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Handout 1

Course Outline
&
Introduction to the Course

References
Ray, Debraj, Development Economics, Princeton University Press,
(1998).
Todaro, Michael. P. and Stephen Smith, Economic Development,
12th Edition, (2015).

Introduction
• Over the two decades prior to the COVID-19 pandemic, living standards of the
global population noticeably improved.
Economic wellbeing (measured as GDP or GNP per capita) doubled in the
poorest countries between 1995 and 2018.
Child mortality halved relative to 1995, and
the proportion of children attending school increased substantially.
• Despite this progress, gigantic challenges remain:
People still live on extremely low incomes. About 681 million people lived
below the $1.90 per day poverty line in 2019.
Five million children still die every year before their 5th birthday. A child born
in sub-Saharan Africa is 20 times as likely to die before their fifth birthday as
a child born in Australia/New Zealand. Half of the world’s children still leave
school without basic literacy and numeracy skills.
COVID-19 marked the end of a phase of global progress in poverty reduction.
About 97 million more people are living on less than $1.90 a day because of
the pandemic, increasing the global poverty rate from 7.8% to 9.1%.

© Manir Hossain 2 April 23

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Course Description
• This course provides a comprehensive understanding of the major problems
and prospects for economic development. Specific emphasis is given to the
plight of the poor for whom low levels of living are a fact.
• Review of the course outline
• Planned coverage
I. Introduction to Development Economics
II. Classification of Countries and Defining Developing World
III.Nutrition and Poverty
IV.Health Vs. Education
V. Families and Household Decision Making
VI.Risk Attitudes, Savings and Credit Markets
VII.Micro-Entrepreneurship
VIII.Institutions and Politics

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Useful Concepts
 Economics and Development Economics
 Economic Growth Vs. Development
 Meaning of Development
 Macroeconomic Measures: Gross Domestic Product (GDP), Gross
National Income (GNI) and Purchasing Power Parity (PPP)
 Drivers of Economic Growth
 Absolute Poverty
 Millennium Development Goals (MDGs)
 Sustainable Development Goals (SDGs)

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Economics and Development Economics

Development Economics is an extension of traditional economics and political
economy.
• What is economics? Economics is a social science that deals with the efficient
use of scarce resources to maximize satisfaction of unlimited human wants. It
focuses on utility and profit maximization, market efficiency, and determination
of equilibrium in a world of perfect markets.
• Political economy goes beyond traditional economics and view economic
activity in its political context. Combine economic analysis with politics.
Focuses on the relationship between economics and politics with a special
emphasis on the role of power in economic decision making.
• Development economics has a greater scope. While also concerned with
efficient resource allocation and the steady economic growth, it focuses on the
economic, social, political and institutional mechanism to transform economies
from low income to high income status and to overcome the problem of
absolute poverty.
• Essentially, Development economics is a field that studies the causes of global
poverty and how best to combat it.
5 April 23

Why Study Development Economics?

A study of economic development starts with per capita income, then to income
distribution and then consider other indicators of development.
To help gain a better understanding, a number of questions about developing
economies are:
 What are the causes of extreme poverty? What policies have been most
effective in reducing poverty?
 What is the real meaning of development? Do the Millennium Development
Goals (MDGs) or the Sustainable Development Goals (SDGs) fit with these
meanings?
 What are the lessons from the history of economic progress in the developed
world?
 How do the initial conditions differ?
 What are the sources of economic growth?
 Why some countries make rapid economic growth while others remain poor?
 What are the theories of development?
 How can the extremes between rich and poor be so great?
 What are economic institutions and how do they cause problems of
underdevelopment and prospects for development?

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What is Economic Development?

 Traditional Economic View
 In economic terms, development means achieving sustained rates of growth of real income per
capita – national output (GDP or GNI) growing faster than its population growth. Viewed as an
economic phenomenon.
 Levels and rates of growth of real per capita GNI are used to measure the economic well-being of
the population.
 Problems of poverty, income inequality, unemployment and discrimination are of secondary
importance. Rapid gains in per capita GNI growth assumed to trickle down to the population in the
forms of job and other economic opportunities.
 The New Economic View of Development
 Economic development now came to viewed as a multifaceted concept, embodying not just
income and its growth, but also achievements on other fronts: lower infant mortality, higher life
expectancy, higher literacy rates, access to medical and health services, , reduction of inequality,
the eradication of poverty. and so on.
 Economic development is not just about income, it is also the removal of poverty and malnutrition,
an increase of life expectancy; access to sanitation, clean drinking water and health services;
reduction of infant mortality, and increased access to knowledge and schooling and literacy.
 Economic Development redefined in terms of reduction of poverty, inequality and unemployment
within the context of growing economy. “Redistribution from growth” became a common slogan.

7 April 23

Macroeconomic Measures
Gross Domestic Product (GDP)
The total unduplicated value of the goods and services produced in the
economic territory of a country or region during a given period.
Gross National Income (GNI), also known as GNP
• Gross national income (GNI) is equal to gross domestic product (GDP),
plus net receipts of primary income (compensation of employees and
property income) from abroad.
 Compensation of employees receivable from abroad are those that
are earned by residents working abroad and whose centre of
economic interest remains in their home country.
 Property income receivable from/payable to abroad includes
interest, dividends, and all (or part of) retained earnings of foreign
enterprises owned fully (or in part) by resident enterprises (and
vice versa).
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Macroeconomic Measures (Cont’d)

Purchasing Power Party (PPP)
 PPP is a ratio of the prices of a good or service paid in two countries in their own
currencies. For example, if the price of a good X is US$40 in the United States, and
the same good X is sold for CAN$50 in Canada, the PPP is 40 ÷ 50 or US$0.80 per
Canadian dollar
 World Bank International Comparison Program(ICP): PPPs can be used to convert
the cost of a basket of goods and service into a common currency while
eliminating price level differences across countries.
 In other words, PPPs equalize the purchasing power of currencies. Due to large
differences in price levels across economies, market exchange rate-converted GDP
does not accurately measure the relative sizes of economies and the levels of
material well-being.
 PPPs make it possible to compare the output of economies and the welfare of the
people in ‘real’ terms, thus controlling for price level differences across countries.
 The high-income countries with less than 17% of the global population have 64%
of global GDP on an exchange-rate basis, but 49% of global GDP on an exchange
rate basis.
International Comparison Program (ICP) (worldbank.org)
https://www.worldbank.org/en/programs/icp
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Top 5 Economies of the World, 2021

Share of the global economy (World =100)

30.0

25.0 24.2
Exchange-rate
20.0 18.4 18.6 based (US $)
15.7
15.0 PPP-based

10.0
6.9
5.1 4.4
5.0 3.6 3.3 3.3

0.0
USA China Japan Germany India

Note the difference of ranking between PPP-based and market exchange-rate based measures.
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Share of Global GDP and Population by income

group and region

Purchasing
Power Parities
and the Size of
World
Economies
(worldbank.org)

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Drivers of Economic Growth

Economic growth is defined as the growth of real GDP per capita of an
economy.
Three important drivers of economic growth:
1. Capital accumulation
Investments in physical capital (land, machinery and equipment) and
human capital (health, education, and skills)
2. Population and labour force growth
Population growth contributes to economic growth by supplying
more workers and by providing a domestic markets for a country’s
products.
3. Technological progress—new ways of accomplishing tasks
Neutral, labour/capital-saving, labour/capital augmenting

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Drivers of Economic Growth (Cont’d)

 We can show how these factors contribute to economic growth using the production
possibility curve (PPC). A PPC is a graph indicating alternative combinations of two
commodities or categories of commodities (e.g., agricultural and manufactured goods)
that can be produced when all the available factors of production are efficiently
employed.
 Given available resources and technology, the curve sets the boundary between the
attainable and the unobtainable.
 Initial possibilities for the production of rice and radios are shown by the curve PP below.

Figure 1 Effect of an increases in physical and human resources on the Production Possibility Curve (PPC).

 Shift of the PPC (due to increase in

resources or technology). Production
capacity increases.

 Point inside the PPC and a

movement within the PPC (but still
remains below potential)

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Figure 2 Effect of Growth of Capital Stock and

Land on the Production Possibility Curve

Note: Radio production is capital-intensive and rice production is land-intensive

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Effect of Technological Progress

 Technological progress refers to increased application of new scientific
knowledge in the form of inventions and innovations with regard to both
physical and human capital. This is an important source of economic growth
 Three basic types of technological progress: neutral, labour-saving, and capital-
saving.
 Neutral technological progress occurs when higher output levels are achieved
with the same quantity and combinations of factor inputs.
 Labour-saving technological progress occurs when higher output is achieved
by unchanged quantity of labour inputs. Modern machinery and equipment
can be classified as products of labour-saving technological progress.
 Capital-saving technological progress results from some invention or
innovation that facilitates the achievement of higher output levels using the
same quantity of capital. Capital-saving technological progress is a much rare
phenomenon.

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Effects of Technological Progress (cont’d)

Figure 4 Effect of Technological Change in

Figure 3 Effect of Technological Change in the the Industrial Sector on the Production
Agricultural Sector on the Production
Possibility Curve
Possibility Curve

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Millennium Development Goals and Targets

• In September 2000, the UN adopted the following 8 Millennium Development
Goals (MDGs) with 18 targets to be achieved by 2015.

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Millennium Development Goals and Targets

(Cont’d)

See this report for an update: MDG 2015 rev (July 1).pdf (un.org)
The Millennium Development Goals Report 2015

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Millennium Development Goals Progress

The Millennium Development Goals (MDGs) have produced the most successful anti-poverty movement in history and
will serve as the jumping-off point for the new sustainable development agenda (SDG).
The MDG Report 2015 found that the 15-year effort to achieve the eight aspirational goals was largely successful. The
report confirms that goal-setting can lift millions of people out of poverty, empower women and girls, improve health
and well-being, and provide vast new opportunities for better lives. Highlights
• The number of people living in extreme poverty declined by more than half, falling from 1.9 billion in 1990 to 836
million in 2015.
• The number of people in the working middle class—living on more than $4 a day—nearly tripled between 1991
and 2015.
• The proportion of undernourished people in the developing regions dropped by almost half since 1990.
• The number of out-of-school children of primary school age worldwide fell by almost half, to an estimated 57
million in 2015, down from 100 million in 2000.
• Gender parity in primary school has been achieved in the majority of countries.
• The mortality rate of children under-five was cut by more than half since 1990.
• Since 1990, maternal mortality fell by 45 percent worldwide.
• Over 6.2 million malaria deaths have been averted between 2000 and 2015.
• New HIV infections fell by approximately 40 percent between 2000 and 2013. By June 2014, 13.6 million people
living with HIV received antiretroviral therapy (ART) globally, an immense increase from just 800,000 in 2003.
• Between 2000 and 2013, tuberculosis prevention/diagnosis/treatment interventions saved an estimated 37
million lives.
• Worldwide 2.1 billion people have gained access to improved sanitation.
• Globally, 147 countries met the MDG drinking water target, 95 countries met the MDG sanitation target and 77
countries met both.
• Official development assistance from developed countries increased 66 percent in real terms from 2000 and 2014,
reaching $135.2 billion.
https://www.undp.org/publications/millennium-development-goals-report-2015
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• The Sustainable Development Goals (SDGs) were set at the United Nations Conference on Sustainable
Development in Rio de Janeiro in 2012. The objective was to produce a set of universal goals that meet
the urgent environmental, political and economic challenges facing our world.
• The SDGs replace the Millennium Development Goals (MDGs), which started a global effort in 2000 to
tackle the indignity of poverty. The MDGs established measurable, universally-agreed objectives for
tackling extreme poverty and hunger, preventing deadly diseases, and expanding primary education to all
children, among other development priorities.
• For 15 years, the MDGs drove progress in several important areas: reducing income poverty, providing
much needed access to water and sanitation, driving down child mortality and drastically improving
maternal health. They also kick-started a global movement for free primary education, inspiring countries
to invest in their future generations. Most significantly, the MDGs made huge strides in combatting
HIV/AIDS and other treatable diseases such as malaria and tuberculosis.

