One of the traditional uses of household survey data has been the analysis of family budgets, starting with the descriptive work of the 18th and 19th centuries, and becoming more analytic and econometric in the 20th, with Prais and Houthakker's (1955) classic monograph perhaps still the best known. That literature has investigated the distribution of the budget over goods, how that allocation changes with levels of living—Engel curve
analysis—and the relationship between the demographic structure of the household—the sexes and ages of its members—and the way in which it spends its resources. These studies have had a wide audience in the policy community. The early work came from social activists who hoped that documenting the living standards of the poor would generate a political demand to improve them. Engel curve analysis has been an important ingredient in understanding how the structure of economies changes in the process of economic growth (see in particular the classic work of Kuznets 1962, 1966). Much of the work on demographic structure has been motivated by attempts to derive "equivalence scales," numbers that tell us how much a child costs relative to an adult, and that might allow us to correct crude measures of living standards such as income or total expenditure for differences in household composition. Such corrections have a major impact on measures of poverty and inequality, on the identification of who is poor, and on the design of benefit programs. This chapter is concerned with these traditional topics in the context of surveys from developing countries.
In the eyes of many people, including many development economists, poverty is closely related to whether or not people get enough to eat, so that documenting the living standards of the poor becomes a question of counting calories and a major task of household surveys is to assess nutritional adequacy. Household survey data can also be used to examine how levels of nutrition change with the amount of money people have to spend. The topic is important in the debate over development strategy, between growth versus basic needs, and between less and more interventionist positions. If the elasticity of calories with respect to income is high, general economic development will eliminate hunger, while if the elasticity is low, we are faced with a choice, between a strategy for economic growth with hunger remaining a problem for a long time, perhaps indefinitely, or a more
interventionist strategy that targets the nutrition of the poor while letting general economic development look after itself. This topic is addressed in Section 4.1 using survey data from India and Pakistan. I look at some of the theoretical as well as empirical issues, and argue that some of the questions in the debate can be approached using the nonparametric techniques discussed in Chapter 3.
Section 4.2 is about the demographic composition of the household, its effects on demand patterns, and about the use of such information to make inferences about the allocation within the household. Household surveys nearly always collect data on household consumption (or purchases), not on individual consumption, and so cannot give us direct information about who gets what. In the development literature, much attention has focussed on gender issues, particularly although not exclusively among children, and on the question of whether girls are treated as well as boys. I review some of this work, as well as recent theoretical developments on how to use household data to make inferences about intrahousehold allocation. I implement one specific methodology that tries to detect whether girls get more or less than boys, and look at evidence from India and Pakistan as well as from a number of other countries.
Section 4.3 turns from the relatively firm empirical territory of Sections 4.1 and 4.2 to the more controversial ground of equivalence scales. Although the construction of scales is of great importance for any enterprise that uses household survey data to draw conclusions about welfare, the state of knowledge and agreement in the area is not such as to allow incontrovertible conclusions or recommendations. Even so, it is important to understand clearly what the difficulties are in passing from the empirical evidence to the construction of scales, and to see the assumptions that underlie the methodologies that are used in practice. Clarification of assumptions is the main
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issue here; equivalence scales are not identified from empirical evidence alone although, once an identifying assumption has been made, the empirical evidence is relevant and useful. Nor is there any lack of practical empirically based scales once identifying assumptions have been made. The problem with much of the literature, both in the construction and use of equivalence scales, is that identifying assumptions are often implicit, and that the effects of the assumptions on the results can be hard to see. As a result, it is difficult to know whether different investigators are actually measuring the same thing, and those who use the scales run the risk of implicitly
incorporating an assumption that they would have no hesitation in rejecting were it made explicit.
In most of this chapter, I adopt the standard convention of household budget analysis, that prices are the same for all households in the survey. The assumption of uniform prices is what has traditionally separated the fields of family budget analysis on the one hand from demand analysis on the other. The former investigates the nature of Engel curves and the effects of household composition, while the latter is mostly concerned with the measurement of price effects. Chapter 5 is about the effects of prices on demand in the context of tax and price reform, and while prices are typically not central to the questions of this chapter, there is no satisfactory justification for the uniform price assumption. Because transportation and distribution networks tend to develop along with economic growth, there is
much greater scope for spatial price variation in less developed than more developed countries. In consequence, the uniform price assumption, while possibly defensible in the context of the United States or Great Britain, is certainly false in the countries analyzed in this book. I shall indicate places where I think that it is potentially hazardous to ignore price variation, but this is a poor substitute for the research that builds price variation into the analysis. That work is not straightforward. Price data are not always available, and when they are, they frequently come in a form that requires the special treatment that is one of the main issues in the next chapter.
