The Family and Economic Development David Canning, Marc Mitchell, David Bloom, and Erin L.

Kleindorfer Harvard Institute for International Development

When people make decisions, they seldom think in terms of national or global consequences. However, they also seldom act entirely as individuals. Most often the family or household acts in light of likely consequences and perceptions of how they will affect the family unit.1 Economic decisions on where to work, how much to save and invest, and what education to acquire are most frequently made at the family level. Demographic decisions are essentially family decisions. Few families choose to limit the number of children they have because of a national or global "population problem." Rather, households act on the basis of the familys best interests. Thus as countries have tried to understand the factors that influence fertility, labor force participation, education enrollment rates, and saving, they have begun to look more closely at how the household makes its decisions and what factors influence this process. A familys place in society depends, to some extent, on the economic functions it performs, and these functions follow the needs of the prevalent mode of production. Economic development leads to a breakdown of the family as a production unit. This change essentially follows the increased division of labor and of specialization within societies as economies move away from a predominantly agricultural base. The family cannot match the size and flexibility of the modern corporation. Family size usually falls dramatically during economic development, and this reduction in size tends to reduce its ability to provide a safety net to family members in the event of temporary setbacks. In addition, the increasing mobility of the labor force undermines those long-term relationships that cement the family together. This paper explores the familys role in countries in the midst of an economic and demographic transition based on the experience of other countries. It will also discuss some of the policy implications that countries should consider in the face of smaller, more isolated, families, an aging population, and an economy increasingly based on production outside the home. These countries will also need to take into account the consequences of increasing education rates, female labor force participation, and occupational mobilityOften, the implications include ensuring that other institutions are in place to take over the functions that the family can no longer perform. However, institution building is difficult and creates a fundamental tension between security and flexibility. Institutions that provide security to their members, come what may, often lack the flexibility to take full advantage of rapidly changing economic conditions, while institutions that are more efficient often achieve this by dismissing people as soon as they can no longer make a net contribution, thereby creating insecurity. In addition, institutions can have far-reaching consequences, for example, building institutions to take over the familys function when it fails may reduce the familys usefulness and hasten its demise. These factors mean that institution building needs careful consideration before being implemented.
1

This paper will use the terms family and household more or less interchangeably. While the authors recognize that these terms are not synonymous, for the purpose of the discussions in this paper, they will not be differentiated.

Theories of the Family Households are the central decision making units in most societies. While demographers tend to focus on aggregate fertility rates and economists on gross national product, the family, not the nation, makes decisions about spending, number of children, migration, education, and the roles assigned to parents and children within the household. Thus an understanding of household decision making is critical to an understanding of the relationship between economic development and demography. In economic terms, the concept of a household is an economic unit that lives together and shares resources for the common benefit. In general, the assumption is that the household contains a nuclear family plus additional members of the extended family, such as parents and unmarried siblings. The nuclear family consumes together, gaining the benefits of economies of scale in consumption because, on average, two can live more cheaply than one. The family raises children and cares for the old and sick. It allocates its capital resources between its members, generating investment in both enterprise and in education. It allows risk sharing between its members, ensuring that temporary bad luck does not permanently damage an individual members prospects. In some cases the family is also a production unit and organizes the division of labor, often based on gender. The extended family, because of its long-term relationships based on trust, allows risk sharing and the efficient allocation of capital between its members. It can also serve as an important source of information flows. An example of this is when one branch of an extended family migrates and acts as a magnet for other parts. Finally, the family acts as a mechanism for social inclusion, ensuring that individual members are not permanently alienated from society. It satisfies a psychological need for belonging. It represents commitment and security in an uncertain world. Despite its importance, economists often try to avoid dealing with the family. The most common approach in economic theory has been to treat the family, or household, as a single economic unit, the agent. This implies that the household acts as if it were an individual, in particular, that it has welldefined preferences for outcomes. Economists justify this by arguing that everyone in the family has the same interests, or if their interests differ, that the family has a dominant member and follows that members wishes. This unitary view of the family works well in considering many functions that the family provides. The problem with this approach, however, is that it says nothing about whether conflicts within the family are resolved and whether such intra-family dynamics influence the behavior of families as a whole. In response to the concern that the family does not always act as a unitary whole, recent studies have looked at how resources are shared within a household. The classic model of the unitary household is that resources are shared equitably among household members and that no conflicts of interest arise. However, recent literature indicates that in most households this is not the case. Instead, family members constantly negotiate over resources, including food, parental attention, access to external benefits such as school, and allocation of work within the household. This view is captured in the bargaining model, which assumes that members of a family have different interests, and must therefore bargain over family decisions. How much of their way individuals get

