#24: Development is in the air
Reflections from a recent visit to Canada
Whenever I have travelled to a developed country, I envy its residents for the quality of public goods and services — clean streets, pedestrian-friendly infrastructure, reliable public transit, general safety, and so on.1
If you have been following this newsletter for a while, you probably know my basic take on development — it is a function of productivity. In high-income economies, on average, each worker produces more goods and services than most other places worldwide.2
When we think of development, we typically focus on the state (e.g., better public facilities). But it goes way beyond that, and I noticed this during a recent visit to Canada. Yes, the immigration officer was more professional and efficient, but so was the cashier at Burger King.
On average, every worker I interacted with seemed highly competent and conscientious. The server at the coffee shop answered my annoying questions off the top of their head without having to consult other staff. My nephew’s swimming instructor was more attentive, patient, and playful than a typical parent in India. The driver of a toy train seemed more enthusiastic about each landmark than the kids themselves.
I do not believe there is anything fundamentally special about the individuals in these places. Instead, this is a result of high human capital, which gets amplified due to agglomeration effects — they are concentrated in one place, creating a conducive ecosystem and culture. The same person might not be equally productive in a different place. Notice that this does not start and end with the state, though it is likely an important enabler.
In the last edition, I referred to the O-ring theory of development, which argues that economic development is highly sensitive to the weakest links in production processes, much like how a space shuttle can fail due to a single faulty O-ring. Therefore, slight differences in skills or quality across various levels can lead to significant differences in overall productivity and outcomes.
The seemingly higher capability and competence at every level I experienced in Canada is the O-ring theory in action. It makes the sum greater than its parts. In addition to building a better state, we in India need to patiently build a culture of high capability and competence.
Productivity arbitrage through labour mobility
Recently, Lant Prichett3 has been talking about a productivity arbitrage of sorts. It is simple yet deeply insightful: when people move to high-income places, their productivity (and wage) converges with the productivity of that place. Their individual capability builds quickly, and even if they go back, they carry with them the knowledge and experience of the high-productivity ecosystem. This is a win-win for the world.
The quote below may not make complete sense in isolation, and therefore, I suggest you watch the full video later:
… we have huge productivities across countries today. So, if you look at the wages of an equivalent person — and think if their wage is determined by productivity — if you move a person from a low productivity to a high productivity country, their productivity just almost immediately converges with the productivity of the place.
So, instead of thinking productivity as being primarily a characteristic of people — which is true within an economy, some people have higher wages and lower wages, higher productivity and lower productivity — the main difference in the world is that people of equivalent intrinsic personal productivity have radically higher productivity in rich countries than poor countries because productivity is kind of in the air*.
Productivity is a characteristic of places. So, if we allow a person who is poor in a low productivity place to move to a high productivity place we get 4X 5X increases in that person's wage. If you add up the potential of labor mobility times the wage per movement, you could add an economy the size of France to the global economy of additional product...
*The title of this piece is a play on his expression, “productivity is in the air.” There is another interpretation: you can feel development by breathing clean air. The environment switches to a higher definition. As a Delhi resident, it hits hard.
Recommendations
[Article] Lies, Damned Lies, and Productivity Data by Arnold Kling argues that the productivity measurements that we rely on are so flawed that they are not worth analysing within-country recent trends.
[Article] The world is awful. The world is much better. The world can be much better. by Max Roser makes a nuanced claim:
[Tweet] /@rshotton summarises a recent article in the Economist, which shows SUV ownership is a classic case of the Prisoner’s Dilemma.
[Video] Lesson from Sri Lanka, Bangladesh, Pakistan: if you have no patience, you don’t deserve democracy by Shekhar Gupta.
[Journal Paper] Is Liberalism Committed to Its Own Demise? by Hrishikesh Suhas Joshi explores whether immigration restrictions are compatible with liberalism.
[Video] Understanding India’s Pensions Disaster by Amit Varma and Ajay Shah shows why the old pension scheme, a popular demand from some opposition parties (including the Indian National Congress), is simply impossible to fulfil.
This is based on my very limited experience of travelling abroad.
Check out the OECD Compendium of Productivity Indicators for a primer. Also see cross-country statistics on labour productivity from the International Labor Organization (ILO).
New drinking game: take a shot every time I mention Lant Prichett.
Is some form of fraternity or a larger "Us" a precondition for higher productivity?
Productivity differences between developed and less-developed countries are large enough to enable one to be confident that it is not measurement error. Within-country changes in measured productivity over two years or less are not as reliable.