KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT

Balkumari, Lalitpur
Nepal

DEVELOPMENT ECONOMICS
Analytical Assignment# 1

WHY GROWTH MATTERS

Submitted By:

Saugat Dangal

Roll No. 18722

BBA Year II Semester I

Group B

Submitted To:

Ms. Anupama S. Pant

Visiting Faculty - Development Economics

Date: August 30, 2019

1. Does the writer portray a bleak but realistic view of poverty of the poorest of nations
in the article? Justify.

The theory of demographic transition can be used to dig down the economic status of a nation
based on birth and death rates.

The writer visits Deenu who had 13 siblings, and Deenu's brother also had 7 kids. This
signifies high birth rate in the community the writer visited. The writer also talks about infant
mortality rate being 20% of the total births in poorest 5 countries, and about 7 million
children dying from simple avoidable diseases. This figures signify high mortality or death
rate. The high birth rate might be for the reason that the people of the community are
involved in traditional agriculture and require more manpower to help in the fields;
superstitious beliefs and lack of education. The high mortality rate maybe a result of poor
health and satiation awareness and facilities, and also ignorance.

According to the theory of demographic transition, high birth and high death rate
correspond to under developed or least developed nations. Such nations have poor economic
status. Let us compare the characteristics of a poverty prevailing / economically poor nation
to description mentioned in the article to have a clear picture:

Low Level of Income: 85% of people in Pakistan live under $2 a day while 31% of
those live under $1 a day

Bad Housing Condition: Mud and dirt house with dung-fired oven and cattle dungs
kept up to dry; over-crowded housing in the rural villages of Pakistan

Low Literacy: Only provision of elementary school, that too recently established
and only for boys in Gulvera

Pre-Dominance of Agriculture: Men working in the fields all day manually for
agriculture

High Gender Disparity: No school for girls; no women's right; oppression of

women; women under shadow in the Pakistani villages

Lacking basic infrastructure: No proper road; village only getting electricity some
months ago; no communication facility; no health and sanitation facility; improper
waste management
 Bad nutrition: Lassi pitcher covered with flies; abnormally short kids in African
nations like Uganda due to nutrition deficiency; people in Malawi staying without
food for even a week; eating sawdust

Child Workers: Children as soldiers for poor nations like Uganda, Somalia;
Children work as prostitute from the age of 12 just for a dinner; 42% of age 10-14
kids working instead of going to school; forced to do slavery to earn a living

High Crime Rate: Bandits and kidnappers targeting travelers in Pakistan; one family
killing another

The description in the article support that realistic some of poverty is showcased in the
article. However, the study of economics demands factual datas and indicator measures
(along with description) to make a concrete conclusion. In this regard, to assess if the poverty
is more realistic and is that of the poorest nations, some indicators if had been mentioned in
the article would have been useful:

Per capita income: It gives the idea of the average income per population of the
nation. Lower the value, the poorer is the nation and vice versa.

Gini Co-efficient: It gives the idea about the level of income inequality in the nation.
Higher the value, the more of nation's income is concentrated in the hands of rich,
and the poor have very less.

Human Development Index: HDI measures a nation's status in social and economic
dimensions of human development. Higher the value, better it is for the nation.

Human Poverty Index: HPI indicates the summary poverty figure for a given
population. Higher the HPI value, the higher the level of poverty. HPI was replaced
by Multidimensional Poverty Index (MPI) which uses a winder range of
parameters to compute the poverty figure.

These information if given and viewed in compliment with one another would give us a more
clear idea of whether the article demonstrated realistic view of poverty of the poorest nations.
Example: The information about a nation with low per capita income, high gini co-efficient,
low HDI and high MPI would suggest that the national income of the nation is low, among
which the top rich people have the highest share in income while the bottom poor have
almost nothing and that the people are low in parameters of health, education etc measured
by HDI and MPI. This nation would thus be concluded to be a poor poverty abundant nation.
2. How can the fact the 42% of the children aged 10 to 14 are workers in the poorest
countries, affect the development process of the nation. Discuss?

The transmission of the effect of child labor to an economy's development can be viewed
through numerous perspectives.

At micro level, child labor increase the income of the family in the short run. The cumulative
effect of increase in income of thousands (or millions) of families in an economy will lead to
increase in the national income (growth) in the short run. However, increased income or
growth does not always correspond to economic development. Increased income leading to
development is subject to the externalities produced by growth, the working condition of the
workers, whether the produced goods/services reflect the need of the society and so on.

As an example, let's say a child worker to earn some bucks has to go through dangerous task
of mining. This will certainly generate some income, but the hazardous work the child does
puts his life at risks and ultimately degrades his quality of life, which is not the sign of
development. Also, child labour has a negative impact on health by default, and health is a
major determinant of development as per the HDI indicator.

Adding to this, increased household income though child workers encourage the poor
households to give birth to more children. They regard children as the source of income, and
hence the fertility/birth rate increases, leading to rapid population growth at the macro level.
We know that a measure of standard of living is income per capita. Since child works are not
paid much (or do not have much greater productivity), the income they generate in most
cases, is less proportional to the increase in population the concept of "more child more
income" leads to. As a result the standard of living declines, which is a sign of negative
development.

In the long run, the opportunity cost for the working children is eduction & knowledge
acquired from speeding time with the family or at school. This will lead to the children not
being able to achieve the potential skills and productivity as they grow up, and hence will
reduce their future earning capacity. An economy not having productive human resource will
face tremendous difficulty in development.