depends on their bargaining power, and in particular, on the threats they can credibly employ. For example, improving womens potential position in and after divorce can increase the credibility of a threat to dissolve the marriage, and may improve their lot within marriage. With full information, the model predicts the efficient allocation of resources to maximize family income, with individuals rewards depending on their bargaining power. In practice, however, bargaining often leads to inefficiency, because individuals may be willing for their families to be worse off if they personally do better. For example, parties may hide information to increase their personal share of resources. Household surveys in South Africa have shown that men often hide some of their income from the family to use for their own ends, while women often have hidden savings. This model seems to reflect many of the elements of household dynamics quite accurately. One logical outcome of the bargaining model is that as long as women and children have less power than adult males, they will get a smaller share of food and other resources. Indeed, several studies have indicated that in many countries, female children do get less food, less free time, less education, and fewer inputs from their parents than their male siblings. Furthermore, these discrepancies are even greater in large families. Children with more siblings suffer differentially a loss in resources relative to adults even after accounting for children's lower consumption needs. Thus larger families mean greater inequity between the generations in terms of resource distribution (Bauer and Mason(1993), p. 24). However, bargaining models of intra-family dynamics also have their shortcomings. One of their failings is that they treat the individual in the family as a strictly selfish person who uses other family members only as a source of resources to be exploited. In practice, people in families tend to care about each other, and the happiness of all influences the happiness of each. While explaining most behavior within families as the result of selfish goals may be possible, this does not seem to be a good explanation of how households actually work. Family members tend to be nice to each other so that other family members will be nice to them. In addition, an element of pure altruism seems to be apparent in intrahousehold relationships, particularly in parents relationships toward their children, that the bargaining model does not explain. Another problem with economic theory as it relates to the family is that it does not distinguish much between men and women. We know from sociological and anthropological literature that gender roles go well beyond the biological requirements for reproduction and are not explained by physical differences between the sexes. Furthermore, while traditional societies tend to place an enormous burden on women in their role as mothers, modern societies characterized by reduced numbers of pregnancies and children and the potential of men and women to be equal have managed to retain many of the traditional divisions of labor related to children and the home. Thus while economists may treat men and women as equal, most societies do not. As a way to understand the importance of families to society, let us imagine a world without families. Theoretically, every adult could live alone and gain all the things a family provides from the market, the state, and other institutions. People could work and consume individually or in groups without any of the commitments we associate with the family. Risk sharing, old age care, health care, and child care could all be carried out by the state or through the private sector. Children could, in principle, be born not

