Small families are good for economic development.

According to the Economist magazine:

In the 1980s, population was regarded as relatively unimportant to economic performance. American delegates told a UN conference in 1984 that “population growth is, in and of itself, neither good nor bad; it is a neutral phenomenon.”

This was an active debate in the 1970s and 1980s. On one side were people like Julian Simon who believed that more population is always better and on the other side were people like Paul R. Ehrlich who were worried that overpopulation would cause a collapse in living standards which could lead to communist revolutions. In hindsight, both extremes were wrong and the truth is somewhere in the middle.

Before the 1970s, the Chinese government had believed in the conventional wisdom of emperors for millennia; that higher population growth would strengthen the nation. Mao Zedong oulawed birth control and encouraged big families.  That ideology developed among pre-industrial elites because they profited from higher population density as more unskilled labor helped raise land rents (and lower wages) and fill their armies with soldiers. 

Although that made sense in a Malthusian economy, industrialization requires investment in education and capital so China soon reversed course and began encouraging birth control.  In 1979 China took the dramatic step of limiting parents to only one child and they enforced the one-child policy with financial penalties, forced abortions and sterilizations. The Chinese leadership came to believe that smaller families would help China grow economically and China soon thereafter achieved over several decades of the fastest economic growth ever recorded. China’s dramatic fall in fertility rates contributed to China’s success because:

  1. Population growth reduces the amount of physical and natural capital per person.  This is a core part of the old Malthusian equilibrium which humanity has escaped by increasing the economic growth rate above the population growth rate.  In 1970, China’s population growth rate was nearly 3%/year and so China had to grow their economy at 3%/year just to break even in per-capita income.  That isn’t easy to do.  The US economy has averaged less than 3% economic growth since 1980 and it is relatively rare in all of recorded history for nations to have achieved sustained economic growth above 3% for more than a few decades. Although it is hard to to increase economic growth by 2 percentage points, modern birth control has made it very easy to reduce population growth by 2 percentage points and it is impossible to develop without increasing the economic growth rate above the population growth rate. 
  2. Smaller families produce children with more human capital.  They tend to be healthier, and better-educated than children in larger families.  This is because family resources are more concentrated on fewer offspring and so each child gets a larger investment.  In poor countries, the children in larger families are shorter than children in smaller families because the food doesn’t have to feed as many mouths smaller families.  There is a similar rule of thumb in biology known as r/K selection theory.  Some animals like rats and sea turtles produce high quantities of offspring and invest very little in each one resulting in very low rates of survival.  Other animals like whales, arctic terns and naked mole rats produce very few offspring and invest a large amount in the quality of each child so that most survive.  Humans face similar tradeoffs.  Although survival is no longer a problem for large families, they typically don’t invest as much in education per child when the family’s attention and dollars have to be spread out between more children. 
  3. Parental investment is only one part of what it takes to raise a child.  Some researchers go so far as to argue that parental involvement has almost no effect on child outcomes. This seems extreme to parents like me because I hate to think that my efforts are a waste, but it isn’t controversial to argue that peers, teachers, neighbors, and extended family have a bigger impact on teens than their parents.  There is a lot of truth in the cliche, ‘it takes a village to raise a child.’  One way the effect of family size on society is measured is the dependency ratio. It is the ratio of dependents (children and elderly) over the working aged population.  Countries with higher dependency ratios tend to develop slower than countries with lower dependency ratios.  Most countries grow faster during their “demographic dividend” when their dependency ratio is low. When dependency is low, national savings and investment are high, education is higher quality, and a higher percentage of the population is manufacturing goods instead of serving dependents and making goods is the activity that has the highest potential for productivity growth. 
  4. Imagine being able to increase labor productivity by 50%!  That can happen during the demographic dividend simply because women (and men) reduce their childcare burden and enter the labor market.  As women can do work that boosts GDP instead of boosting capita, development ensues.  And there is a transition from working as teachers and midwives to working in higher-growth employment like manufacturing. 

In 1970, China’s median age was 19.5years, so kids almost outnumbered adults. That makes it hard to invest a lot in each kid. 

pop-grow-median-age

Gapminder

All these reasons boil down to the simple idea that many children dilute resources and lead to lower per-capita investment in building wealth. 

Diluting societal investment is probably more important than diluting parental investment in modern societies because all modern societies greatly subsidize child rearing.  So if a few American families have large numbers of children, there isn’t much penalty for each child because most of the cost of educating and providing healthcare for large families is paid by American society, not parents.