21 April 23

Transitioning
from the
MDGs to the
SDGs -
YouTube

Sustainable
Development
Goals PART 1 -
YouTube

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23 April 23

Reading Assignment

1. The Millennium Development Goals Report 2015, United Nations (2015).

https://www.un.org/millenniumgoals/2015_MDG_Report/pdf/MDG%202015%20rev%20(Jul
y%201).pdf
2. Purchasing Power Parities and the Size of World Economies Results from the 2017
International Comparison Program, The World Bank (2020). Purchasing Power Parities and
the Size of World Economies (worldbank.org)
https://openknowledge.worldbank.org/server/api/core/bitstreams/d508f4dd-1075-579f-
843d-cae5631a0a61/content
[Specifically Chapter 1, Chapter 2 (text and Table 2.1), Chapter 3
3. Millennium Development Goals Reports, 2015
https://www.un.org/millenniumgoals/2015_MDG_Report/pdf/MDG%202015%20rev%20(Jul
y%201).pdf
4. Millennium Development Goals: 2015 Progress Chart
https://www.un.org/millenniumgoals/2015_MDG_Report/pdf/MDG%202015%20PC%20final
.pdf

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 Handout 2

Classification of Countries and Defining

Developing World

References
Todaro, Michael. P. and Stephen Smith, Economic Development,
(2015).
Ray, Debraj, Development Economics, Princeton University Press,
(1998).
World Bank, IMF, UNDP and United Nations

1
 Highlights

• Defining Developing Countries

• Computing Human Development Index (HDI)
• Basic Indicators of development
• Characteristics of the developing world
• Diversity with commonality
• How low income countries today differ from
developed countries in their early stages
• Are they converging?

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 Defining the Developing World
 Several international agencies such as the United Nations, the World Bank and International
Monetary Fund (IMF) classify countries using different sets of criteria. The most common way to
define the developing world is by the level of per capita income. See the paper below for a detail
discussion on country classification:
https://www.imf.org/external/pubs/ft/wp/2011/wp1131.pdf
1. The best-known classification is that of the World Bank.
• The World Bank classifies countries according to gross national income (GNI) per capita in US$.
The GNI per capita is derived from the sum of GDP and net income of residents.
• The World Bank classifies countries in four classes. Each year on July 1, new thresholds are
determined. For 2022-2023:
a) low-income economies are those with a GNI per capita of $1,085 or less in 2021;
b) lower middle-income economies are those with a GNI per capita between $1,086 and
$4,255;
c) upper middle-income economies are those with a GNI per capita between $4,256 and
$13,205; and
d) high-income economies are those with a GNI per capita of $13,206 or more.
• Check out the World Bank New World Bank country classifications by income level: 2022-2023
https://blogs.worldbank.org/opendata/new-world-bank-country-classifications-income-level-
2022-2023
• With some exceptions, the developing countries are those with low, lower-middle, or upper-
middle incomes countries. 3
Defining the Developing World: Human Development

2. The United Nations Development Programme (UNDP) classify countries according

to human development index (HDI).
 “The HDI was created to emphasize that people and their capabilities should be the ultimate
criteria for assessing the development of a country, not economic growth alone.” It became the
most widely accepted and cited measure of its kind, and has been adapted for national use by
many countries.
 “The HDI is a summary measure of average achievement in key dimensions of human
development: a long and healthy life, being knowledgeable and have a decent standard of
living. The HDI is the geometric mean of normalized indices for each of the three dimensions.”
 First, create three dimension indices: health, education and income. Then aggregate these three
indices into a composite index by way of geometric mean of the three dimension indices.
 The HDI sets a minimum and a maximum for each dimension, called goalposts, and then shows
where each country stands in relation to these goalposts, expressed as a value between 0 and 1.
 After defining the relevant minimum and maximum values, each dimension index is calculated as
follows

 Dimension index =

April 23 4
 Human Development Index (HDI)
 The minimum and maximum values are set as follows:

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Computing the HDI: An Example

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 Defining the Developing World

 Country grouping according to HDI scores

◦ The HDI currently ranks countries in four groups on the basis of a 10 year
average of HDI (introduced in 2014 Human Development Report)

◦ List of countries with HDI score and its components is available free on line.
https://hdr.undp.org/system/files/documents/global-report-document/hdr2021-
22pdf_1.pdf

◦ For details about HDI see http://hdr.undp.org/en/data

April 23 7
 Defining the Developing World (Cont’d)
3. International Monetary Fund (IMF) classification:
◦ The IMF classifies countries into three major groups in the Fiscal
Monitor:
i. 41 advanced economies
ii. 95 emerging and middle-income economies, and
iii. 59 low-income developing countries.
https://www.imf.org/external/datamapper/datasets/FM
[Note that IMF also classify countries on a different basis in the World Economic
Outlook] See World Economic Outlook, April 2023: A Rocky Recovery (imf.org)
4. Another widely used classification is that of the least developed
countries, a UN designation.
• As of 2021 there are 46 countries included as LDC. For inclusion, a country
has to meet each of three criteria: low income (current threshold $1,018),
low human capital, and high economic vulnerability. Reviewed every
three years.
April 23 8
https://www.
un.org/develo
pment/desa/
dpad/wp-
content/uploa
ds/sites/45/S
napshots2021
.pdf

April 23 9
 Basic Indicators of Development
 Three dimensions of development:
1. real income per capita adjusted for purchasing power;
2. Health: measured by life expectancy, undernourishment, and child
mortality; and
3. educational attainments: measured by literacy and schooling
1. Real Income per capita
 Gross Domestic Product (GDP)
 Gross National Income (GNI)
 Purchasing Power Parity (PPP): defined as the number of local currency
units required to purchase the identical quantity of goods/services in the
local market as $1 US would buy in the United States.
 For example, if $1 US could buy a can of coke in the US market, and the
price of a similar coke is Rs 40 in the Indian market, then PPP conversion
rate is 40 Indian rupee = $1 PPP.
 If domestic price is lower, PPP measure of GNI per capita will be higher than
estimates using the official exchange rate.
April 23 10
 Basic Indicators of Development (Cont’d)

2. Indicators of Health and Education

Besides average incomes, it is necessary to evaluate a nation’s average health
and educational attainments, which reflect core capabilities
 Life expectancy: average number of years newborn children are expected
to live if subjected to the mortality risks applicable to their cohort at the
time of their birth
 Undernourishment: indicates consumption of too little food to maintain
normal levels of activity Problem arising from hunger.
 Literacy: refers to the basic abilities to read, write and solve problems.

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 Characteristics of the Developing World
Developing countries have some common characteristics but with great diversity - in comparison
with developed countries:
1. Lower levels of living and productivity
 Significant gap exists between developed and developing countries and also among
developing countries.
 The wide disparity in income levels largely corresponds to the large gaps in output per
worker (i.e. productivity).
 Existence of a vicious circle – low income leads to low investment, which in turn leads to
low productivity. Creates a poverty trap.
2. Lower levels of human capital (health, education, skills)
 Average levels of health, nutrition and education are poor in developing countries.
 Under-5 mortality rates higher in developing countries
 Primary school enrolment lower.
3. Higher Levels of Inequality and Absolute Poverty
 Inequality of income exists between developed and developing countries and among
developing countries.
 Absolute Poverty: being unable to meet the basic needs - food, clothing, shelter and
basic healthcare.
 World Poverty: About 681 million people lived below the $1.90 per day poverty line in
2019.

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 Characteristics of the Developing World (Cont’d)
4. Demographic characteristics: Higher Population Growth Rates
 While developed countries often have birth rates near or below
replacement rates (zero pop. growth), most developing countries
have both high birth and death rates, with death rates declining as
development proceeds. Often birth rates remain high for some time
that leads to higher population growth
 Crude Birth rates, Fertility rates, Death Rates and Population growth
rates.
 More than 80% of the global population live in developing countries,
and more than 90% of global population growth takes place in
developing regions.
 High birth rate leads to higher dependency burden. While developed
country dependency burden come from higher older population who
have life savings, developing country dependency burden comes
mainly from children who are unproductive.
5. Larger Rural Populations and Rapid Rural-to-Urban Migration
 With economic development, a shift of economic activities occur
from agriculture to manufacturing and services. Lead to rural urban
migration.
April 23 13
 Characteristics of the Developing World (Cont’d)
6. Lower Levels of Industrialization and Manufactured Exports
 Generally, developed countries have higher share of employment and
income in modern manufacturing and services sectors than developing
countries.
 Along with lower industrialization, developing countries tend to have a
higher dependency on exports of primary products.
7. Adverse Geography
 Low resource endowment.
 Land-locked economies often have lower incomes than coastal countries.
 Tropical or subtropical developing countries suffer from tropical pests and
parasites, endemic diseases such as malaria, water resources constraints,
and extreme heat.
 Environmental decay
8. Underdeveloped Financial and Other markets
 Imperfect markets
 Incomplete information
9. External Dependence
April 23 14
 How Low-Income Countries Today Differ from Developed
Countries in Their Earlier Stages
There are significant differences in initial conditions of low-Income countries today from
developed countries in their earlier stages.
1. Physical and human resource endowments
 Most contemporary developing countries are less well endowed with natural and skilled
human resources than the currently developed nations at their early stages of economic
growth.
 Even countries with plentiful natural resources are not able to exploit these resources for
industrialization for want of investment in physical and human capital.
 The ability of a country to exploit and utilise its natural resources depends primarily on the
managerial and technical skills of its people and cost-effective access to market and product
information. There exists technology gap and idea gap between developed and developing
countries.
2. Per capita incomes and levels of GDP in relation to the rest of the world
 The people living in low-income countries have, on average, a lower level of real per capita
income than their developed-country counterparts had in the nineteenth century.
 At the start of their growth, today’s developed nations were economically advanced than
the rest of the world. They took advantage of their relatively strong financial position to
boost growth. By contrast, today’s developing countries began their growth process at the
low end of the international per capita income scale.
April 23 15
How Low-Income Countries Today Differ from Developed
Countries in Their Earlier Stages (Cont’d)
3. Climatic differences
◦ Most developing countries are in tropical or subtropical climatic zones while most
economically successful countries are located in the temperate zone. There is
evidence that tropical geography poses significant problems for economic
development as the extremes of heat and humidity contribute to deteriorating
soil quality, the rapid depreciation of many natural goods, low productivity of
certain crops, the weakened regenerative growth of forests, and the poor health
of animals. Extremes of heat and humidity can also weaken workers’ health, and
generally lower their levels of productivity and efficiency.
4. Population size, distribution, and growth
◦ Population size, density, and growth constitute another important difference.
Many developing countries have big population size and high density.
◦ Before and during their early growth years, Western nations experienced a very
slow rise in population growth. With industrialization population growth rates
increased due to falling death rates with slowly rising birth rates.
◦ European and North American countries did not have natural population growth
rates exceeding 2%. By contrast, population growth rates in many developing
countries are more than 2.5%. April 23 16
 How Low-Income Countries Today Differ from Developed
Countries in Their Earlier Stages (Cont’d)
5. Historic role of international migration
◦ During the process of industrialization, surplus labour from one country moved to another
country contributing to economic growth. For example, labour migration within Europe
and from Europe to North America.
◦ Those labours were mainly unskilled. But present day immigration is mainly a process of
brain drain from less developed to developed countries.
6. International trade benefits
◦ International free trade was the “engine of growth” for today’s developed countries.
Rapidly expanding export markets led to the establishment of large-scale manufacturing
industries. Higher export earnings drive capital accumulation, which in turn, stimulates
further production. The European and North American countries were benefited from
relatively free trade, free capital movements, and the unfettered international migration
of unskilled surplus labour.
◦ The situation in many developing countries is very different. With the exception of a few
very successful Asian countries, the non-oil-exporting (and even some oil-exporting)
developing countries faced difficulties in generating rapid economic growth by trade. Their
exports expanded, but usually not as fast as the exports of developed nations. Their terms
of trade (the price of their exports relative to the price for imports) declined over several
decades.
April 23 17
 How Low-Income Countries Today Differ from Developed
Countries in Their Earlier Stages (Cont’d)
7. Scientific/technological research and development capabilities
◦ Scientific research and technological development played a crucial role in the
growth of the contemporary developed countries. Even today, the process of
scientific and technological advance is heavily concentrated in the rich nations,
despite the emergence of China and India as destinations for research and
development (R&D) activities of multinational corporations.
◦ By contrast, in the area of scientific and technological research, low-income
developing nations are in an extremely disadvantageous position vis-à-vis the
developed nations.
8. Efficacy of domestic institutions
◦ The domestic economic, political, and social institutions in developing countries
are largely ineffective and are not conducive to economic development. By
contrast, many developed countries, notably the United Kingdom, the United
States, and Canada, had economic rules in place that provided relatively broad
access to opportunity for individuals with entrepreneurial drive during their early
industrialization. .
◦ The developed countries also typically enjoyed relative political stability and
more flexible social institutions with broader access to mobility. April 23 18
Living Standards of Developing and Developed Nations:
Converging?
 Are per capita income gaps among countries narrowing? Are poor countries
catching up with high income countries? In other words, are developing and
developed countries are moving towards more equal living standards?
 According to some economic theories, developing country incomes are expected
to catch up developed countries in the long run if the following two conditions are
met:
◦ Technology transfer
◦ More rapid capital accumulation: Due to diminishing returns to capital, the
marginal product of capital and the profitability of investment would be lower
in developed countries where capital intensity is higher. That means the impact
of additional capital on output would be expected to be smaller in developed
countries that already have a lot of capital in relation to the size of the
workforce. As a result it would be rational to expect higher investment rates in
developing countries either through domestic sources or from foreign
investment.
 Evidence of convergence are mixed.

