SOLUTION: Pace Institute Looping Condition and the Body of the Loop Report Paper

Chapter 3
Follow-up on lousy statistics (from The Economist)
The IMF’s 2019 annual report on Tanzania raised concerns about the
official GDP numbers numbers and noted that the government’s
“unpredictable or interventionist policies…could lead to meagre (or
even negative) growth.” The Tanzanian president blocked the report’s
If Tanzania’s economy grew by almost 7% in the fiscal year to the end
of June 2019, why did tax revenue fall by 1%? And why has bank
lending to companies slumped? Private data are bad, too. In 2019 sales
at the biggest brewer fell by 5%. Sales of cement by the two biggest
producers were almost flat.
The discrepancies are so large that it is hard to avoid the conclusion
that the government is lying. But the government does things like
closing a newspaper for publishing accurate exchange rates.
Lying is bad for democracy: without reliable numbers, it is hard for
voters to hold governments to account. Lies are also bad for
governance: it is hard to craft good policies without knowing what
works. Because accurate numbers matter so much, donors spend
almost $700m a year helping poor countries collect them. The World
Bank even gave Tanzania a $30m loan to improve its statistics bureau.
What was the point, if the IMF buckles to political pressure and
professes to believe codswallop?
Follow up on special economic zones
Paul Romer’s “charter cities” are basically like special
economic zones
• Some countries have freeports, where companies have
import components duty-free, but are required to use those
imports only for exports.
• Romer’s bigger idea was that the “charter cities” would serve
as injections of A, that would then seep into the rest of the
• Before 1997, a UK think tank proposed allowing Hong Kong’s
people to resettle in a barren island in the northern UK.
“Bring the right A, and the K and L will come.”
• Shenzhen and other zones were used as pilots for freemarket reforms in commerce, finance, and industry
• Saudi Arabia is now building Neom, a high-tech city with
laws and regulations separate from the Kingdom.
© 2014 Pearson Education, Inc. All rights reserved.
© 2014 Pearson Education, Inc. All rights reserved.
When you have completed your
study of this chapter, you will be able to
1. Explain trends in global population growth over
2. Explain the determinants of population growth and
the demographic transition.
3. Explain how different determinants shape fertility
4. Explain why countries may use family planning to
reduce population growth.
• Thomas Malthus (1766-1834) noted that in absence of wars, famines
and natural catastrophes, population would grow exponentially while
food production would increase linearly.
• Up to 1800s, world’s population was fairly stable through history.
Wars, famine and disease played a role in holding down growth.
• From then we have experienced a population “explosion,” an
increase associated with the events associated with the industrial
revolution (e.g., increases in agricultural productivity, income,
advances in hygiene, health science, etc.)
• The world population reached its first billion around the 1800s. Today
it stands at roughly 7 billion people.
• About every 4 days, the world population increases by 1 million.
• In the last 60 years, the largest population increases have been
taking place in developing countries, especially in Asia and Africa.
Figure 3.1. Evolution of the World Population since 1000 BCE.
Figure 3.2. Population in 1950 and Population Increase (19502010) per Continent.
• The total fertility rate is the average number of children born to a
woman of childbearing age (15-44).
• The birth rate is number of babies born each year per 1000
• The death rate is number of deaths each year per 1000 inhabitants.
• Both the fertility and death rate can be computed age-specific.
• The population growth rate is the difference between the birth rate
and the death rate (expressed per 1000 habitants, divided by 10 to
get percentage growth rate).
• The net migration rate is the difference between the number of
persons entering and leaving a country per 1000 inhabitants.
• The birth, death, and fertility rates depend on the age distribution
defined as the percentage of the population belonging to different
age groups.
© 2014 Pearson Education, Inc. All rights reserved.
• The growth rate of the population has increased dramatically
since the Industrial Revolution. ( gt = 100* (pt – pt-1)/pt-1 )
• The global population growth rate increased steadily from
1800s to the 1960s, peaking at about 2%. Since then it has
decreased, to around 1.5% now.
• A possible explanation is that the world, like individual
