Thursday, May 10, 2007

A Productivity Story

This week the Economist covers a paper by Rob Jensen that nicely illustrates how technological advances can translate into unexpected productivity improvements, and win-win economic gains.
How do mobile phones promote economic growth? A new paper provides a vivid example


This, in a nutshell, was the situation facing Kerala's fishermen until 1997... On average, 5-8% of the total catch was wasted, says Robert Jensen, a development economist at Harvard University who has surveyed the price of sardines at 15 beach markets along Kerala's coast.

...But starting in 1997 mobile phones were introduced in Kerala... As phone coverage spread between 1997 and 2000, fishermen started to buy phones and use them to call coastal markets while still at sea. (The area of coverage reaches 20-25km off the coast.) Instead of selling their fish at beach auctions, the fishermen would call around to find the best price. Dividing the coast into three regions, Mr Jensen found that the proportion of fishermen who ventured beyond their home markets to sell their catches jumped from zero to around 35% as soon as coverage became available in each region. At that point, no fish were wasted and the variation in prices fell dramatically. By the end of the study coverage was available in all three regions. Waste had been eliminated and the “law of one price”—the idea that in an efficient market identical goods should cost the same—had come into effect, in the form of a single rate for sardines along the coast.

...Furthermore, says Mr Jensen, phones do this without the need for government intervention. Mobile-phone networks are built by private companies, not governments or charities, and are economically self-sustaining. Mobile operators build and run them because they make a profit doing so, and fishermen, carpenters and porters are willing to pay for the service because it increases their profits. The resulting welfare gains are indicated by the profitability of both the operators and their customers, he suggests. All governments have to do is issue licences to operators, establish a clear and transparent regulatory framework and then wait for the phones to work their economic magic.
It's a neat story about how technological progress sometimes results in economic gains that are almost completely "loser-free". The only note of caution that I would interject is that one shouldn't extrapolate from this example that technological progress always produces winners without producing losers. Most types of technological change that I can think of create both winners and losers.

That doesn't mean that one should be any less enthusiastic about technological-based productivity improvements. But it does mean that we have to try hard to remember that there are losers from nearly all types of economic change. What, if anything, we should do about that fact is then a matter of personal opinion.

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