2. THEORETICAL PERSPECTIVES
2.4 Birth Rate, Income Inequality, and Economic Development
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Latin America to slow its development is that it did not industrialize due to its type of education.
He believes education should be technical for it to be innovative and have hope to catch up with the developed countries. Furthermore, he states that from East Asia we could learn that increasing the number of school years and providing adequate job training of the labor force is vital.
Therefore, he suggests an education strategy with five components: First, universal access to public education at the basic level. Second, some adequate curricula for secondary education should be implemented. Third, inciting teaching and quality research at universities. Fourth, teaching and research that interacts with other segments of the national system of innovation. Finally, fifth, overall improvement of every level of education. These five components should go hand in hand with retraining programs for workers. Technical education should be something to consider in Latin America as education in every aspect is something that will dictate if a country will thrive or no.
2.4 Birth Rate, Income Inequality, and Economic Development
The researcher considers that the high indexes of birth rate in the LAC are one of the main reasons that impede its economic development. Some academic work testing the relation of these variables have been done, but it is important to point out that the majority of the literature review found, examines fertility and not birth rate as a variable. I chose to test birth rate instead of fertility because birth rate provides us with an accurate number of live children born at a determined time, not restricted to any specific age, group, or ethnicity. In one hand, general fertility rate portrays the total number of live births of a determined age group, usually in the reproductive stage from population age 15 to 44. On the other hand, total fertility rate provides us with a hypothetical number of birth rates woman between age 10 to 49 could have in 5-year age groups. That is if they do follow a trend.
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Therefore, I believe the independent variable “birth rate” to be more accurate and specific for this research. Yet, a study done explicitly testing for a sample that is exclusively from the LAC is an essential need for the region. Therefore, this will be the primary contribution of this study. A particular research, tests both birth rate and economic development to see whether economic development used as an independent variable, will prevent excessive population growth using birth rate as the dependent variable (Weintraub, 1962). Although this study is of great importance, it is necessary to state that this research differentiates from Weintraub’s in its research design. In this research, I will be using economic development as the dependent variable and birth rate as the independent variable.
Weintraub wisely argues that “If our plans to permanently raise living standards in underdeveloped nations above the subsistence level are to succeed, preventive checks to family reproductivity are necessary.” This argument reflects light on the big problem family reproductivity pose on our dependent variable. Weintraub used 30 nations as a sample, of which only six are originally from the LAC region. He uses data retrieved from the UN in the 1950’s and provides three basic measures of economic development: per capita income, the ratio of population in farming, and infant mortality. Weintraub’s results go on and confirm the Malthus, Thomas R. (1798)
“Malthusian hypothesis that income increments generate birth rate increases as well as the more widely held hypotheses that birth rates decline with urbanization and decreases in infant mortality.” His final contribution in the article infatuates the importance in policies, stating that
“Policies must be devised to assure that continuing high birth rates do not offset or impede efforts to develop underdeveloped economies.”
Fifty decades after Weintraub’s study, LAC seems unable to provide effective policies. As per the year, this study was made, I aim to contribute to more modern results with a sample that extends
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from 1960 to the year 2015. Although the already confirmed Malthusian hypothesis that states that
“income increments generate birth rate increases,” I want to note that education and high-income inequality are important variables, which were completely relegated from this study. Hence, closer attention should be paid to the segment of the population that cannot access education and to the significant income differences between the population. I believe my research for the LAC region can be highly beneficial to the academic community and the LAC governments.
Ahituv, A. (2001), created an empirical model to test between fertility and economic development.
This important study shows that when population growth decreases by one percent, gross domestic product per capita grows by more than three percent. The research explains that families with low levels of human capital decide to have more children, therefore, income per capita is observed to grow faster in developed countries compared to developing countries, in contrast to the Malthusian hypothesis.
Brander, James A., and Dowrick, Steve (1994), re-examinded the effects between fertility and popoulation growth on economic growth. Similar results to Ahituv, Avner (2001) are observed.
Brander, James A., and Dowrick, Steve (1994), find that a high number of birth rates reduce economic growth through promoting investment and also could be through capital dilution, on the other hand, a birth rate decline can produce “strong mediun-term positive imapct” on per capita income growth through the means of labor supply, therefore favoring a “Neo-Malthusian” view yet not a classical Malthusian one. To conclude in a clear statement Brander, James A., and Dowrick, Steve. (1994) when birth rate declines we can expect income growth to increase.
Doing a more in-depth research on the income subject, I find income inequality explicitly affecting economic development. Persson and Tabellini (1994), notice that in eight developed democracies, inequality has a negative and significant relationship with growth. To test this, the authors used a
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general equilibrium model which showed that the greater income inequality is, the lower is equilibrium growth. Although this study was performed on a sample of only developed countries, we should expect the same results in developing countries. The previous argument based on the Kuznets curve, which argues that income inequality first increases and then decreases development. The reason for the severe impact income inequality possess over growth is because income inequality leads to policies that do not protect property rights. Therefore, not allowing a complete private appropriation of returns from investment and “growth-promoting activities” that would redistribute income.
Supporting Persson and Tabellini’s (1994) work, we find Alesina and Rodrik (1994). Alesina and Rodrik (1994), see a negative and significant relationship between income and land ownership inequality and economic development. The authors use a model of endogenous growth, which results show that the higher the rates of taxation are, the lower the economic growth will be.
