Escaping the Poverty Trap in a Developing Rural Economy Author(s): Nguyen Manh Hung and Paul Makdissi Source:

The Canadian Journal of Economics / Revue canadienne d'Economique, Vol. 37, No. 1 (Feb., 2004), pp. 123-139 Published by: Blackwell Publishing on behalf of the Canadian Economics Association Stable URL: http://www.jstor.org/stable/3696101 Accessed: 22/04/2009 12:52
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Escaping the poverty trap in a developing rural economy

Nguyen Manh Hung Paul Makdissi Departement d'economique, Universite Laval Departement d'economique, Universite de Sherbrooke

Abstract. In this paper, we examine the economic policies that might allow a developing rural economy to escape from the poverty trap characterized by a subsistence level of per capita consumption in the long run. In our model where labour is combined to land available in fixed quantity to produce a homogeneous good, saving could be made through only having children, the number of which is an endogenous decision. We provide conditions under which the economy runs into a poverty trap, and proceed to analyse the relevant policies in this case. We demonstrate that an escape from this poverty trap is possible through a suitable technology transfer, or an appropriate childrearing tax, but not with a foreign manufacturing sector, which increases only temporarily the labour income in this rural economy. JEL classification: Jl 1, O11, 040 Dans cet article, nous analysons les politiques qui peuvent permettre a une economie rurale en developpement de sortir d'un pi6ge de pauvrete caract6rise par un niveau de consommation de subsistance. Dans notre modele pour lequel le travail est combine a la terre afin de produire un bien homogene, l'epargne ne peut se faire qu'a travers les enfants dont le nombre est une variable de decision endogene. Nous decrivons les conditions sous lesquelles l'economie converge vers un piege de pauvret6 et analysons les politiques appropriees a adopter dans une telle situation. Nous d6montrons que la sortie du piege de pauvrete peut etre accomplie grace a un transferttechnologique approprie ou a travers une taxe sur les enfants. Par contre, l'introduction d'un secteur manufacturier contr6le par des etrangers ne fait qu'accroitre temporairementle revenu per capita.

Se sortir du piege de la pauvrete dans une economie rurale en developpement.

We thankJ.-P. Amigues,P. Michel,J. Percebois, J.-C. Poudou,Y. Richelle,G. Rotillon,and J.Y Duclos for manyusefulcomments. Email:paul.makdissi@usherbrooke.ca
Canadian Journal of Economics / Revue canadienne d'Economique, Vol. 37, No. 1 February / f6vrier 2004. Printed in Canada / Imprime au Canada

0008-4085 / 04 / 123-139 / ? Canadian Economics Association

124 N.M. Hung and P. Makdissi 1. Introduction For many countrieson the African continent,explosive populationgrowth, civil wars,desertification, the slim chanceto get on the path of industrialand ization offer the most pessimisticlife prospectfor nearly300 million peoples (see Chen and Ravallion2001). In these least developedcountries,economic activitiesare basicallyrural.The HumanDevelopment Report2002 (UN DevelopmentProgram2002) shows that 74.3%of the populationlives in the rural areas where the human being is both the sole asset and sole factor in comis binationwith fixed land in agricultural production.Industrialization nearly non-existent because of, among other things, frequent wars and political unrest. Internationalaid, if any, is given in the form of food, medication, contraceptivepills to check population growth, and primarilysettlementof displaced population. The result of these dramatic situations is poverty: according to Chen and Ravallion (2001), the percentageof people living with less than $1 per day has increasedfrom 46.6% to 48.0% duringthe last decade. For these developingrural economies, it is importantto determine the parametricconditions for which the long-runequilibriumis one with a subsistence level of percapitaconsumption. The next questionwouldnaturally called be how to escapefrom this unappealing (hereafter long-runequilibrium the povertytrap),with povertybeing identifiedas subsistence living. interestin the theoreticalpopulationproblempoints Recently,resurrected to the important connection between economic growth and the fertility decisionin the new householdeconomics.In this vein, the pessimisticvision comes back to haunt the debate on the thorny subject of economic sustainability.The human-carrying capacityof the earth in the presentstate of has recentlybeen well documentedin Cohen (1995), where, once technology again, the questionis raisedof which populationsize would keep per capita consumptionsustainableat some decent level other than mere subsistence. Does technological progress induce a population growth that ultimately In equilibrates capitaconsumptionto the level of subsistence? the affirmaper tive, are theresome means of escapefrom this ratherdesperateperspective? importanceto this Malthusian vision in view of the possibility of factor substitutionin the productionprocess(see Tamura2000). Populationgrowth remainsunboundedin Barroand Becker(1989), where fertilitydecisionsare endogenous,but labour can be substitutedby physical capital that can be accumulatedwithout limit. The same conclusion is reached when, instead, human capital plays a role of factor substitutionin Becker, Murphy, and Tamura (1990). If capital is to be understood in a larger sense and would ultimembodiesthe environmental category,however,its accumulation come to an end and unlimitedfactor substitutionis no longer possible. ately Whatshouldthen happen? it possiblethat technological Is progresswill induce
Many theorists - some of them the most prominent - would give little set forth two centuries ago in Malthus's Essays in the Principle of Population