For example, private health insurance does not charge more for insuring a family with 13 children than a family with 1 child even though the actual cost of providing healthcare is 13 times larger.  The rest of us subsidize the difference through higher health insurance costs. 

Education is also mostly paid for by the public.  Most American kids go to public school and the average cost per student of a year of public high school in America was almost $11,000 in 2013.  It would be impossible for most Americans to afford to educate even one child through 12 years of public schooling and have savings left to pay for college.  College in America is also subsidized by government, but families also share much of the burden, so one of the main ways the government helps big families is by directing private schools to give big families much more financial aid through the FAFSA system.

A society with a high dependency ratio like Niger where the average family size is 7.6 is going to have less ability to invest in anything because after the average household has taken care of the bare necessities for 7.6 kids, there are few resources left that anyone can contribute to anything else. When the average number of kids is 7.6, then every family with 1 kid is balanced out by the equivalent of another family with about 14 kids.

But it is also possible to have fertility rates that are so low that they hurt long-run economic development. For example, if the fertility rate were zero, the world would come to an end after the current generation dies off.  The current generations would die off relatively young without retirement without any young people to care for us in our old age.  Zero fertility would be an economic and humanitarian disaster on a scale equivalent to a slow-moving global nuclear holocaust.

So what is the optimal fertility rate for economic development?  I’ve never seen anyone try to estimate it, but many scholars seem to idealize the replacement fertility rate as an approximate policy goal.  The Economist Magazine explains.

The move to replacement-level fertility is one of the most dramatic social changes in history. It manifested itself in the violent demonstrations by students against their clerical rulers in Iran this year [2009]. …It shows up in rural Malaysia in richer, emptier villages surrounded by mechanised farms. And everywhere, it is changing traditional family life by enabling women to work and children to be educated. At a time when Malthusian alarms are ringing because of environmental pressures, falling fertility may even provide a measure of reassurance about global population trends.

The fertility rate is …not the same as the birth rate, which is the number of children born in a year as a share of the total population. Rather, it represents the number of children an average woman is likely to have during her childbearing years, conventionally taken to be 15-49.

If there were no early deaths, the replacement rate would be 2.0 (actually, fractionally higher because fewer girls are born than boys). Two parents are replaced by two children. But a daughter may die before her childbearing years, so the figure has to allow for early mortality. Since child mortality is higher in poor countries, the replacement fertility rate is higher there, too. In rich countries it is about 2.1. In poor ones it can go over 3.0. …By about 2020, the global fertility rate will dip below the global replacement rate for the first time.

Modern Malthusians tend to discount the significance of falling fertility. They believe there are too many people in the world, so for them, it is the absolute number that matters. And that number is still rising… Populations can rise while fertility declines because of inertia, which matters a lot in demography. If, because of high fertility in earlier generations, there is a bulge of women of childbearing years, more children will be born, though each mother is having fewer children. There will be more, smaller families. Assuming fertility falls at current rates, says the UN, the world’s population will rise from 6.8 billion to 9.2 billion in 2050, at which point it [might] stabilise.

Behind this is a staggering fertility decline. …Between 1950 and 2000 the average fertility rate in developing countries fell by half from six to three—three fewer children in each family in just 50 years. …Things are moving even faster today. …The rate in Bangladesh fell by half from six to three in only 20 years (1980 to 2000). The same decline took place in Mauritius in just ten (1963-73). Most sensational of all is the story from Iran.

When the clerical regime took over in 1979, the mullahs, apparently believing their flock should go forth and multiply, abolished the country’s family-planning system. Fertility rose, reaching seven in 1984. Yet by the 2006 census the average fertility rate had fallen to a mere 1.9, and just 1.5 in Tehran. From fertility that is almost as high as one can get to below replacement level in 22 years: social change can hardly happen faster.

As of 2017, half of the world’s population had a fertility rate at or below the magic replacement rate of about 2.1 children per woman and global population growth has been slowing ever since it peaked in 1962.  National leaders can have a big impact by either restricting birth control or encouraging it as well as many other policies.  When the government of Bangladesh convinced their imams (religious leaders) to support contraceptive use, fertility rates plummeted.