Alesina and Rodrik state that inequality conduces to the implementation of growth-retarding policies because problems with distribution that are harmful to growth tend to take place when there is resource distribution inequality. Therefore, society would make popular demands which would be difficult for the governments to ignore without repercussions. Hence, to conclude land distribution and income inequality have a negative effect on growth.
Two years later Perotti (1996), further investigates the relationship between income distribution, democratic institutions, and economic growth. Perotti evaluates specific channels of operation of income distribution: endogenous fiscal policy, socio-political instability, borrowing constraints, and endogenous fertility. His sample contains 67 countries of which 17 are LAC countries. The author finds strong support in his data when linking income distribution to socio-political instability and the education/fertility decision. When socio-political instability decreases,
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investment and growth increase. Logically, equality increases when socio-political instability decreases.
Regarding fertility, Perotti takes into consideration the reviewed Malthusian hypothesis that more income implies a higher demand for children. Yet, he argues against this hypothesis with the
“substitution effect” which explains that as the cost of raising children increases, demand for procreation decreases. This effect will remain constant at high levels of human capital because the cost of raising children is a small part of the total costs. Hence, high levels of human capital, lead to less fertility and higher investment in human capital. This result states that “Growth increases as an investment in human capital increases and fertility decreases.” Perotti’s results are in line with Persson and Tabellini(1994) and Alesina and Rodrik (1994) concluding that equality has a positive significant effect on growth.
On the other hand, there are challengers to the arguments detailed before, that explained that income inequality has a negative effect on economic growth. Between them we can find Forbes (2000), who argues that by using a panel technique she can control for “time-invariant country-specific effects, therefore eliminating a potential source of omitted-variable bias.” The author uses 45 countries in her sample, of which only nine are from the LAC region. Forbes, claims that in short and medium term, an increase in inequality has a boost in economic growth. Forbes uses Latin America’s high inequality levels as an example, showing that despite them it grew at a fraction of the average East Asian rate. In Forbes study, it is important to note that when country effects are included in her pooled model, the relationship between inequality and growth is positive and significant. Also, despite the author’s robust results, it should not be forgotten that her findings do not apply on the long-run term because of lack of data availability. Most importantly, Forbes does not investigate the interconnectivity between inequality and economic development.
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Banerjee and Duflo (2013), follow Forbes line of argument and by using non-parametric methods show that changes in inequality are associated with reduced growth in the subsequent period. The authors agree that this can be caused by a variety of non-observed or unobservable factors related to growth. Banerjee and Duflo, also raise attention on the consistent use of linear relationships on the research of income inequality and growth. They argue that results coming from these linear tests should be doubted. To conclude, Banerjee and Duflo state that their data has “little to say”
about the answer to whether inequality is bad for growth. Therefore, the studies done in this thesis could help enrich with arguments on the inequality and growth debate.
Lastly, Halter, Oechslin, and Zweimüller (2013), by working with a theoretical model intend to show how changes in inequality affect economic growth over time. The author’s consistent with Forbes(2000), find that higher inequality boosts economic performance in the short term. On the other hand, the authors find that higher inequality reduces GDP per capita growth in the long-run.
Some of the answers to this argued by Halter, Oechslin, and Zweimüller are that it might be that the growth-reducing effects on economy involve factors that take a long time to settle in. Such as institutional change, socio-political movement rising, and education. Therefore, in a non-shortsighted manner, one should state that inequality is bad for economic development.
Indeed, some factors influence economic development, but there exists a logical nexus between the levels of income inequality and high indexes of birth rates affecting economic development.
This because income inequality by itself will determine every aspect of human life, including quality of nutrition, quality of education, quality of medical services and the type information we can access.
A domino effect could be hoped to be observed when tackling income inequality and birth rates.
Other essential variables like education could be impacted as a result of the interaction of income
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inequality and birth rates. If we have a reduction of birth rate indexes, there could exist a possibility of governments having more money, which could be used to improve areas that have special needs in a country, like increasing the quality of education. If this optimistic scenario was to happen, then this better-educated people could help in the reduction of income inequality due to the better opportunities they will have in becoming part of a more qualified labor force or a more significant opportunity of saving capital and becoming entrepreneurs. Also, more women in the labor force in both urban and rural areas, can help decrease both birth rates and income inequality.
In the same line of thought of what I discussed previously, the rise in income and reduction of the income gap between the urban and rural population, should, therefore, increase the quality of life of the population. These people might delay parenthood in order to work, study, or simply to invest time in themselves. The longer the population delays parenthood, the more time they have to invest in increasing their capital, this giving them the opportunity of being more prepared for the moment when they decide to start families. These families will, therefore, have better access to education, health, and every other human need leading to economic development. Hence, we could hope that in a place where birth rate indexes and income inequality levels are low, economic development should increase.
Therefore, having reviewed the discussion of the different studies regarding birth rate and economic development, income inequality has to be taken into consideration to have a broader perspective of how economic development is affected by the discussed variables. A testable hypothesis derived from this discussion is that a country that has a high birth rate should have an even lower level of economic development if the country has a high level of income inequality.
Thus, the interaction of these two variables affects the level of economic development.
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3. THE COMBINED EFFECTS OF BIRTH RATE AND INCOME INEQUALITY