Russ Roberts

Chris Blattman on Sweatshops

EconTalk Episode with Chris Blattman
Hosted by Russ Roberts
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Islands of Poverty in a Sea of... Beats the Alternative...

textiles.jpg If you were a poor person in a poor country, would you prefer steady work in a factory or to be your own boss, buying and selling in the local market? Economist Chris Blattman of the University of Chicago talks with EconTalk host Russ Roberts about experimental evidence on how poor people choose in the labor market and the consequences for their income, health, and satisfaction.

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0:33

Intro. [Recording date: November 16, 2016.]

Russ Roberts: Chris Blattman... previously appeared on EconTalk in July of 2014 talking about giving cash to poor people as a way to fight poverty, as opposed to less direct methods. And today he's back talking about a different research project he's been working on, trying to figure out whether working in a factory is better for the poor--what is sometimes called a sweatshop--than informal self-employment. Chris, welcome back to EconTalk.

Chris Blattman: Thank you.

Russ Roberts: Now, you begin your paper, which is co-authored with Stefan Dercon, pointing out that a lot of anti-poverty programs, in the name of development, try to help poor people become more successful entrepreneurs: they are typically self-employed. Let's talk about what some of those programs are and what we've learned about their success or failure.

Chris Blattman: Sure. So, I mean, I think a lot of these programs fall into two categories. A lot of them give--and I think the best ones--give capital to the poorest people. And some of them give skills. They are basically giving some kind of input into production, because these people are producing. And one of the reasons, I think is just because in most of these very poor countries there are very few firms. And so, being employed means being self-employed. And that could be your farm; it could be being a petty trader. It could be some really crude manufacturing. And so, so, basically giving people inputs that they otherwise have difficulty getting.

Russ Roberts: Yeah. In these kind of situations I see somebody sitting on a stool outside a poor dwelling offering something for sale or service inside. Right?

Chris Blattman: Right. Or one of these, you know, you sort of walk around a village and a city and you see just shop after shop selling the same crummy goods, the same maybe 20 things--matches and soap--and you kind of wonder. And that's an employment of a sort. You kind of wonder how any of them are making any money.

Russ Roberts: Or presumably they are not making very much.

Chris Blattman: No.

Russ Roberts: So, when we think about adding capital to that activity--'capital' is a big, fancy word--but sometimes that would mean a factory. Sometimes it means a wheelbarrow. And sometimes it just means some cash to borrow so that they can invest in something, a tool, a very basic tool. Right?

Chris Blattman: So it could mean--so, a lot of the time it means livestock. And it means inventory. And is basically what people do. So, if you give them those things directly, or if you give them cash, which is what we talked about last time, people tend to actually take these things that don't look super-profitable on the face of it. They expand the stock of the store from, you know, 10 crummy items to 30 crummy items. Or they got a goat, or two. Or they get some chickens or maybe a cow. And that's how they sort of expand what they are doing a little bit. And so these--the funny thing is these programs tend to be pretty successful. So, when we've done randomized evaluations of giving people cash, of giving people goods that they can use in a business by helping them expand their inventory, it turns out these shops, you know, they are not super-profitable, but they do a little bit better. And so, they go from earning $2 a day to $4 a day. Or they go from earning $5 a day to earning $10 a day. And that's not a whole lot. But when you consider how cheap some of these interventions can be --not always, but how cheap they can be--that's a pretty good return. And if you only earned $2 bucks a day, an extra $2 bucks makes a really big difference.

Russ Roberts: For sure. And also, it's a cushion. If things don't go well for a while. There's illness, there's all kinds of uncertain and unexpected events.

4:46

Russ Roberts: One question I have about this whole research agenda is: As an outsider to the development world--meaning this is not my expertise. You are in it, and I'm an outsider who is very, very interested in it; but I am not in it--

Chris Blattman: Yup.

Russ Roberts: And the actual kinds of aid that occur--well, some of them are happening as part of an experiment. Which is what we are going to talk about today. You get, or an economist gets a grant or has some funds to find out how people respond to various things. And that's interesting. It's interesting about the human condition; it's interesting about how work is in poor countries. But when I think about "global aid"--when I think about, say, money that the U.S. government spends or an aid agency: Is that the kind of thing they are going to actually do, is go around to poor merchants on the streets of a terribly poor city and give them a little bit of money? In other words, what kind of infrastructure is there to implement these kind of lessons?