Escaping the poverty trap 125 only population growth, thus leaving the economy imprisoned in a poverty trap? This is an important question to address, since, as pointed out by Kremer (1993), the major part of human history is characterized by this kind of poverty trap. One very interesting attempt to address this question is Galor and Weil (1998).1 They build a model in which, in a first regime, the economy has a globally stable steady state in which per capita consumption is equal to subsistence level. There, technical progress in terms of human capital acquisition is slow and completely wiped out by population growth. In a second regime, the growth rate of technology increases. Population growth absorbs much of the output growth, but per capita consumption rises slowly. Then, the economy undergoes a demographic transition in which there is a reversion of the positive relationship between income per capita and population growth. In this third regime, population growth is moderate or even negative, and per capita consumption rises rapidly. Two forces drive the transition betwen regimes. First,technical progress is driven both by increases in the size of the population and by increases in the average level of education. Second, technical progress creates a state of disequilibrium, which raises the return to human capital and induces parents to substitute child quality for quantity. Nevertheless, as pointed out by the authors: 'While our model presents a unified description of the development process followed by Europe and its offshoots, it is clearly not fully applicable to countries that are developing today. For currently developing countries, a large stock of pre-existing technology is available for import, and so the relationship between population size and technology growth, which helped trigger the demographic transition in Europe, is no longer relevant' (Galor and Weil 1998, 37). The objective of this paper is to give a prescription of the escape from a poverty trap for a developing rural economy for which technical progress can be made available through technological transfer, international aid, or foreign capital investment. We face these questions by echoing what was pointed out in Chen and Ravallion (2001), namely, that the incidence of poverty is still highly devastating and even seems to be increasing in most parts of Africa. We consider a model with the human being as both the sole asset and the production factor, which can be combined with a fixed factor such as land to produce a homogeneous commodity. Saving, so to speak, can be made only through having children, the number of whom is an endogenous decision to the household. The utility of the representative household takes the dynastic form (see Barro and Becker 1989), so that the decentralized decision making of all agents of different generations can be subsumed to a planning problem. We show that only a non-neutral technological transfer would help escape from the poverty trap. Alternatively, in the absence of technological transfer, we show
1 Other attempts to address this question have been made by Lucas (1998) and Tamura (2002), who provide models that describe a mechanism for a transition from agriculture to an industrial revolution.

126 N.M. Hung and P. Makdissi that an increase in child-rearingcosts through taxation may also help to lead the economy to an equilibriumwith fewer people to feed and a level of consumption better than subsistence level. Finally, we briefly consider whether with the introduction of another sector, say a foreign manufacturing sector, the rural economy would be able to escape from the poverty trap. In combination with foreign capital, if this sector hires local labour at a higher wage and produces a good often aimed at exportation to international markets, then the resulting increase in income would raise over the subsistence level per capita consumption and also raise the number of their offspring. Higher population growth will gradually bring back consumption to the subsistence level. The model of this paper is presented in the next section. In section 3, we show that the economy can escape from a poverty trap through a non-neutral technological transfer or an appropriate child-rearing tax. Also, we consider the set-up of a manufacturing sector operated with foreign capital in our rural economy and see whether this may help an escape from the poverty trap. If this industrialization brings about a temporary increase in labour income, the answer to the question is negative. We conclude with section 4. (Cumbersome technical details can be found in an appendix available from the authors by request.) 2. The model The model considered in this paper is a continuous version of the Barro-Becker model of growth with endogenous population (Becker and Barro 1988; Barro and Becker 1989). Ours is a variant of the neoclassical growth model, where, instead of physical assets, 'people' constitute the only form of productive 'capital.' In discrete time, each agent living for one period at time t earns an income, yt, and has to make a decision about his own consumption ct and the number of offspring, nt, who become adults at t + 1. The utility of each family head is a function of his own consumption and the utilities of his immediate where U is the usual nondescendants; that is, Vt= U(ct) + nt6(nt)Vt+l, and concave utility function, a(nt) is the degree of altruism shown decreasing towards each child, and 6 is the time discount factor. Assuming the degree of altruism is of constant elasticity with respect to the number of children, a(nt) = nte, the utility of the head of the dynasty V0 is a function of all ct and nt, and both are normal goods in that the income effects are positive. In the continuous-time version, the dynastic head's utility takes the following form: Vo = e-tN U(ct)dt, (1)

