A typical morning. An assembled-in-China tablet wakes me up. Half asleep, and still wondering why the made-in–Pakistan ball did not make it in yesterday’s soccer match, I reach the kitchen and prepare a strong Costa Rican coffee. Ok, running shoes from Vietnam on, time to get out… need to burn off all the amazing chocolate from Ghana eaten last night.
Access to markets, either national or international, is key for improving the well-being of millions in developing countries. Market frictions are common in these settings, characterized by significant levels of informality and low trust. That is why policy implementation aiming at a fair distribution of benefits from export-oriented industries will be key for the poorest households to benefit from market access.
Given this, why don’t we see more work at the intersection of Development Economics and Industrial Organization? Two particular challenges to overcome are access to good micro data, which are not always available in a developing country setting, and making the research relevant for policy. Fortunately, the latest research is showing a lot of progress on both of these issues.
The growing literature on manufacturing export markets (e.g. Atkin, Chaudhry, Chaudry, Khandelwal, Raza, and Verhoogen (2016) on Soccer Balls) and agricultural cash crop markets (e.g. Macciavello and Miquel-Florensa (2016) for coffee) shows how the data challenge is being overcome, both with the use of administrative and experimental data. The job market papers of Swatz (2016) and Falcao Bergquist (2016) are two clear examples of the trends to creatively answer Industrial Organization questions in developing country settings. Swatz uses a very detailed survey on Nigerian traders to show that search (finding out which goods are available) and contracting frictions (ensuring that the contracts will be honoured) in differentiated goods trade are large, and can have a substantial impact on welfare in developing countries. Falcao Bergquist studies the gap between producer and consumer prices of maize in Kenya with three randomized control trials. The first one analyses the extent of pass-through of a subsidy to traders, the second one looks at the shape of demand with randomized price discounts to consumers, and the third looks at the effects of entry on market prices with a randomized incentive to the entry of new traders to the market. She concludes that traders have significant market power, and that the entry of new traders in the market has negligible impact on prices, which suggests that entrants collude with incumbents upon entry.
Another relevant challenge of working on Industrial Organization in developing countries is how to make the research relevant for policy. For instance, how should we design programs to reduce informality, improve firm productivity, and obtain a welfare-improving distribution of profits? McKenzie and Woodruf (2016) use data on business practices (marketing, stock-keeping, record-keeping, and financial planning) from two South Asian, three African, and two Latin American countries to show that the variation in these practices explains as much of the variation in outcomes—sales, profits and labour productivity, and total factor productivity—in microenterprises as in larger enterprises. The two authors have done extensive research on how to improve productivity in small and medium enterprises in developing countries: improve access to credit, incentives to formalization, and worker training and incentives programs, among others. Recent work by Blattman and Dercon (2016) sheds light on the challenges to expand the formal industrial sector for workers in developing countries with an interesting experiment with factory workers in Ethiopia.
To conclude, we need to continue to make progress on the challenges of working at the intersection of Industrial Organization and Development Economics in order to help ensure a fair distribution of the benefits gained from market access in developing countries.
by Josepa Miquel-Florensa
David Atkin, Azam Chaudhry, Shamyla Chaudry, Amit K. Khandelwal, Tariq Raza, and Eric Verhoogen (2016) “On the Origins and Development of Pakistan’s Soccer-Ball Cluster” THE WORLD BANK ECONOMIC REVIEW
Chris Blattman, Chris and Stefan Dercon, (2016) “Occupational choice in early industrializing societies: Experimental evidence on the income and health effects of industrial and entrepreneurial work” Working paper
Macciavello and Miquel-Florensa (2016) “Vertical Integration and Relational Contracts: Evidence from Costa Rica’s Coffee Chain” Working paper.
Swatz, Meredith (2016) “The value of face-to-face: Search and contracting problems in Nigerian trade” Job Market Paper
Falcao Bergquist, Lauren (2016) “Pass-through, Competition, and Entry in Agricultural Markets: Experimental Evidence from Kenya” Job Market Paper
David McKenzie and Christopher Woodruf (2016) “Business Practices in Small Firms in Developing Countries” Management Science Forthcomming