Atanu Dey On India's Development

The Population-Poverty Trap

The causal connection between population and poverty is widely researched and understood by many economists and demographers quite well. There is a causal link between poverty and population which is mediated by a third component which is broadly labeled the local resource base. Poverty cannot be understood without reference to the resource base that the population has access to. The three components of population, resources, and poverty are interrelated and influence each other in complex ways that vary across time and space. How these factors influence each other without any of them being the prior cause of the others is as interesting a study as it is depressing to note that the complex interrelations make problems arising within an economy nearly intractable to simple solutions.

Complex systems are often characterized by multiple equilibria. For instance, low population numbers and low population growth rates with high per capita incomes and high educational attainments and low levels of environmental degradation and access to a large resource base could be an equilibrium for an economy. Conversely, another equilibrium for the same economy could be high population numbers with high population growth rates with low per capita incomes and low educational attainments and high levels of environmental degradation and access to a very limited resource base. An economy could be trapped in the latter low level equilibrium and there are no simple ways of nudging the economy out of this trap without multiple interventions applied simultaneously which have their own complex interactions that may be poorly understood. India is caught in the low-level equilibrium characterized above and the challenge is to figure out whether it is possible to transition to a high-level equilibrium and if so how it can be done.

For analytical purposes, it is instructive to state the problem of a low-level equilibrium trap at the level of a household. Imagine a low-income household living at a subsistence level in what is called a developing economy. Given its situation in a poor economy, it does not have access to, or is unable to pay for, services that are normally available in developed economies. For instance, the household may not have sufficient income to send its children to school because the children have to supply labor to the household even if schooling were available for free (which it is most often not available at all, free or otherwise.) Further, since children do add to household income and become net assets to the household at an early age in a subsistence economy, there is an incentive to have more children than is socially beneficial leading to a collective action disaster. For the household with a large number of children with low educational attainment, the future is bleak as the competition for resources intensifies and the succeeding generations continue to be trapped in a rapacious vicious cycle of large family sizes and grinding dehumanizing poverty.

Now imagine a moderate-income household in a developed economy. The number of children dictated by the circumstances is low enough for the family to afford to send them to school and thus ensure that succeeding generations will be well placed to continually increase their economic well-being. Given the household decision and the ability to educate its children, collectively the society ensures its future with low population growth rates, high per capita incomes, and so on.

The essential distinction between the two households above is the environment within which each makes rational utility maximizing decisions. The household in a developed economy has access to capital: its own private capital in terms of its wealth and its income, and the social capital in terms of institutions both private and public such as schools, hospitals, transportation systems, government support, access to credit and so on. In contrast to that, the poor household in a poor country has severe constraints in terms of credit, income, wealth, healthcare, and a million other things. The poor make choices that are “rational” within the constraints they find themselves in and it is unfortunate that their constrained rationality leads to a collective failure that ends up trapping them into an even more constrained situation. In other words, the “environment” is poor for a poor household in a poor country.

An example of such a constrained rational response is the number of children that the poor have. The poor, like the rich, have a natural inbuilt instinctive desire to procreate. Having children is an end in itself. Any society that lacks the genes which predisposes people to children is unlikely to leave very many descendents. But for the poor, the need for children transcends the need for children as an end in themselves. To them, children are productive assets. Where capital is relatively scarce, human labor is the substitute. Labor is required for gathering water, fuel, food production, caring for livestock and other household needs. Children provide that labor required.

Another compulsion that the poor face is the need to have children for old-age security. Lacking any publicly funded social security net, poor people over-insure in terms of having more children than is socially optimal. There are other reasons such as social norms (imitative behavior, for instance), religious (sons are valued for performing the last rites), etc, which compel people to have children. What is rational, or constrained rational, at the household level could on the aggregate translate into a collective failure at the social level. The more children people have in a subsistence economy the more likely they will be to continue to be trapped into a cycle of declining resource availability due to positive feedback effects. In other words, poverty increases the individual incentives for having more children, which in turn reduces the per capita availability of resources both natural and manmade which leads to deepening of poverty.