where p E (0, 1) is the rate of time preference, E E (0, 1) is a parameter representing altruism toward offspring, and Nt and ct are population and per capita consumption at time t. This is a variant of the form adopted in Barro

Escaping the poverty trap 127 and Sala-i-Martin (1995).2 Under this specification, e = means that the parent attaches a weight equal to unity for his children's utility regardless of the size of the family. The objective function (1) of the patriarch is Benthamite (sumof-utilities). As e increases, this weight declines and the parent is said to be less altruistic. When e= 1, only the average utility of each child counts for the parent, and the objective function (1) is Millian (see Nerlove, Razin, and Sadka 1986). In order to focus on the issue of endogenous population in developing rural countries, we suppose a simple production process that requires essentially the use of labour, the supply of which depends on the agent's fertility decisions. With respect to the other factor supply, assume that each individual is entitled to have an equal right on L (i.e., L/N,), the land factor available in fixed quantity. For factors' demand side, assume that the production in the economy is conferred to a profit maximizing firm with a production function F (L, Nt). Assume also that the product markets and the factors' markets are competitive. Under those assumptions, this firm pays labour and rents land at the marginal productivity w = FN and r=FL. Factor market-clearing conditions and a production under constant returns to scale imply y = w + r LINt = F(.)/N, where y denotes the individual income. If we consider the marginal cost of having one child, 3, as a constant, the budget constraint for each individual is therefore F(o)/Nt = ct + /n,. The aggregate resource constraint of the economy is then
F(L, Nt) = Ntct + /Ntnt. (2)

In this framework, since , = (nt,- 1)Nt, equation (2) can be cast in terms of the following diffusion process:
N=t -F(L,

I 1

Nt) -

Ntct - Nt, No given.

(3)

The problem of an individual living at time t is to choose his consumption rate, c,, and the number of offspring, n,, under the budget constraint. Since his utility depends not only on his own consumption but also on the well-being of all of his descendants, this recurrent relationship allows us to subsume utilities of immediate as well as all ensuing descendants in a single patriarch's utility function (1). Note that since this function satisfies the Strotz-consistency requirement, all individual decisions could be studied by examining the patriarch's decisions concerning the number of offspring and of consumption stream over the whole time horizon. This problem therefore consists of
2 In our continuous time setting, n, is a natality rate at time t. If we assume that the mortality rate is equal tq,1 (so that each agent lives just one period), then the population at time t is simply N = NoeJo (n-)ds.

128 N.M. Hung and P. Makdissi max

{c,})o

e-PtN -'U(ct)dt
0=

(P) Ntct - Nt, No given,

subject to

t = -F(L, Nt) -

which is a planning problem. It may be worthwhile to make the following remarks. First, 'people' as the sole form of capital, being only conceivable in preindustrial society, constitutes the unique vehicle of saving. In continuous time, each individual lives one period, a saving that should do more than offset the depreciation of capital in order to avoid the event of a vanishing society. With identical individuals, this means nt > 0, t E [0, oo) must hold. Accordingly, the constraint (2) can be rewritten as
Ct < F(L,Nt)/Nt. (4)

For simplicityof notation, we assume that this constraint is always non binding. Second, problem (P) is a non-standard one-sector growth model. Here, the population (state variable) is embedded in the objective function (1). Hence, steady state equilibria, if they exist, may be multiple (see Kurz 1968). In order to avoid the issue of multiplicity of equilibria, yet be able to highlight important parametric aspects of the poverty trap problem, we adopt the following utility functional form:
U(ct)

-00co

t /(l

ifc, if Ct < Cs,

(Al)

where c, stands for the subsistence level below which the utility loss is infinite,3 and i/a, a positive constant, stands for the elasticity of intertemporal substitution. In addition, our problem should take into account the additional constraint ct > Cs.