Useful reference: Banerjee, Abhijit and Duflo, Esther, Good Economics for Hard
Times (2019).
April 23 19
 Living Standards: Are Nations Converging?

Percent Growth of per capita real GDP

Per capita real GDP (US$)
6 70,000 2,500
5 60,000 2,000
4 50,000
1,500
3 40,000
1,000
2 30,000
1 20,000 500

0 10,000 0

1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
2020
1961-69 1970-79 1980-89 1990-99 2000-09 2010-19

USA India
USA India (RHS)

Source: World Bank, World Development Indicators

• In 1960, India’s per capita GDP was $306 or 1.6% of US per capita GDP of $19,135.
• In 2021, India’s per capita GDP increased to $1,937 or 3.1% of US per capita GDP of $61,856
Question: Are they converging in terms of per capita income?

April 23 20
 Evidence of convergence
1. Recent data suggest existence of convergence.
https://www.imf.org/external/pubs/ft/fandd/2012/09/pdf/dervis.pdf
 According the IMF study ‘the world economy entered a new age of convergence around 1990’, when
average per capita incomes in developing economies started growing much faster than advanced
economies. The sharp division between rich and poor countries is now weakening.
 Over the past two decades ‘per capita income in emerging and developing economies has grown almost
three times as fast as in advanced economies’. Growth in emerging markets sped up in the 1990s, followed
by an acceleration in the less developed countries around the turn of the century (see Chart 1).
 Three developments explain much of this new convergence.
1. Globalization—strong trade links and rising foreign direct investment—facilitates catch-up growth as
countries import and adapt know-how and technology.
2. The demographic transition of many developing economies with slower population growth supported
greater capital intensity and faster per capita growth. At the same time, many developing countries
enjoyed a golden age as the ratio of the economically active to the total population peaked. Meanwhile,
the share of the older population increased significantly in the advanced economies, particularly in
Europe and Japan.
3. A third significant cause is the higher proportion of income invested by emerging and developing
countries—27.0% of GDP over the past decade compared with 20.5% in advanced economies.
Investment increases the labour productivity by giving labour more capital to work with. It can also
increase total factor productivity—the joint productivity of capital and labour—by incorporating new
knowledge and production techniques and facilitate transition from low-productivity sectors e.g.,
agriculture to high-productivity sectors like manufacturing, which accelerates catch-up growth. This third
factor, higher investment rates, is particularly relevant in Asia— most noticeably, but not only, in China.

Kemal Dervis, World Economy: Convergence, interdependence, and Divergence, Finance and Development,
September 2022. https://www.imf.org/external/pubs/ft/fandd/2012/09/pdf/dervis.pdf
21
 Evidence of convergence (Cont’d)

https://www.imf.org/external/pubs/ft/fandd/2012/09/pdf/dervis.pdf

April 23 22
 Evidence of convergence (cont’d)
2. In a survey article in the Journal of Economic Literature, Paul Johnson and
Chris Papageorgiou ask “What Remains of Cross-Country Convergence?”
Their answer seems to be, “not much.” The abstract reads, in its entirety:
 We examine the record of cross-country growth over the past 50 years
and ask if developing countries have made progress on closing income
gap between their per capita incomes and those in the advanced
economies. We conclude that, as a group, they have not and then
survey the literature on absolute convergence with particular emphasis
on that from the last decade or so. That literature supports our
conclusion of a lack of progress in closing the income gap between
countries. We close with a brief examination of the recent literature on
cross-individual distribution of income which finds that, despite the lack
of progress on cross country convergence, global inequality has tended
to fall since 2000. [emphasis added]

Johnson, Paul and C. Papageorgiou, What remains of cross-country convergence?, Journal

Economic Literature 2020, 58(1), 129-175.
https://pubs.aeaweb.org/doi/pdfplus/10.1257/jel.20181207
23
 Reading Assignments
1. Nielsen, Lynge, Classifications of Countries Based on Their Level of
Development: How it is Done and How it Could be Done, IMF Working Paper
(2011)

2. Johnson, Paul and C. Papageorgiou, What remains of cross-country

convergence?, Journal Economic Literature 2020, 58(1), 129-175.
https://pubs.aeaweb.org/doi/pdfplus/10.1257/jel.20181207

3. Kemal Dervis, World Economy: Convergence, interdependence, and Divergence,

Finance and Development, September 2022.
https://www.imf.org/external/pubs/ft/fandd/2012/09/pdf/dervis.pdf

4. Read the Malawi National Human Development Report 2021 (available free on
the UNDP website), https://hdr.undp.org/system/files/documents/national-
report-document/malawinhdr2022pdf.pdf Identify a development issue and
summarise the issue. Do not submit. This work will help you identify a
contemporary development issue.

April 23 24
 2023-05-07

Handout 3

Magnitude of Poverty and the Poverty Trap

Main References
Poor Economics: Chapters 1-2

1 May 23

Poverty
 Poverty is synonymous with hunger –poverty and hunger go together.
 International poverty line (IPL): set based on consumption/income per day on a PPP basis.
 For years (since 1990), the World Bank used the dollar-a-day income as the poverty line. The IPL was re-
defined in 2008 (at $1.25 per day), in 2015 (at $1.90 per day) and in 2022 (at $2.15 per day).
 The IPL is calculated as an unweighted average of some of the world’s poorest countries’ national
poverty lines expressed in PPP dollars. The average is then converted back to local currency to calculate
each country’s counts of those living below the line.
 In 2008, the IPL of $1.25 per person per day was the mean of PPP-adjusted national poverty lines of 15
poorest countries in the world, on the basis of countries’ household final consumption expenditure per
capita, using 2005 PPPs . In 2015, the same 15 national poverty lines were used, but converted to 2011
PPPs, while in 2022, the IPL was updated at $2.15 using 2017 PPP.
https://link.springer.com/content/pdf/10.1007/s10888-016-9326-6.pdf
https://documents1.worldbank.org/curated/en/353811645450974574/pdf/Assessing-the-Impact-of-the-
2017-PPPs-on-the-International-Poverty-Line-and-Global-Poverty.pdf

2 May 23

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Poverty

 Banerjee and Duflo (Poor Economics) used a modified version of

the poverty line, calculated as a weighted average of over 50
countries where most of the poor live. It is expressed in Indian
rupees.
 The poverty line, so calculated was 16 Indian rupees per person
per day. Using PPP conversion rate, 16 rupees corresponds to
US 99 cents.
 Imagine living with 99 cents per day in the US or Canada for
almost all your everyday needs…
3 May 23

Poverty (Cont’d)
 As a reference, consider “Canada’s Poverty Reduction Strategy” that established the Official
Poverty Line for Canada. Canada’s Official Poverty Line reflects the combined costs of a basket of
goods and services that individuals and families require to meet their basic needs and achieve a
modest standard of living.
 The basket includes items such as healthy food, appropriate shelter and home maintenance,
and clothing and transportation. It also includes other goods and services that permit
engagement in the community, particularly for children, youth, parents and seniors.
 Wherever individuals and families cannot afford the cost of this basket in their particular
community, they are considered to be living below the Official Poverty Line.
https://www.canada.ca/content/dam/canada/employment-social-development/programs/poverty-
reduction/reports/poverty-reduction-strategy-report-EN.pdf

4 May 23

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Global Extreme Poverty Rate and

Headcount, 1990-2015

5 May 23

Poverty (Cont’d)
• The key reference we follow for our definition of poverty is Angus Deaton and Olivier
Dupriez, “Purchasing Power Parity for the Global Poor,” American Economic Journal:
Applied Economics. The World Bank’s ICP project collected a comprehensive set of price
data in 2005.
• Deaton and Dupriez used those price data to calculate the cost of a basket of goods
typically consumed by the poor in all the poor countries for which they had data. They
used the Indian rupee as the benchmark and used a price index in India compared to the
United States to convert this poverty line into dollars, adjusted for the purchasing power
parity.
• They proposed the 16-rupee poverty line as the average of the poverty line of 50 countries
where the vast majority of the poor live, weighted by the number of poor in those
countries. Then used the exchange rate, adjusted for the price index between India and
the United States, to convert the 16 rupees into a figure in dollars, which comes to 99
cents.
6 May 23

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Dimensions of Poverty
 Poverty reflects not only lack of income, but also:

 Poor health: High child mortality rate

 Low life expectancy- less than 55 years in many African countries

 High incidence of maternal death at child birth

 Poor education: 50% of children enrolled in school in India cannot read a simple
paragraph.

 Poor quality of life: hours collecting water instead of playing, working, learning.