Is there a way out of this cycle of increasing poverty and population growth? I have argued elsewhere that the single most important and binding constraint in this situation is the credit constraint. Given access to credit, a poor household would be able to invest in factors that systematically reduce the need for having a large number of children and also educate the children that they have adequately. If a household could pay for health care, for instance, childhood mortality rates would be low and hence the need to over-insure against childhood death would be mitigated. Having access to credit would also allow families to invest in education and the returns on education could be higher than the cost of education. Higher educational attainment would imply higher household incomes and thus lower incentives to have more children in the next generation. Higher household incomes would on the aggregate translate to greater availability of social security and thus a lower need for children for old-age insurance.

However necessary releasing the credit constraint is, it is clearly not sufficient. There are other factors that need to be simultaneously addressed. For example, empowerment of women is a factor that is strongly correlated with development. For that to happen, female education is a necessary condition. To quote Dasgupta:

. . . high fertility, high rates of female illiteracy, low share of paid employment, and a high percentage of working at home for no pay – they all hang together. From the data alone, it is of course difficult to discern which of these measures are causing, and which are merely correlated with, high fertility. But the findings are consistent with the possibility that lack of paid employment and education limits a woman’s ability to make decisions and therefore promotes population growth.

The beneficial effects of parents’ education, particularly mothers’ education, on the well-being of their children have been much documented. Studies suggest also that education helps mother to process information more effectively, and enables them to use the various social and community services that may be available more intensively. Among other things, education appears to impart a degree of self-confidence to a person, enabling her to avail herself of whatever new facilities that may be on offer. This is invaluable for rural populations living through changing circumstances.
Source:The Population Problem: Theory and Evidence.
Journal of Economic Literature.
Dec 1995.

To come back to the question that I am concerned with, namely, is there is a way out of the low-level equilibrium trap of high population growth and low educational attainment, the tentative answer has to be yes if for no other reason but that otherwise we are all wasting our time trying to transform India. The question then is what needs to be done to achieve that transformation. I believe that, among other things, these are what we chiefly need:

  • Access to credit
  • Female empowerment
  • Universal literacy at the minimum, and
  • Reduced population growth rates

How to get those things rolling is matter we will address ourselves to in the future.

[This entry was originally posted on Feb 13th, 2004. I have moved the entry here partly because I think it is pertinent to the current debate.]

  • http://www.worldisgreen.com Suhit Anantula

    Atanu:

    Shyamal Majumdar in the Business-Satndard writes about a International Labour Office (ILO) study on the costs and benefits of eliminating child labour.

    http://www.business-standard.com/today/story.asp?Menu=26&story=34227

    The average benefit to costs ratio is 7 to 1. Their idea is to replicate the “Bolsa Escola programme in Brazil” which would transfer up to 80 per cent of the average value of a child’s labour to poor households. The study extrapolates the same over a 20 year period.

    Though the target was child labour for this study, the program benefits can help in the increase in basic universal education and possible decrease in the population growth rate.

    Suhit

  • Arun Anantharaman

    You say …for the poor, the need for children transcends the need for children as an end in themselves. To them, children are productive assets. Where capital is relatively scarce, human labor is the substitute. Labor is required for gathering water, fuel, food production, caring for livestock and other household needs. Children provide that labor required.

    Another compulsion that the poor face is the need to have children for old-age security. Lacking any publicly funded social security net, poor people over-insure in terms of having more children than is socially optimal.

    IMHO, that is a flawed argument. I don’t believe the poor have more children with the intention of using them as productive assets or for old age social security. That their children serve those purposes is simply an unfortunate consequence of the poverty.

    Easier access to credit is certainly necessary – there is no disputing that. However the population problem is not a consequence of the lack of access to credit. The cause for that lies in your points 2 and 3 – Lack of female empowerment, and relatively poor education levels.

  • http://kaisare.net/ Niket

    I agree with Arun’s points. The main issues are female empowerment and education. The poorer sections of the Indian society, especially the “BIMARU,” have gotten into this vicious circle of poverty-illitracy-high fertility-(social) injustice. The appropriate cause-effect relationship is unclear. Its like a wheel; you may consider any of the above issue as a cause and you will have data to support that the others are its effects. Is gutthi ko sulzane me its required to find the loose end of the thread—-the cause—and target it.

    Your opinion is that the population growth is the cause, my belief is that its a symptom.

    [BTW, why doesn't your "Remember Info" work? I have cookies enabled, and it works on other blogs.]