Why is the world such that my snow blower is so cool?

Lant Pritchett3rd Migration and Development

ConferenceSept. 11, 2010

What is wrong with this picture?(multiple answers permitted)

My neighbor and his (even cooler) snow blower

My other neighbor: commercial service—even more capital intensive

Truck with blade

My snow blower is cool

• Can shovel snow up to 10 inches deep

• Self-propelled

• Compared to the “low-tech” alternative—a snow shovel—is amazingly productive, reduces task from hours to half an hour.

• My wife, normally averse to both cold and machinery, will shovel the walks

Other cool stuff: Lawn care (in the USA)

Cool Super cool

Market transaction

Home produced

Labor intensive Worker (casual or otherwise) with a snow shovel

Me with a snow shovel

Capital intensive

Commercial service with a truck/snow blower

Me with a snow blower

Market transaction

Home produced

Labor intensive Worker with a snow shovel

Me with a snow shovel

Capital intensive

Commercial service with a truck/snow blower

Me with a snow blower

Labor MarketDistortions

(Quotas, Taxes)

Ind

uced

Inn

ovatio

n

Lab

or M

arketD

istortio

ns

(Qu

otas, T

axes)

Indu

ced

inno

vatio

n

Three issues

• “Wasted” induced innovation due to distortions—innovations that are profitable, conditional on distortions, but not otherwise

• Changes in returns within rich countries as commercial services become capital intensive

• “Blow-back”—once invented, technology choices come back into poorer countries for which relative prices never would have allowed

Other examples: Food consumption--Chad

Food consumption: Ulan Bator

Food Consumption: Cairo

Food Consumption: Germany

Food Consumption: USA (North Carolina)

High levels of capital intensive (packaged) food preparation (facilitated by storage, refrigeration)

How “specialized” are people (men and women) in rich economies relative to facing world prices?

• How many people have a driver? (capital intensive own production of transportation services)

• Household cleaning? (dishwashers, vacuum cleaners, washing machines)

• Food preparation? (market purchase of value added—made possible by refrigeration, size of pantry, food storage stability)

• Home repair?

Purchasing power parity wages from various potential suppliers of semi-skilled labor

In US In Home

Nigeria $8.71 $0.59

Haiti $8.25 $0.80

India $10.90 $1.74

Philippines $8.73 $2.28

Brazil $11.23 $2.98

Mexico $8.36 $3.30

Dominican Rep. $8.47 $4.25Source: Clemens, Montenegro, and Pritchett, 2008, “The

Place Premium”

Distortion induced R&D

• Labor market distortions:– Taxation of labor—means “marketed” transactions are doubly

disadvantaged (e.g. generating income and supplier)– Border based quantitative restrictions on labor mobility induce

price differentials across equivalent productivity labor

• Generates patterns of relative prices and demand for goods

• Application of R&D based on relative profits of innovations (depends on purchasing power)

• Long-run equilibrium, inclusive of induced R&D, may be very different from short-run impact

Incredible concentration of highly skilled labor in rich countries

Table 2: Estimates of numbers of a cohort above absolute performance thresholds for mathematics using TIMSS data

Number above threshold on TIMSS (in ‘000), rounded to nearest thousand

Country Above 550 Above 625

Top Three in Number above 625

Japan 753 291

USA 1069 258

Korea 452 226

Selected Developing Countries

Egypt 78 13

Philippines 37 0

Iran 32 0

South Africa 12 0

Chile 7 0

Morocco 2 0

Tunisia 1 0

Ghana 0 0

Source: Adapted from Das and Zajonc (2009), table 4.

Nearly all high quality universities are in rich countries

US/UK AngloCont

EuropeRich

AsiaTotal of

rich

Sum of top 100 49 64 20 14 98

Sum of top 20082 107 52 23 182

Magnitude of Distortion Induced R&D

• People talk about “biased” R&D in the health sector (e.g. Viagra versus tropical diseases)

• In Agriculture (e.g. drought resistant crops)• In Energy (e.g. too little (?) carbon saving due to

the climate change externality)

But all commercially motivated R&D is potentially biased by massive (order of magnitude) distortions in rich country relative prices—the world’s greatest talent pool devoted to reducing demand for a world abundant factor (labor)

Changes in structure of demand (within commercial)

• Especially in US massive long-run shifts in relative wages of unskilled versus skilled labor—at every level of “skill”

• Small absolute rise in wages of low skill workers over very extended periods in USA (but rises in labor compensation)

• Substitution of capital for labor in variety of unskilled occupations—imposing costs on consumers (de-specialization)

Self-checkout, for example

Hugely sophisticated technology embedded in “capital”

Me

Are the nurses of the future Robots or Rosalie?

“Hard core non-tradables” (non-outsourceable services) are the major labor growth of the future who will do these jobs?

With a declining labor force what is the face of the future labor force?

Market transaction

Home produced

Labor intensive Worker with a snow shovel

Me with a snow shovel

Capital intensive

Commercial service with a truck/snow blower

Me with a snow blower

Labor MarketDistortions

(Quotas, Taxes)

Ind

uced

Inn

ovatio

n

Lab

or M

arketD

istortio

ns

(Qu

otas, T

axes)

Blow-back on other countries

• Wheels on your luggage

• ATMs in India

• Adoption of consumer durables embedding relative prices (e.g. dishwashers, washing machines)

Blow-back in poor countries is potentially pernicious

• Income equality increases in poor countries (shock)

• Availability of labor reducing technologies means labor intensity of marginal propensity to spend of rich is lower

• More income inequality (higher returns to capital and skilled labor).

Why “blow-back”?

• Moves the marginal poor country rich consumer towards home production through increased productivity– Especially with driving down the cost curve so

that poor country are cheap

• Organizational linkages, practices (e.g. my World Bank story)