Indonesia is another Muslim nation that promoted family planning enthusiastically.  They minted it right on their 5-Rupia coins from 1974 to 1996.  It has a picture of what they called the “happy family” which only had two kids and the slogan translates as, “FAMILY PLANNING, TOWARDS PEOPLE’S WELFARE”.

happyfamily

When my wife and I bicycled across part of Indonesia in the early 1990s, this family planning coin was in circulation as part of the government’s successful family planning program. The Indonesian government had decided that reducing population growth would help Indonesia prosper and as a result, they  changed the culture so much that strangers regularly asked us about birth control in everyday conversation.  The Indonesians we met were amazingly warm and friendly people and they loved to talk about family so a typical opening question was to inquire whether we had any children.  When we said no, many people followed up to ask if we were using birth control!  It often came up in polite conversation within minutes of meeting someone for the first time.  This isn’t a stereotypical conversation starter for conservative rural Muslims, but that was what we often encountered. 

Below are some wonkish excerpts from academic economists about research on demography and development in the 2001 book Population Matters: Demographic Change, Economic Growth, and Poverty in the Developing World by Nancy Birdsall, Allen C. Kelley, and Steven Sinding.

No social phenomenon has attracted more attention in the last half‐century than the ‘population explosion’—that surge of population numbers rising almost threefold from 2.5 billion in 1950 to over 6 billion at the turn of the millennium, and continuing at a diminishing pace to level out at as much as 11 billion in the middle of the twenty‐second century. Given the exceptional complexity and diversity of the various impacts of rapid demographic change and rising population numbers, assessments of the consequences of the population explosion have varied widely, ranging all the way from the view that more population growth leads to more prosperity to forecasts that rapid population growth would precipitate wide‐ranging catastrophes (famines, ecological collapses, wars, natural resource depletion, and the like).1

 the findings in this volume strike some new themes…

First, in contrast to assessments over the last several decades, rapid population growth is found to have exercised a quantitatively important negative impact on the pace of aggregate economic growth in developing countries. The finding, as discussed below, bodes well for the future, as population growth rates decline, even as it helps account for low economic growth in the past.

Secondly, rapid fertility decline is found to make a quantitatively relevant contribution to reducing the incidence and severity of poverty. Though an association between poverty and high fertility has long been noted, research in this area has rarely gone beyond association to causality, and has advanced slowly given the challenges of empirical assessment. The new findings suggest more strongly than before that past high fertility in poor countries has been a partial cause of the persistence of poverty—both for poor families that are large, and via the kinds of economy‐wide effects that Malthus theorized about, for poor families even if they are small. As with the finding that rapid population growth affects economic growth, this bodes well for the future, since fertility is declining almost everywhere in the developing world.

Dependency Ratios:

…John Bongaarts’s analysis of dependency burdens in the developing world (Ch. 3) is… a critical starting‐point for much of what follows in this volume. Bongaarts emphasizes that declining fertility, now under way to one degree or another in all regions of the world, will result in substantially changed age structures and distribution, with gradually reduced proportions of the population under age 15 and enlarged proportions over age 65. As countries move through the demographic transition of falling mortality followed eventually by falling fertility, they face first a period of increasing child‐dependency ratios, then of decreasing child‐dependency ratios as a larger proportion of the population moves through the working ages, and eventually of increasing old‐age‐dependency ratios.

The effect of fertility decline in the second intermediate stage (through which virtually all developing countries have passed and will be passing in the latter twentieth and early twenty‐first centuries) is a one‐time ‘demographic bonus’ or ‘window of opportunity’—a period of as many as 50 years during which an initially high ratio of the working age to the dependent population gradually declines. After a country has passed through this period, it returns to a more or less stable child‐dependency ratio (and a higher aged‐dependency ratio), at new lower levels of both fertility and mortality.

Changes in the dependency ratio are driven mostly by fertility decline and less by changes in mortality… So the duration and pace of fertility decline, and the extent to which mortality decline is disproportionately concentrated on infants and children, affect both the…duration and impact of the so‐called window of opportunity [also called the demographic dividend]. The faster the decline, the larger the potential benefits of a relatively high ratio of working‐age to dependent ages, but the shorter the period the window will remain open. The period of the window of opportunity is characterized by (1) more workers producing more total output, if they are productively employed; (2) greater accumulation of wealth, if savings occur and are productively invested; and (3) a larger supply of human capital, if appropriate investments are made in its formation.