knowing who their parents were, and could be raised by private firms to start their working lives with a debt, or by the state, in which case they would face a tax liability. Such a world is possible in theory, and indeed, both Plato and Marx supported such a concept. However, our unease with the prospect of such a world is deep-seated. This is partly a problem of risk. As long as societal institutions continue to function, such a world may work quite well. However, history teaches us that revolutions occur in both politics and economic institutions, and that we cannot guarantee the survival of economic institutions. The family is one of the most robust institutions in existence. It survives when all other social relationships disintegrate. However, in addition to the overall fragility of a society without families, we feel a deeper unease. To some extent it may simply be that we are so used to families that the prospect of not having them is frightening. More likely, however, is that people need, as a psychological requirement, some stable, long-term relationships of mutual support to function effectively. Often the family provides this, although sometimes it fails to do so. Other institutions can provide such long-term security, but in practice they are often more fragile than the family. Despite the decline in their economic activities, families are important in society because they provide connections between individuals. A central social problem is the alienation of some individuals and the emergence of an underclass of people who lack connections to mainstream society. The family, the firm, the religious organization, and the club all provide members with constraints, rewards, and opportunities. At the extreme of economic modeling we think of an economy as made up of people who interact through the market, with a legal framework in place to resolve disputes. In reality, most people work in organizations, rather than acting as individuals in a market. The institutions of a society determine its social norms and moral standards and channel people into socially desirable behavior. Alienated individuals without links to others through these organizations have little love of society and often little fear of it. Two-tiered societies have emerged in many industrial countries, with most people having strong links with others in society and sharing the benefits of economic development, while a marginal underclass lives its life as if in a different country, except for the inevitable spillovers of crime and punishment. In addition, families play a role of insurer of last resort, providing aid and solace when all else fails and preventing temporary setbacks from becoming permanent. We could list more roles that the family plays and develop each item much more deeply; however, while the family plays a host of functions, it is not essential. Indeed, in almost every case alternative institutions and mechanisms can supplant the role of the family. The fact that some individuals manage to live full lives without ever being associated with a family demonstrates that the family is not essential. Development and Reduced Family Size The evidence indicates that as countries develop economically, an associated reduction occurs in fertility and in family size. Rising incomes account for some of the force behind this reduction, but it is mostly due to increased levels of female education and greater employment opportunities for women outside the home. The calculus of advantage changes from children making a net contribution to their parents

incomes to being a net cost. Once people desire children only for altruistic reasons, and not for economic reasons, they want small families. Furthermore, a reduction in family size can contribute to the social and economic development of both the country and of the individual family. For example, consider a childs ability to access education, and thus become more productive in a formal economy. Children from large families are more often denied access to schooling, because the family cannot afford to educate so many children purely from the parents incomes, and to survive may require the child's current contribution to the household. In economic terms, as the size of the family increases, the costs of schooling, both direct and in terms of other income forgone, increase, leading to lower school attendance for children from large families. This is particularly true for female children, because their traditional role has been to care for their younger siblings and help their mother with other household chores. Large families have a strong incentive to keep their older children at home, thereby denying them the future benefits of an education. This leads to a vicious cycle wherein children from larger families receive less education, play more traditional roles in the household unit, and have fewer opportunities for either employment or other forms of social mobility. This pattern leads to earlier marriage and higher fertility for these children in a cycle of poverty and high fertility. When the girls from large, traditional families reach adulthood, they will have been socialized to perform more traditional roles, will be less knowledgeable about the world around them, will have fewer remunerative skills, and will be less able to access resources on their own. As a result they will have little bargaining power within the family, be more reliant on their husband and children, will be less likely to use modern methods of contraception, and will likely have more children than young women with fewer siblings. Thus high fertility perpetuates itself, shortening the space between generations and increasing the momentum of population growth (Lloyd (1994), p. 23). Contrast this with the situation of a girl in a smaller family. Females in smaller families often benefit from more attention and the availability of more resources. They are more likely to go to school, and even more important, to complete primary school, and perhaps even secondary school. Their nutritional status is also likely to be better, and because more of their mother's and father's time is available, they are better able to develop a sense of individual identity rather than simply being "one of the children." As a result of smaller family size, both male and female siblings will have more time to study and to play, and the likelihood that they will be pushed into nontraditional roles, such as boys helping with the cooking or women going out in the village without a male chaperone, increases. A child from a small family, more educated and with more autonomy, is far more likely to have a small family in the next generation, and consequently contribute to reducing population growth. Another important finding is that as family size increases, the nutritional status of the younger children is more profoundly affected than that of the older children. This is because the older children start off life in a small family, and by the time the family has grown significantly in size, they are already past early childhood, when sensitivity to nutritional deficits is most critical to development. Even when children are all equally wanted, later children in large families may face differential access to resources.