 Difficulty to realize ambition: Get a loan for a business, be insured for the risk of the
farm or small business.
7 May 23

Magnitude of poverty
 Despite massive progress in the past few decades, global poverty — in all its
different dimensions — remains a broad problem.
 In 2015, 736 million people (9.9% of global population) lived on less than $1.90 a
day; 413 million of them were in sub-Saharan Africa.
 821 million were undernourished in 2017, up from 784 million in 2015.
 5.4 million children under five died in 2017, mainly of diseases that could have been
prevented. Almost half (2.5 million) of them took place in the first month of life.
 Every day in 2017, approximately 810 women died from preventable causes related
to pregnancy and childbirth. Sub-Saharan Africa alone accounted for roughly two-
thirds of such death.
 In 2018, an estimated 19.4 million infants worldwide did not get life-saving
vaccinations.
 Life expectancy at birth is 55 years in Nigeria, 82 years in Japan & 72.6 years globally.
8 May 23

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Magnitude of poverty (Cont’d)

An Update (World Bank)
 For three decades, the number of people living in extreme poverty—
defined as those who live on less than $2.15 per person per day at 2017
PPP—was declining. But the trend was interrupted in 2020, when
poverty rose due to the disruption caused by the COVID-19 crisis. The
number of people in extreme poverty rose by 70 million to more than
700 million people. The global extreme poverty rate reached 9.3%, up
from 8.4% in 2019.
 The recent crises have pushed the world further off track from the goal
of ending extreme poverty by 2030. Given current trends, 574 million
people—nearly 7% the global population—will still be living on less than
$2.15 a day in 2030. https://www.worldbank.org/en/topic/poverty/overview
9 May 23

Easy to get discouraged if the problem is big– Rokia Experiment

 A survey at the University of Pennsylvania shows how we can feel overwhelmed by the magnitude of the
problem.
 Researchers gave two groups of students $5 to fill out a short survey. They were asked to contribute to ‘Save the
Children’ (statistical victim) after reading either a general text, or the story of Rokia (identifiable victim). See Poor
Economics, Chapter 1
 Story of Rokia (Identifiable Victim): The flyer includes a picture of a young girl and the following words. “Rokia, a
7-year-old girl from Mali, Africa is desperately poor and faces a threat of severe hunger or even starvation. Her life
will be changed for the better as a result of your financial gift. With your support, and the support of other caring
sponsors, Save the Children will work with Rokia’s family and other members of the community to help feed her,
provide her with education, as well as basic medical care and hygiene education”.
 General Information (Statistical Victim): The flyer had the following words. “Food shortages in Malawi are
affecting more than 3 million children. In Zambia, severe rainfall deficits have resulted in a 42% drop in maize
production from 2000. As a result, an estimated 3 million Zambians face hunger. Four million Angolans — one
third of the population— have been forced to flee their homes. More than 11 million people in Ethiopia need
immediate food assistance”.
‘10 May 23

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Rokia Experiment
 The Identifiable Victim flyer, in which the plight of millions became the plight of one, raised 2.83

dollars per student on average. The Statistical Victim flyer raised 1.16 dollars per student on
average.

 The students were willing to help Rokia, but when faced with the scale of the global problem, they

felt discouraged.

 Some other students were shown the same flyers, but were told that people are more likely to

donate money to an identifiable victim than when presented with general information. Those with
statistical victim flyer donated roughly the same amount what that flyer had raised without the
warning— $1.26. Those shown the Rokia flyer, after this warning, gave only $1.36, less than half of
what the previous group committed. Encouraging students to think again prompted them to be
less generous to Rokia, but not more generous to everyone else in Mali.
11 May 23

Rokia Experiment
• In sum, the results demonstrate that sympathy for
identifiable victims diminishes with deliberative thought,
but remains consistently low for statistical victims. The
students’ reaction is typical of how most people feel
when confronted with problems like poverty.

• Our first instinct is to be generous, especially when facing

an imperiled seven-year-old girl. But, like the survey
participants, our second thought is often that there is
really no point: Our contribution would be a drop in the
bucket, and the bucket probably leaks.

• The large problem makes us depressed. Saving Rokia or

Saving the World?
12 May 23

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So, how to combat the problem?

 Not ask the big question: can foreign aid solve the problem? Rather ask: what are the
effective ways to help the poor?
 Dig deeper into each problem: health, education, food, nutrition, savings, credit, etc.
 Divide this issue into smaller, more manageable, questions – for example, the most
effective interventions for improving educational outcomes or child health.
– Are there really poverty traps?
– Why are the poor behaving the way they do? Are there things that could improves their
lives? What are they? What are the barriers?
– What are the mechanism that underlies the persistence of poverty? What types of
interventions have been tried or could be tried? What has been effective and what has
not?

13 May 23

Poverty Trap and its Solution

 Two opposing views: one supporting existence of poverty trap, and the other opposing it.
 According to Jeffrey Sachs
 Poor countries are poor because they are hot, infertile, malaria-infested and often land locked.
 When poverty is very extreme, the poor do not have the ability – by themselves – to get out of the
mess. Because, when people are utterly destitute, all energy goes into survival and there is no
capacity to save anything for the future.
 Low income – no savings, no investment, low productivity– lead to lower income next period

 So, it is hard for them to be more productive without an initial large investment – trapped in
poverty.
 This is why foreign aid is key to end poverty. They need a big push The rich countries need to invest
enough so that the poor countries can get their foot on the ladder. After that, the tremendous
dynamism of self-sustaining economic growth can take hold.
 Sachs argues that if the rich world had committed $195 billion in foreign aid per year between 2005
and 2025, poverty could have been entirely eliminated by the end of this period.
http://www.economia.unam.mx/cedrus/descargas/jeffrey_sachs_the_end_of_poverty_economic_poss
ibilities_for_our_time__2006.pdf
14 May 23

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Poverty Trap and its Solution (Cont’d)

Opposing View
 Sachs’s view was challenged by another school (William Easterly)
 There are no such things as poverty traps. He asks, “why the west’s efforts to aid the rest have done
so much ill and so little good?”
 Easterly questions why despite aid expenditures of $2.3 trillion over five decades, there are still 1
billion people without access to clean water, 840 million people under malnutrition and 10 million
children die needlessly every year while they could have been saved by four-dollar bed nets and
twelve cents medicines.
 Argues that aid does more harm than good. It prevents people from searching for their own
solutions, while corrupting local institutions.
 Studies show no consistent positive impact of aid on growth. Many show the opposite. Multi-
country data show that those received more aid did not grow faster than the rest.
 The easy availability of money creates a negative incentive for the government not to enact real
reforms.
 People don’t need hand-outs. When markets are free and the incentives are right, people can find
ways to solve their problems. So, what are we supposed to do?
15 May 23

• Easterly pointed out:

– Money has been spent, but
it has not helped.
– Africa is still poor.
• But what would have
happened without the
aid?
Is it the green line or the
yellow line?

16 May 23

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How Important is Foreign Aid?

 Aid is only a small part of what is spent on the poor every year. In 2022, total official development assistance
(ODA) given by 31 OECD countries was $204 billion, up 13.6% from 2021 and accounting for 0.36% of their
GNI.
 Most poverty related programs are domestically financed
 In Africa, foreign aid represented only 5.7% of the total government budget in 2003 (Poor Economics, p5).
 India receives no aid, but it spends billions of dollars on the poor
 Aid is most successful when it is used for development assistance. An OECD review of 25 years of official
development assistance found that despite setbacks in Sub-Saharan Africa and some countries of Latin
America, many developing countries had achieved remarkable economic and social growth over the past
quarter century.
 Deliberate government policy to direct aid effectively while expanding on other sources of finance is critical to
the positive impact of aid.
 Aid is not an end in itself. “Provided that it is delivered on the basis of being timely, temporary, and
targeted, it can save lives and transform life chances in today’s developing world, just as the Marshall Plan
helped rebuild European economies after the long years of war.”

17 May 23

Poverty Trap Debate: Diagrammatical Illustration

Poverty Trap: S-shaped curve of income trajectory
 Current income determines future income.
 If today’s income is not sufficient to meet today’s consumption and investment needs, tomorrow's income will be
lower and the individual is trapped in poverty.
 If, on the other hand, today’s income is sufficient to cover consumption and investment needs, tomorrow’s income
will be higher, and the individual will be richer and richer.
 So, your income trajectory depends on your current level income: are you below poverty line?
 The trajectory looks like an “S”

No Poverty Trap: Inverted L –shaped trajectory

 the poor has the potential to earn more in future than they start with today – can save and invest from their own
income.
 The potential for relatively more income is significantly more at lower income levels, thereby increasing savings
potential and subsequent standards of living.
 So, the poor will end up at a certain income level regardless of any help they receive.
18 May 23

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The S-Shape Curve and the Poverty Trap

 On the 450 (diagonal) line, income today equals income
tomorrow. Points below the diagonal line represent future
income lower than today’s income.
 For the people along the curve below the diagonal, future
income is lower than current income. This means that over
time, those in this zone become poorer and poorer and they
will eventually end up trapped in poverty at point N. This area
is defined as a “poverty trap zone,” and individuals who have
an income within this zone are trapped indefinitely with
negative savings potential. The arrows from A1 represents a
trajectory: from A1 to A2 then to A3 and so on.
 For individuals starting outside the poverty trap zone, future
income is higher than income today and so they become
richer and richer, at least upto the point Q. If you are at B1,
you will move to B3.

19 May 23

The Inverted L-Shape Curve: No Poverty Trap

 People, who think there is no poverty trap, believe Figure 2: The inverted L-shape: No poverty trap
the world is inverted L-shape as in Figure 2.
 The curve is always above the 450 (diagonal) line
showing higher future income than current income.
 The curve goes up fastest at the beginning, then
slower and slower.
 There is no poverty trap: the poorest people earn
more than the income they started with, they
become richer over time until their incomes stop
growing at Q.
 The arrows going from A1 to A2 to A3 depict a
possible trajectory.
 This income may not be very high, but the point is
that there is relatively little we need or can do to
help the poor.
 A onetime gift will not boost anyone’s income
permanently. At best, it can just help them move up
a little bit faster, but it cannot change where they
are eventually headed.
20 May 23

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Jaffrey Sach’s Millennium Villages Project

 Jeffrey Sachs launched an experiment in 2005 to prove that it is possible to end global poverty by taking a
holistic, community-led approach to sustainable development. The Millennium Villages Project targeted
some sub-Saharan villages, using an integrated approach to help achieve the Millennium Development
Goals to address poverty, health, gender equality and disease.
 Main hypothesis: Millennium village economies can transition over a period from subsistence farming to
self-sustaining commercial activity.
 A one-time infusion of aid could set a person on a self-sustaining income trajectory

 Villagers got free fertilizers, school meals, health care, computers in their schools, and much more

 Kennedy, a young Kenyan farmer, is one of the fortunate villagers who received such aid
 He grew 20 times more when he got free fertilizers

 Now able to save from the higher output and can support himself forever.

 Free fertilizer freed him from the poverty trap he was in.

 Was he really trapped in poverty or not? Which of these two diagrams best describes him?
 Answer depends: is it about savings? Is it about nutrition, health or education or market?
 Needs right data and research to find out the actual reason and then make appropriate policies.
21 May 23

Experimental Approach of Development Economics

 While a theory can pinpoint certain policies to combat a development issue, it does not tell
us how powerful these are in practice.
 Examples:
 theory cannot tell us whether temporarily employing additional contract teachers with a
possibility of re-employment on better students grades is a more cost-effective way to
raise the quality of education than reducing class sizes.
 Neither can it tell us whether microfinance programs effectively boost entrepreneurship
among the poor.
 Nor does it reveal the extent to which subsidized health-care products will raise poor
people’s investment in their own health.
 Knowing the right quantitative answers to such specific questions is vital for enhancing
human capital, increasing income, and improving health among the poor.
 Answering these questions requires field experiment to identify workable policies.
22 May 23

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Field Experiment
 The modern approach to development economics relies on two simple but powerful ideas.
 One idea is that empirical micro-level studies guided by economic theory can provide
crucial insights into the design of policies for effective poverty alleviation.
 The other is that the best way to draw precise conclusions about the true path from
causes to effects is often to conduct a randomized controlled trial (RCT).
 An RCT is a method to estimate the causal impact of a certain intervention, program or
policy. A field experiment is an RCT in which participants make choices in their normal
day-to-day environment.
 In an RCT, individuals or communities are randomly assigned to different “treatments”—
different programs or different versions of the same program. Since the individuals
assigned to different treatments are exactly comparable (because they were chosen at
random), any difference between them is the effect of the treatment.