Chris Blattman: Right. Well, there are just so many forms of aid. Even if we don't give very much, as say a percentage of income here, that's still a small percentage turns into big numbers. So, aid gets spent on a lot of things. There is a significant amount that turns into these kinds of employment programs or cash transfer programs. Here's a couple of the examples. One, of all the millions of Syrian refugees throughout that region, whether they are in Lebanon or Jordan or Turkey, have ATM (Automatic Teller Machine) cards. In fact, they probably have a wallet with 6 ATM cards: one is from the U.N. High Commission for Refugees. And one might be from the International Rescue Committee. One might be from another organization. And when those organizations, when they--instead of giving out sacks of grain or tarps like they might have in the past or might still in a really remote region--these are refugees who are not in a remote regions. You don't need tarps or grain they need to survive. And so they transfer cash onto these ATM cards. So, infrastructure there is extremely simple in some ways. And it needs to be simplified. But that's very effective. And then in places where that doesn't exist, or even in the recent past we didn't have so many ATM cards--some of the cash transfer programs [?] in Uganda--the Ugandan government gave out, had a $300 million dollar program, which was basically cash transfers to groups of youths and to communities. Some of that was for starting businesses; some of that was for livestock purchases; some of that was for community goods building like little bridges or a teacher's house or something in that nature. And that was the second-biggest program in the history of the country. So, countries are doing this on a large scale, either with their own money or with aid money.

Russ Roberts: I can't help but note that we aren't as likely to give a tarp to a poor person in a Third World country, we are still giving 'tarps' to rich people in America. That's a little finance joke. I couldn't help myself. TARP--Troubled Asset Relief Program--I think is what it stood for. The $300 million that the Ugandan government gave--that's out of their tax revenue? Who is funding that?

Chris Blattman: Well, that was a credit from the World Bank. And a lot of aid comes in the form of subsidized credit. And so, in this case the World Bank provides a very low-interest loan to Uganda; and the Ugandan government has conceived of this program. They've done so with some advising from the World Bank, because the Bank has said, I think, they've done this in Tanzania; and the Tanzanian government was very happy with it. And so they sort of help transfer some of these programs. And so the idea is they'll pay this back eventually. Now, if it fails, probably those loans would get forgiven. But if they succeed--and this program seems to have succeeded--then the idea is that this helps you grow your economy now; and then you have the tax revenues in the future to make taking that loan worthwhile.

Russ Roberts: Boy, that sounds optimistic. But I guess we'll find out. It's a nice idea.

Chris Blattman: Yeah. I mean, you know, a lot of the average African country has been growing--I can't remember the exact percentage but somewhere between probably 6% and 8%--not per capita but overall over the last decade, maybe even for 15 years. So, that's not bad. I personally think aid is a part of that. I don't think it's a major part of that. Which is why I ended up taking an interest in factories and industrialization. But I do think it's been an important part.

9:43

Russ Roberts: So, before we turn to industrialization, I wanted to ask you about private efforts. Are there private charities that are trying to fund these kind of microfinance or small infusions of capital for an entrepreneur in a very poor setting like we've been talking about?

Chris Blattman: So, I think most of the innovation has been with private organizations. And they've often then been picked up and scaled by governments. And so, whether it's organizations--there's a whole host of organizations that are giving out cattle and livestock along with various skills where there have been randomized control trials in countries. So, I think BRAC is an example of an organization that does this all over the world. The International Rescue Committee is a private organization that's doing this in the Syria region as well as other conflict-affected places. Give Directly is a famous example of an organization trying to give cash in the simplest, cheapest way possible. Which is arguably the best way to make sure that this organization passes some kind of cost-benefit test.

Russ Roberts: At least that people don't starve to death. I think there's a big difference--they're both important--but there's a big difference between keeping someone from death--making sure they are "above subsistence," that they don't fall into tragedy, on the one hand--and growth, which is a much more ambitious and I think more challenging thing. So, if you think about an undeveloped--there's not an easy word to describe; let's call it a barter economy, where people are making small amounts of something and then trading it with their neighbors. Perhaps they are reselling things they purchased, so they are acting as a middleman. That's better than being self-sufficient. We know that as economists. But it doesn't translate into growth. There's no engine there to push that higher. Right? So, if I have access to a supply of matches and you have access to a supply of soap, we might swap; and we might use cash to make that easier so we can trade more effectively. But it's not likely to lead to growth.

