Economic development and population

No issue within the ambit of development economics is more important, or raises more controversy

than that of the relationship between population growth and human welfare, particularly given the link

between both and environmental change. This section starts with a review of the multiple causes of

population growth, with an emphasis on the economics of children. It then explores the positive and

negative effects of population growth on economic growth and human welfare, and concludes with a

short discussion of population policy.

SUBSETS:

Determinants of population growth

The theory of demographic transition states that economic growth (and associated processes of

modernization, such as urbanization) results in a fall in both crude death rates (CDRs) and crude birth

rates (CBRs), but that the CDR falls more rapidly than the CBR. The theory can be explained in provision

of death reducing institutions and services (such as clean water, sanitation, medical facilities) than of

fertility reducing institutions and services (such as delayed parenthood, birth spacing and

contraception). So long as a gap persists between the CBR and the CDR then natural population growth

(that is growth not attributable to net migration) will be positive. Furthermore, the temporary burst of

population growth thus resulting from economic development is accentuated by the phenomenon of

demographic momentum. This refers to population growth arising from the increase in the proportion

of women of childbearing age that itself results from population growth. The theory of demographic

transition highlights the importance of understanding what determines the total fertility rate (TFR), or

the number of children a woman would have if she matched current age-specific birth rates throughout

her life. The TFR may be viewed as a lead indicator of the CBR, since it does not capture effects

attributable to demographic momentum.

Following Becker, a useful starting point for modeling changes in the TFR is to regard children as a

complex durable asset (part investment, part consumption good) subject to rational choice cost-benefit

calculations of their parents. Changes in the TFR can then be linked to wider changes that have a

significant positive or negative effect on the number of children that parents consider it beneficial to

aim to have. Positive effects include the expected pleasure or satisfaction to be had from children and

from having heirs, the net present value of income children are expected to earn for the household, and

their role in providing security for parents during old age. Negative effects include physical and

psychological risks and hardships of bearing and rearing children, the actual costs incurred, and the

opportunity costs of labor required for childcare. Marginal opportunity costs for average parents are

likely to rise as child rearing claims a larger and larger proportion of their budget, and hence there will

be some optimum desired number of surviving children (DC) at which marginal costs and benefits are

equal.

Economic Consequences of Population Growth

Development economists were initially particularly concerned with the influence of population growth

on the savings rate. There were two distinct approaches. First, changes in worker-dependency ratios

(due to a rise in the proportion of both very young and very old people) might be expected to reduce

savings rates (more mouths, less hands). Second, population growth would affect the functional

distribution of income between workers and capitalists. If it helped to sustain the existence of surplus

labor and hence restrains wages, then profit rates stay high and this may increase overall savings rates.

But if real food prices rise (due to diminishing marginal returns in agriculture) then the terms of trade

may go against capitalists and in favor of rich landlords and peasants whose marginal propensity to save

in high productivity activities is lower. However, both these lines of reasoning are limited because they

assume (a) rates of return on saving are not also being affected (b) parents are not already taking into
account possible rates of return to investment in children for old age, in line with portfolio and life-cycle

theories of saving.

Starting instead from a neoclassical and rational choice perspective, it can be inferred that the number

of children born will be the same as the number that maximize human welfare only if three conditions

are satisfied. These are that (a) parents have perfect foresight (b) they are able to achieve the number of

children they want, and (c) they fully take into account externalities, or the costs and benefits of their

children on other people. Economists have generally concentrated on identifying and measuring the

external effects. But departures from the first two conditions are also important. In particular,

overpopulation is likely to result where the infant mortality rate is high and parents are strongly averse

to falling below their target number of children. This argument supports the counter-intuitive but widely

accepted view that reducing infant mortality is essential to any strategy for reducing population growth.

Second, reducing population growth may be desirable not because it harms economic growth, but

because it indicates that more people (particularly women) are avoiding having more children than they

wanted.