4.1—
The demand for food and nutrition
One attractive definition of poverty is that a person is poor when he or she does not have enough to eat, or in more explicitly economic terms, when they do not have enough money to buy the food that is required for basic
subsistence. For the United States or other developed economies, where few people spend more than a third of their incomes on food, such a definition is clearly inadequate on its own, and must be supplemented by reference to commodities other than food. However, in countries such as India and Pakistan, where a substantial fraction of the population spend three−quarters or more of their budgets on food, a hunger−based definition of poverty makes sense. This section explores the relationship between measures of nutritional status, typically the number of calories consumed, and the standard economic measures of living standards, such as income or total expenditure.
As usual, the analysis will be largely empirical, using data from India and Pakistan, but there are a number of theoretical issues that have to be given prior consideration.
Welfare measures: economic or nutritional?
If everyone spent all their income on food, and did so in the ways that are recommended by nutritionists, there would be no conflict between economic and nutritional views of living standards. However, people choose to buy goods other than food, some of which are obvious necessities like housing, shelter, and medical care, but others less obviously so, like entertainment or tobacco, and they buy such goods even when food intake is below the best estimates of subsistence. Furthermore, food purchases themselves are rarely organized according to purely
nutritional considerations. As has been known (before and) since the first applications of linear programming—see Stigler (1945) and Dorfman, Samuelson, and Solow (1958, pp. 928) for an
account—minimum nutritional requirements can usually be met for very small amounts of money, even by the standards of the very poorest. But minimum−cost diets are tedious and uninteresting, and they often bear no relation to what is actually eaten by poor people who presumably have interests beyond nutritional content. As a
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result, measures of welfare based on nutritional status will differ from the standard economic measures based on expenditures, income, or assets. There is, of course, no reason why we cannot
have multidimensional measures of welfare—someone can be wealthy but hungry, or well−fed but poor—but we can run into difficulties if we do not keep the differences clear, especially when the two views have different implications for the design of policy.
The conflict between nutritional status and economic welfare is sharpest when we look at price changes, where it is possible for something that is desirable from the point of view of nutrition to be undesirable according to the standard economic criteria. In particular, economists tend to think that individuals with high substitution elasticities are in a good position to deal with price fluctuations, since they are well equipped both to avoid the consequences of price increases and to take advantage of price decreases. By contrast, nutritionists see high substitution elasticities as a cause for concern, at least among the poor, since nutritional status is thereby threatened by price increases. To clarify these issues, we need a simple formulation of welfare under the two alternative approaches.
For the economist, welfare is defined with reference to a preference ordering or utility function, which for these purposes we can write as ν (q f, q n, ) where the two components are food and non−food respectively. We can think of q f and q n as vectors, but nothing is lost here if we consider only two goods, one food and one nonfood.
Corresponding to this utility function, there is an indirect utility function, written ψ (x, p f , p n, ) whose value is the maximum utility that can be reached by someone who has x to spend and when the prices of food and nonfood are p f and p n, respectively. In practice, indirect utility would usually be approximated by real total expenditure, which is x deflated by a price index formed from p f and p n.
To consider the effect of price changes on welfare, it is convenient to follow the usual route of consumers' surplus and convert price changes into their money equivalents. For this, we use the cost or expenditure function c (u, p f, p n ), which is defined as the minimum expenditure needed to reach the welfare level u at prices p f and p n; see Deaton and Muellbauer (1980a, ch. 2) for a full discussion of the cost function and its properties. The partial derivatives of the cost function with respect to prices are the quantities consumed, while the matrix of second derivatives is the matrix of compensated price effects, the Slutsky matrix. The cost function is concave in the prices; holding utility constant, the response of cost to price is linear (and proportional to consumption) if consumption is held constant in face of the price increase, but will typically increase less rapidly because it is possible to substitute away from the more expensive good. In particular, if prices change by an amount ∆ p, the associated change in costs ∆ c satisfies the inequality
Equation (4.1) is illustrated for a single price change in Figure 4.1. The straight line through the origin is the case of no substitution, where the same is bought irrespective of price, and costs are proportional to price with slope given by the amount consumed. The other two cases show two different degrees of substitu−
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Figure 4.1.
