ECON6035 Economic Policy in Development 2, Part 2

Transcription

1 University of Southampton April 2007 Alice Schoonbroodt ECON6035 Economic Policy in Development 2, Part 2 Goals The purpose of this course is to discuss policies related to demographic change, education, child labour laws and female labour supply. This unit will use economic models and empirical analysis to understand, evaluate and devise economic policy in developing countries. This unit aims to provide students with a thorough understanding of common policies implemented in developing countries and the economic theory behind those policies. Course material The basic ideas will be laid out in lecture slides that will be made available as we go along. In addition, there will be one or two papers per lecture that constitute required reading. Additional reading is suggested but optional (see below). Outline 1. Review of Economic Growth Theory First, we will review basic economic growth theories (the Solow model, the Ramsey model, the Ak and Akh models) to analyze their predictions for GDP growth when population growth changes or education is subsidized. Similar tools will be employed in models where fertility is chosen. 2. The Barro-Becker and the Boldrin-Jones Models of Endogenous Fertility In this segment we study two models of endogenous fertility (chosen). The Barro-Becker model builds on altruism from parents toward children, while the Boldrin-Jones model builds on altruism from children to parents. While in the first, children are mostly a consumption good, they are an investment for old age insurance in the second. We review their implications in terms of fertility in response to changes in mortality, costs of children, technological progress, financial innovations, 3. Intergenerational Transfer Arrangements and Endogenous Fertility In this section we address two popular policy issues: on the one hand, high fertility levels in underdeveloped countries and the idea that this is detrimental for growth; on the other hand, low fertility levels in developed countries and the idea that this leads to problems in terms of 1

2 sustainability of social security. While we will not take a stand on whether fertility should be high or low, we will compare predictions of these models in terms of fertility when there are intergenerational transfers - endogenous (e.g., bequests, donations, parental support, ) and exogenous (e.g., government mandated parental support, PAYGO social security). 4. The quantity-quality trade-off: compulsary education, child labour laws and development In this part of the unit, we analyze policies that aim at development through accumulation of human capital. We will review two major policies that are allegedly successful in achieving this goal by reducing the number of children per person but increasing educational investments in children. 5. Female Labor Supply and Children s welfare If time allows, we will address the effect of female employment on children s well-being through differential spending patters between men and women. Reading list with abstracts What follows is a list of useful papers. I mention lots of papers in class, and this list will allow you to look for them, should you get interested. This list is obviously NOT complete. Without any doubt there are famous papers (and famous authors) left out, and most certainly some of the papers we will mention are not here. In fact, even some of my recent papers are not here. I mark with a star (*) the papers I consider required reading. 1. Review of Economic Growth Theory (*) Chapter 11, p , in Macroeconomics by Matthias Doepke, Andreas Lehnert, and Andrew Sellgren. This book is available online, click here. This book as opposed to what you have seen with John Bluedorn - uses discrete time in the model. It is therefore very useful for looking at the technical parts. Note that the notation is slightly different from the one I used in lectures. This should be a good exercise to check if you deeply understood everything. 2. The Barro-Becker and the Boldrin-Jones Models of Endogenous Fertility (*) Barro, R.J. and G.S. Becker, (1989), Fertility Choice in a Model of Economic Growth, Econometrica 57, Altruistic parents make choices of family size along with decisions about consumption and intergenerational transfers. The authors apply this framework to a closed economy, where the determination of interest rates and wage rates is simultaneous with the determination of population growth and the accumulation of capital. Thus, they extend the literature on optimal economic growth to allow for optimizing choices of fertility and intergenerational 2