Improving the educational and health status of children in small families provides a positive driving force for economic development. However, while both the family and society benefit from smaller families, smaller families also create some major problems. One is the loss of the safety net the family provides for the elderly, the sick, and the unemployed. Smaller families have an exponential effect on the size of extended families. Let us consider, for example, two extended families: A and B. In family A, both the mother and father come from families with 6 children, and they and their siblings each have 6 children. In family B, the mother and father come from families of 2 children, and they and their siblings each have 2 children. Now consider you are a child in family A. You have 5 siblings, 10 aunts or uncles (excluding spouses), and 60 first cousins. By contrast, in family B you have 1 sibling, 2 aunts or uncles (excluding spouses), and only 4 first cousins. Now consider that the extended family functions for many as an important source of support, especially when resources are needed quickly and would otherwise be unavailable. This occurs, for example, when a child is sick and needs money for medicines, or when a house burns down or is flooded and must be replaced. The extended family can provide housing, food, and often temporary employment during hard times. Finally, it is the extended family that provides for the elderly, the chronically ill, and the aged. When an individual has 60 cousins and 10 aunts and uncles, the likelihood that someone will be able to help him or her out is high. However, with only 4 cousins and 2 aunts or uncles, this safety net may be much more difficult to find. This is especially true as internal migration increases and family members move to the city in search of jobs. Smaller families may be less able to help when they buy food instead of growing it, when their housing is much more limited, and when their own cash needs fully consume their earnings. A major impact of economic development and health improvements is longer life expectancy and an increased need for provision for old age. Yet in most societies the children, often the male children, are those who provide for their parents in their old age. As families become smaller, become more mobile, and rely increasingly on a cash economy, it whether this filial responsibility will continue to be met is unclear. Indeed, in countries such as Japan, where the demands of a modern economy have overtaken the tradition of parental care, this issue is now posing a considerable problem. If countries wish to address the forces that undermine the trend toward smaller families and gender equality among children, they must develop alternative institutions that will provide for saving, insurance, and public provision of old age benefits. Thus to counter the loss of the extended family and to meet the new needs generated by development, other structures must be put in place that provide a financial safety net for individuals facing temporary economic setbacks, and that provide access to the small-scale savings and capital that the extended family traditionally offers. In the industrial world, such structures are represented by social security systems, pensions, insurance, and banks and credit unions that provide both saving opportunities and credit for business investments. In developing countries such institutions are typically available only to the rich, and the poor or near poor who need them most have no way to access these safety nets. This is of particular concern, because recent evidence suggests that without this type of safety net, the near poor will often suffer from cyclical financial setbacks, such as bad weather or bad luck, and be pushed into a permanent state of poverty.

This same issue arises in raising capital for small business ventures, which is a key component of economic growth. Because sources of investment capital are extremely limited in most developing countries, people rely on their relatives to lend them money to start small ventures such as shops or trades. Again, relying on one's family when it is small and scattered around the country is more difficult, thereby limiting opportunities for investment by individuals. Finally, another threat that comes from reduced family size, and thereby its smaller economic role, is that family links decline in importance, and some individuals do not find other connections to generate links to society. Once disengaged from society, such individuals can form an underclass with no stake in societys success. The family plays a key role in preventing social alienation, because it is the one structure individuals are part of by birth rather than by choice. Even if all other institutions fail individuals, they can always turn to their family in times of difficulty if the institution of the family is functioning. Without the family to fall back on in times of stress, the likelihood that individuals leave society and enter the underclass when, for example, they face unemployment, increases. Policy Implications So far most of the policy debate on population growth and economic growth has focused on the need for a lower rate of population growth as a driving force for higher per capita incomes. For societies that have not yet reached the stage of small families, having policies in place aimed at reducing population growth is important. Perhaps the most import of such policies is improving the relative position of women. As we learn more about the role of individual family members, we have become more aware of the need for women to be in a stronger bargaining position in relation to their husbands and other family members (such as in-laws) to assure equitable distribution of resources for their children and themselves. This has a dramatic impact on education, nutrition, health, and fertility, and also implies the receipt of direct economic and social benefits for women. However, this paper has gone a step further, and focused on some of the changes that will occur as the size of families decreases because of changing fertility. While many of these changes have positive implications for both social and economic development and for the opportunities individual family members will have, some roles that the family has traditionally assumed will need to be transferred to other institutions. In modern societies, the dominant economic institutions are the market, the company, and the state. However, while these institutions provide alternatives to the family, they have their own problems. Market mechanisms can produce efficient outcomes, but pervasive market failure exists in many areas. Companies, in theory, maximize shareholder value. In practice, they often provide job security and other insurance to their workers, since insurance markets often fail. The conflict between these motives means they often fulfill their goals imperfectly. The idea that the state should intervene in such cases is commonplace, but the state itself is not omnipotent, and state failure, in the sense that it fails to deliver as