Demography & Economic Growth

Declining fertility and mortality, and to a much smaller extent, larger populations and higher densities, have all spurred economic growth. The only trend that has apparently slowed growth for the average country is a decline in the growth rate of the working age population. Of course many of the poorest developing countries that are still in a relatively early stage of fertility decline can look forward to increases in the size of the working‐age population for many years to come.

Why should a relatively larger working‐age population contribute to positive economic growth? Economists have long theorized that savings contribute to higher levels of per capita income (by financing higher investment and thus higher output per person), and …that higher savings and investment may contribute to sustained rates of income growth as well…

Williamson …and others …see changes in age structure in East Asia in the last three decades as an important contributor to that region’s large upward swings in savings and investment over the same period. The resulting high savings and investment levels were one of many factors that set the stage for that region’s long and sustained period of historically unprecedented economic growth. Williamson concludes from cross‐country statistical analysis that demographic changes, especially the increase in the working‐age population and the increase in savings induced by changes in (p.11) dependency, can be associated with as much as one‐third of the total average annual per capita [economic] growth rate of about 6 percent in East Asia in that period.

…though fertility decline is the primary impetus to the change in age composition that generates the demographic bonus, the statistical results point to mortality decline as an important factor in raising economic growth rates, despite the obvious initial and partial result of higher population growth.7 Mortality decline has long been assumed by demographers to catalyze, with a lag, a subsequent fertility decline—this is at the heart of the theory of the demographic transition. In addition, the economic models suggest that mortality decline more directly improves growth prospects—possibly by increasing the private incentives to invest in human capital, or because it is associated with morbidity declines that raise productivity.

…At the same time, the likelihood of reverse causality out there in the world raises another issue. Reverse causality (…meaning that fertility and mortality decline may be outcomes …instead of causes of economic growth) creates a methodological problem. …Reverse causality, if present, implies that even an initially small impact of fertility decline in raising growth prospects (by reducing youth dependency for example) could, over time, induce a mutually reinforcing process with larger cumulative effects, as the resulting economic growth contributes to further fertility decline, leading to more economic growth and so on.

…Another point: …the …powerful impact of female labor force participation on economic growth, and the link between declining fertility and increased female labor force participation. Declining fertility and rising female labor force participation may both be the outcome of increases in the opportunity cost of women’s time in child‐rearing, in turn due to rising levels of education and/or to increasing demand for labor in the formal sector. Rising female labor force participation means that the growth in total work participation increases even faster than the growth in the size of working‐age population. The ‘demographic bonus’ thus may be realized not only through shifts in the age structure but through increases in the participation of women in the formal labor force that fertility decline encourages or at least permits…

Malthus noted …that high fertility would likely worsen income distribution and increase poverty by increasing the price of food and reducing the price of labor…

Robert Eastwood and Michael Lipton (Ch. 9) …estimate that had the average country in this group of 45 countries reduced its birth rate by 5 per 1,000 throughout the 1980s (as in fact many countries did) the average country poverty incidence of 18.9 percent in the mid‐1980s would have been reduced to 12.6 percent between 1990 and 1995.12 The statistical work suggests that about half the estimated decline in poverty over the period in the countries studied can be attributed to increases in economic growth and half to changes in the distribution of consumption that helped the poor.

Eastwood and Lipton also show that the poorer the country and the higher its initial level of fertility, the greater the effect of declining fertility on a decline in absolute poverty…

There is little debate that poverty and large family size go hand in hand. Eastwood and Lipton’s study and Thomas Merrick’s (Ch. 8) refer to dozens of empirical analyses confirming that in today’s developing countries larger households have higher poverty incidence. Moreover, among poor households, those that have more children invest less in children’s education and health, and systematically see worse health outcomes associated with pregnancy for mothers.14 …

Population, Agriculture, and Natural Resource Use

…though rapid population increase may encourage technological innovation that leads to increased output, such population increase can also have a negative impact, especially in the absence of an adequate policy and institutional environment—that is, an environment that creates incentives for individuals and societies to manage natural resources in a sustainable manner. On the one hand, the potential negative effect of population growth has been and can be mediated by policy and practices. This is particularly the case with respect to output and land productivity.22 On the other hand, …without collective action, population density can make things worse in terms of agricultural output, land productivity, and most important in terms of human welfare.
…Collective action includes in this instance the capacity of societies to develop the necessary policies, for example protection of property rights and appropriate pricing of water, and the necessary institutions, including rules for sustainable use of common property resources.
…In summary, the chapters in this volume, …strengthen the proposition that the demographic transition and the reductions in rates of population growth throughout most of the developing world in the last few decades have contributed and are contributing to improvement in the lives of that world’s poor.

