How this book by Nobel laureates provides some sound answers to our biggest economic issues
Since the fall of the Berlin Wall, the world has experienced a remarkable period of economic growth driven by globalisation of capital and supply chains. Over the last 30 years, hundreds of millions of Chinese and Indian citizens have escaped the clutches of poverty while the Western world has experienced rising prosperity and improved living standards. However, this prosperity has been accompanied by rising levels of inequality across the world, leading to the rise of nationalism and the decline of liberal democracy. Governments and societies across the globe are searching for answers.
Taking a stab at these issues, Nobel Prize winners for Economics Esther Duflo and Abhijit V Banerjee provide some answers in their recent book Good Economics for Hard Times.
Economic theory often fails when facing the reality of human behaviour. The authors use their real-world experience derived from hundreds of field trials to help us understand the challenges of migration, trade, and climate change. Duflo and Banerjee are world-class empiricists. The book is a reminder that they are also remarkable theorists and powerful storytellers.
The most important message is about the stickiness of labour markets. From Tennessee to Tirupur, labour market stickiness has profound economic and social consequences. Mobility, both geographic and across jobs, is much lower than economists and policymakers have accounted for. While unemployment in the US is at a historical low, and coastal cities are booming, middle America is undergoing economic and social distress.
When people lose their jobs, they don’t leave town in search for a new job. Family and local ties keep them in their communities. For middle-aged employees in the developed world, getting laid off has devastating economic and life consequences. Both their livelihood and dignity are tied to their jobs.
Labour market stickiness is also prevalent in emerging markets. Educated professionals spend their prime years waiting for a government job that never arrives. The predictability of a stable government job is preferred to a private sector job. Mismatched expectations and the dearth of formal jobs in the private sector are to blame.
The authors make a strong case for cash transfers or a Universal Basic Income. Cash transfers are more effective than food subsidies, which are wasteful and expensive. Through Randomised Controlled Trials (RCTs), the authors have demonstrated that the poor are capable of making prudent economic decisions. Counterintuitively, cash transfers seem to make people work more, not less.
Duflo and Banerjee are ambivalent about the benefits of free trade. Unfortunately, they do not seem to account for the second order benefits of trade liberalization. For developing countries, opening up domestic markets provide significant benefit in terms of improving competitiveness of local industries, which in turn has positive impact for export growth, entrepreneurship and consumer welfare.
The prescriptions for dealing with labor market stickiness and trade dislocations resulting from trade are mostly based on government intervention. These solutions appear to underestimate the dysfunction of the political system in the developed world and overestimate the capability of the administrative state in low income countries. I hope that in the future, the authors will tell us more about the political and administrative reforms that create the space for their recommended policy interventions.
A visit to any public school in rural India will quickly reveal the hopelessness of state-sponsored K-12 education in the developing world. Most of the improvements in affordable education in India have come from the private sector.
Low income families are voting with their feet and abandoning public education, and it would be helpful to hear about ideas on how policy interventions can improve the quality of private education providers. In countries with low levels of state capacity, solutions to the most intractable problems are more likely to come from the private sector.
What kind of frameworks do we need to encourage the private sector to address the needs of low-income communities? What will encourage the private sector to create formal jobs with living wages?
I hope that Duflo and Banerjee tackle these subjects in their next book.
(Edited by Evelyn Ratnakumar)
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)