Nafziger Economic Development (4th ed)

306 Part Three. Factors of Growth

QUESTIONS TO DISCUSS

1.What factors have contributed to a rising LDC population growth rate since 1950 compared to previous periods of the same length? Why has the LDC population growth rate decelerated in recent decades?

2.Explain the demographic transition theory. At what stages in the theory are LDCs? Why are they in different stages?

3.Compare and contrast the historical population growth patterns of DCs and today’s LDCs. Why are the patterns different?

4.What, if any, is the statistical relationship between birth rate and GNP per capita? Between birth rate and income distribution? What are the reasons for these relationships?

5.Why would population continue to grow for several decades after it reaches a replacement-level fertility?

6.What are some of the costs of a high fertility rate and rapid population growth?

7.How well does Malthusian population theory explain Western population growth? Contemporary LDC population growth?

8.What do you expect to happen to food production per capita (especially in LDCs) in the early decades of the 21st century?

9.Discuss and evaluate views of economic optimists such as Simon who argue that LDC governments do not need a policy to limit population growth.

10.Which policies are more important for reducing fertility: family-planning programs or socioeconomic development?

GUIDE TO READINGS

Population sources include the annual World Population Data Sheet from the Population Reference Source, the U.S. Census Bureau’s World Population Information (see later), the most recent World Bank’s World Development Indicators (CD-ROM or volume), and http://www.unfpa.org/ for the U.N. Population Fund. Birdsall, Kelley, and Sinding (2003) summarize the empirical evidence on the relationship between population and economic growth.

The Population Bulletin frequently provides timely surveys of the LDC population and labor force. The Population and Development Review is probably the best journal to browse for the latest analyses of the relationships between population and economic development. Several chapters in Eicher and Staatz (1998), including those by Antholt, Bonnen, Hayami, Morris and Byerlee, Pingali, Schiff and Valdes, and Timmer, analyze issues pertaining to increasing LDC food productivity.

Merrick (1986:7–15) and Teitelbaum (1975:420–425) discuss the demographic transition. Teitelbaum expounds and criticizes the theory of demographic transition. Kelley (1988:1685–1728) summarizes the literature on the economic effects of population growth. Dasgupta (1995b:1879–1902) surveys the literature on the population problem.

Chamie (1994:131–146) points out the weaknesses of population databases that contribute to faulty analyses and strengths. Pritchett (1994:1–55) presents evidence that actual fertility in LDCs closely coincides with desired fertility. Bongaarts (1993) introduces “The Supply-Demand Framework for the Determinants of Fertility,” including an analysis of the economic historian Richard Easterlin’s theory of household choice in fertility. Nancy Birdsall (1988) examines “Economic Approaches to Population Growth.”

Bloom and Freeman (1986:401–408) summarize the effect of rapid population growth on LDC labor force growth. Johnson (1994:503–531) is an excellent demographic study of China’s population.

If technology is fixed, the flow of natural resources places an absolute limitation on physical production in such industries as steel and aluminium. New discoveries or techniques may allow increased exploitation of natural resources, so that the flow of N increases per time period; by contrast, advances in technology, such as transistors and silicon chips, may reduce the natural resources required per unit of output.

Entrepreneurship is the production resource coordinating labor, capital, natural resources, and technology. Variable E lends itself even less to quantification than the other production factors.

Technology (T), or technical knowledge, connotes the practical arts, ranging from hunting, fishing, and agriculture through manufacturing, communication, medicine, and electronics. T can be a direct production input, as in Equation 9-1, or a variable affecting the relationship between inputs L, K, N, and E and output Y. From the latter perspective, technologies are skills, knowledge, procedures, and activities for transforming inputs into outputs, and an increased T reduces inputs per output (Fransman 1986:23).

The scale of production is a variable that might have been included in Equation 9-1, With a given technology, increasing the inputs – labor, capital, natural resources, and entrepreneurship – by some multiple may not result in the same multiplication in output because of economies or diseconomies of scale.

Because our focus is on income or production per worker (or per person), we could restate Equation 9-1 with the independent variable Y/L or Y/P (with P, population). In this case, the production function would become more complex.

The next two chapters concentrate on the role of the labor force in economic development. Chapter 11 discusses capital and technology, Chapter 12 entrepreneurship, and Chapter 13 natural resources, land, and the environment in economic growth.

