Ibarra Cotacachi Quiroga
1.4 RESERVA BIOLÓGICA CHOCO ANDINO
Development isn’t something that just happens to people. People are active participants in development. Their choices help determine the speed of economic growth and how the benefits of growth are distributed. If we wish to understand the development process or design good devel- opment policies, we must study how people in developing countries make many important choices. This chapter introduces readers to the role of choice in development and to how devel- opment economists study choices. It then begins building the analytical framework of Part III by examining three important sets of choices: consumption, time allocation, and production. The chapter reviews the basic theories that economists bring to the study of these choices and demonstrates their usefulness in empirical applications relating to nutrition policy, child labor, and the Green Revolution.
In later chapters, we argue the need to combine and modify these basic theories to better understand many development concerns. The basic theories nonetheless offer many insights of enduring value in development analysis.
6.1
Choices, Development, and Development
Economics
Many choices influence the speed and character of development. Most obviously, when people choose to set up businesses, send their children to school, adopt new agricultural technologies, or cooperate with others in building roads, they create assets and contribute to economic growth. More subtly, when people choose how to interact with one another in market and nonmarket settings— choosing what to supply or demand in various markets and whether to comply with various institutional rules and norms—they help determine market prices and other critical socioeconomic outcomes (as we will see). In so doing, they help determine how the benefits of growth are dis- tributed across households and what effects growth has on diverse dimensions of living conditions. In this chapter, we examine peoples’ choices regarding what to consume, how to spend their time, and what to produce (and with what inputs) on farms or in nonfarm enterprises. These choices are sometimes of direct interest, as when policymakers seek ways to increase the con- sumption of nutritious foods, reduce the time children spend working, or discourage the use of environmentally harmful farm inputs. These choices are also of more indirect and broader interest in development studies, because they help explain the quantities of goods, services, and labor that households demand or supply in various markets. We must understand these supplies and demands if we wish to understand how markets work, how the effects of policy may be trans- mitted to diverse households through markets, and how markets might contribute to development. In the rest of Part III (Chapters 7–13), we will examine many other choices, including households’ choices regarding whether or not to participate in markets at all, whether to partic- ipate in shorter- or longer-distance markets, where to work and live, how much to save and invest, what kinds of investment to undertake, and whether to comply with institutional rules and norms. In the policy analysis applications of Part IV, we will also examine people’s choices regarding whether to participate in targeted transfer programs, use infrastructure services, enroll children in primary school, create or adopt new agricultural technologies, use microcredit, purchase insecticide-treated bed nets, and acquire health insurance.
Following common practice among development economists, we begin our study of each set of choices by applying standard economic assumptions about how people make choices. These are the assumptions to which readers have been exposed in introductory and intermediate microeconomics courses. The most fundamental of the standard assumptions is that people exhibit neoclassical rationality. This means that they make choices with the aim of maximizing their utility given the constraints they face. The utility they maximize is assumed to be a function only of the goods, services, and experiences they would possess after making choices. Additional assumptions regarding utility functions (which we will examine in Chapter 10) become relevant when defining neoclassical rationality for choices regarding saving and investment, which involve comparisons between present and future consumption and between safer and riskier outcomes.
In addition to assuming neoclassical rationality, standard economic models also assume that people have complete and accurate information about their options and constraints and that the only relevant constraints are inescapable resource constraints. These include the constraints that people cannot spend more money than they take in, cannot spend more time than they have available, and cannot obtain more output from production inputs than is technologically possible. By invoking and applying the standard economic assumptions, we create simple theoretical models of how people make particular sets of choices. These models are useful because they help us work out lists of the many possible determinants of peoples’ choices, or the features of their circumstances—such as how much land they own, how much education they have, or what prices they face—that they take as given in the present moment and that help to determine the choices they make. The models also remind us that any one choice a household makes (e.g., the choice of how much rice to consume) is inextricably linked to other choices (e.g., the choices of how much to consume of all other goods and services) and help us work out lists of the many possible choices that might be altered as the result of a change in a single determinant. These lists offer important guidance for empirical research, through which we seek to identify which of the theoretically possible cause–effect relationships (between determinants and outcomes) are indeed important in practice and to measure the sizes of these effects. Such research helps illuminate how socioeconomic systems work and what effects diverse policies are likely to have on peoples’ choices and on development outcomes.