Chris Blattman: So, under some circumstances that's true; under others, it's not. And I don't know if we know exactly what kind of a world we're in, in a lot of these places. But one of the things is that if you think that there are actually a lot of opportunities for these really small entrepreneurs to go from selling or manufacturing a few matchbooks to manufacturing more matchbooks, or from producing a small amount of milk to a larger amount of milk--but if you think that there are really fundamental breakdowns in the credit and the insurance markets, which is basically a perfect description of a lot of rural villages, then providing a one-time amount of capital, be it like a cash grant or providing regular cash transfers, which acts like as a form of insurance as well as providing capital, can lead people to grow businesses that they otherwise wouldn't have been able to grow. And maybe take risks that they otherwise would not have sensibly taken. And so you can get growth. But again, even then--when you look at--the thing that stimulated my interest in industrialization in general was, while working on this as a graduate student, I actually spent a little bit of time helping write a report for the World Bank on the Kenyan manufacturing sector. So, I was in Kenya; I was doing other things; and I was roped into this. And the thing that still sticks with me to this day was some statistic--and I should probably remember exactly what this was, but this was something like 14 years ago--was something like 5% of the country's workforce was in manufacturing. But they produced something like half the national income, or the Gross Domestic Product (GDP). And the reason was because these manufacturing firms were just so productive--they added so much value. They combined all of this capital and technology and people's labor to produce so much more value than these farmers. So, you could double the income of every farmer in the country, but because they make very, very little and they are producing very little real income and they are not very productive, that would make them a lot better off. These are the kinds of programs that I work on all the time. But you are not going to have a huge impact on national income. You are not going to transform the economy. So, you can get growth, if you resolve these credit constraints and insurance and you can make people a lot better off. And that's a really important service of aid. But the growth you are going to get is--I don't know that there's many people who think that's going to be very transformative or dramatic.

Russ Roberts: Yeah. Just a couple of comments. The 5% making 50% of GDP is partly a result, probably, of the inability to count some of the economic activity that's taking place in informal structures.

Chris Blattman: True.

Russ Roberts: But still, the point I'm sure is real: We're really talking about Adam Smith's pin factory--that specialization drives productivity; division of labor is limited by the extent of the market. If you don't have a lot of people to sell to, it's not worth it to invest in capital to make more soap or more matches. If you have a bigger market--if you are in a bigger village or in a city--you can obviously change your production process; and eventually you get to industrialization: you get to a factory.

15:35

Russ Roberts: The other thing I just want to comment on--I don't have a way to say this very well, and so I'm going to ramble here for a minute or so and see if you can clean it up for me. But, it seems to me we don't, as economists, have very good understanding of the nature of the dynamics of an economy. So, if you think about a village--I'm trying to invoke--I called it a barter economy. It's not really the right word. But people are--they are self-producing. They are not in factories. They are not cooperating in large numbers to produce lots of stuff. Each person makes something. Or resells something. Or adds a couple of things together and makes something. And they trade it. And they buy it. And they buy other stuff from other people and they sell the stuff they can make, whether it's livestock, output, or food from farming or whether it's small, small-scale production, like clothing made by hand. And there's just an inherent limit--and this is really, again I'm coming back to Adam Smith--there's an inherent limit to how much prosperity that kind of situation can produce. You can shower them with money: it's not going to have a big impact--if it's a small group of people interacting. But if it's a larger group of people interacting, there's the potential for what we call economies of scale, or industrialization, or factory productivity--then, yes, there can be barriers of capital that keeps entrepreneurs from creating those institutions, those type of companies and firms. But there just seems to me to be a big difference between a village, which is going to inherently be somewhat poor, and a city, that is going to have the possibility of the kinds of economies of scale that Smith and we are interested in. Does that make sense?

Chris Blattman: So, I think it's true. But at the same time--if you traveled across different countries in Africa or even different countries in Latin America, for argument's sake, which are the places that I know better, and you went from rural area [?] village to village, it's true that you might--you'll never find, like a Singapore there. You'll never find a--you'll very seldom find an enormous amount of, you know, First-World-level production. But here's the thing: You will find that some villages in some places, or even in the same country, are 10 or 20 times as wealthy as other villages. And a lot of that is because they've become better at producing and better at organizing and just more productive in general. And so there is a lot of room for variation. So, you can get a lot of growth. And you can make a lot of strides, in terms of quality of life, and infant mortality, and all of the things that we care about. Things like--just the marginal utility, like the benefits we get a little bit on the margin from those advances are so huge--

Russ Roberts: Yeah, I agree--

Chris Blattman: that you can--so there's a lot of room. I don't want to leave people with the impression that it's all about urbanization, industrialization. That there's a lot of benefits to being able to become more productive in agriculture and small-skill production.