23 May 23

Field Experiment (Cont’d)

 Low service quality is an explanation why poor families invest so little in preventive
measures. One example is that staff at the health centres for vaccinations are
often absent. Banerjee and Duflo investigated whether mobile vaccination clinics –
where the care staff were always on site – could fix this problem. They used an
RCT method.
 Vaccination rates tripled in the villages that were randomly selected to have
access to these clinics, at 18% compared to 6% for the control group.
 This increased further, to 39%, if families received a bag of lentils as a bonus
when they vaccinated their children. Because the mobile clinic had a high level
of fixed costs, the total cost per vaccination actually halved, despite the
additional expense of the lentils.
 So, the cost effective policy: mobile clinic with incentives.
24 May 23

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Randomized Controlled Trials

25 May 23

A Nutrition-based Poverty Trap

 Poverty is synonymous with hunger –poverty and hunger go together. Poverty is
traditionally defined based on hunger. The inability of poor to feed themselves properly is
an often cited main cause of a poverty trap.
 When someone is very poor, all the food he or she eats is barely enough to survive. Not
strong enough to earn more, leading to lower future income.
 With your wage, you buy food, which gives you strength that allows you to get wages: it
creates a relationship between income today, and income tomorrow.
 The very poor earn less than they need to be able to do significant work; but those who
have enough to eat can do serious and higher paying work. This creates a poverty trap.
That's an S-shape income trajectory, with curve intersecting the 45 degree line from
below at some point. The poor gets poorer and rich gets richer.
 The S-shape is made of two relations:
 How much better do you eat if you have a little more income, and
 How much stronger to do you become if you have a bit more to eat.
26 Chapter 2

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Nutrition-based Poverty Trap: A Case Study– Pak Solhin

 Banerjee and Duflo met 40 year-old Pak Solhin in a small village in Java, Indonesia in summer
2008.
 He owns no land (with 13 siblings, his parents cut the land in many small pieces to build
homes). His house did not have a single item of furniture, no water, no electricity
 Until that summer, he was a casual farm labourer making $2 US PPP per day
 Due to an increase in fertilizer and oil prices in that summer, farmers stopped/reduced
hiring workers to save money, and started to work the farm themselves.
 Pak Solhin could not accept a lower wage, because the food prices had increased too: at a
lower wage, he would not even have enough strength to work a whole day. He became
unemployed.
 He was too weak for the most physical work, too inexperienced for more skilled labour and
too old to be an apprentice.
27 May 23

A Case Study– Pak Solhin (Cont’d)

 He had no money to feed himself. No body lent him money. So his wife and older
kid went to the Jakarta, where his wife got a job as maid, not earning much to feed
their three children.
 The older child, a 13 year old, dropped out of school and became an apprentice
construction worker in the nearby city. The other two children were staying with
their grand-parents.
 He eats about once a day, when he gets subsidized rice (9 pounds per week), or
he catches a fish on the bank of the river
 He can’t swim, so he can’t properly fish.

 He is very depressed, and negative about the future. Lack of food made him weak
and there was no farming job available.

28 May 23

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Putting a Face on Poverty: Pak Solhin

 Land owning farmers decided to fire their workers instead of cutting wages because they
thought lower wages would push workers into starvation as food prices increased.
Workers would be useless in the field.
 An important feature about Pak Solhin is that lack of food impedes his productivity.
 The first few calories are used by your body just to survive: they don’t make you strong

 When you start eating enough to survive, the next calories start giving you strength

 Someone who is very poor like Pak Solhin may not have enough to eat to be very
productive
 but if he could eat more, he would be more productive
 A nutrition-based poverty trap?

29 May 23

Is there A Nutrition-based Poverty Trap?

 Although a hunger-based poverty trap is a possibility, how relevant is it in practice?
 If there was a S-Shape curve between nutrition and productivity, the poor should eat as much as they can. If there
was any chance that by eating a bit more, the poor could start doing meaningful work and get out of the poverty
trap zone, then they should eat as much as possible:
 The share of food in the budget would be very high for them.
 If you have some unavoidable expense, expenditure on food would first increase more than proportionally, and
then less than proportionally. For example,
 Total budget: 20 rupees = 5 rupees on clothing and house, 15 rupees on food
 Budget: 30 rupees = 5 rupees on clothing and house, 25 rupees on food
 Budget: 45 rupees = 10 rupees on clothing on house, 30 rupees on food, 10 rupees on movies
 Pak Solhin looks like one trapped in nutrition-based poverty trap. Is it so?
 Did he eat right amount of food with extra nutrition that might make him more productive?
 The eighteen country data set collected by the authors show that food represents from 45 to 77 per cent of
consumption among the rural extremely poor. They don't spend as much as they can on food.
 An example from Udaipur, India show that a typical household could spend upto 30% more on food than it
actually does if it completely cut expenditures on alcohol, tobacco and festivals.
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How Much Are the Poor Spending on Food

31 May 23

Is there A nutrition-based poverty trap?

 The poor have many choices, and they don’t elect to spend as much as they can on food. This is
evident from looking at how poor people spend any extra money that they might get.
 An analysis of detailed information from people about food consumed and using a calorie
conversion table to estimate how much calories that represents, suggests
 a poor household who is 10% richer spends about 7% more on food (i.e., elasticity of food
expenditure is 0.7). This extra spending is shared in half: half to get more calories, half to get
better tasting more expensive calories (meat instead of cereals; rice instead of coarse cereals).
 even the money that people spend on food is not spent to maximize the intake of calories.
When very poor people get a chance to spend a little bit more on food, they don’t put
everything into getting more calories. Instead, they buy better-tasting, more expensive calories.
 Many countries use food price subsidies to encourage greater nutrition. It is expected that when
the price of something goes down, people buy more of it. A study in China showed opposite
happened. Households that received subsidies for rice or wheat consumed less of those two items
and ate more shrimp and meat, even though their staples now cost less. (Giffen good).

32 May 23

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Is there A nutrition-based poverty trap?

 If households consume less rice and more shrimps, but shrimps are not very nutritious per
dollar spent, the effect on calorie consumption of subsidizing rice may not be large, and it
may even be negative.
 This suggests that at least among these very poor households, getting more calories was
not a priority: Getting better-tasting ones was. And this is true not only for calories but
also other nutrients.
 What does this tell us about the effect income on calorie consumption in this population?
It must be negative.
 One reason the poverty trap might not exist is that most people have enough to eat.
Starvation exists in today’s world, but only as a result of the way the food gets shared
among us. There is no absolute scarcity.

33 May 23

Is there A nutrition-based poverty trap?

 Does eating more make people more productive?
 A 1986 study by John Strauss (Does better nutrition raise farm productivity?) showed a
highly significant effect of caloric intake on labor productivity. The impact of calories on
productivity in Sierra Leone showed that the productivity of a worker on a farm increased
by 4% when his calorie intake increased by 10%. Thus, even if people doubled their food
consumption, their income would only increase by 40%.
 The shape of the relationship between calories and productivity was not an S—shape, but
an inverted L—shape:
 The largest gains are obtained at low levels of food consumption. There is no steep jump
in income once people start eating enough. This suggests that the very poor benefit
more from eating extra calories than the less poor. This is precisely the type of situation
where we would not see a poverty trap.
 So it is not because they don’t eat enough that most people stay poor.

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Is there A nutrition-based poverty trap?

 Poor people’s behaviour make us a bit suspicious that there can be a poverty trap
based on nutrition.
 They do not seem very hungry for extra calories. They do not consume as much calories as
they could, and when their income goes up, they don’t seem to eat that much more.
 Indeed, it seems that the benefit to consuming more calories may be positive, but perhaps
not large to generate a S-Shape.

35 May 23

Global Action
Millennium Development Goal 1: Eradicate extreme
poverty and hunger

MDG 2015 rev (July 1).pdf (un.org)

https://www.un.org/millenniumgoals/2015_MDG_Report/pdf/MDG%202015%20rev%20(July%201).pdf

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Global Action
Millennium Development Goal 1: Eradicate extreme poverty
and hunger

37

Global Action
Sustainable Development Goals: Goal 1 Targets

1.1 By 2030, eradicate extreme poverty for all people everywhere, currently measured as people
living on less than $1.25 a day
1.2 By 2030, reduce at least by half the proportion of men, women and children of all ages living in
poverty in all its dimensions according to national definitions
1.3 Implement nationally appropriate social protection systems and measures for all, including
floors, and by 2030 achieve substantial coverage of the poor and the vulnerable
1.4 By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal
rights to economic resources, as well as access to basic services, ownership and control over land
and other forms of property, inheritance, natural resources, appropriate new technology and
financial services, including microfinance
1.5 By 2030, build the resilience of the poor and those in vulnerable situations and reduce their
exposure and vulnerability to climate-related extreme events and other economic, social and
environmental shocks and disasters
1.A Ensure significant mobilization of resources from a variety of sources, including through
enhanced development cooperation, in order to provide adequate and predictable means for
developing countries, in particular least developed countries, to implement programmes and policies
to end poverty in all its dimensions
1.B Create sound policy frameworks at the national, regional and international levels, based on pro-
poor and gender-sensitive development strategies, to support accelerated investment in poverty
eradication actions
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Global Action
Sustainable Development Goals: Goal 1 Progress

• Between 2015 and 2018, global poverty continued its historical decline, with the global
poverty rate falling from 10.1 per cent in 2015 to 8.6 per cent in 2018.
• Owing to the COVID-19 pandemic, the global poverty rate increased sharply from 8.3
per cent in 2019 to 9.2 per cent in 2020, rewinding progress by about three years.
• This unprecedented reversal is being further exacerbated by rising inflation and the
impacts of the war in Ukraine. It is estimated that these combined crises will lead to an
additional 75–95 million people living in extreme poverty in 2022, compared with pre-
pandemic projections.
• The losses have been much higher for low-income countries, where poverty reduction
has been set back by between eight and nine years. Although the poverty rate is
projected to decrease to 8.7 per cent in 2021, it was still higher than the pre-pandemic
level.
• For the first time in two decades, the world’s share of workers living with their families
below the international poverty line increased from 6.7 per cent in 2019 to 7.2 per cent
in 2020, meaning that an additional 8 million workers were pushed into poverty.

Goal 1: End poverty in all its forms everywhere - United Nations Sustainable Development
https://www.un.org/sustainabledevelopment/poverty/
39

Global Action
Sustainable Development Goal 1: End poverty in all its
forms everywhere
• The decline of extreme
poverty continues, but
the pace has slowed, and
the world is not on track
to achieving the target of
ending poverty by 2030.
• Extreme poverty today is
concentrated and
overwhelmingly affects
rural populations.
• Increasingly, it is
exacerbated by violent
conflicts and climate
change.

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Global Action
Sustainable Development Goals: Goal 2 Targets

2.1 By 2030, end hunger and ensure access by all people, in particular the poor and people in vulnerable situations,
including infants, to safe, nutritious and sufficient food all year round.
2.2 By 2030, end all forms of malnutrition, including achieving, by 2025, the internationally agreed targets on
stunting and wasting in children under 5 years of age, and address the nutritional needs of adolescent girls,
pregnant and lactating women and older persons.
2.3 By 2030, double the agricultural productivity and incomes of small-scale food producers, in particular women,
indigenous peoples, family farmers, pastoralists and fishers, including through secure and equal access to land,
other productive resources and inputs, knowledge, financial services, markets and opportunities for value addition
and non-farm employment.
2.4 By 2030, ensure sustainable food production systems and implement resilient agricultural practices that
increase productivity and production, that help maintain ecosystems, that strengthen capacity for adaptation to
climate change, extreme weather, drought, flooding and other disasters and that progressively improve land and
soil quality.
2.5 By 2020, maintain the genetic diversity of seeds, cultivated plants and farmed and domesticated animals and
their related wild species, including through soundly managed and diversified seed and plant banks at the national,
regional and international levels, and promote access to and fair and equitable sharing of benefits arising from the
utilization of genetic resources and associated traditional knowledge, as internationally agreed.