Employment Problems in LDCS

You cannot understand LDC unemployment unless you realize how it is different from that in the West. The openly unemployed in LDCs are usually 15–24 years old, educated, and residents of urban areas. The unemployed in LDCs, usually supported by an extended family in a job search, are less likely to be from the poorest one-fifth of the population than in DCs.

Still, the employment problem is of major concern to developing countries. Obviously, providing adequately paid, productive jobs for the very poor is a major way of reducing poverty and inequality in LDCs. High unemployment rates represent a vast underutilization of human resources; the unemployed, who are most often young, urban, educated males, are a potential source of social unrest and political discontent (Nafziger and Auvinen 2003:45–48).1

1 The Economist (2003a:48) reports on popular unrest by “piqueteros, jobless protesters from the metropolitan rust belt,” who blocked the city center, “forced the resignation of President Fernando de la Rua, and ushered in Argentina’s traumatic devaluation and debt default.” The piquetero movement originated “in the arrival of mass unemployment, for the first time in modern Argentina, in the mid-1990s.” Unemployment was 16 percent in May 2003.

310 Part Three. Factors of Growth

In the West, economic development was accompanied by a large internal and international migration from rural areas, where technical progress freed labor, to urban areas, where rapid, industrial expansion increased labor demand. Many economists expected that rapid industrialization would resolve the employment problem in LDCs. Unfortunately, for reasons to be discussed later, this strategy of rapid industrial growth did not have the same results in LDCs as in the West.

Scope of the Chapter

The next two sections of this chapter discuss the types of underutilized labor and the extent of LDC unemployment and underemployment. The subsequent section examines whether LDC industrial expansion can absorb labor force growth. Following that, we look at disguised unemployment in agriculture. We review the Lewis model and examine the Harris–Todaro model of rural–urban migration and consider why Western explanations for unemployment may not apply to LDCs. After that, we explain LDC unemployment by looking at LDC technology, factor-price distortions, and educated labor markets. The final section considers policies to reduce unemployment.

Dimensions of Unemployment and Underemployment

The openly unemployed refer to those in the labor force without work but available and seeking employment. Unemployment as a percentage of the labor force (employed plus unemployed), 1998–2001, was estimated as 3.7 percent in East Asia, South Asia, and the Pacific, 8.2 percent in China, 9.2 percent in Latin America and the Caribbean, 5.9 percent in the Middle East, 14.2 percent in Africa, 11.1 percent in developing Europe and Central Asia, and 6.2 percent in high-income countries (World Bank 2003h:52–53; International Labour Organization 2000:282; Hu 2001:131–134). Yet unemployment rates moved cyclically, peaking during periods of recession and adjustment to chronic balance-of-payments deficits (Horton, Kanbur, and Mazumdar 1991:531–558).

These unemployment rates have substantial margins of error. Statistics from the usual sources, household surveys, whereas generally more reliable than data from unemployment registries or insurance systems, may be deficient because of inadequate infrastructure, errors in the sampling method, and the inexperience and lack of training of interviewers and supervisors (International Labour Office 1995:15–21).

Who are the unemployed in LDCs? Mainly city residents – unemployment in urban areas is twice that of rural areas. Most unemployed are first-time entrants to the labor force: The unemployment rate for youths, 15 to 24, is twice that of people over 24. The unemployed are often women – although there are fewer unemployed females than males, the rate for women is higher (worldwide 6.4 percent unemployed to 6.1 percent for men) (ILO 2004). Finally, the unemployed are fairly well educated. Unemployment correlates with education until after secondary levels, when it begins to fall (Squire 1981:66–69). These patterns are explained later in the chapter.

Most countries distinguish people who work short hours from those who work full time. Students, retired people, and houseworkers who work a few hours usually do not identify themselves with their employment status. Part-time workers are people who voluntarily work short hours.

To the unemployed, we must add the underemployed, those who work less than they would like to work. The visibly underemployed are workers who are compelled to work short hours as an alternative to being out of a job. Invisible underemployment results from an inadequate use of workers’ capacities.

Readers should be skeptical of journalists’ reports of combined unemployment and underemployment rates in excess of 50 percent in a depressed country. One reason to be skeptical is that there are no operational guidelines for measuring underemployment, so that most such rates are meaningless (International Labour Office 1995:12–21).