The most important negative externality argument is that population growth dilutes access to a fixed

stock of natural capital, particularly land. Malthus’ original formulation of this argument assumed that

parents could not control their own fertility (or, more precisely, that any increase in wages would be

dissipated through earlier marriage leading to increased labor supply that would drive wages back again

to subsistence level). But capital dilution may also result from weak property rights if parents

consequently fail to take into account the marginal effect of their children on availability of capital for

the children of other people. Other forms of collective capital, such as public services and aid flows, may

also be diluted by population growth even where these are not fixed, but supplied with a lag.
All these arguments hinge on the existence of diminishing marginal returns to labor, and need to be

weighed against empirical evidence in the opposite direction. Population growth creates opportunities

for increasing specialization and realization of economies of scale. It may also increase the supply of

productivity enhancing geniuses more than productivity undermining idiots, as well as inducing demand

for technological change. Higher population density may also lower transactions costs, and reduce the

cost per person of investment in non-rival public goods, such as defense, environmental protection,

social infrastructure, public administration, research and technology generation.

In countries undergoing industrialization, population growth has almost invariably also been positive,

suggesting that the positive external effects prevail. But the transitional capital dilution effects arising

from population growth of more than a couple of percentage points per year may also act as a drag on

the growth of average incomes, even in areas with relatively low population densities. However, the

case for stronger policy intervention to reduce birth rates generally rests more convincingly on the

adverse distributional effects of population growth, particularly on women. In such cases fertility can

often be influenced sufficiently by measures that reduce infant mortality rates, improve women’s

control over their own fertility and raise the opportunity cost of their time by strengthening their

educational and employment opportunities

Models based on these assumptions permit a number of hypotheses to be advanced to explain the

negative correlation between economic development and the TFR. For example, the TFR is likely (other

things equal) to be higher, the greater is the present value of children’s labor, the less access parents

have to formal social security, and the greater the opportunity cost of parents’ time. If the costs of

rearing children assumed by women are greater than their share of the benefits, then the TFR will be

lower the more say women have over fertility decisions. It is also likely to be lower where parents have

the option to substitute a larger number of less educated children for a smaller number of more
educated children as they become richer. However, a fully comprehensive theory of the link between

fertility and economic development also needs to take into two additional considerations. First, induced

changes in culture and institutions (such as marriage, pro-natalism, inter-generational relations) alter

the degree of autonomy that parents have over the fertility decision. Second, nutrition, health,

availability of contraception and control over intercourse may all physically prevent men and women

from attaining the number of children they want.

Definition of comparative advantage

Comparative advantage occurs when one country can produce a good or service at a lower opportunity
cost than another. This means a country can produce a good relatively cheaper than other countries

The theory of comparative advantage states that if countries specialize in producing goods where they
have a lower opportunity cost – then there will be an increase in economic welfare.

Note this is different to absolute advantage which looks at the monetary cost of producing a good.

Even if one country is more efficient in the production of all goods (absolute advantage) than the other,
both countries will still gain by trading with each other, as long as they have different relative
efficiencies.

Theory of Comparative Advantage

David Ricardo developed the classical theory of comparative advantage in 1817 to explain why countries
engage in international trade even when one country's workers are more efficient at producing every
single good than workers in other countries.

Eighteenth-century economist David Ricardo created the theory of comparative advantage. He argued
that a country boosts its economic growth the most by focusing on the industry in which it has the most
substantial comparative advantage.

For example, England was able to manufacture cheap cloth. Portugal had the right conditions to make
cheap wine. Ricardo predicted that England would stop making wine and Portugal stop making cloth. He
was right. England made more money by trading its cloth for Portugal's wine, and vice versa. It would
have cost England a lot to make all the wine it needed because it lacked the climate. Portugal didn't
have the manufacturing ability to make cheap cloth. Therefore, they both benefited by trading what
they produced the most efficiently.

Ricardo developed his approach to combat trade restrictions on imported wheat in England. He argued
that it made no sense to restrict low-cost and high-quality wheat from countries with the right climate
and soil conditions. England would receive more value by exporting products that required skilled labor
and machinery. It could acquire more wheat in trade than it could grow on its own.

The theory of comparative advantage explains why trade protectionism doesn't work in the long run.
Political leaders are always under pressure from their local constituents to protect jobs from
international competition by raising tariffs. But that’s only a temporary fix. In the long run, it hurts the
nation's competitiveness. It allows the country to waste resources on unsuccessful industries. It also
forces consumers to pay higher prices to buy domestic goods.