3 transfers. The authors use the model to assess the effects of child-rearing costs, the tax system, the conditions of technology and preferences, and shocks to the initial levels of population and the capital stock. (*) Boldrin, M. and L. Jones, (2002), Mortality, Fertility and Savings in a Malthusian Economy, Review of Economic Dynamics 5, We develop a model of fertility choice by utility maximizing households, based on an explicit notion of intergenerational external effects. In contrast to previous economic literature, we assume that the external effects run from children to parents. This gives rise to a fundamentally different reason for bearing of children, as parents expect to be cared for, at least partially, by their children in their old age. We take the behavior of infant mortality since 1541 as the key exogenous variable and endogeneize the size of the transfer from children to parents by linking it to the endogenous savings and fertility choice of the parents. This generates a dynamic model of a Malthusian society that performs substantially better, qualitatively and quantitatively, than previous economic models of endogenous fertility. Becker, G.S. and R.J. Barro (1988), A Reformulation of the Economic Theory of Fertility, Quarterly Journal of Economics 103, Alvarez, F., (1999), "Social Mobility: The Barro-Becker Children Meet the Laitner-Loury Dynasties," Review of Economic Dynamics, 2(1): Bar, M. and Leukhina, O., (2005), "A Model of Historical Evolution of Output and Population," working paper, University of North Carolina. Becker, G., Murphy, K. M. and R. Tamura, (1990), Human Capital, Fertility and Economic Growth, Journal of Political Economy, Vol. 98, No. 5, Part 2, S12-S37, October De la Croix, D. and Doepke, M., (2003), "Inequality and Growth: Why Differential Fertility Matters," American Economic Review, 93, (4): Doepke, M., (2005), "Child Mortality and Fertility Decline: Does the Barro-Becker Model Fit the Facts?," Journal of Population Economics, 18: Fernandez-Villaverde, Jesus, (2001), Was Malthus Right? Economic Growth and Population Dynamics, available on line at Galor, O. and D.N. Weil (1999), From Malthusian stagnation to modern growth, American Economic Review, 89, Galor, O. and Weil, D. N., (2000), Population, Technology, and Growth: From 3

4 Malthusian Stagnation to the Demographic Transition and Beyond, American Economic Review, 90 (4): Greenwood, J. and Seshadri, A., (2002), "The U.S. Demographic Transition," American Economic Review Papers and Proceedings, 92 (2): Hansen, G.D. and E.C. Prescott (1999), From Malthus to Solow, Federal Reserve Bank of Minneapolis, Research Department Staff Report 257. Kremer, M., (1993), Population Growth and Technological Change: One Million B.C. to 1990, Quarterly Journal of Economics CVIII, Lucas, R. E. Jr., (2002), Industrial Revolution: Past and Future, in Lectures on Economic Growth, Cambridge: Harvard University Press. 3. Intergenerational Transfer Arrangements and Endogenous Fertility (*) Michele Boldrin, M. De Nardi and Larry E. Jones "Fertility and Social Security,". Working paper In this paper, we study the effects of differential sizes of governmentally provided pension funds on the incentives for parents to have children in two different models of endogenous fertility These two models are the Barro and Becker model of children as consumption and the Caldwell model of children as investments for old age as developed in Boldrin and Jones. We find that changing the size of a PAYGO Social Security System has only a very small effect on fertility in the B&B model, but that the effects are large, and quantitatively significant in the Caldwell version. For example, in the calibrated version of the Caldwell model that we use as our base case, we find that increasing the size of a PAYGO Social Security System from a tax rate of 10% to 25% gives rise to a fertility reduction of about 60% of the observed fertility differential between the U.S. and the Southern European countries. Shown in the graph is a time series of the entire fertility history of the U.S. from 1850 to now along with the predicted path of fertility from the Caldwell model discussed above. The chart is prepared using steady state to steady state movements of fertility in the model over time when the only changes are the actual changes in young adult mortality and changes in the size of the Social Security System from U.S. data. Available at (*) Ehrlich, I. and Lui, F., (1991), Intergenerational Trade, Longevity, Intrafamily Transfers and Economic Growth, Journal of Political Economy 99, The authors develop an overlapping-generations model of endogenous growth in which human capital is the engine of growth and the generations are linked through material and emotional interdependencies within the family. Parents invest in their children to achieve 4