Substitution and the costs of price change
tion; because there is substitution away from the good as it becomes more expensive, as well as toward it when it becomes cheaper, consumers with more ability to substitute are hurt less by price increases and benefit more by price decreases.
Suppose now that only the price of food changes. A second−order Taylor approximation to the change in the cost of living can be obtained from the cost function using the fact that its first derivative is the quantity consumed and the second the substitution (Slutsky) term:
where s ff is the compensated derivative of demand with respect to price. Because the substitution effects of price must be nonpositive, so that s ff < 0, the second term in (4.2) is always zero or negative; the larger the
opportunities for substitution, the more is the consumer able to offset the costs of the price increase. In Figure 4.1, s ff is the curvature of each line at the origin, and thus (locally) determines how much consumers benefit from substitution. Clearly, substitution is a good thing; the higher the substitution, the less vulnerable is the consumer to increases in price, and the more he or she benefits from decreases. Further, any policy or other change that increases substitution possibilities (while preserving consumption levels) will make people better−off and is thus to be encouraged.
For the nutritionist, the costs of a price increase are measured in lost calories or other nutrients. If k is the calorie content per unit of food, and k is total calorie intake (k for kilocalories,) the change in calories induced by the price change can be approximated by
where the derivatives are uncompensated. If we compare (4.2) and (4.3), both depend on the responsiveness of food consumption to prices, the latter through the uncompensated first and second derivatives, and the former through the compensated price derivative. We can perhaps be permitted to assume that the second term in (4.3) is negligible—it is the price derivative of the price derivative and certainly there is little or no empirical evidence about such a quantity—in which case the distinction between the two equations becomes quite sharp. In (4.2), the cost of a price increase is smaller the larger (absolutely) is the (compensated) price response, while in (4.3) the
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nutritional cost of the price increase is larger the larger (absolutely) is the (uncompensated) price response. The difference between the compensated and uncompensated price effects will be large when the good whose price is changing is a large share of the budget, which is true for food as a whole, but in practice we are usually concerned with the price of a particular food where the difference will be small.
The crux of the conflict between the two approaches can be seen by considering an example. Suppose that milk is being subsidized, that the poor receive a good deal of their nutrients from milk, and that the government is considering reducing the subsidy for budgetary reasons. Suppose also, for the purpose of the argument, that, according to the best empirical evidence, there is a large price elasticity among the poor, so that if the price is increased, the poor will reduce their consumption of milk and its associated nutrients. The nutritional advice is therefore to maintain the subsidy, while the economic advice is likely to be the reverse. By their high price elasticity, the poor have revealed that there are good substitutes for milk, in their own eyes if not in those of the nutritionists, so that the withdrawal of the subsidy is unlikely to hurt them much. For those who, like most economists, base welfare on people's purchasing power and leave the choice of individual goods up to people themselves, the large price elasticity is welcome since it is evidence that people are not vulnerable to increases in the price of milk.
This conflict between commodity−specific and money approaches to welfare occurs in many other situations;
health care, education, and even telephones, are cases where policymakers and their constituents sometimes believe that consumption of a specific good is valuable independently of the general living standards of the consumer, and independently of whether people appear to value the good themselves. At the heart of the matter is whether or not we accept people's own judgments of what is good for them. While it is easy to find examples of people making poor choices, it is also difficult to find convincing cases where policymakers or other ''experts"
have done better on their behalf. One such case that is relevant for the current discussion is the history of food rationing in Britain during World War II; in spite of widespread shortages there was a marked improvement in general nutritional standards brought about by policies that simultaneously limited consumption (by rationing) while redirecting it towards commodities such as fresh milk that had not been widely consumed prior to the war and
whose supply was guaranteed during it (see Hammond 1951). The policy seems also to have narrowed long−standing health and mortality inequalities, at least temporarily (see Wilkinson 1986). In any case, my quarrel is not with those who wish to change tastes, or who wish to eliminate hunger even at the expense of more general economic well−being. Although many economists would disagree with such prescriptions, there is no logical flaw in the arguments.
