Macro-Micro Linkages Abhijit V. Banerjee Ford Foundation International Professor of Economics, MIT A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B

The Unavoidability of Macro No man is an island, entire of itself every man is a piece of the continent, a part of the main if a clod be washed away by the sea, Europe is the less, … any man's death diminishes me, because I am involved in mankind and therefore never send to know for whom the bell tolls it tolls for thee. from a sermon by John Donne ( ) A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B

From the Point of Evaluations Both an opportunity and a problem An opportunity because it makes it clear that the data we generate feeds into a much bigger conversation A problem because it makes evaluations harder. A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B

How Macroeconomics has Changed Much more emphasis on heterogeneity All firms are not the same in terms of average product Or in terms of marginal products And therefore on the question of how economies manage to channel resources to where there is maximal social value No longer assumed to be automatic Function of market institutions, regulations, etc. A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B

Evidence on Non-Equalization of Returns On one side in developing countries Evidence on interest rates varying Evidence on direct measures of marginal products »Udry-Goldstein in agriculture (Ghana) »Duflo-Kremer-Robinson in agriculture (Kenya) »McKenzie-Woodruff and their co-authors (Sri Lanka, Mexico) »Banerjee-Duflo (India) On the non-utilization of the best available technologies A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B

Evidence on Non-Equalization of Returns continued On the other hand macro estimates suggest low overall marginal product in poor countries (Caselli) The evidence from the ICOR The only way to square the circle is to assume that marginal products are not equalized And that the marginal dollar does not go to the best use A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B

Causal Factors Market failures In the capital market »Both capital »And risk capital In the market for labor/human capital »Agency issues In the market for technology »Appropriate technology »Learning Regulatory failures Insufficient competition Labor laws Not enough property rights protection Ineffective contractual protection A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B

Micro Distortions Macro Consequences Countries are often poor because they have poorly allocated resources Hsieh-Klenow for India, China (relative to the US) »Equalizing marginal products within 4 digit industries would increase TFP by 50% or more Follow up work in Latin America Moreover poorly allocated resources can be very persistent, especially when factor prices are distorted E.g: Not enough demand for labor depresses wages, which reduces supply of entrepreneurs who can set up large firms and hire labor. A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B

Macro Consequences continued A lot of people enter some industry (say retail) because they are desperate to make a living Drives down profits in those sectors Makes it harder for the most efficient firms to grow and absorb more labor Hence very few jobs get created No one uses the best technologies, therefore no one learns about them. The untalented children of the rich grab a lot of the spots in the good schools. Low returns to education. A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B

The Role of Micro Experiments To identify the specific distortions To help identify the best responses to them To help us build macro models that are based on realistic parameters. A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B

Challenges for the Micro-Experimenter The macro perspective highlights a number of challenges to the micro perspective as well Spillovers: From learning Across markets Within markets Require policy changes that are very broad Legal reforms, creation of institutions Experiments are not always possible, but more often than one thinks. A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B

Bon Courage! A B D U L L A T I F J A M E E L P O V E R T Y A C T I O N L A B