41

Global Action
Sustainable Development Goals: Goal 2 Progress

• In 2020, between 720 million and 811 million persons worldwide were suffering from
hunger, roughly 161 million more than in 2019.
• Also in 2020, a staggering 2.4 billion people, or above 30 per cent of the world’s population,
were moderately or severely food-insecure, lacking regular access to adequate food.
• Globally, 149.2 million children under 5 years of age, or 22.0 per cent, were suffering from
stunting (low height for their age) in 2020, down from 24.4 per cent in 2015.
• To achieve the target of a 5 per cent reduction in the number of stunted children by 2025,
the current rate of yearly decline – 2.1 per cent – must double to 3.9 per cent.
• In 2020, wasting (low weight for height) affected 45.4 million or 6.7 per cent of children
under 5 years of age.
• The share of countries burdened by high food prices, which had been relatively stable since
2016, rose sharply from 16 per cent in 2019 to 47 per cent in 2020.

Goal 2: Zero Hunger - United Nations Sustainable Development

https://www.un.org/sustainabledevelopment/hunger/
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Sustainable
Development
Goals: Goal
2 Progress

43

Reading Assignment
Ferreira, F., Chen, S., Dabalen, A., Dihkanov, Y., Hamadeh, N., Jolliffe, D., Narayan, A., Prydz, E., Revenga,
A., Sangraula, P., Serajuddin, U., Yoshida, N. A global count of the extreme poor in 2012: data issues,
methodology and initial results. Journal of Economic Inequality (2016).
https://link.springer.com/content/pdf/10.1007/s10888-016-9326-6.pdf

Jolliffe, D., Mahler, D., Lakner, C., Atamanov, A., and Tetteh-Baah, S. Assessing the Impact of the 2017 PPPs on the
International Poverty Line and Global Poverty, World Bank Policy Research Working Paper 9941 (2022).
https://documents1.worldbank.org/curated/en/353811645450974574/pdf/Assessing-the-Impact-of-the-2017-PPPs-on-
the-International-Poverty-Line-and-Global-Poverty.pdf

The Sustainable Development Goals Report 2022, — SDG Indicators (un.org)

& Progress Chart — SDG Indicators (un.org)

Sachs, Jeffrey, Lessons from the Millennium Villages Project: a personal perspective, The Lancet (2018).
https://www.thelancet.com/journals/langlo/article/PIIS2214-109X(18)30199-2/fulltext

44

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Interesting Readings

Sachs, J., The end of poverty: Economic possibilities for our time. Penguine Press (2005).
http://www.economia.unam.mx/cedrus/descargas/jeffrey_sachs_the_end_of_poverty_economic_possibilities
_for_our_time__2006.pdf

Finckenstein, Valentina. How International Aid Can Do More Harm than Good The Case of Lebanon. LSE Ideas. London
School of Economics (2021)
https://www.lse.ac.uk/ideas/Assets/Documents/updates/LSE-IDEAS-How-International-Aid-Can-Do-More-
Harm-Than-Good.pdf

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Handout 4

Health Trap and Low Hanging Fruit

References
Poor Economics: Chapter 3
&
Other Reading Materials

Context
• Modern public-health technologies, e.g., vaccines, antibiotics and anti-malarial drugs, and
effective preventive methods, such as mosquito nets and drinking-water treatment, have
improved health in low income countries.
• Nevertheless, the risk of a child dying before age five is still significantly higher in low-income
countries than in high-income countries.
• And coverage of a range of low-cost preventive health products remains incomplete in the
developing world.
• The standard human-capital model views health both as a consumption good and as an
investment good. Human capital can be built up by investing in health, and rational consumers
undertake such investments if they expect the marginal benefit to exceed the marginal cost.
• Without government intervention, wedges between private and social benefits generate
underinvestment in health by consumers. For example, health investments will be too low if
treatment or prevention has positive externalities, or if they are public goods. This simple model
was the starting point for a series of studies conducted by Michael Kremer (2019 Economics
Nobel Laureate) and his co-authors to understand the reasons for the suboptimal uptake of
public-health measures.
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The Health Trap

 Health has the potential to be a source of a number of different traps.
 Ill health leads to future poverty
 Ill health of the father leads to future poverty of the children

 According to Jeffrey Sachs a large proportion of the world’s poorest

people are stuck in a health-based poverty trap.

 As an example, countries in which a large proportion of the population is

exposed to malaria are much poorer as malaria makes labour force less
productive. Being poorer makes it harder to prevent malaria which in turn
keeps them poor.
 Investment in the prevention of malaria would have very high return.

The Health Trap (Cont’d)

 A Case Study: Ibu Emptat, the wife of an Indonesian basket weaver.
 Her husband had trouble with his vision and could not work

 She borrowed money at an interest rate of 10% per month to pay for his

medicine and food for the period when her husband was recovering.
 They could not pay back the loan that led to higher debt with high interest

rate beyond their capacity to pay.

 One of her sons got asthma but she did not have money for treatment.

 Classic poverty trap: father’s illness made them poor which is why the

child stayed sick, too sick to get proper education which will lead to his
future poverty.

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Preventive care: the Low Hanging Fruit

 In 2017, more than 5 million children under five died from preventable
diseases such as diarrhea and malaria and 10 million people developed
tuberculosis.
 There are effective and cheap technologies to prevent health issues:
 Bed nets for malaria
 Oral rehydration solution (ORS) to combat diarrhea
 Chlorine to sanitize water
 Immunization
 Breast feeding
 Some of these technologies are so cheap that even the very poor can afford
them.
5

Preventive care: the Low Hanging Fruit (Cont’d)

 The gains of using these technologies are huge:
 One study on malaria eradication in the U.S. and Latin America suggests that a child
who grew up malaria-free earns 50% more per year, for his entire adult life,
compared to a child who got the disease. [Ref: Bleakley, Hoyt. 2010. "Malaria
Eradication in the Americas: A Retrospective Analysis of Childhood Exposure."
American Economic Journal: Applied Economics, 2 (2): 1-45]
 Applying this results for Kenya, a $14 investment in a long-lasting insecticide-treated
bed net would have an average return of $88 annually over a Kenyan child’s entire
work life.
 Access to piped water, better sanitation and chlorination of water sources reduces
diarrhea and infant mortality substantially. The experience of Gram Vikas in Orissa,
India: A $4 cost per month per household to provide piped water and sanitation
reduced the prevalence of diarrhea and malaria.
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Preventive care: the Low Hanging Fruit (Cont’d)

 However, the technologies are not used much.
 Why don’t people pick these ‘low-hanging fruits?
 Why don’t mothers vaccinate their children?
 Why don’t families use bed nets, or buy chlorinated water?
 The poor does not seem to be willing to sacrifice money and time to get
clean water, bed nets, de-worming pills despite huge health benefits. Even
though breast-feeding has no cost, fewer than 40% of the world’s infants are
breast-fed for six months.
 When people must pay for bed-nets or chlorine, they often do not do it.

Preventive care: the Low Hanging Fruit (Cont’d)

 Yet, people spend a lot of money on health, but mainly on expensive cures rather than
cheap prevention.
 The eighteen country data used in the textbook, shows that more than a quarter of
households in many countries made at least one visit to healthcare workers in a
month.
 The same data set also show that the poor spends a considerable fraction of their
monthly budget on health care ( 6% in India, 3-5% in Pakistan, Panama and Nicaragua).
 They borrow large amount of money at high cost to meet health spending.
 Why do they spend such large amounts of money on ineffective cure instead?
 The question is not how much money the poor spend on health care, rather what the
money is spent on.

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Some Questions

• What percentage of children living on $1 a day die before the age of 5?

• What percentage of children are immunized against measles?
• What percentage of children are immunized against polio?
• In the past month what percentage of households met with a healthcare
provider?
• In the past month what percentage of households members were sick?

See Poor Economics database

Percentage of children die before the age of 5 living on $ 1 a

day.

Source: Poor Economics

10

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What percentage of children are immunized against

measles?

Source: Poor Economics

11

In the past month what percentage of households met with a

healthcare provider?

Source: Poor Economics

12

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In the past month what percentage of households members were

sick?

Source: Poor Economics

13

Why don’t people pick these ‘low-hanging fruits?

 There are a number of possible explanations. These can include:
 Price sensitivity
 Unreliable health service delivery
 A lack of information or trust
 Time-inconsistent behavior, and
 Poor people may be extremely price-sensitive regarding investments in preventive healthcare
 Public facilities that deliver preventative care may not be available when needed.
 People also may not understand how certain treatments will help. This is especially true for preventative
medicine where the "treatment" has no noticeable effect.
 And even if they do understand, they may procrastinate because the cost of getting the preventative care
is today, but the benefits are in the future.
 Small incentives, like lentils for vaccines, make it as easy as possible for people to do the “right” thing, while,
perhaps, leaving them the freedom to opt out.
 In rich countries, most of these decisions are made for us, and we don't have to think about it: It should not
be different for the poor.
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Pricing Strategies for preventive healthcare

 Whether and how much to charge users for medicine and health services are hotly debated policy
issues.
 Issue: Malaria is one of the world’s foremost public health concerns.
 About a 1 million deaths each year, the majority in sub-Saharan Africa
 Malaria is often associated with poverty.
 Reduce GDP by an estimated one percentage point each year in malaria-endemic countries.
 The spread of malaria can be greatly reduced with the use of preventive strategies such as
insecticide-treated bed nets (ITNs).
 Opinion
Provision of public health goods with positive externalities should be publicly financed.
Debate on what proportion of the cost the beneficiaries of these public health programs should
bear.
 Standard economic analysis implies that goods that have a positive benefit (such as reduced
malaria transmission) to the whole community when they are used by individuals should be
provided at zero cost to the user.

15

Pricing Strategies for preventive healthcare: Research

 The Research: Researchers conducted more than a dozen randomized
evaluations in eight countries to empirically test the arguments underlying this
debate, and evaluate how pricing affected take-up and use of various preventive
health products.
 One of such studies was conducted by Jessica Cohen (Harvard University) and
Pascaline Dupas (Stanford University) to test whether it is preferable to freely
distribute bed nets or to require a co-payment by recipients.
 They set up a randomized evaluation to evaluate the impacts of different subsidies
on take-up and use of bed nets when delivered to pregnant women in Kenya. In
sixteen randomly selected health clinics, nets were offered at a subsidized rate,
with the discount varying between 90 and 100 percent of market price.

16

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Pricing Strategies for preventive healthcare: Research

 A field experiment by Kremer and co-author investigated how the demand for deworming pills for
parasitic infections was affected by price.
 They found that 75 per cent of parents gave their children these pills when the medicine was free,
compared to 18 per cent when they cost less than a US dollar, which is still heavily subsidized.
 Subsequently, many similar experiments have found that poor people are extremely price-sensitive
regarding investments in preventive healthcare.
 Low service quality is another explanation why poor families invest so little in preventive
measures. One example is that staff at the health centres that are responsible for vaccinations are
often absent from work. Banerjee, Duflo et al. investigated whether mobile vaccination clinics –
where the care staff were always on site – could fix this problem. Vaccination rates tripled in the
villages that were randomly selected to have access to these clinics, at 18% compared to 6%.
 This increased further, to 39%, if families received a bag of lentils as a bonus when they vaccinated
their children. Because the mobile clinic had a high level of fixed costs, the total cost per
vaccination actually halved, despite the additional expense of the lentils.