5 both old-age support (care) and emotional gratification, and material support from children is determined through self-enforcing implicit contracts. The authors show that optimal intergenerational trade can then lead to maximization of growth opportunities. Their model produces a theory of the "demographic transition" linking longevity, fertility, and economic growth. See also Neher, P.A. (1971), Peasants, Procreation and Pensions, American Economic Review 61, Razin, A. and U. Ben-Zion (1974), An Intergenerational Model of Population Growth, American Economic Review 65, The quantity-quality trade-off: compulsary education, child labour laws and development (*) Doepke, M., (2004), "Accounting for Fertility Decline During the Transition to Growth," Journal of Economic Growth, 9(3): In every developed country, the economic transition from pre-industrial stagnation to modern growth was accompanied by a demographic transition from high to low fertility. Even though the overall pattern is repeated, there are large cross-country variations in the timing and speed of the demographic transition. What accounts for falling fertility during the transition to growth? To answer this question, this paper develops a unified growth model which delivers a transition from stagnation to growth, accompanied by declining fertility. The model is used to determine whether government policies that affect the opportunity cost of education can account for cross-country variations in fertility decline. Among the policies considered, education subsidies have only minor effects, while accounting for child-labor regulations is crucial. Apart from influencing fertility, the policies also have large effects on the evolution of the income distribution in the course of development. Available at (*) M. Doepke and Fabrizio Zilibotti, The Macroeconomics of Child Labor Regulation, American Economic Review 95(5), , December We develop a positive theory of the adoption of child labor laws. Workers who compete with children in the labor market support the introduction of a child labor ban, unless their own working children provide a large fraction of family income. Fertility decisions lock agents into specific political preferences, and multiple steady states can arise. The introduction of child labor laws can be triggered by skill-biased technological change that 5

6 induces parents to choose smaller families. The theory can account for the observation that in Britain regulations were first introduced after a period of rising wage inequality, and coincided with rapid fertility decline. Available at Rosenzweig, M. R., (1990), Population Growth and Human Capital Investments: Theory and Evidence, Journal of Political Economy 98, S38-S Female Labor Supply and Children s Welfare (*) Orazio Attanasio & Valerie Lechene, "Tests of Income Pooling in Household Decisions," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(4), pages , October. Using the Progresa data from Mexico, we investigate intrahousehold decision making using a variety of outcomes. We exploit both the experimental nature and the (short) panel dimension of the data to measure the impact of exogenous changes in the intrahousehold distribution of resources on household decisions. We test for global pooling of resources within households, which would correspond to the unitary model of household decision making. We also exploit a set of questions about power and the decision making process in the household to investigate aspects of strategic interactions between household members. Our findings confirm previous rejections of income pooling. We also cannot reject that the wife's relative income share is a significant determinant of the wife's decision making power in the household, with a higher share of income associated with more decision making power. (*) Lundberg, S.J. & Pollak, R.A. & Wales, T.J., Do Husbands and Wives Pool Their Resources? Evidence from the United Kingdom Child Benefit The Journal of Human Resources, Vol. 32, No. 3. (Summer, 1997), pp Common preference models of family behavior imply income pooling, a restriction on family demand functions such that only the sum of husband's income and wife's income affects the allocation of goods and time. Testing the pooling hypothesis is difficult because most family income sources are not exogenous to the allocations being analyzed. In this paper, we present an alternative test based on a "natural experiment"-a policy change in the United Kingdom that transferred a substantial child allowance to wives in the late 1970s. Using Family Expenditure Survey data, we find strong evidence that a shift toward greater expenditures on women's clothing and children's clothing relative to men's clothing coincided with this income redistribution. 6

7 (*) Mark M. Pitt; Shahidur R. Khandker, The Impact of Group-Based Credit Programs on Poor Households in Bangladesh: Does the Gender of Participants Matter?, The Journal of Political Economy, Vol. 106, No. 5. (Oct., 1998), pp This paper estimates the impact of participation, by gender, in the Grameen Bank and two other group-based micro credit programs in Bangladesh on labor supply, schooling, household expenditure, and assets. The empirical method uses a quasi-experimental survey design to correct for the bias from unobserved individual and village-level heterogeneity. We find that program credit has a larger effect on the behavior of poor households in Bangladesh when women are the program participants. For example, annual household consumption expenditure increases 18 taka for every 100 additional taka borrowed by women from these credit programs, compared with 11 taka for men. Bernal R.. The effect of maternal employment and child care on children s cognitive development. Working Paper, Northwestern University,