much as is expected of it, is also common. Other institutions, such as religious organizations, clubs, and community associations, play important roles in the social arena, but usually lack significant economic resources, due to their voluntary nature. Recognizing that someone must pay the cost of providing services is also important. If the private sector is used, poorer individuals will tend to be excluded. The private sector cannot redistribute resources, each person gets what he, or she pays for. In addition, marketing costs and commissions often lead to large lump sum fees on private services such as insurance, which tends exclude poorer customers who desire low value contracts. If the public sector is used, this implies an increased tax burden. If companies are legally obliged to provide services such as health care or pensions to their workers, this has a cost in terms of higher prices for goods and loss of international competitiveness. The roles the family now has difficulty playing include providing a measure of security for the elderly and providing a safety net for periods of unemployment. The extended family has also been the lender of last resort when families need money either for bills such as for health care or construction, or for investment capital for new economic enterprises. In addition, the family has served as a social unit where customs are preserved, ethics are maintained, and acceptable behaviors are defined. Thus with a decline in the familys role in these areas, developing alternative institutions to fill the gap will be crucial. These institutions will be needed for the following: Providing pension schemes for the elderly. Timing in this regard is particularly important. Today, when the number of productive workers far exceeds the number of dependents, more can be paid into a pension system than needs to be paid out. However, in 40 years that situation will reverse, and both the economic and the political decisions that will be needed then will be far more difficult than those taken today. A well-planned pension system, either public, or more likely private, can provide both a safety net for the elderly and a source of capital for the country to invest in its own development. Providing health insurance. In most countries, the government provides health care to the poor while the private sector cares for the everyone else. However, as the population ages, as the epidemiological trend moves from acute infectious diseases to chronic diseases, and as the familys ability to pay for catastrophic illness decreases, a more comprehensive approach toward paying for health services is urgently needed. Many models for this are available, of which none is perfect, but some type of national health insurance can provide a measure of security and lead to improved services for the country as a whole. Providing micro-financing. Families have often provided the start-up capital for small businesses and other family enterprises that enable the development of small-scale enterprises. As families become smaller, other formal institutions that are willing to provide small loans, small saving schemes, and perhaps advice on managing small businesses must assume this role. Developing and supporting social institutions for young people. The role that the family traditionally plays in defining and maintaining social norms will not be as strong when families move to the city; when they are subject to inputs from the outside, like television and newspapers; and

when parents and children spend more of their time outside the home than inside. Under such circumstances the family must be given support, and other institutions, such as clubs, boys and girls youth organizations, religious youth organizations, sports teams, and school- based activities should be made available to young people to prevent the influence of gangs, drugs, and other socially disruptive behaviors. However, old age pensions, health insurance, and financial institutions for saving, whether public or private, provide the individual with security, and may weaken the desire for children and the importance of the family. The question that remains for policymakers is how to provide the safety net that the family has traditionally provided without undermining the values of family support. References Bauer, John and Andrew Mason (1993), Equivalence scales, costs of children and poverty in the Philippines and Thailand, in Fertility, Family Size and Structure: Consequences for Families and Children, C.B. Lloyd (ed.), Population Council, New York, pp. 13-39. Lloyd, Cynthia B. (1994), Investing in the Next generation: Implications of high Fertility at the Level of the Family, Research Division Working Paper, No. 63, Population Council.