What is both incorrect and logically flawed is to try to follow both the commodity−specific and economic
approaches simultaneously. High substitution effects are either a good thing or a bad thing; they cannot be both. It is entirely legitimate to worry about the effects of food prices on nutrition or of user charges on consumption of hospital services or education by the poor—and such has been a major research topic in the World Bank in recent years (see Jimenez 1987 or Gertler and van der Gaag 1990)—but it is necessary to take a view about what high price elasticities mean. If our goal is to provide these services to the poor even when their behavior suggests that they do not value them, then that fact should be explicitly recognized and its implications—for education, for example—taken into account. Alternatively, if we accept that the decisions of the poor have a reasonable basis—perhaps because the services are of poor quality and worth very little—then it is necessary to think hard about the justification for the subsidy, and whether or not the funds could not be better employed elsewhere, perhaps in improving quality and delivery. Spending scarce resources to subsidize facilities that are not valued by the poor will not do much to reduce poverty, and the true beneficiaries of such policies are often to be found elsewhere.
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Nutrition and productivity
An important issue is the direction of causation, whether the link runs, not only from income to nutrition, but also from nutrition to income. One possibility is that those who do heavy manual labor require more calories than those who do not—see for example Pitt, Rosenzweig, and Hassan (1990), who also consider the implications for intrahousehold allocation. This possibility can be dealt with by controlling for the appropriate occupational variables in the nutrition demand function. However, it is also possible that not getting enough to eat impairs productivity to the point where poverty and malnutrition become a trap; it is impossible to work because of malnourishment, and impossible to escape from malnourishment without working.
Following Leibenstein (1957), the theory of nutritional wages has been worked out by Mirrlees (1975) and Stiglitz (1976) in some of the finest theoretical work in economic development. These models can account for the existence of unemployment; attempts by workers without jobs to underbid those with jobs will only succeed in reducing their productivity, so that the employer gains nothing by hiring them. By the same token, the theory can explain the existence of high wages in modern sector jobs. It is also consistent with unequal allocations within the family because equal shares may leave no one with enough energy to work the farm or to be productive enough to get a job. This model has been used to
account for destitution in India by Dasgupta (1993, pt. IV see also Dasgupta and Ray 1986, 1987) as well as by Fogel (1994), who sees the mechanism as the major impediment to historical growth in Europe.
While there has been some empirical work that looks for such effects—most notably by Strauss (1986) for Sierra Leone—there are formidable difficulties in the way of constructing a convincing test. If we use data on
self−employed workers, and find a relationship between income and nutrition, we need some means of knowing whether what we see is the common−or−garden consumption function, by which higher income generates more spending and more nutrition, or is instead what we are looking for, the hypothesized effect of nutrition on productivity, output, and income. In principle, such identification problems can be solved by the application of instrumental variables, but it is doubtful whether there are any variables that can convincingly be included in one relationship and excluded from the other. These points were argued by Bliss and Stern (1981), who also identified the corresponding difficulties in looking for nutritional effects among employed workers. Since employers will only hire well−nourished workers—which is the source of the model's predictions about
unemployment—nutritional effects will only be found among the employees of those employers who are unaware of the effects of nutrition on productivity! The Mirrlees−Stiglitz theory hinges on nonlinearities in the effects of nutrition on productivity, and requires that productivity be a convex function of nutrition at low levels, becoming concave as nutritional status improves. These nonlinearities would have to provide the basis for identification in the econometric analysis, which is likely to be both controversial and unconvincing.
There is one final point on which the empirical evidence is directly relevant. For the nutritional wage theory to be a serious contender to explain the phenomena for which it was invented, the calories required to maintain
productivity must be costly. If it is possible to obtain enough calories to do a day's work for a very small fraction of the daily wage, then low productivity rooted in malnutrition is an implausible explanation for unemployment.
In the empirical analysis below, we shall use Indian data to make these calculations.
The expenditure elasticity of nutrition: background
The relationship between nutritional intake and total expenditure (or income) in poor countries is the link between economic development and the elimination of hunger. In the simplest of worlds, one might imagine that food is the "first necessity," and that people whose incomes do not permit them to buy enough food would spend almost everything on food. Even admitting the existence of other necessities, such as clothing and shelter, it is still the case that the poorest households in India (for example) spend more than three−quarters of their budget on food,
Nutrition and productivity 175