Working children always lack education, and education also being a major factor of the HDI
indicator helps us conclude that child labour has negative impact on nation's development.
Moreover, parents who lack education is a major cause behind high fertility rate and
population growth - which also has a bad effect on development as already stated before.
In another perspective, child workers are cheap workforce for the firms. This discourages the
firm to invest into new machines and technology and instead exploit the cheap child workers
to save costs. Discouraged investment will reduce the national income:

Figure: Effect on national income due to change in investment

The initial national income is Y1 when the level of investment is I1 (leading to AE1), but
when investment in new technology and machines decreases (due to child labour), the
investment decreased to I2 corresponding to AE2 and hence national income decreases to Y2
from Y1, which will slow down the development process. Production will decrease, people
will lose jobs but the decrease in AE/AD will however help to solve demand-pull inflation if
any.
Children workers are unskilled labor. The
increase in children workers increase the
supply of unskilled labor and hence
driving the wages of unskilled labors
down. As supply of unskilled labor
increases from S1 to S2, the wage rate
falls from W1 to W2. Unskilled labors are
already the ones with low income, and the
effect of use children workers drive their
income even lower. This leads to the
increase in income inequality in the
nation. High income inequality is a bad
Figure:
 macroeconomic indicator and hinders the
Demand & Supply of Unskilled Labor
nation's development adversely. On the
other side, this lowers down the cost of labor to the firms and makes them more price
competitive in international arena - promoting exports and increasing national income.
3. What surprised you the most when you first read this article? Why?

I was surprised by the number of deaths in children that could have been prevented through
small measures. About 7 million children die from diarrhea, polio, measles, pneumonia etc
combined while upto 400 million suffering fatal with intestinal parasites. Also about 10% of
the world population suffer from goiter due to Vitamin A deficiency.

All of those diseases could be prevented or cured through inexpensive medication, but still
the problem persists. The major reason behind this could be information asymmetry. The
people from the poor community are not aware about the availability and benefits of such
medications, due to which those medications, which are merit goods might have been
underproduced in such communities. It might even be that though it seems inexpensive to us,
the medications still might be expensive for the poor. Lack of education is also a cause of
such ignorance towards disease, and medication. Education can in a way solve the
information asymmetry problem, create awareness about diseases and its cure. In the long
run, education can be the root solution for this problem. However, education too might be
underproduced, or be expensive for them.
D1 is the demand for medication or
eduction in the poor community leading
to Q1 quantity of medication/eduction
being produced for the community. But
the optimum level of medication/
eduction required is Q2, highlighting
that there is underproduction. The
welfare loss (deadweight loss) is the
area DWL, which could be eliminated if
the people were more aware about the
good sides of medication/education and
would have demanded more of those
leading the demand to shift from D1 to
D2.
Figure: Underproduction of Merit Goods

In developing countries, especially in poor communities with such health problems both
health service and education should be the priority of the government. Heath service and
eduction should be taken as a public good and should be provided by the state for no charge,
because there is no way that the free market would produce such essential goods/service for
the poor population. This will however increase burden to the government both cost and
administration wise.
4. On what points do you disagree with the writer in the article? Why?

The writer states that on the study of the relationship between growth and poverty, his
colleagues defined poverty as an absolute concept i.e. poor are the ones who had incomes
below $1 a day. But, I believe that the study should have been done with poverty being as a
relative concept.

Absolute concept of poverty could have been applicable to study the effect of growth on
poverty if all the 65 developing nations studied were in the same level of development,
economic parameters and indicators and standard of living. For example, if $1 could buy the
same amount of goods in all the countries.

Use of relative concept of poverty would have been better as it would measure the extent of
the standard of living of the households relative to the households with an acceptable well-off
standard of living.

For example:
Country A: Bread costs $2 a loaf
Country B: Bread costs $0.5 a loaf

Under absolute approach, in Country A households who can't even afford a loaf of bread
would not be considered poor, but in Country B the same household would be considered
poor. Under relative approach, the household in both the countries with be considered at the
same level. This approach would give a more accurate result on the relationship between
growth and poverty.

Another point out here is that, the article has stated growth to be more of a lifesaver to the
poor than redistribution. The study result in the article says that there is no change in the
income inequality as there is growth in the economy. But as far as what I have being seeing
and hearing in the news and world economy, especially in developing countries like Nepal,
growth is being stimulated by the rich. People who already are rich and already have enough
accumulated productive resources are using those resources to get more richer and
accumulate more resources by exploiting the poor (the labors). In this case, the proportion of
income increased for poor through economic growth is significantly less than the proportion
of income increased for the rich; i.e. the income for both poor and rich does not increase in
the same ratio. There seems to be no way to come out of poverty without redistributing the
income from the rich to the poor: resources taken from the rich and given to the poor.
However, such decisions to redistribute income (especially through tax) is unpopular, and the
rich, who have much political influence/reach always direct the policies in their favor.
References:

Galli, R. (2001, April 25). The Economic Impact of Child Labour. Retrieved from
International Labour Organization website: https://www.ilo.org/inst/publication/discussion-
papers/WCMS_193680/lang--en/index.htm

Pal, D. 7 Main Characteristics of Less Developed Countries (LDCs). Retrieved on from

Economics Discussion website: http://www.economicsdiscussion.net/economic-growth/7-
main-characteristics-of-less-developed-countries-ldcs/14142

Honor Code:

On my honor as a student, I pledge that I have neither given nor received aid on this
assignment.

Saugat Dangal