Underutilized Labor

In addition to the openly unemployed, Edgar O. Edwards (1974:10–11) identifies three forms of labor underutilization or underemployment: the visibly active but underutilized – those who are “marking time,” including:

1.Disguised unemployment. Many people seem occupied on farms or employed in government on a full-time basis even though the services they render may actually require much less than full time. Social pressures on private industry also may result in disguised unemployment. The concept is discussed in more detail later.

2.Hidden unemployment. Those who are engaged in nonemployment activities, especially education and household chores, as a “second choice,” primarily because job opportunities are not (a) available at the levels of education already attained; or (b) open to women, as a result of discrimination. Thus educational institutions and households become “employers of last resort.” Moreover, many students may be among the less able. They cannot compete successfully for jobs, so they go to school.

3.The prematurely retired. This phenomenon is especially apparent in the civil service. In many LDCs, retirement age is falling as longevity increases, primarily as a means of creating job opportunities for younger workers (ibid.).

The remainder of the chapter focuses on the openly unemployed, the underemployed, and the disguised unemployed.

Labor Force Growth, Urbanization, and Industrial Expansion

Growing LDC unemployment is caused by the labor force growing faster than job opportunities. From 1950 to 2001, the LDC labor force increased fivefold – from 500 million in 1950 to 2,517 million (World Bank 1979i:48; World Bank 2003c:44). Today’s developing countries must contend with a much more rapid labor force growth than the industrialized countries had at a similar stage in their growth. The

312Part Three. Factors of Growth

labor force in Western Europe, North America, and Japan grew at 0.8 percent a year in the 19th century compared to 1.6 percent per year in the developing countries in 2001–10 (World Bank 2003h:44). (Labor force growth lags behind population growth. China’s 1980 to 1985 labor force growth of 2.5 percent yearly was a reflection of population growth in the early to mid-1960s, whereas the 2001 to 2010 annual labor force growth of 0.8 percent is linked to the declining 1985 to 2000 population growth that accompanied an expedited family-planning program. The echo of East Asia’s reduced labor force growth at the turn of the 21st century is the falling 1.4-percent yearly population growth that occurred from 1980 to 1985.) It took almost 90 years for the labor force to double in industrialized countries; it now takes about 44 years in the developing countries.

In the United States, the labor force participation for females over age 15 surged from 34 percent in 1950 to 59 percent in 1994. The story, however, is quite different in developing countries, where 80 percent of the world’s women live. There is substantial variation in LDC female participation rates and some of these data are unreliable. Still, population economists think that female participation rates in Asia (except China) and Africa fell from 1950 to 1990. In sub-Saharan Africa, where women comprised 42 percent of the agricultural labor force but only 27 percent of the nonagricultural labor force in 1985, the growth of industrial and services shares in the labor force has diminished female labor force participation. In the Middle East, where traditional culture discourages or prohibits women from leaving the safety and sanctity of their homes to work for others, economic growth may even reduce female labor force participation. According to the World Bank (2003h:45): “More women than men continue to be employed in unpaid family work with the largest shares being in Africa and Asia.”

According to the International Labour Office (2004), Population Reference Bureau, and World Bank (2003h:44) the female share of the world’s labor force (not the same as the uncertain global female labor participation rate) increased from 35 percent in 1950 to 36 percent in 1990 and 40 percent in 2003 (1.1 billion of the world’s 2.8 billion workers). In LDCs, the female share of the labor force increased from 33 percent in 1950 to 34 percent in 1990 (and was projected to 34 percent in 2025) (Bloom and Brender 1993:8–9).

Economic growth is usually accompanied by a decline in the proportion of labor force in agriculture and an increase in the share of labor in the more productive industrial and services sector. Yet in 1998–2001, 57 percent of the labor force in low-income countries was in agriculture and only 20 percent in industry, whereas in middle-income countries, 46 percent was in agriculture and 25 percent in industry (see Table 4-1).

Annual industrial employment expanded at 0.5 percent of the total labor force in developing countries in 1987–92 – higher than the 0.3 percent figure for industrialized Europe at the turn of the 20th century (U.N. Development Program 1990:157, 167; U.N. Development Program 1994:163, 174).

Because of fast labor force growth, industry in today’s developing countries absorbs only 25–35 percent of the increased labor force, compared to about 50 percent in Europe in 1900. Let us illustrate. Assume the labor force is growing at 2.7 percent

a Excludes Japan. b Not available.

