13 February 2012

Why don't microenterprises grow?

A couple of very interesting ideas from David McKenzie that I hadn't heard before in the second part of his interview with Tim Ogden:  (here is part one)

maybe microenteprises are viable because the "reserve wage" of their owners is so low; 
If you start trying to value the opportunity cost of that labor and you calculate it at some sort of market wage rate quickly you’ll find that many of these businesses look unprofitable ... 
why it is that microfinance can get a woman to run somewhat profitable businesses with chickens and things but they never get those businesses to grow into something greater. And the whole thing is that the women in these Asian countries have no other options. When their time value is 0 they can do this but as soon as they have to hire somebody at market wage it becomes unprofitable to expand.
and measuring microenterprise profit is generally really really hard
if you look at the Banerjee and Duflo Spandana paper, for instance, there’s a huge amount of noise in their profits data. I did some calculations and I think it came out that they would need 2 million people to find an increase of 10% in profits given the take-up of microfinance and the noise in profit measurements
Finally; I am really looking forward to Tim's new book, Experimental Conversations, based on interviews with a variety of economists conducting field experiments on poverty interventions. One of the best books I ever read on macroeconomics was a book of interviews. There is a tremendous amount that goes unwritten in journal articles. Blogs have increased access to this kind of informal chat, but there is probably still an undersupply of good ideas communicated well. In Tyler Cowen's words; 
why do not more economists blog? I believe it is because they can’t, at least not without embarrassing themselves rather quickly, even if they are smart and very good economists. It’s simply a different set of skills.
As Freakonomics demonstrated ably (at least the original book), researcher-journalist collaborations can be a decent way of filling the gap. David McKenzie is one of my favourite economists, doing lots of fascinating research, and he blogs. And yet I hadn't heard either of these two fairly substantial points before.

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