Although not really essential, we now assume that the production is of Cobb-Douglas type:
F(L, Nt) = L-"N7
-

AN7,O < 7 < 1,

(A2)

so that our problem is

3 Note here that, although the utility loss is infinite if consumption is below the subsistence level, the marginal utility of an increase of consumption over the subsistence level, limct,c u(c) = c;- , is finite. Obviously, if this marginal utility were infinite, the poverty trap will have been excluded, because the agent would never chose a path that leads to a steady state where coo= c. On this point, Galor and Weil (1998) use the same kind of assumption.

Escaping the poverty trap 129

max{c,}, fo

e-PtN- [ct -/(1 - a)]dt 1 1 AN - -N,c, - N, No given, (P

subject to N, =
ct s > 0.

If {c,, N,t}to is the optimal path, then it satisfies Pontryagin conditions: N Cl- ,t /3 = (1 -) N,t = 1 AN +At = 0
N Ec I1

(5)

(6)
(7) (8)

1 --Ntc,-N,

A[ct - c] = 0; A, > 0; ct - c, > 0,

where 7r,represents the efficient price of capital (one unit of population, or equivalently, a child). Equation (5) is an arbitrage condition between consumption and saving, the latter being made by the individual through having children. It stipulates that at each point in time the current marginal cost in terms of consumption must be equal to the current marginal value of a child. On the other hand, equation (6), appropriately rewritten, stipulates that the net total rate of return on the investment in offspring must be equal to the rate of time preference. If we recall remark 1 in the preceding section, n, > 0, and thus (4) should delimit the feasible region in the plane (c,, N,) for the optimal path. We now state the following proposition.
PROPOSITION

1. Assuming that 0< e < a, the solution path {ct, Nt}_o satisfying to (8) is optimalprovided the standard transversalityconditions:4 (5)
t-,oo t--o

lim e-P7rtNt = 0

(9) (10)

lim e-ptrt > 0,

Proof. In order to prove the proposition we use the following transformation Dt= Ntc,. Under this new notation, problem (P1) can be rewritten as

4 If, insteadof lim,,,ooe-P'trN = 0, we havelim,ooe-P't7rN, 0, thisimpliesthatthe present value > of the population stockat t -- oo is positive.Then,to investmorein population thanis prescibed wouldaugmentthe presentvalueof the objective function.If we thinkof infinityas the end of conditionis that the optimizing planninghorizon,then the intuitionbehindthe tranversality assetbeingwastedat theend insteadof usingit to raise agentdoes not wantto haveany valuable the utilityat some date in finitetime. For this matter,see Barroand Sala-i-Martin (1995,65-6, 507-8).

130 N.M. Hung and P. Makdissi r

r(r)

C((T) "-

S
s

Cs

O) .(

T)N

\\

max
subject

e-pNt "[DtlI-a/(1 - a)]dt

to Nt = -AAtDt - Nt,No given,

Dt - Nts > 0.

The objective function of is strictly concave in (D, N) and the Nt is concave in (D, N). We can apply theorem 9.3.1 in Leonard and Long (1992) to prove that {Ct, Nt}to is optimal.1 In order to characterize in further detail this optimal path in the phase plane (ct, Nt), let us derive Ct/Ct from (5) and (6). Assuming that the constraint ct- c 0 is not binding, so that At=, then totally differentiating (5) with respect to t, and substituting into (6), we get
-aCtlct

= (l + p-e)-3(

I-

e
ct +

I-

i(1 - a)

/3

ct +

e e - -Y

/3

ANt- 1

(11)

Note that it = Nt = 0 would readily imply ct = 0; thus the steady-state equilibrium could be determined by the locus <I(c,N) IN,= and (c,N) I,=o, depicted by I4) and lJ in figure 1. The locus (I is given by
c, + - AN- 0, (12)

while the locus ,I is given by

Escaping the poverty trap 131

/3(l+p-e)l aA l C whenAl=0and 0a aANt=O

= (13)

when - Cs= 0 when At > 0. ct

The steady-state equilibrium is then determined by the intersection of (4 and I. Note that the locus 9" contains a horizontal part, with consumption being equal to the subsistence level cs. In order to describe in further detail the dynamics involved, let us define c and N by the intersection of (<1 and I'. Straightforward computation yields

C =

3(1 a)(l + p y) 0'(1 -0 + (I C a(1 -) a)(7y-)

(14)
4)
.

N=L

_a(1l-e) + (1 -

(-)(l+p-7)

)(-

(15)

(15)

In the absence on the subsistence consumption constraint, the value of c and N would be the steady-state equilibrium consumption. With the constraint, the steady-state equilibrium values in our model are:

fc coo
No =

if c >

(16)

^-f?
N = L[cs i]+ N L

ifc,<?

11~~~~~~~~(16)
(17)

ifc,>s if Cs< c.

