Measurements of consumer behavior, firm productivity, and real standards of living across countries are all crucial to understanding economic growth and development, as well as shaping policy—but what if the measurements are wrong?
At the Milton Friedman Institute for Research in Economics' (MFI) conference “Measuring and Analyzing Economic Development,” researchers highlighted current problems with data and measurement techniques underlying poverty and growth estimates and proposed alternative and improved approaches of analysis.
In keeping with the Institute's mission of fostering collaborations and drawing together preeminent scholars from across the globe, the distinguished roster of speakers included Angus Deaton of Princeton University, Nicholas Bloom of Stanford University, Simon Johnson and Robert Townsend of MIT, and Alwyn Young of the London School of Economics. Erik Hurst and Steven Davis of the University of Chicago Booth School of Business organized the February 26 conference at the University of Chicago, which drew a broad audience from the campus community and local institutions.
Lars Peter Hansen, Institute Director and the Homer J. Livingston Distinguished Service Professor in Economics, said, “It is exciting to have the opportunity to draw together a group of researchers of this caliber, and to hear about the latest work in this field. Conferences of this type are crucial to supporting the dialogue necessary to push our research into productive and innovative new directions.”
Disparate and sometimes inadequate data on growth rates in developing countries undermine both academic research and policy prescriptions. Improved estimates on consumption, income, and other measures of standard of living are instrumental to understanding economic growth and development, shaping how policy decisions are made, and guiding public discourse.
Deaton, Johnson, and Young highlighted issues with the existing data used to measure poverty. They examined the difficulties of making income comparisons across countries with different prices and economic structures, and particularly with the global poverty line calculations used by organizations such as the United Nations and the World Bank in their foreign aid strategies.
Deaton argued for skepticism when comparing countries with highly disparate consumption patterns and prices, finding that such comparisons “rest on weak theoretical foundations and are fragile in practice.” Instead, improvements in micro-data, such as household surveys, and the upgrading of national accounts are urgently needed to estimate growth and poverty across countries more reliably.
To address the paucity and poor quality of the data underlying existing estimates, Young demonstrated how household survey data could be used to construct new estimates on consumption in 29 sub-Saharan and 27 other developing countries. Among his results, he finds that real household consumption in sub-Saharan Africa could be growing between 3.2 and 3.8 percent per year, instead of the 0.9 to 1.0 percent reported in the standard international data sources.
Other work at the conference examined how individual firms and households in developing countries make economic decisions. Better information on behavior at the microeconomic level is a crucial input for designing policies that target poverty and nurture economic growth.
Townsend collected survey data to examine financial decision making at the household level. Using data collected from households in 16 Thai villages, he studied the consumption, investment, and financing decisions made in these households. In particular, he considered the interaction between household production and consumption activities. Analyses of this type are central for assessing the need for policy interventions targeted at financing productive investment opportunities.
Bloom looked at decision making at the firm level to examine a broader question of why productivity differences, which account for a substantial portion of per capita income differences, exist across countries. Examining textile firms in India, he found that the lack of implementation of basic and widely accepted management practices was a root cause of low productivity and profits. He concluded that in developing countries, improved management training programs, coupled with government policy reducing barriers to entry and emphasizing quality, could measurable narrow the productivity gap across countries.
A Useful Discussion
The conference ended with a panel discussion that fielded questions from graduate students and faculty. Deaton concluded the conference by saying, “It was wonderful to be here and to talk about these measurement issues in a coherent way. Erik [Hurst] and Steve [Davis] have done a tremendous job in pulling these papers and these people together, and it's a wonderful service of the Milton Friedman Institute too.”
Conference attendee Walt Stubbins, MBA'88, echoed the sentiment. “I'm in the investment business, and I need to understand the issues in developing countries. Attending events sponsored by the Milton Friedman Institute is a great way to stay on top of what's going on. I need to be learning all the time. That is why I keep in touch with the University of Chicago.”