Research based on standard economic models has yielded many useful insights into development and policy, but we will oftenfind it useful to question the standard assumptions and to carry out additional rounds of research guided by alternative assumptions.
The standard assumption that is most commonly questioned and rejected in development studies is the assumption that decision makers possess accurate and complete information. In reality, information is costly and difficult to obtain, especially in developing countries, and poor information flows inhibit development. People cannot take advantage of new investment opportunities—such as the opportunity to use a new and improved agricultural technology— unless they know about it (Chapter 20). Even when people are aware of certain opportunities, they may be discouraged from choosing them by inadequate, inaccurate, or untimely information. For example, people might fail to sell grain in a lucrative distant market because they lack up-to-date information about the price of grain in that market on any given day (Chapter 8). Similarly, they might fail to send a child to school because they lack accurate information about the benefits their children would derive from education (Chapter 19). We will also see that asymmetries of information—in which parties on one side of a market transaction know more about the quality of the good or service on offer than the parties on the other side—can cause markets to fail (Chapters 9, 10, and 13).
At times, development economists also question the assumption of neoclassical rationality. Taking their inspiration from the economics subdiscipline of behavioral economics or economic psychology (reviewed in DellaVigna, 2009), development economists sometimes define specific alternative models of how people make decisions and then undertake laboratory and field
experiments to test whether peoples’ choices are better explained by standard models of neo- classical rationality or models based on the alternative assumptions. The alternative assumptions explain some behaviors better and sometimes yield novel policy suggestions (Datta and Mullainathan, 2012).
In this textbook, we consider four kinds of departure from neoclassical rationality. We acknowledge,first, that the utility people derive from particular choices may be influenced by the behavior or beliefs of other people or by how their choices affect other people (Chapters 6 and 12), rather than depending only on the quantities of goods and services they themselves would possess after making the choices. Second, people’s choices can depend not only on the utility they would experience after executing choices but also on their endowments, circum- stances, or emotions at the moment they must make a choice (see Chapter 22). Third, when people must weigh tradeoffs between present and future consumption (as they must when making choices regarding saving and investment), they might seek to maximize a utility function that exhibits present bias. This is a potential complication in how people evaluate utility as a function of consumption over time that is disallowed in standard economic models but can help explain why people procrastinate and why they sometimes lack the self-control to follow through on plans for saving and investment (see Chapter 10). Fourth, people’s capacity to make the complex calculations required for maximizing utility may be diminished by attention limits or other deficits. Development and behavioral economists point out that while departures from neoclassical rationality appear equally relevant to human beings in all walks of life and in rich and poor countries alike, they can prove especially burdensome to people living in poverty (Mullainathan, 2006).
In addition to questioning the assumptions of perfect information and neoclassical ratio- nality, development economists also examine how people’s choices are governed by constraints other than inescapable resource constraints. More specifically, taking their inspiration from another economics subdiscipline—the economics of institutions—development economists increasingly examine the impacts of institutional rules and norms, the humanly devised con- straints we introduced briefly in Chapter 2. Formal institutions include laws and regulations, which are enforced at least in part by the threat of codified penalties. Informal institutions can take the form of social norms. Many healthy institutional rules and norms encourage cooperation by prohibiting people from taking self-interested actions that detract from the common good (Chapter 12). Other norms seem to define systems of mental accounts, which limit the sets of uses to which people may legitimately devote income derived from specific sources (Chapters 7 and 22). Yet others, unfortunately, allow people with power to extract labor or wealth from powerless people. Development economists increasingly seek to understand not only how institutional rules affect peoples’ choices but also how the rules come to exist and why people obey them (Chapter 12).