countries, is undergoing a demographic transition:
A shift from a stabilized population with high birth and high
mortality rates to a stabilized population characterized by
low birth and low mortality rates. SEE SLIDE 14
• Demographers expect the world population to stabilize at
around 8 billion.
• What are the key determinants that drive the demographic
Figure 3.3. Estimated Average Annual Population Growth Rates
since 1000 BCE.
Figure 3.4. Average Annual Population Growth Rates per
Continent during Recent Decades.
Before modern (circa-1825), birth and death rates were both
high, leading to the low (0.06%) growth of population.
For today’s AEs, the onset of economic development in the
1800s led to lower infant mortality rates, lower death rates,
and higher life expectancy
• Improved agricultural productivity and nutrition
• Improved health, education, and housing due to higher
incomes and policy
• Improvements in medical technology
Fertility also increased a bit, but then steadily fell. Hence, as
seen in the Finland graphs, population growth also fell, from
1.4% in 1825 to 1.2% in 1910 and 0.2% in 2003.
Some AEs (eg, Italy) now have birth rates below replacement
rates (2.2)
Age Distribution and Population Growth
There is usually a high proportion of young people in developing
countries, while there is a usually a high proportion of elderly people in
developed countries. Even where mortality and fertility rates are the
same the age distribution significantly affects population growth.
• Table 3.1. shows an example of the effect on population growth of
differences in age distribution.
• Suppose country A has 70 young and 30 old and country B has 50
young and 50 old (50% male and 50% female in each).
• Today’s young will become old in the next period and die. The
mortality rate among the young is 10%. Fertility rate is 2.2.
• A’s population in period 2 = 2.2*(70/2)+(70*.9) = 140 population
grows 40%
• B’s population in period 2 = 2.2*(50/2)+(50*.9) = 100 population
grows 0%
Table 3.1. The Effects of Age Distribution.
Population pyramids are often used to show the age distribution
within a country.
• Demographic trends tend to have considerable inertia.
• A stationary population is defined as having zero growth over
time (i.e., stable fertility and mortality rates).
• Even temporary fertility shocks to a stationary population
creates inertia, leading to growth long after the shock (e.g.,
U.S. baby boom and baby boom echo).
• Therefore, family planning policies tend to have a delayed
effect. This must be taken into account when evaluating their
Figure 3.5. Brazil’s Age
Pyramid in 2000.
The Demographic Transition
• Stage I: High birthrates and death rates
• Stage II: Continued high birthrates,
declining death rates
• Stage III: Falling birthrates and death
rates, eventually stabilizing
The Demographic Transition in Western
In today’s LDCs, however, development has progressed in a
compressed period.
Mortality has fallen, and it has fallen faster than birth
rates have fallen.
Finland: death rate fell from 24 to 15 in 85 years.
LDCs: death rate fell from 24 to 15 in 15 years
Finland: birth rate fell from 39 to 29 in 85 years
LDCs: birth rate is about 24 as of 2000
Consequently, population growth is about 1.5% in LDCs
Which Middle Eastern country has sharply reduced population
The Demographic Transition in Developing
Why does Amartya Sen say there are 100 million missing
At birth, usually 1.05 boys per 1.00 girl
But females usually have longer life expectancy
Ratio of women to men
Europe and North America 1.05
South Asia, West Asia, China 0.94
Punjab/Haryana 0.86
Kerala 1.03, but Kerala is poorer than Punjab
Amartya Sen estimates that if the latter group had ratios closer to AE
ratios, there would be 100 million more females than there actually
• Distribution of nutrition and health services
• Also sex selection through abortion, now facilitated by technology
(ie, ultrasound and amniocentesis) and higher incomes
What affects the demand for women?
The situation is likely to be less unfavorable to women if
• they can earn an outside income;
• their work is recognized as productive (this is easier to
achieve with work done outside the home);
• they own some economic resources and have some rights to
fall back on; and
• there is a clear-headed understanding of the ways in which
women are deprived and a recognition of the possibilities of
changing this situation. This last category can be much
influenced by education for women and by
participatory political action.
Economically, “gainful” employment (i.e., working outside the
home for a wage), “as opposed to unpaid and unhonored
housework”—no matter how demanding—can substantially
enhance the deal that women get.

