Macro-Micro Linkages

Abhijit V. BanerjeeFord Foundation International Professor of Economics, MIT

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The Unavoidability of Macro 

No man is an island, entire of itselfevery 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 (1562-1631)

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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.

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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.

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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

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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

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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

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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.

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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.

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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.

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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.

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Bon Courage!

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