We now proceed to use the familiarphase diagram to characterizethe optimal path and its dynamic properties.At the outset, recallthat in the positive orthant of the plane (c, N) all feasible paths are contained the region delimited by (4) and c, - cs > 0. As for the locus '1, one can easily observe that it has a positive slope when e < y and a negative slope when e > -y.On the other hand, the locus (4Mhas always a negative slope. Essentially,there are two possibilities.The first possibility correspondsto the case where the locus (4 intersectsthe locus '1 at its increasing section. In this case, the steady-stateequilibriumusually found in growth model. The second possibility arises when the locus (4 intersects the locus '1 at its horizontal part determined by the subsistence level of c,, with the poverty trap obtained as an equilibrium outcome S depicted in figure 1, where we draw the phase diagram for the case e < y. Clearly, the steady-stateequilibriumexits and is unique. Standarddynamic analysis shows that this equilibriumis stable in the sense of a saddle-pointpath. Obviously, the convergenceto S can be carriedout in two ways. If No < N, the convergentpath sticks to ct = c5,Vt. If No > N, this path would follow the path q until it hits the consumption constraint,then reaches S along the horizontalline c5c'. Recallingthat the steady state consumption is given by (16), we now state the following proposition.

132 N.M. Hung and P. Makdissi

2 PROPOSITION

1. If the subsistence level of consumption, c,, falls short of = [3(1 - a)(1 + p - 7)]/[( - e) + (1 - )(7 -)], the economy tends in the long run towards an equilibriumlevel of consumptionco = c. 2. If the subsistence exceeds level of consumption, cs, = [/3(1- c)(1 + p - -y)]/[(1l -) + ( - )(7 - e)], the economy tends in the long run towards the poverty trap. The subsistence level of consumption as the long-run equilibrium outcome is hereafter called the S-equilibrium. If the poverty trap is identified as the backwardness of the economy, then proposition 2 would imply that population could not necessarily be its cause: there does not exist any size of population that could be theoretically associated with this trap. The poverty trap in our work is not the kind of Malthusian trap where exogenous population growth would ultimately come to check the level of consumption. Instead, given a level of subsistence consumption cs, whether or not the economy tends towards the poverty trap would depend on the value of relevant parameters determining c. The most important parameter is the degree of parental altruism e. In this regard, inspection of (15) shows that the higher the value of the altruistic parameter e, the higher will be '. Given c,, if the poverty trap prevails as a long-run equilibrium for e, it will be so for any value 0 < e < e. This is due to the fact that the locus TI in figure 1 shifts to the right as e decreases in value, resulting, therefore, in an equilibrium with a higher level of population but with a constant level of subsistence. It should be clear, however, that the converse is not true. When the parent is less altruistic, e takes on a higher value and the economy possibly could move out of a poverty trap, ending up reaching an equilibrium with a lower population level and higher consumption. 3. Escaping the poverty trap If the long-run equilibrium happens to be the poverty trap, the question we now ask is whether the economy can escape from this unappealing state. The search for such policies focuses naturally on how to modify the critical level c either through inducing a change in the value of a determinant parameter and/or a shift of the locus I4 and J" in figure 1, or again, as most of us would expect, through a process of industrialization of the developing rural economy. 3.1. Technologicalprogress The first element of hope for such an escape may come from possible technological progress, presumably in the form of a technological transfer to the developing rural economy. We distinguish, as usual, neutral from non-neutral progress. For the former kind of progress, marginal productivity

Escaping the poverty trap 133 of both factors increases over time in the same proportion, leaving their production shares unchanged. For the latter, technical progress favours one factor over the other, and the production shares of factors will accordingly be modified. We consider, first, the kind of costless progress falling as 'manna from heaven' and later the costly endogenous progress that requires some human effort. Let us consider for the first kind a neutral technology transfer (without adoption cost or, equivalently, with a fixed adoption cost). The simplest way to take this into account is through assigning a parameter r to our production function rANt. This technical shift will exert a horizontal translation of the loci 1D, tIt to the right in figure 1. If we recall that c and N are given by equations (14) and (15) for which r= 1, it is easy to check that c(r) = ', and N(r) = rl/1-N. Thus, clearly, in presence of neutral technology transfer, the economy cannot escape from the poverty trap. This kind of transfer will lead to a population increase only while per capita consumption remains unchanged. We now turn to the case of endogenous technological progress, where some investment in human capital is required in order to have the technology transfer. Let us assume that the production function takes the following form: F(L, Nt) = (AtL)'-7(ltN)7, < y < 1, (A2')

where At is the productivity index of the transferable technology at t, which should now be endogenously determined.5 Following Lucas (1988) we assume that to increase At, the agent must now reduce by a factor (1 - lt) the time he devotes to production in order to engage in human capital formation. In this framework, equation (3) becomes
=Nt =

(At)'-7(ltNt)7 -

Ntct - Nt, No given.

