PPS232S.01 Microeconomics of International Development Policy

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Microeconomics of International Development Policy


In this section, we continue our investigation of the
process of development by looking at another important
input in the production function of the economy, viz.

By “labor,” what I mean specifically in this context is
“labor quality,” i.e., how healthy and educated the labor
force is.

We will thus look at food and nutrition; health; and
education over the next several lectures.

Food Security, Consumption, and Nutrition

Poverty entails a lack of essential

including basic
nutrients. Thus “development” often means:

1. Alleviation of hunger;

2. Improvement in longevity; and

3. Improvement in physical well

This is also often true of poverty in the US.

Food Security, Consumption, and Nutrition

Given the foregoing, many development practitioners and
researchers spend a great deal of time measuring,
monitoring, and attempting to improve human nutrition,
especially among children.

In the extreme, faming occurs. But as per

insight, note that famines rarely (if ever) occur because
of a lack of food to go around.

For that insight, as well as for his work on poverty and
famine, Sen won the Nobel in 1998.

Engel Curves

A longstanding empirical question in development
economics relates to how changes in income, aggregate
expenditures, and other indicators affect patterns of food
consumption, human nutrition, health, and well

The central debate revolves around Engel curves, which
describe the relationship between consumption (here,
consumption of food) and income.

Engel Curves


Budget share

of a good (%)

Engel Curves

If Engel curves are reasonably steep, then income growth
can achieve the welfarist goals of improved nutrition
and health.

But if food consumption, nutrient intake, and human
health respond weakly (or not at all) to changes in
income, then income growth
based development
strategies are ill

Engel Curves

Structural interventions (e.g., clean water, waste disposal,
deworming, vaccination, primary health care, health
education, credit market access, etc.) may be more

Thus, the debate about income elasticities

i.e., how
sensitive is food consumption and nutrient intake to
changes in income

is central to the question of which
policies are best
suited to improve health and nutrition.

Engel Curves

Note the use of “welfarist” vs. “nonwelfarist” criteria.

Some economist are dismayed by the fact that
policymakers and development practitioners are
suspicious of our notion of (money metric) “utility” as
welfare. Utility, after all, is unobservable.

Engel Curves

We must accept that as fact, especially in light of the
Easterlin Paradox.

Easterlin (1974) founded the sub
field of “happiness
economics” when he identified the following empirical

“(…) contrary to expectation, happiness at a national level
does not increase with wealth once basic needs are

Engel Curves

More importantly, if one cares about the health and
nutritional status of women and children

people who
often have little or no bargaining power in developing

the use of income (and income elasticities)
may very well be ill
advised, considering
intrahousehold allocations.

Engel Curves

Moreover, if people sincerely care about their own health
but only have limited information, suffer from
addictions, or face other constraints to making optimal
choices, then simply assuming that individuals’ chosen
allocations are optimal may be incorrect.

In other words, the invisible hand may very well need a
little nudging.

Engel Curves

There is, however, a strong correlation between income
and nutrient intake in both cross
sectional and time
series data.

So the key question is really about the magnitude of the
effect. Is that correlation weak or strong?

The Dual Purpose of Food

Food plays a dual purpose role in consumption:

It is a direct source of utility to consumers;

It is an input in consumers’ health production function.

The problem is that most of micro theory only focuses on
the former.

The Dual Purpose of Food

Let’s start by following the traditional line of reasoning

food purely as a consumption good

to then move
towards the research frontier

food as an intermediary
input in the production of the health component of
human capital.

Expenditures and Income Elasticities of Demand for

Engel’s Law: Food is a
normal good
(i.e., quantity
demanded increases as income increases), but also a

(i.e., income/expenditure elasticity of demand
between zero and one.)

That is, the poor spend a much larger share of their income
on basic necessities than the rich do.

In other words, the Engel curve for food looks like…

The Engel Curve for Food


Budget share

of food (%)

The Engel Curve for Food


Total expenditure

on food

Expenditures and Income Elasticities of Demand for

It is thus not surprising that the budget share of staples is
often close to 85 percent in developing countries
(Barrett and Dorosh, 1996).

In industrialized countries, the budget share of food is
usually less than 10 percent.

This suggests that income elasticities are low.

Expenditures and Income Elasticities of Demand for

Indeed, empirical findings suggest that estimated
elasticities lie between zero and one.

Thus, it seems that increased incomes would constitute a
sufficient condition for improved nutrition.

Over the last 25 years, however, this income
relationship has been the subject of heated debates.

Expenditures and Income Elasticities of Demand for

Behrman and Deolalikar (1987) and Bouis and Haddad
(1992) are examples where income elasticities are
extremely close or not statistically significantly different
from zero.

This means that nonwelfarist objectives

i.e., objectives
unrelated to increasing incomes; perhaps behavioral

may be better suited. Thus, obsessing over
incomes may not be the right thing to do for

Expenditures and Income Elasticities of Demand for

This is important, for if the relationship between income
and nutrition or health is negligible, then it calls into
question the appropriateness of income and wealth
metrics for development.

This is not just an arcane debate about elasticities

points to a more fundamental philosophical debate
about the meaning of “development.”

Expenditures and Income Elasticities of Demand for

What are the core questions?

Elasticity of what? Food expenditures, food
consumption, nutrient availability, nutrient intake,
nutritional status (anthropometric indicators, e.g.,
BMI/HAZ/WHZ) What is the outcome of interest?