17

Randomized evaluations: Results and Policy Lessons

 Impact on bed-net usage intensity: There is no evidences to suggest that cost-sharing
increases bed-net usage:
 Women in Kenya who paid positive subsidized prices were no more likely to use nets than
those who received nets for free.
 Impact on net demand: Cost-sharing considerably dampen demand. Bed-net uptake drops
by 60 percentage points when the price increases from zero to $0.60, a price still $0.15 below
the market price in Kenya. These results imply that demand for nets is 75% lower at the cost-
sharing price prevailing in Kenya at the time of the study ($0.75) than it is under a free
distribution scheme.
 A similar study focusing on the general population found similar results: intake rates were
considerably higher when nets were given for free rather than sold.
 Overall, results suggest that free distribution of nets is both more efficient and more cost-
effective than cost-sharing.
 Evaluations on other preventive health products such as deworming medication, water
disinfectant, and handwashing soap, all pointed to the efficacy of subsidizing user fees for key
preventive health products by eliminating cost-sharing when possible.
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Pricing Strategies for in preventive healthcare

19

Pricing Strategies for in preventive healthcare

20

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Time Inconsistent Preferences

 Today, cost of immunizing the child is: time taken, child discomfort, potential side effects.
 Benefits are in the future (at some unknown time).
 Human beings think of the present and the future differently
 Costs incurred today appear very large relative to benefits.
 Costs to be incurred next month appear small relative to benefits.
 We have a tendency to postpone small costs to a future period.
 But when the future comes, it is now the present, and the costs again seem large.
 This could explain why getting an immunization is always postponed until next month while
people are willing to spend large sums of money on a curative care treatment for the same
disease for their child.
 In this case, a small benefit that offset the small cost and is obtained today (e.g. a bag of
lentils) can convince parents to take the step today.
 In most developed countries, there is a compulsory schedule of immunization: it plays the
same role.
21

Time Inconsistent Preferences (Cont’d)

 If time inconsistency is the main problem, there can be other ways to help
individuals in taking the right steps:
 “Nudging" : Marketing techniques used to stir individuals to a choice that
would be right from their rationale's self point of view (e.g. “good" default
choices).
 Helping them to commit in advance to behave in a certain way in the future:
commitment devices.
 There is evidence that time inconsistency plays a role.
 However, constantly postponing preventive care, if we are fully aware of its
benefits, requires to be both time inconsistent and very naive.
 May be it is not the entire explanation, and part of the problem has to do with
low perceived benefits: how we learn about health.
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Global Action
Millennium Development Goals
 Goal 4: Reduce child
 Under-five mortality rate declined from 90 to 43 deaths per 1,000 live
mortality births between 1990 and 2015.
 Goal 5: Improve  Measles vaccination helped prevent nearly 15.6 million deaths between
2000 and 2013.
maternal health
 Since 1990, the maternal mortality ratio has declined by 45 per cent
 Goal 6: Combat worldwide, from 380 per 1000 live births to 210.
HIV/AIDS, malaria and  New HIV infections fell by approximately 40 per cent between 2000 and
2013, from an estimated 3.5 million cases to 2.1 million.
other diseases
 The global malaria incidence rate has fallen by an estimated 37% and the
 Goal 7: Reduce the mortality rate by 58%.
proportion of people  Between 2000 and 2013, tuberculosis prevention, diagnosis and
without sustainable treatment interventions saved an estimated 37 million lives. The
tuberculosis mortality rate fell by 45% and the prevalence rate by 41%
access to safe drinking between 1990 and 2013.
water and basic  Globally, 147 countries have met the drinking water target, 95 countries
have met the sanitation target and 77 countries have met both.
sanitation
23

Global Action
Sustainable Development Goal 3 : Targets
3.1 By 2030, reduce the global maternal mortality ratio to less than 70 per 100,000 live births.
3.2 By 2030, end preventable deaths of newborns and children under 5 years of age, with all countries aiming to
reduce neonatal mortality to at least as low as 12 per 1,000 live births and under-5 mortality to at least as low as 25
per 1,000 live births.
3.3 By 2030, end the epidemics of AIDS, tuberculosis, malaria and neglected tropical diseases and combat hepatitis,
water-borne diseases and other communicable diseases.
3.4 By 2030, reduce by one third premature mortality from non-communicable diseases through prevention and
treatment and promote mental health and well-being.
3.5 Strengthen the prevention and treatment of substance abuse, including narcotic drug abuse and harmful use of
alcohol.
3.6 By 2020, halve the number of global deaths and injuries from road traffic accidents.
3.7 By 2030, ensure universal access to sexual and reproductive health-care services, including for family planning,
information and education, and the integration of reproductive health into national strategies and programmes.
3.8 Achieve universal health coverage, including financial risk protection, access to quality essential health-care
services and access to safe, effective, quality and affordable essential medicines and vaccines for all.
3.9 By 2030, substantially reduce the number of deaths and illnesses from hazardous chemicals and air, water and soil
pollution and contamination. https://www.un.org/sustainabledevelopment/health
24 /

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Global Action
Sustainable Development Goal 3 : Progress
 From 2010 to 2020, the adolescent birth rate dropped from 47.9 births to 41.2 births per 1,000 adolescents aged
15 to 19.
 The universal health coverage improved from a global average of 64 out of 100 in 2015 to 67 in 2019.
 In 2020, an estimated 1.5 million people were newly diagnosed with HIV and 680,000 people died of AIDS-related
causes. The incidence of HIV infections globally declined by 39 per cent between 2010 and 2020, far less than the
75 per cent target agreed to by the General Assembly in 2016.
 TB deaths increased from 1.2 million in 2019 to 1.3 million in 2020 due to disruptions associated with the
pandemic.
 In 2020, 627,000 people died from malaria, with cases estimated to have reached 241 million. About two thirds of
the additional deaths were linked to disruptions in the provision of malaria services during the pandemic.
 From 2019 to 2020, coverage of infant immunization slipped from 86 per cent to 83 per cent.
 7 million children missed out on vaccinations in 2020, 3.7 million more than in 2019 and the highest number since
2005.
 1 million older children did not receive vaccines through the routine immunization programme in 2020, an
increase from 13.6 million in 2019.
Health - United Nations Sustainable Development
https://www.un.org/sustainabledevelopment/health/
25

SDG Goal 3: Ensure healthy lives and promote well-being for all
at all ages

 In 2020 and 2021, 14.9 million people were estimated to have died due to COVID-19 and its impact on health
systems and society.
 Interruptions in essential health services were reported in 92 per cent of 129 countries surveyed at the end of
2021.
 As of May 2022, more than 80 per cent of people had received at least one dose of a vaccine in high-income
countries but the proportion is only about 17 per cent in low-income countries.
 Between January 2020 and May 2021, the pandemic may have claimed the lives of 115,500 health and care
workers worldwide.
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SDG Goal 3 :Ensure healthy lives and promote well-being for all at all
ages (Cont’d)

 In 2015–2021, about 84% of

births were assisted by skilled
health professionals, up from
77% in 2008–2014.
 The global under 5 children
mortality rate fell by 14% from
2015 to 2020. 5 million children
died before reaching their fifth
birthday in 2020 alone, down
from 5.9 million in 2015.

27

Reading Assignment
Sustainable Development Goal 3: Ensure healthy lives and promote well-being for
all at all ages, Targets, Facts and Figures.
https://www.un.org/sustainabledevelopment/health/

The Sustainable Development Goals Report 2022, — SDG Indicators (un.org) &
Progress Chart — SDG Indicators (un.org)

Children: improving survival and well-being, World Health Organization

(2020). https://www.who.int/en/news-room/fact-sheets/detail/children-reducing-
mortality

Pascaline Dupas, Short-Run Subsidies and Long-Run Adoption of New Health

Products: Evidence From a Field Experiment, Econometrica (2014).
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4193678/pdf/nihms580530.pdf
Note: Focus on non-technical contents.
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Handout 5

Education

References
Poor Economics: Chapter 4
&
Other Readings

Education: A Human Capital

Source: Guide on Measuring Human Capital Prepared by the Task Force on Measuring
Human Capital, United Nations New York and Geneva, 2016.
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Benefits of Education
A. Age-Earning Profile: shows the growth of earnings over the
life cycle.
• The profile can be shown by gender or by level of education
• Age-Earning Profile of a typical developing country, by level
of education.
B. The Returns to Education
• The rate of return by level of education, by income group
and by region
• The rate of return by year of schooling, by income group
and by region
• The rate of return by gender

Reference: Psacharopoulos, G. and H.A. Patrinos. 2004.

“Returns to Investment in Education: A Further Update”.
Education Economics, Vol. 12, No. 2
3

Benefits of Education: Example

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Age-Earning Profile of Canada, 2017

80
70
Thousand dollars

60
50
40
30
Men Women
20
10
0
16-24 25-34 35-44 45-54 55-64 65 +
Men 17,400 50,100 66,400 75,000 66,600 47,500
Women 14,800 38,400 48,700 50,900 41,900 33,600

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Source: Statistics Canada, Canadian Income Survey, 2017, Table: 11-10-0239-01

Age-Earnings Profiles by Level of

Education of a Typical Developing Country

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The Returns to Education

Returns to Investment in Education by Level, Regional Averages (%)

Returns to investment in education by level, latest year, averages by

per-capita income group (%

The Returns to Investment in Education

The rate of return to another year of schooling: regional
averages

• Average returns to schooling are highest in the Latin America and the
Caribbean region and for the sub-Saharan Africa region. Returns to
schooling for Asia are at about the world average.
• The returns are lower in the high-income countries of the OECD.
Interestingly, average returns to schooling are lowest for the non-
OECD European, Middle East and North African group of countries
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The Returns to Investment in Education

The rate of return to another year of schooling: Averages by
Per capita income group

The returns are lower in the high-income countries, but higher in

low income countries.

The Returns to Investment in Education

The rate of return to another year of schooling, by gender

Overall, women receive higher returns to their schooling

investments. But the returns to primary education are much higher
for men (20%) than for women (13%). Women, however, experience
higher returns to secondary education (18% versus 14%).
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Other benefits of education

• There are other studies looking at other aspects of

education
• Taiwan instituted compulsory schooling in 1968 (for 9 years)
 This led to an increase in schooling of both boys and girls
 Infant mortality declined in the regions where education
increased fastest due to this reform.
• Nigeria used oil money to build schools: This led to a
reduction in fertility in regions where more schools were
built.

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Education in developing countries

• In the developing world, school enrolment rate for children are rising. Yet, both
teacher and child absentee rates remain very high.
• There are evidences showing that schools in developing countries deliver very
little:
 In India, for example, only about half of children enrolled in school can read at
the first grade level.
• Some expert say that this is because there is no point pushing children into
school until there is a real value to education.
• In fact, education has monetary and non-monetary benefits: Each year of
education increases earnings, and there are also non-financial benefits such as
healthier children, good citizen, etc.
• Many in the policy community feel that building free schools and hiring teachers
will lead to improved education.
• Making substantial progress in the quality of education is possible. Pratham, an
Indian NGO, has helped millions of children to learn to read with volunteers.
• But many parents believe that the main goal of education is to get a government
or clerical job – so, education is only worthwhile if the child complete secondary
schools or more.
• Teachers and school systems have the same view: hence the school system is
elitist, and fails to deliver basic skills to the larger number.
• Enormous gains can be made by scaling down expectations, focusing on teaching
the basics, and using technology to complement, or if necessary substitute for,
teachers.
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A Case Study: Shantarama of Karnataka,

India
 Shantarama, a 40 year-old  But an interview with
widow and mother of six Shantarama revealed that it was
 Her husband died four years not because of her financial
ago without a life insurance. situation. It was because they
So they did not have any
income. did not want to continue in the
– The oldest was a 22-year- school.
old daughter and married  Absence often does not seem to
– The next two were still in be driven by a need at home.
school and had at least Reasons include:
eighth grade,
– The next two – a 14-year-old  Ill health
girl and a 10-year-old boy  Mostly, reflects children’s
dropped out unwillingness to be in school
 Why did they drop out?
 Parents not being able, or
 Was it because of their
father’s death? willing to make their children
 The authors assumed so. stay at school.

