Star economists of development

Two leading young economists identified by The Economist who are concerned with development.

Firstly, Ester Duflo of MIT Poverty Action Lab who:

"studies economic development as seen from the field, clinic or school, rather than the finance ministry. They might be called the “peace corps” of economists, bringing the blessing of their investigative technique to the neglected villages of India or the denuded farms of western Kenya.

Ms Duflo has made her name carrying out randomised trials of development projects, such as fertiliser subsidies and school recruitment. In these trials, people are randomly assigned to a “treatment” group, which benefits from the project, and a “control” group, which does not. By comparing the average outcome of each group, she can establish whether the project worked and precisely how well.

In one study, Ms Duflo and her colleagues showed that mothers in the Indian state of Rajasthan are three times as likely to have their children vaccinated if they are rewarded with a kilogram of daal (lentils) at the immunisation camp. The result is useful to aid workers, but puzzling to economists: why should such a modest incentive (worth less than 50 cents) make such a big difference? Immunisation can save a child’s life; a bag of lentils should not sway the mother’s decision either way.

Randomised trials “give you the chance to be surprised”, Ms Duflo says. Had they arrived at this result using some other method, she and her colleagues would have assumed they had made a mistake. But randomisation removes such doubts, showing that it was indeed the lentils that made the difference. The result cannot be dismissed; it must be explained.

The approach has its critics. A randomised trial can prove that a remedy works, without necessarily showing why. It may not do much to illuminate the mechanism between the lever the experimenters pull and the results they measure. This makes it harder to predict how other people would respond to the remedy or how the same people would respond to an alternative. And even if the trial works on average, that does not mean it will work for any particular individual".

Secondly, Marc Melitz, a trade economist at Princeton University

"Mr Melitz is a pioneer of the “new, new trade theory”, which succeeds the “new” trade theory propounded by Mr Krugman almost 30 years ago. The source of its novelty is its recognition that firms differ, and only the best firms export. In America, for example, exporting factories are more than twice as big as plants that do not sell beyond their shores, and they squeeze 14% more out of their workers.

In Mr Melitz’s theory firms first prove themselves at home, discovering their own limits and abilities. Only the best then venture overseas. Entering a foreign market is an expensive endeavour, he points out, even before firms encounter the tariffs or transport costs that preoccupy most trade models. An exporter must find and introduce itself to distant customers, comply with alien regulations and set up distribution channels abroad. One study found that it cost Colombian chemical factories over $1m to enter a foreign market.

The gains from trade also differ in Mr Melitz’s model. In the new trade theory that preceded it, international commerce raises the productivity of firms by enlarging their market, allowing them to reap economies of scale. In Mr Melitz’s model, trade raises the productivity of industries, not by allowing firms to grow bigger, but by giving the better firms a bigger share of the market. Foreign competition sifts and sorts firms, winnowing out the weakest firms and leaving a greater share of the market to their stronger rivals".