Expenditure/consumption/etc. by whom? Households
or individuals? Population or vulnerable sub
populations? What is the relevant unit of analysis?

Expenditures and Income Elasticities of Demand for

Question 1 arises from the fact that people like variety
and quality in food, not just nutrients

remember our
discussion of Banerjee and Duflo (2007), who
practically admonish the poor for not going for calorie
dense millet.

Jensen and Miller (forthcoming) study the impact of a
randomized program of large food price subsidies for
poor households. No evidence that subsidies improve
nutrition. Via a wealth effect, households simply
substitute toward better
tasting, but calorically less
dense foods.

Expenditures and Income Elasticities of Demand for

Food consumption generates pleasure directly, not just
indirectly through health, although this appears to be a
luxury good: only in very rich societies do we glorify
chefs, and dedicate considerable amounts of time to
watching the Food Network.

Bennett’s Law: As incomes grow, people substitute fine
grains (e.g., rice) for coarse grains (e.g., sorghum) and
roots and tubers (e.g., cassava). At higher levels, they
substitute meat for grains.

Expenditures and Income Elasticities of Demand for

A consequence of this is that income elasticities tend to be
underestimated, because price per nutrient increases as
people consumer more variety and quality (i.e.,
substitute fine grains for coarse grains, then meat for
grains), which includes paying for food processing and

So if food for health is our concern, we should focus on
nutrient intake, and not expenditures.

Expenditures and Income Elasticities of Demand for

But then, which nutrients should we focus on?

Most studies focus on calories, some focus on protein.

But that’s not the whole story. The most common problem
in developing countries is lack of micronutrients (e.g.,
minerals and vitamins), not macronutrients (e.g.,
calories, fat, protein).

Expenditures and Income Elasticities of Demand for

Side note: Obesity related to excessive macronutrient
(simple carbohydrates, essentially) intake is rapidly
becoming a public health problem in low

and middle
income countries.

Example: Central America and China, where
is becoming a serious public health concern. In
Guatemala, people start drinking Coca Cola instead of
water as they get wealthier (Marini and

Expenditures and Income Elasticities of Demand for

Vitamin A deficiency is the primary source of blindness
among children and young adults in the world.

third of children under 5 are thought to suffer from
vitamin A deficiency, which claims the lives of nearly
700,000 children every year.

(By the way, it turns out your mom was right: carrots are a
good source of vitamin A.)

Expenditures and Income Elasticities of Demand for

More than one billion people are at risk of iodine
deficiency, the single, largest source of brain damage
and mental retardation in the world.

Iodine is found mainly in kelp, but a cheap and easy
means of delivering it is through the sale and
distribution of iodized salt.

Twice that number suffer from anemia, mainly children
and women.

Expenditures and Income Elasticities of Demand for

The problem is that there is little to no empirical evidence
about whether micronutrient intake even responds to
changes in income.

This is especially true at the intrahousehold level, i.e., the
relevant level.

Why? My own view is that it is an issue of perception: unlike
macronutrients (i.e., carbohydrates, fats, protein), it’s
difficult to tell if you’re deprived of micronutrients (e.g.,

Expenditures and Income Elasticities of Demand for

Moreover, micronutrient intake information is little
understood by the population at large, especially in
places where most people can barely read.

Finally, it is extremely costly to collect data on
micronutrient intake, and it can also be very invasive.


No module on food and nutrition would be complete without a
discussion of famines.

This is especially true given the recent famine in Southern
Somalia which, for now, represents the apex of the food
crisis that began at the end of 2010.

Note: Last lecture, I talked about my work on food riots. Once
famine strike, it is too late for food riots, because people are
too weak. Riots are thus an early warning signal.


Three excellent references about food in general and
famines in particular:

Ó Gráda, C. (2009),
Famine: A Short History
Princeton: Princeton University Press.

Fraser, E.D.G., and A. Rimas (2010),
Empires of Food
New York: Free Press.

, F. (2010)

Great Famine
, New York:
Walker & Co.


When the UN declared the situation in Southern Somalia to be
a famine last summer, it had been almost 40 years since the
term had been used by officials

When is a famine declared? According to the UN, a famine
meets three conditions:

20 percent or more of the population must have less than
2100 kcal per day;

30 percent or more of children must be acutely
malnourished; and

Two (four) deaths or more per 10,000 adults (children)


Sen’s insight was that famines never occur in democratic
countries and in countries where there is a free press.

Of course, famines are usually the consequence of some
natural disaster combined with a failure of governance.

The natural disaster need not necessarily be a drought or a
flood. There is some evidence that volcanic eruptions
often set in motion chains of events that lead to famines
the following year.


Two cases in point.

The Chinese Famine of 1958

Referred to as the “three years of natural disasters” in China.
The impacts of a drought were magnified by Mao’s Great
Leap Forward: peasants were ordered to produce iron and steel
and away from agriculture; collectivization of agriculture.
Food diverted from rural to urban areas (Bates, 1981).

In rural areas, people would eat bark, clay, each other’s
children, etc. See

(2010) for a



The Current Famine in Southern Somalia

The current famine in Southern Somalia began with the
worst drought in 60 years in East Africa. Many refugees
have left Southern Somalia for Kenya and Ethiopia.
Everyone has seen pictures of

refugee camp.

As proof that famine is the result of political conditions,
militant Islamic
group Al

tightly controls the
region and prevents the delivery of aid. See Polman
(2010) for more examples of this, and Barrett and
Maxwell (2005) on food aid in general.