(18)

Moreover, we assume that

At= lAt[1 - 1t], (19)

where It is the marginal productivity of human capital formation efforts. It is easy to show that under this setting the population grows at the same rate and per capita consumption remains constant. Routine computation leads to

5 The case of exogenous technical change corresponds to a special case where It is fixed.

134 N.M. Hung and P. Makdissi /(1 a(1 ) + (1

)(l + p-7
-

+ (c-7))
7)(7 -6) 'v

(20)

where 06 is the productivity growth rate.7 As previously, the per capita consumption converges towards
c

-co ~t

f c5 if cs >
ifcs? .

(21) (21)

In our analysis, by comparing (20) to (14) we get ' < c, and therefore cs > c implies c5> F. Henceforth, if the economy is bound to reach the subsistence level of consumption, cs, it will a fortiori be so with an endogenous neutral technology progress. What should be clear at this point is that neutral technological progress, whether exogenous or endogenous, would not help the economy to escape from the subsistence level of consumption. We now turn to consider a non-neutral technology transfer, which, by the definition given earlier, induces a favourable change of the productivity of one factor relative to that of the other. We examine, in particular, a transfer that brings about an increase in the marginal productivity of land relative to that of labour for any level of population. For simplicity, let us suppose a technical shift parameter r, - E [1, T], such as F(L, N, T) = L1 -Y7NY(-). If this technical shift T increases the marginal productivity of land relative to that of labour in the production, then by definition, y'(r)< 0. Inspection of (13) and (14) shows that the locus 'I' as well as the locus 14' would shift to the left, as depicted in figure 1. Using equation (14) and recalling that the denominator is positive, we easily obtain the function (7y),which is strictly decreasing for 0 < -y< 1. It is straightforward to show that c(0) = [/(1 - a)(1 + p)]/(a - e) is the upper bound for the steady-state consumption. If c, > c(0), then it is impossible to escape from the poverty trap. Given c, we can find the lowest value of the technical shift parameter r that provides a steady-state consumption equal to the subsistence level. It is easy to see that this parameter satisfies Y(r)= [(a - e)c, - 3(1 - a)(1 + p)]/ [(1 - )(c, - )]. Clearly, for any r> -, the economy secures a level of consumption higher than c,. In other words, a technology transfer r that positively shifts land's marginal productivity would decrease y, thus bringing

6 The productivity growth rate is entirely determined by the parameters of the model. Routine computation leads to e- e) + 72[0(1 + X p - ) + A - pa] P A) + A - 0 P] + 7[e(/ + =,(a - a+ e(2 -c- a(l - e)] + a- e + 1[l a-)] 72-[ Details of these computations are gathered in an appendix that is available to readers upon request. 7 Note that if investment in land productivity is assumed away, (20) is identical to (14), as one would naturally expect.

Escaping the poverty trap 135 about an increase in the steady-state consumption (7y),and would help the rural economy to get a consumption higher than the subsistence level Cs.We draw in figure 1 the locus I1(r), which intersects the locus 4M1(r) at ET, the long-run equilibrium. To sum up, we present the following proposition.
PROPOSITION 3

1. A neutral technology transfer does not enable the economy to escape from a poverty trap. 2. Consider a non-neutral technology transfer that increases land's marginal productivity relative to that of labour. If cs < [P(1 - a)(1 + p)]/(ao- c) and if the 7(.) is continuous in r with y/(r) < O, then there exists a critical value r beyond which the economy would escape from the poverty trap. This proposition shows that only a non-neutral technology transfer may help the economy to escape from the subsistence level of consumption. Even captured by a poverty trap for some time, the economy will depart from the subsistence level of consumption provided that the non-neutral technology transfer that increases the productivity of land relative to labour in the production could come into existence. 3.2. Child-rearingtax Beside the technology transfer discussed above, are there any other policies that might help the economy to escape from the subsistence level of consumption? The answer to the above question naturally comes from public interventions through appropriately modifying the cost of child-rearing by a tax (subsidy) policy. Let 0 denote this policy instrument, with 0>0 if it is a child-rearing tax, and conversely otherwise. The net cost of child rearing is therefore 13 = P + 0. All ingredients in this analysis can now be parametrized by 0. Clearly, both loci '9 and D1shift to the left as 0 increases. Let us define 0 by
a(1 -E)+(l-a)( 0 = c5s( -)

3(1 - 0)(1 + p - 3)

-/3.