David Ricardo started out as a successful stockbroker, making $100 million in today's dollars. After
reading Adam Smith’s "The Wealth of Nations," he became an economist. He was the first person to
point out that significant increases in the money supply create inflation. This theory is known as
monetarism.

He also developed the law of diminishing marginal returns. That’s one of the essential concepts in
microeconomics. It states that there is a point in production where the increased output is no longer
worth the additional input in raw materials.

Comparative Advantage Versus Competitive Advantage

Competitive advantage is what a country, business, or individual does that provide a better value to
consumers than its competitors. There are three strategies companies use to gain a competitive
advantage. First, they could be the low-cost provider. Second, they could offer a better product or
service. Third, they could focus on one type of customer.

How It Affects You

Comparative advantage is what you do best while also giving up the least. For example, if you’re a great
plumber and a great babysitter, your comparative advantage is plumbing. That's because you’ll make
more money as a plumber. You can hire an hour of babysitting services for less than you would make
doing an hour of plumbing. Your opportunity cost of babysitting is high. Every hour you spend
babysitting is an hour’s worth of lost revenue you could have gotten on a plumbing job.

Absolute advantage is anything you do more efficiently than anyone else. You’re better than everyone
else in the neighborhood at both plumbing and babysitting. But plumbing is your comparative
advantage. That's because you only give up low-cost babysitting jobs to pursue your well-paid plumbing
career.

Competitive advantage is what makes you more attractive to consumers than your competitors. For
example, you are in demand to provide both plumbing and babysitting services. But it’s not necessarily
because you do them better (absolute advantage). It's because you charge less.

Karl Marx Theory

Karl Marx was communism’s most zealous intellectual advocate. His comprehensive writings on the
subject laid the foundation for later political leaders, notably V. I. Lenin and Mao Tse-tung, to impose
communism on more than twenty countries.

Marx was born in Trier, Prussia (now Germany), in 1818. He studied philosophy at universities in Bonn
and Berlin, earning his doctorate in Jena at the age of twenty-three. His early radicalism, first as a
member of the Young Hegelians, then as editor of a newspaper suppressed for its derisive social and
political content, preempted any career aspirations in academia and forced him to flee to Paris in 1843.
It was then that Marx cemented his lifelong friendship with Friedrich Engels. In 1849 Marx moved to
London, where he continued to study and write, drawing heavily on works by David Ricardo and Adam
Smith. Marx died in London in 1883 in somewhat impoverished surroundings. Most of his adult life, he
relied on Engels for financial support.

At the request of the Communist League, Marx and Engels coauthored their most famous work, “The
Communist Manifesto,” published in 1848. A call to arms for the proletariat—“Workers of the world,
unite!”—the manifesto set down the principles on which communism was to evolve. Marx held that
history was a series of class struggles between owners of capital (capitalists) and workers (the
proletariat). As wealth became more concentrated in the hands of a few capitalists, he thought, the
ranks of an increasingly dissatisfied proletariat would swell, leading to bloody revolution and eventually
a classless society.

It has become fashionable to think that Karl Marx was not mainly an economist but instead integrated
various disciplines—economics, sociology, political science, history, and so on—into his philosophy. But
Mark Blaug, a noted historian of economic thought, points out that Marx wrote “no more than a dozen
pages on the concept of social class, the theory of the state, and the materialist conception of history”
while he wrote “literally 10,000 pages on economics pure and simple.”1

According to Marx, capitalism contained the seeds of its own destruction. Communism was the
inevitable end to the process of evolution begun with feudalism and passing through capitalism and
socialism. Marx wrote extensively about the economic causes of this process in Capital. Volume one was
published in 1867 and the later two volumes, heavily edited by Engels, were published posthumously in
1885 and 1894.

The labor theory of value, decreasing rates of profit, and increasing concentration of wealth are key
components of Marx’s economic thought. His comprehensive treatment of capitalism stands in stark
contrast, however, to his treatment of socialism and communism, which Marx handled only
superficially. He declined to speculate on how those two economic systems would operate.