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The Political Economy of Education

Supply-Demand Wars
 Like any good or service, the amount of schooling received by an
individual, although affected by many nonmarket factors, is largely
determined by demand and supply.
 On the demand side, the two principal influences on the amount of
schooling desired are
1. more educated student’s prospects of earning are considerably more
through future modern-sector employment (the family’s private benefits
of education) and
2. the educational costs, both direct and indirect, that a student or family
must bear.
The amount of education demanded is thus, a derived demand for high-
wage employment opportunities in the modern sector. This is because
access to such jobs is largely determined by an individual’s education..
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The Political Economy of Education

Supply-Demand Wars

 On the supply side, the quantity of school space at various

levels is determined largely by political processes, often
unrelated to economic criteria. Given mounting political
pressure throughout the developing world for greater number
of school places at higher levels, it may be assumed that the
public supply of these places is fixed by the level of
government educational expenditures.
 These are in turn influenced by the level of aggregate
private demand for education.

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The Political Economy of Education

Supply-Demand Wars
 There is intense policy divide: Should government intervene? Do we
need an Education Policy?
 Supply side: called “supply wallahs”. Emphasis is given on the supply of
schools and well trained teachers. Focus is on increasing enrolment rates
and reduce drop out rates. Need an education policy to ensure education
for children. MDG and SDG Goals are examples of supply side views.
 Demand side: called “demand wallahs”. Argue that there is no point in
supplying education unless there is a demand for it, which depends on
the returns to education. When returns to education is high enough,
demand for education will increase leading to higher levels of enrollment
and quality of education. So, no government policy on education is
necessary – leave this with the market and parents.

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Supply-side
Constraints
 Market fails to provide enough supply: determined by government fiscal strength and
private endowments
 No schools in remote areas
 Bad roads and transportation is difficult
 Shortage of well trained teachers
 Large class size
 Teacher Absenteeism
Type of Interventions
 Build schools and hire teachers
 Make education free (universal or gender-based upto certain levels)
 Offer scholarships
 Conditional Cash Transfers (CCT) programs: Welfare benefits provided to poor
families if their children regularly attend school.
 Removing small costs: free school uniform or school meals
 Shortening travel time by leveraging existing infrastructure to create schools
 Reducing child morbidity: providing iron pills or school-based de-worming, etc

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Teacher Absenteeism

Source: Nazmul Chaudhury, et al, “Missing in Action: Teacher and Health Worker Absence in
Developing Countries” Journal of Economic Perspectives—Volume 20, Number 1—Winter
2006—Pages 91–116
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The demand for education

 Would parents send their kids to school without compulsory

education?

What constrains them?

 The need for child labour
 “no economic resources”
 “need to get married”
 Is it useful? Do parents know it? What do they expect of
education
 What worries them about schools?

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Parents need not be forced to send their children to school,

they just need financial help.
 Eliminating school fees can lead to large increases in participation. A program in
Ghana offered full scholarships to academically qualified students who did not
immediately enroll in secondary school. Roughly 80% enrolled in secondary school
after receiving the scholarship compared to only 20% in the comparison group at the
beginning of the first academic year and the majority of the scholarship winners
completed senior high school.
 The Conditional Cash Transfers (CCT), first tested in Mexico, called PROGRESA,
led to substantial increase in school enrolment. CCTs consistently increase school
enrollment and attendance, but are expensive.
 Small incentives, or removing small costs, can have large impacts. Evaluations on
reducing small costs by providing free school uniforms or school meals in Kenya,
Jamaica, Burkina Faso and Uganda found positive impacts on participation. An
evaluation in Malawi found that providing a considerably smaller cash transfer was just
as effective and more cost-effective than a larger CCT for increasing participation.
 Reducing costs by shortening travel time to school increases school enrollment. In
areas where few schools exist, using existing resources to create new local schools is a
very effective way to increase enrollment and attendance. Two programs that created
local schools in Afghanistan and Pakistan found very large gains in enrollment.
 Reducing child morbidity leads to large gains in school attendance. Two programs in
India and Kenya found that, in areas where anemia or worm infections are prevalent,
addressing these conditions with iron pills and school-based deworming increased
school attendance.

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Conditional Cash Transfer (CCT) Programs

 Conditional Cash Transfer (CCT) programs are antipoverty programs in
many developing countries. The objectives of these programs, including
short-term poverty reduction via cash transfers and long-term poverty
reduction through enhanced investment in human capital.
 The CCT programs usually follow the general design of the Programa de
Educación, Salud y Alimentación (PROGRESA), the Mexican CCT
program begun in 1997.
 The main components of the CCT include regular cash transfers to
women—conditional on scheduled visits to healthcare providers for young
children and on school enrollment and regular school attendance for
school-age children—and social marketing to encourage investment in
nutrition, health, and education.
 Results from eighteen high-quality randomized evaluations of CCTs in
twelve countries all found positive impacts on school participation.
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However…

 It is true that education quality is fairly low in developing

countries:
 High absence rates among teachers and students
 Low achievement:
 For example ASER survey in India finds that about 35% of
children age 7-14 could not read a grade 1 paragraph, and
60% cannot read a grade 2 story in 2005
 Similar results in other countries such as Kenya, Pakistan,
Uganda
 What is going on? What is the problem? Is it so hard to teach
children to read? And if not why are schools not delivering?

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Mean reading performance and per capita GDP

• Countries with higher

national incomes tend
to score higher in
PISA reading
assessment.
• 44% of the variation
in countries’ mean
scores is related to
per capita GDP

Note: Programme for

International Student
Assessment (PISA) is a
triennial survey of 15-
year-old students around
the world.

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Facts based on 18 country surveys

 What is the Literacy Rate among children living on $1 a day?

 What is the Literacy Rate among children living on $6 to $10 a day?
 How many girls aged 7 -12, living on $ 1 day are in School?
 How many boys aged 7 -12, living on $ 1 day are in School?
 What percent of monthly budget spent on education for child living on $
1 day?
 What percent of monthly budget spent on education for child living on
$6 to $10 a day?

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What is the Literacy Rate

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What is the Literacy Rate (Cont’d)

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How Many Girls Aged 7 -12, are in School

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How Many Boys Aged 7 -12, are in

School

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Spending on education

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Spending on education

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The curse of expectations: S-curve

 Parents’ view of education: way for their children to acquire wealth.

 Returns to education very low for the first few years of education. See
an S-shape.
 Invest in one child rather than all of them.
 In reality, there should not be an education-based poverty trap.

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Education-related Millennium Development Goals

 Target 2.A. Ensure that, by 2015,

children everywhere, boys and girls
Achieve universal alike, will be able to complete a full
primary education. course of primary schooling.

 Target 3A: Eliminate gender disparity

in primary and secondary education,
Promote gender preferably by 2005, and in all levels of
equality and education no later than 2015
empower women

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Millennium Development Goals Progress

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Millennium Development Goals Progress

MDG 3: Eliminate gender disparity in primary and secondary education,
preferably by 2005, and in all levels of education no later than 2015

 Many more girls are now in school compared to 15

years ago. The developing regions as a whole
have achieved the target to eliminate gender
disparity in primary, secondary and tertiary
education.
 In Southern Asia, only 74 girls were enrolled in
primary school for every 100 boys in 1990. In
2015, 103 girls enrolled for every 100 boys.
 Women make up 41 per cent of paid workers
outside the agricultural sector, an increase from 35
per cent in 1990.

https://www.un.org/millenniumgoals/2015_MDG_Report/pdf/MDG%202015%20rev%20(J
uly%201).pdf
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MDG 2: Achieve universal primary education

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Sustainable Development Goal 4: Targets

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Sustainable Development Goal 4: Progress

• 147 million children are estimated to have missed more than half of their in-class instruction over
the past two years due to school closures caused by the COVID-19 pandemic. This generation of
children could lose a combined total of $17 trillion in lifetime earnings in present value.
• The proportion of young people completing upper secondary school increased from 54 per cent in
2015 to 58 per cent in 2020, with progress slowing from the preceding five-year period.
• Data from 73 countries, mostly in the low- and middle-income bracket, indicate that between 2013
and 2021, about 7 in 10 children who were 3 and 4 years old are developmentally on track.
• The participation rate in organized pre-school learning rose steadily in the years before the COVID-
19 pandemic, from 69 per cent in 2010 to 75 per cent in 2020 but with considerable variation
between countries.
• Only 20 per cent of countries undertook significant measures to provide additional mental health
and psychosocial support for students after school reopening.
• Most countries have not achieved gender parity in the proportion of children meeting minimum
learning proficiency standards in reading, and in the lower secondary completion rate.
• In 2020, about one quarter of primary schools globally did not have access to basic services such as
electricity, drinking water and basic sanitation facilities. Roughly 50 per cent of primary schools had
access to facilities such as information and communications technology and disability-adapted
infrastructure.
• In 2020, there were about 12 million pre-primary schoolteachers, 33 million primary school teachers
and 38 million secondary school teachers working in classrooms around the world, and 83 per cent
of primary and secondary school teachers were trained.
https://www.un.org/sustainabledevelopment/education/
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Sustainable Development Goal 4: Progress

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Inequality in human development

 Take two babies, both born in 2000— one in a low human development
country, the other in a very high human development country. What do we
know about their prospects for adult life today?
 We know that they are vastly different. The first is very likely to be
enrolled in higher education, along with the majority of 20-year-olds in
more developed countries today. She or he is preparing to live in a highly
globalized and competitive world and has chances do so as a highly skilled
worker.
 In contrast, the child from the low human development country is much
less likely to be alive. Some 17% of children born in low human
development countries in 2000 will have died before age 20, compared
with just 1% of children born in very high human development countries.
And those who survive have an expected lifespan 13 years shorter than
their counterparts in the group of more developed countries.
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Inequality in human development (Cont’d)

 The child born in the low human development country is also
unlikely to still be in education: Only 3% are in higher education.
Both of these young people are just beginning their adult lives, but
circumstances almost entirely beyond their control have already set
them on different and unequal paths in terms of health, education,
employment and income prospects—a divergence that can be
irreversible.
 Some inequalities within countries—whether developing or
developed—are no less extreme than those in the between-country
example above. In the United States average life expectancy at age
40 between the top 1% of the income distribution and the bottom
1% differs by 15 years for men and 10 years for women. Such
disparities are widening.
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Inequality in human development

 Take two babies, both born in 2000— one in a low human development country,
the other in a very high human development country. What do we know about their
prospects for adult life in 2020?
 They are vastly different.

Source: Human Development Report Office calculations.

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Massive inequality in human development across the world,

2017

Global elites, including people in low human development countries, enjoy more
knowledge, more years of healthy life and more access to life-changing technologies
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The world remains deeply unequal in key areas of human development in both
basic and enhanced capabilities
• A difference of 19 years in life
expectancy at birth exists between
low and very high human
development countries, reflecting
gaps in access to health. That
means a quarter of a lifespan lost
just for being born in a poor
country.
• The differences tend to remain
over the lifecycle. The differences
in life expectancy at age 70, is
almost 5 years, representing a
third of the remaining lifespan lost.
• The percentage of adults with a
primary education is 42% in low
human development countries,
compared with 94% in very high
developing countries.
• Only 3% of adults have a tertiary
education in low human
development countries, compared
with 29% in developed countries.

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Reading Assignments
Poor Economics, Data base
http://www.pooreconomics.com/data/country/home

Quality Education: Why it matters, United Nations (2020)

https://www.un.org/sustainabledevelopment/wp-content/uploads/2017/02/4_Why-
It-Matters-2020.pdf

George Psacharopoulos and Harry Patrinos, Returns to investment in education:

a further update, Policy Research Working Paper Series, No 2881, The World
Bank (2002)
https://documents1.worldbank.org/curated/en/512891468739485757/pdf/multi0pa
ge.pdf

The Sustainable Development Goals Report 2022

https://unstats.un.org/sdgs/report/2022/

The Millennium Development Goals Report 2015, United Nations (2015).

https://www.un.org/millenniumgoals/2015_MDG_Report/pdf/MDG%202015%20re
v%20(July%201).pdf

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