(22)

It is straightforward to obtain the following proposition.

PROPOSITION

4. Provided that 0 > , it is possible to escape from the poverty trap a child-rearingtax 0. through

This proposition is quite simple to understand. The imposition of a childin rearing tax 0 will shift the locus II and H>< figure 1 to the left, exactly as with a non-neutral technological progress discussed earlier. This tax would discourage procreation by increasing the cost of a child. On the asset market,

136 N.M. Hung and P. Makdissi this lowers the net return to labour, thereforehaving the same effect as a decreaseof labour'smarginalproductivity relativeto that of land, as pointed out previously.In this case, it is plain that rationalagentswouldchoose a path and with a higherper capitaconsumption leadingto a steady-state equilibrium lower populationthan in the povertytrap outcome. At this point, it may be worthwhile relatingour analysisto that of Galorand Weil (1998). In their model, two forces drive the transitionbetweenregimes. First, technicalprogressis drivenboth by increasesin the size of the population and by increasesin the average level of education. Second, technical which raises the returnto human progresscreates a state of disequilibrium, childqualityfor childquantity.In our capitaland inducesparentsto substitute presentwork, we have pointed out that the latter effect can be induced by loweringthe net returnon child quantitythrougha tax on child rearingor a non-neutral technologytransfer. Beforewe turn to the next consideration,it is importantto make a remark on the policy implicationof proposition4. First, if the poverty trap was the result of intertemporalmaximizationfrom economic agents, it is not clear that the impositionof the tax would increasesocial welfare.On this point, Ng (1986) proposes a social choice function for which the objectivefunction of problem(P) is a particularfunctionalform. If we have in mind this kind of social choice function, then the tax decreasessocial welfare.It is hard to find a social choice function to justify the imposition of a child-rearingtax on people who are imprisonedin a poverty trap. However, let us keep in mind that any policy that increasesthe child-rearing will do the job. One policy cost of our model will be that compulsiveschooling, by increasing implication the child-rearing cost, will reducefertilityand increaseper capitaconsumption even if the human capital accumulated through this channel is not used in activities. productive
3.3. Introducingforeign capital in an export manufacturingsector

One would naturallythink that the international movementof capitalmay be one importantfactor that helps a rural developingeconomy to industrialize and to departfroma povertytrap.In manyindustries, suchas clothing,textile, and leatherproducts,which for the most part requireintensivelabour techlow would benefitfromrelatively labourwages. nology, the producer-investors In many cases, almost all the productionof these manufacturing productsare sold on international markets,and verylittle is kept for local consumption.As a matter of fact, in many African economies, capital belongs to foreign investors,and capital returnis often totally repatriated togetherwith profits realizedthroughproductsales. Reinvestment decisionsto buildup new capital stock are generally of the autochthones' out reach.Theycould, however,enjoy where the opportunity workfor a moredecentwagein urbanconcentrations to the manufacturing plants are located. In essence, this is the Harris-Todaro

Escaping the poverty trap 137

frameworkthat is so popular in the literatureof developmenteconomics (see Harrisand Todaro 1970). The questionwe now brieflydiscussconcernswhether,with the introduction of a manufacturing industrial) sector,our ruraleconomywould be able to (or escape from the poverty trap. Consider that foreign capital moves into sector. Assume that the this economy and helps to setup a manufacturing manufactured good is produced,thanks to local labour, Ni, and the foreign capital,Ki. Assumealso, initially,that the ruraleconomyis imprisonedat the in subsistence consumptionlevel depictedby the S-equilibrium figure 1. Also, fromthe consumption if the endemicpovertyexcludesalmostall autochthones of the manufacturedgood, then its production is, by assumption, totally devoted to exportation. Given the competitive prices of good and prothe ductionfactors,profit maximization determines amountof foreigncapital investment. At the S-equilibrium,the rural inhabitant income, being equal to the averagelabour productivity,is exactly the subsistencelevel of consumption plus the cost of rearingone child, cs+ 3. Now, considerthe introductionof foreign capital, Ki, which provides the opportunity to employ some local labour at the wage rate equal to labour marginalproductivity,w =p9G (Ki,
Ni)/ONi, where G (Ki, Ni) represents the production function of the manu-

facturingsector and p is the price of the manufactured good that is exogendetermined international Let marketconditions. us denotethe labourin ously by
rural (resp. industrial) sector by Nr (resp. Ni). The labour constraint N = Nr + Ni