In addition, small families are good for the planet.  Paul Hawken’s Drawdown organization ranked the best solutions for reducing global warming and the number one most effective is a combination of educating girls and promoting family planning because these are very cost effective ways to reduce our carbon footprint.  The combined effect are estimated to potentially reduce the equivalent of 120 gigatons of CO2 by 2050.  That is considerably more than the combined estimated benefit of both on- and offshore wind power put together (99 GT).  Wind power gets a lot more attention from the press, but birth control has had a much bigger effect.

The Economist Magazine explains more details about how small families can be good for economic development:

Indonesia’s Family Life Survey showed that, on average, each birth reduced by a fifth the likelihood that a woman would have a job—lowering household income and pushing some families into poverty. So smaller families made middle-class status more likely. Between 1974 and 1996, Bangladesh turned a district called Matlab into a giant demographic experiment: some villages and households got family planning, others did not. According to one study of the results, fertility in the areas that received help declined by around 15% more than in those that did not. And over the two decades of the experiment, indicators of the well-being of women and their children—health, earnings, household assets and so on—were all higher in the villages that got the planning…

One study in 2002 estimated that as many as a quarter of all pregnancies in developing countries in the 1990s were unintended. Yet another found that more African women say they want to use contraceptives but cannot get them (25m) than actually use them (18m). Unmet demand in turn implies that fertility in some countries could be even lower than it actually is if more family planning were available. The proportion of women using contraception in Latin America and East Asia is four times the African rate.

That points to another big reason why fertility is falling: the spread of female education. Go back to the countries where fertility has fallen fastest and you will find remarkable literacy programmes. …In Iran in 1976, only 10% of rural women aged 20 to 24 were literate. Now that share is 91%… Educated women are more likely to go out to work, more likely to demand contraception and less likely to want large families…

Slowing fertility has other benefits. By making it easier for women to work, it boosts the size of the labour force. Because there are fewer dependent children and old people, households have more money left for savings, which can be ploughed into investment. Chinese household savings (obviously influenced by many things, not just demography) reached almost 25% of GDP in 2008, helping to finance investment of an unprecedented 40% of GDP. This in turn accounted for practically all the increase in Chinese GDP in the first half of this year [2009].

Lastly, low fertility makes possible a more rapid accumulation of capital per head. To see how, think about what happens to a farm as it is handed down the generations in a country without primogeniture. The more children there are, the more the farm is divided. Eventually, these patches become so tiny they cease to be efficient. This is occurring in Bangladesh.

Does immigration have the same effect as fertility?  Both make population grow, but population growth isn’t the main problem with fertility.  The main problem is the dependency ratio and immigration tends to make that better.  The average age of economic migrants is in their 20s and very few senior citizens want to immigrate so immigrants tend to reduce the dependency ratio.

Japan’s economic miracle came when Japan’s average fertility rate plummeted to nearly one child per family which created a demographic dividend while the dependency ratio plummeted.  But such a low fertility rate later causes the population to shrink and that raises the dependency ratio again as the percent of elderly dependents grows. This is causing economic stagnation in Japan.  See how it compares with the US:

But real G.D.P. per potential worker has grown at about the same speed as in the US, so Japan’s productivity per worker is rising about as fast as in the US. 

Japan’s apparent stagnation is entirely caused by the falling number of workers as fertility falls and their rising life expectancy which is causing a rising dependency ratio. The US dependency ratio has recently started to catch up with Japan’s as American immigration slows and fertility has declined.

Posted in Development
2 comments on “Small families are good for economic development.
  1. […] so the demographic effect will be tiny and it will mostly just cause a small reduction in the dependency ratio by reducing the number of retired people the economy […]

  2. […] Ageist revolution. Elders were revered in every preliterate civilization partly because they had the most knowledge and wisdom. Mass literacy meant shifting social prestige away from the most experienced people because younger generations could seek wisdom from books instead. Today there is more shift from asking knowledgeable people towards asking Google or Alexa! (Elders were also more revered for most of history because there were so few elders due to high mortality and high fertility.) […]

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