outside employment by providing income, makes women less
the social respect that is associated with being a “bread winner” (and a
contributor to the family’s prosperity) can improve women’s status and
standing, and may influence the prevailing cultural traditions
if outside jobs come with security and legal protection, vulnerability
outside jobs provide experience of the outside world, and this can be
socially important in improving women’s position within the household
NB: Punjab also has the lowest ratio of women in gainful employment to
The mechanism in China was different
“The compulsory measures to control the size of families which were
introduced in 1979 may have been an important factor. In some parts of
the country the authorities insisted on the ‘one-child family.’ This
restriction, given the strong preference for boys in China, led to a
neglect of girls that was often severe. Some evidence also exists of
female infanticide.”
(1) population would
grow faster than
productive capacity, and
(2) hunger and deaths
would increase,
(3) bringing population
back down until the
subsistence level is
• Did not foresee improvements in technology and
productivity that would enable billions to be fed
• Did not foresee that humans would have the capacity
(ability and motivation) to control births (primitive
ability to control births probably always existed:
herbal products, abortion)
Malthus aside, is population growth bad for
economic growth?

In the simple Solow model, a high n is unambiguously
bad. With more people, capital has to be spread more
But recall from Chapter 4 the positive impact that
population size has on technological innovation.
❖ But can’t R&D and laboratory work be separated
from population pressures inspiring innovation?
❖ Recall that it’s global, rather than national
population, that matters
Market size and economies of scale: but perhaps we
are now at diseconomies of scale, especially with new
technologies (eg, 3D printing and customization)?
Negative externalities, a la overfishing and congestion
and pollution?
Empirically, the relationship is ambiguous (see below). A large
population may be a constraint, but aren’t there work-arounds
for any obstacle? (See World Development Report 1984)
As noted earlier: today’s overpopulation and high dependency
ratios can become tomorrow’s “demographic dividend”; today’s
demographic dividend can become tomorrow’s “demographic
The other direction (that is, the impact of economic
growth/development on population growth), is more
interesting to study.
• Mortality decline is due to higher incomes and
improved technology.
• Explaining fertility decline is somewhat more
complicated – and interesting.
THE Economics of Fertility Choices
Conventional consumer theory assumes a utility function bundling
consumer goods and children subject to a budget constraint (Figure
Shifts in relative price: A reduction in cost of a good relative to other
goods leads to an income effect and a substitution effect.
• If the relative price of children falls, demand for children rises (panel
• If the relative price of other goods falls, demand for children falls
(panel b).
Figure 3.6. The Determinants of Fertility Choices.
Panel (A) A Reduction in the
Cost of Children
Panel (B) A Reduction in the Cost
of Goods other than children
THE Economics of Fertility Choices
Increase in income. The budget line will shift
in parallel, and in most circumstances, the
demand for children and other goods BOTH
• If there is an upward shift in income, it’s possible to afford
both more children and consumer goods (Figure 3.7).
– Inferior goods are defined as goods for which demand decreases as
income increases (potatoes, rice, millet).
– A normal good is one for which consumption increases as income
• Typically, poor families have more children that rich families.
Are children inferior goods? PROBABLY NOT.
Figure 3.7.
Choices and
Increases in
THE Economics of Fertility Choices
A shift in preferences is another possible explanation for fertility choices (Figure

The change in the relative benefits of having children translates into a change
in the shape of indifference curves between consumption and children.