The must be satisfied, where Ns denotes the population at S-equilibrium. allocationof labour betweenthe ruraland industrialsectorswill be dictated by the labour income arbitrage,which is the Harris-Todaro hypothesis in economics.In its deterministic version, this hypothesisis given development
by w = F(L, Nr)Nr > F(L, Ns)/Ns, which, together with the labour constraint

mentioned above, is sufficient to determineNi and Nr. The set-up of the industrialsectorthus bringsthe averagelabourincome to a higherwage level w. At the outset, the resultingincomeeffectwould raisenot only consumption but also the numberof offspring,since both are normal goods, as we have mentionedearlier. We now turnto the problemof optimization underthis two-sectorconsideration specificto our investigation. we haveseen,the percapitaincomeis now As w. The nationalincomein this ruraleconomycomposedof a domestic(rural) sectorand an industrial an sectorproducing exportproduct,F(L, Nr)+ wNi,is
in fact w(Nr + Ni) = ANr- Ns. If we assume that market clearing conditions

inducethe allocationof a proportion0 of total labourto the ruralsector,the

latter relation becomes w(Nr + Ni) = FO-1AN7. National income in this rural

economyis labourincome, and the foreigncapitalincome, by assumption,is totally repatriated.Thus, there is no capital accumulationvia investment decisions,as we usuallysee with the familiarmodel of economicgrowth.The dictatedby elementleft is the endogenous evolutionof population only dynamic

138 N.M. Hung and P. Makdissi live fertilitydecision.Recall that people, the sole asset occurring, for just one at period(thusbeingdepreciated a 100%rate)and can be replacedonly at the unit child-rearing cost /. The populationgrowthequation,analogousto (3) in section2, now reads N, = 9e-1ANt
- Nt

Ct - Nt,

(23)

where Nt denotes the total population at time t. We have to solve the problem (P) under this new dynamic constraint. Rapid inspection of equation (23) indicatesthat the term 07-1 will play exactly the same role as that of the neutral technological transfer r analysed at the beginning of subsection 3.1. Higher labour income due to a manufacturingsector operated with foreign capital should raise the consumption level temporarily above the subsistencelevel. Since childrenare normal goods and people are the sole valuable asset, however, the positive income effect should also induce a higher number of progenitors. The resulting gradual increase in population size would finally bring about subsistence-levelconsumption, which is preciselyshown here. 4. Concluding comments When fertilitydecisionsare endogenousin a dynamicmodel in which people constitutethe sole capitalasset,we have shownthat the economymay runinto a povertytrap. However,we have demonstrated that the economycan escape from this unappealing situationthrougha suitabletechnologytranslong-run fer or an appropriate tax. It is worth we mentioninghere that, child-rearing a reductionof the child-rearing cost may put the economy back conversely, into a povertytrap. International for developingcountriesin health care aid the programs may reducethis cost by decreasing mortalityrate and createthe adverseeffect of maintaining poverty. The main assumptionon the utility function,which allows us to obtain the outcome,is that the marginalutility at povertytrap as a possibleequilibrium the subsistencelevel of consumptionis finite. This is not hard to accept. However,if we abandon the form adopted in this paper for a more general utility function, we should expect to find multiple steady-stateequilibria; the consequently, study of the dynamicsinvolvedshould becomemuch more Recent advances in the study of complex non-lineardynamics demanding. would suggestthe possibilityof cyclicalbehaviourand even of chaos in such models.This issue seemsto deservea separateinvestigation. Othergeneralizations interestincludetreatingthe carrying of capacitynot as a fixed quantity of land, as is done in the present model, but rather as an environmental stock that may be depletedwith its use. One such attempt is in Makdissi(2001), wherelabouris combinedwith a renewable natural given resourcein order to produce a consumptiongood. In this case, if property

Escaping the poverty trap 139 rights over natural resources are not well defined, the economy may again converge to a poverty trap. References Barro,R.J., and G.S. Becker(1989) 'Fertilitychoice in a model of economicgrowth,' Growth Barro,R.J., and X. Sala-i-Martin (New-York:McGraw-Hill) (1995)Economic Becker, G.S., and R.J. Barro (1988) 'A reformulationof the economic theory of Becker, G.S., K.M. Murphy and R. Tamura (1990) 'Human capital, fertility, and Chen, S., and M. Ravallion(2001) 'How did the world'spoorest fare in the 1990s?'
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