisation Structure of urban population growth

Feb. 24, 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

Feb. 24, 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

Feb. 24, 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)

Feb. 24, 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)

Feb. 24, The Urban Informal Sector Importance of informal Employment

Feb. 24, 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 both higher urban wages and higher urban employment opportunities (= probabilities)  migration rates in excess of urban job opportunity growth rates are rational

Feb. 24, Rural to Urban Migration Consequences 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?