Preference can change for noneconomic reasons, especially social norms.

A reduction in benefits will result in fewer children and more consumption of
goods and services.

The benefits of having children are at least partly related to the differences in
institutions across countries.
That’s too easy. In economics, we focus on prices, incomes, constraints, and
Why are children like refrigerators or cars
or sofas?
Children are like refrigerators or sofas
They are durable consumer goods. Unlike a hamburger,
they don’t disappear when consumed, and continue to
provide utility.
To reiterate: If children are normal goods (and no reason
to think otherwise), shouldn’t high-income countries have
higher fertility rates? (It’s actually the opposite.)
If children were a run-of-the-mill “normal good,” yes, but
the substitution effect in the demand for children is more
complicated than with, say, clothes or food.
What are the forms of utility that children provide?
What is the cost of children as goods and how does it
change during the process of development.
What are the forms of utility that children provide?
(especially in LDCs)
Psychic utility: but substitutes arise during development (eg,
movies and entertainment, Japan video baby)
Financial contributions
• Labor and contribution to household income: less important
as parents’ incomes rise or labor laws become stringent?
• Form of saving: but financial system can substitute
• Old-age security (taking care of old parents
becomes less important as retirement systems are set up
and incomes rise and financial sectors develop? MORE ON
High infant mortality can be a motivation for high fertility: to
achieve the target number of children
Queen Anne of England had 17 children: ALL died before her
In societies with no social security, children may represent an
investment for retirement and a source of financial security. Therefore,
poor parents tend to have more offspring where:
• Infant and childhood mortality are high.
• Children tend to be less educated, because they may potentially
be less productive.
• Because of extreme poverty children move away from their
• In advanced economies, parents can use the promise of inheritance
as an incentive to make sure their children take good care of them.
(See Pollak’s game-theoretic analysis of how parents’ transfers to
their children are related to their children’s income.)
• In the absence of economic incentives, however, you often find that
poor countries enforce parental support through cultural and social
Let’s also look at the costs of children
(Lucy Kellaway of the Financial Times
calls her children “cost centers”)
• Out of pocket: hospital, sustenance, etc. Costs of
goods usually falls, but cost of services usually
rises during economic development. As
development proceeds, the required human capital
to be hired also increases. Hence, to enter the
labor force, children’s education requirements
increase, raising their cash costs.
• Opportunity costs: time needed to raise children.
As jobs grow and earnings rise, each hour spent
on raising kids becomes costlier. This is the most
important factor behind fertility decline.
Hence, the demand for quantity of children falls.
And parents could substitute quality, as Gary Becker posited. (And
remember that lower costs of goods, such as food and medicines, help in
increasing quality of children.)
Do you recall that higher human capital is an indicator of development?
Fewer children, but each one better-nourished and better-educated and
better-equipped for the labor force.
The process is not inevitable, and can be moved along:
• Female labor force participation: to raise earnings opportunities
• As the required skill increases, quality becomes more in demand
• Ban child labor?
• Provision of information and contraception: if there is insufficient
awareness of or access to birth control, then there is a market failure
• The change in desired number could also be affected by example
• “One-child policy” a la China? “Stop at two” a la Singapore?
Gender bias also plays a key role in determining fertility
• In many societies boys are preferred to girls.
• This bias may go as far as inducing female infanticide.
• In general, from a biological perspective, there should be
more females than males.
• However, gender bias for boys in some cases dramatically
changes population sex ratios.
Figure 3.9. Population Sex Ratios in 2010.
Fertility Choices and the Demographic Transition
• Changes in fertility usually happen gradually as people take time to
adapt to the evolving economic and social trends.
• In the different stages of the demographic transition the costs and
benefits of having children change.
• Improved income, medical technologies, education, urbanization,
pension systems, and opportunities for women outside the home all
have pushed fertility rates down.
• Social norms evolve or disa …
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