Does Fertility Decrease Household Consumption? an Analysis of Poverty Dynamics and Fertility in Indonesia

Abstract This paper presents an empirical analysis of the relationship between fertility and poverty for Indonesia, a country which has experienced unprecedented economic growth and sharp fertility decline over recent decades. We illustrate the sensitivity of the effect of fertility on household consumption with respect to the equivalence scale in a unitary household framework. Using the propensity score matching method, the analysis suggests that a newborn child decreases household consumption per person by 20 percent within four years. When the estimates of equivalence scales implied by the Indonesian sample are applied, the effect of a child on household consumption is still negative, but the magnitudes are in the range of 20 to 65 percent of that found with the per-capita expenditure as a measure of consumption. Therefore, it is suggested that analysis based on the conventional measure of poverty is likely to exaggerate the effect of fertility on poverty at least because of neglect of the proper equivalence scale. Given that household preference for consumption of private goods such as children's education is negatively associated with fertility, the test for household bargaining supports the model of the unitary household as a valid assumption for examining the relationship between fertility and household consumption. (ProQuest: . denotes formulae omitted.) 1. Introduction The causal relationship between population growth and standard of living has long been of interest to policymakers. While the estimates of the effect of fertility on poverty range from being significantly positive to insignificant, a growing body of literature suggests that the true relationship is likely to be more complicated than unidirectional (e.g. Birdsall et al. 2001). The relationship between poverty and fertility is not unidirectional but dependent on the stage of economic development (McNicoll 1997, Schoumaker and Tabutin 1999). While in most contemporary developing countries this relationship is positive, a negative relationship has been reported within the poorest countries. The latter results are associated with lower reproduction capability and higher rates of infertility among extremely poor households (Lipton 1998, Livi-Bacci and De Santis 1998). Clearly many factors that influence fertility also determine well-being. These include education, health services and family planning policies. In addition to joint causation, reverse causation may also take place. Among poor households, the demand for children is high since those households rely on their children's labor supply and often the child's support is critical when parents become old. Higher fertility in turn is associated with lower investment in education (i.e. demand for quantity rather than quality of children) and consequently lower earnings potential for children, which in turn fosters intergenerational transmission of poverty (Moav 2005). The theoretical perspectives suggest various mechanisms linking fertility and poverty. Empirical studies that tried to identify the causal relationship between fertility and poverty have so far relied on aggregate level data and cross-sectional micro level data (cf. the review by Merrick 2001). With these data, it is difficult to provide robust causal information about fertility and well-being because fertility and household income are jointly determined. Recent longitudinal household surveys in developing countries that incorporate the timing of fertility together with information on consumption expenditure, income and other measures of well-being allow researchers to identify the dynamic relation between poverty and fertility. So far, these data sets have not been used to study the link between poverty and fertility, which is the goal of this paper. In particular, we examine the Indonesian experience for which we have excellent longitudinal information on both fertility and household expenditure, together with a range of other background information. …