May 7, 2007

Trivial Economic Trivia

Dani Rodrik wastes his time and his audience's:

I asked the audience a favorite question of mine: would you rather be poor in a rich country, or rich in a poor country. I gave them the following terms for thinking about the question:

  1. Assume you care only about your own consumption
  2. Define poor and rich as someone who is the in the bottom or top decile of a country
  3. Define poor and rich country analogously as a country in the bottom or top decile of the distribution of per-capita incomes across countries.

The audience was divided evenly between those who would choose to be rich in a poor country and those who would rather be poor in a rich country. The real answer is that it is not even close. This has important implications for how we think about poverty reduction in the world.

Sorry, but this should not be a prominent Harvard professor's favorite question. As defined, it is a question about an artificial world that has little to do with reality. First, he assumes away the value of status, power, and other non-consumption sources of utility. He also pretends that people's desires are absolute, independent of what they are accustomed to or what they see that their neighbors have; such absolute utility for consumption is a very useful concept for typical microeconomic problems, but it leads to absurd conclusions when comparing people in vastly different situations. By Rodrik's criteria, it is better to be a postal worker in the US today than a king in 18th century. But if Rodrik had taken lessons from Mel Brooks, he would know that "it's good to be king."

Second, the way Rodrik defines "rich" and "poor" for this problem is divorced from the words' meanings in normal language. In any country I can think of, the wealth distribution is skewed. Nowhere is the top 10% considered rich, but the bottom 10% is considered poor almost everywhere. The poorer the country, the more skewed the distribution is likely to be; the 90th percentile person there may be a rich person's servant.

Rodrik is right that comparisons between any combination of rich/poor people in rich/poor countries have important implications for poverty reduction, but only if the comparisons are meaningful and fair. Misleading comparisons like this will have important wrong implications.

P.S. In case you haven't guessed, the answer to Rodrik's riddle is here.

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