Wednesday, August 31, 2011

Justin Lin on Esther Duflo

Justin Lin summarizes the Jackson Hole conference;

Esther Duflo, meanwhile, posited that a long term strategy to balance growth with equity should entail policies that maximize the chance for the poor to fully participate in markets. Her paper describes market failures in finance, insurance, land, and education in developing countries, and discusses what is known, and not known, about how best to tackle them.

My view is that fixing all those market failures that are biased against poorer people might not be sufficient. Poor people’s income comes mostly from their labor earnings, while the rich people derive a large portion of their income from capital. If a developing country can follow its comparative advantage and starts its structural transformation by developing labor-intensive industries, the poor will have better employment opportunities, the economy will be competitive and dynamic, labor will turn from relatively abundant to relatively scarce, and the increase in wage rates will be much faster than the return to capital. In this way, the country may achieve growth with equity as Japan, Korea, Taiwan-China, and Singapore achieved during their catching up process.

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