Sources: World Bank 1979i:47; Squire 1981:44–45; World Bank 1988i:282–283; World Bank 1994i: 210–211; World Bank 2003h:44).

per year, the rate for the least developed countries of sub-Saharan Africa from 1992 to 2000. Assume agricultural employment remains constant, so that growth is in industry and services. The nonagricultural sector in these African countries in the first decade of the 21st century employs 33 1/3 percent of the labor force. This sector would have to increase its total employment 8.1 percent yearly to absorb a labor force growth of 2.7 percent (that is, 0.33 1/3 × 0.081 = 0.027). Table 9-2 indicates that although two sub-Saharan countries increased manufacturing output by 11 percent or more per year, this growth substantially exceeds manufacturing employment growth in all sub-Saharan countries. Indeed, only two countries listed, South Korea and Taiwan, increased manufacturing employment by more than 8 percent. Both countries had a rapid rate of industrial growth and an emphasis on labor-intensive manufactures, especially in exports. Because nonagricultural employment rarely grows faster than manufacturing employment, achieving the needed employment growth in most LDCs is difficult (Gregory 1980:673–700; World Bank 1979h:46; U.N. Development Program 1994:162–163).

This pessimistic scenario describes much of the sub-Sahara in the 1990s (see Table 9-1), and for Group I: LLDCs Mali, Chad, Benin, Central African Republic, Burundi, Rwanda, Tanzania, Congo-Kinshasa, Somalia, Sudan, Ethiopia, and Eritrea, but not for Group II: Senegal, Nigeria, Cameroon, Coteˆ d’Ivoire, Congo-Brazzaville, Kenya, Zambia, Malawi, Mozambique, and South Africa during

labor unit from agriculture does not decrease output. Disguised unemployment was a term first used during the Great Depression to describe workers in DCs who took inferior jobs as a result of being laid off. Between the 1930s and early 1950s, LDCs had little visible industrial unemployment, so economists surmised that the LDC counterpart of mass unemployment in the West was disguised unemployment: People continued to work on the farm despite depressed conditions. At that time, foreign experts viewed LDC agricultural production as inefficient. Compared to workers in advanced economies, agricultural workers in LDCs seemed to be producing little and appeared to be idle much of the time. Some agricultural economists assumed that peasant agriculture could be organized to employ all farm workers 10 hours a day, 6 days a week, all year long. But disguised unemployment had many mistaken premises. Many observers misunderstood the seasonality of LDC agricultural work and the difference in economic behavior between subsistence and commercial farmers (Chapter 7) (Kao, Anschel, and Eicher 1964:129–144).

The theoretical basis for zero marginal productivity of labor was the concept of limited technical substitutability of factors. Economic theory frequently assumes that you can produce a good with an infinite number of combinations of capital and labor, adjusting continuously by substituting a little more of one factor for a little less of another. However, in practice, there may be only a few productive processes available to a LDC, these being perhaps highly mechanized processes developed in the capital-abundant West. The extreme case is where production requires an unalterable ratio of capital to labor, so that the capital available to the economy cannot fully employ those in the labor force (Eckhaus 1955:539–565). In peasant agriculture, labor less than fully employed is supposedly reflected in disguised unemployment.

However, the assumption of rigid factor proportions in LDC agriculture is not correct. Jacob Viner (1957:19) notes,

I find it impossible to conceive of a farm of any kind on which, other factors of production being held constant . . . it would not be possible, by known methods, to obtain some addition to the crop by using additional labor in more careful selection and planting of the seed, more intensive weeding, cultivating, thinning, and mulching, more painstaking harvesting, gleaning and cleaning of the crop.

Whether or not disguised unemployment exists depends on how an economist defines the term marginal unit. Zero marginal productivity in agriculture is much less plausible if it refers to a marginal hour of work rather than a marginal worker. It is not difficult to imagine a village or clan applying simple and unchanging techniques and capital equipment to a plot of land whose size has remained the same for years. Because financial incentives do not work and frequent negotiations would be costly, tasks are assigned by custom. People of the same age and sex work about the same amount of time and get the same wage. Everyone is fed to a subsistence level as long as enough food is available. If population and the labor force increase, for example, by one-fifth, each worker’s hours decrease by one-fifth. Output does not change. However, even if an extra worker’s output is zero, an extra hour’s output may