Russ Roberts: Yeah, that's cool--well said. I just--I think there's a discontinuity of sorts there. There's a--I like to think of it as: You put the hundred most talented people, and you can pick them. I'll let you pick who they are. And you put them on an island with no outside exchange possibilities. You can give them all the technology you want. You can give them all the resources. It can be an island full of oil underneath it. And all kinds of metals underneath it. And beautiful, rich soil. But 100 people can't be very wealthy. Now, 100 people trading with, you know, a billion people can be wealthy. So I'm not suggesting that we have to get everybody into the cities. Obviously a well-developed urban sector can help a well-developed rural sector thrive through their interactions. But I just think--when we think about "growth," as opposed to, again, a decent standard of living or a minimal standards above subsistence, there's something a little different going on there. But your point about the variation is huge. Obviously, small villages can be much better off than other small villages if they do things well.

Chris Blattman: And I've been very surprised. Some of the projects I've worked on, and things I've studied--I've often assumed that a lot of these isolated rural villages are really little economies unto themselves and are somewhat cut off, and the markets aren't very integrated across these villages with the city. And I've generally been surprised. I think that there's a lot of exchange going on. And so, that's in some sense a secret. When I say that there's actually a lot of potential in these villages, I think it's in part because there's a lot of potential for these villages to, say, turn to cash crops or animal production or things and then sell into the cities. And so engage in this kind of trade. So they are not 100 people on an island. There's definitely some costs to getting things to market. That is another source of poverty.

Russ Roberts: Transportation, infrastructure, ports.

Chris Blattman: All of these things. Or even just having access to a bicycle or frankly a big challenge, I think in Africa is that there never has been really much in the way of draft animals, because of the disease environment. And so that holds things back, as well. So, as a consequence, there [?], and this is where some of the opportunities lie. There is an ability to trade with the rest of the world. To trade with that billion people, and get some pretty serious gains.

21:43

Russ Roberts: So, let's now turn to the other possibility, which is going to be the focus of the paper: the comparison between the informal, self-employment, entrepreneurial environment of small-scale production, versus being an employee. So, we're going to call this a 'sweatshop.' It's--for better or for worse it's become a term to describe relatively low-paying employment in a poor place, in a factory or a larger workspace. What is your--before you did this research, what was your preconception about that kind of opportunity for the poor in very poor countries.

Chris Blattman: Sure. Well, the first thing I should say, sort of by way of disclaimer, is I didn't then, and even to some extent now, not--I'm not much of a factory expert. This has been sort of a new journey for me. And as you know, not only do I spend a lot of my time mostly thinking about poverty alleviation in the poorest places, but I actually--my main thing is studying violence and gangs and rebellion and things of this nature. So, factories have been--something that for better or for worse, I, you know, I'm not sure I had the--I guess I had the idea that a lot of economists and a lot of my colleagues sometimes voiced, which was different than maybe the pessimistic view that some people have about sweatshops. I would occasionally see a factory. And, like I said, I had a little bit of exposure to the Kenyan factories. There were a few firms, a few industrial firms in Uganda. And when those firms had a set of jobs or when they opened up a new production line and, say, they needed 50 people, you'd see a line-up of 300 people for that job. If not more. And so there's this very basic idea of revealed preference: that if people are standing in line waiting for jobs, these jobs must be pretty good. And people are queuing for this employment. And so that was my first impression. And you would even see some sweatshop activist organizations saying things like, 'Well, as bad as these jobs are,' and they have this kind of agenda to improve what Nike is doing, to improve what some other organization is doing in a poor country. They'd say, 'As bad as these jobs are, they are still better than most people's alternatives in the informal sector, this sector where they are self-employed, producing agricultural goods or running these small, crummy little shops.' And so that was my first impression: that as bad as these are, it's better than people's alternatives. And here I am, spending all this time trying to get a program that can help some--you know, poor somebody--go from $2 a day to $4 a day. And maybe I'm missing out on the action. Maybe I need to be spending more time in thinking about how to help that 5% of the population produce 50% of the wealth. Maybe I have to sort of think about how to illustrate that sweatshops are the answer, not cows or cash transfers; and get the international community focusing a little bit more on that.

Russ Roberts: Yeah; I'm reminded of--I think it's from the Cocoanuts, Marx Brothers' movie, where Groucho, who is the manager of a hotel, says, gathers the staff together and says, 'You don't want to be wage slaves, do you?' And they say, 'No.' And he says, 'You know what causes wage slaves? Wages. So, I'm not going to pay you. And that way you won't be a wage slave.' And you echo this in your paper. Your paper is worth reading just for this one line, for me: It said, you write, as the economist Joan Robinson remarked,' and Joan Robinson was a great British economist in the early and middle 20th century--her quote is: 'The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.' And this is an issue--you know, it's very--it's really a deep, it seems obvious to most economists that that's true. But I think it's a hard issue for a lot of people to think about and deal with, that your shoes or whatever it is you are wearing or buying is made by people who are very poor and who are paid very little. And it's true that it's better than their alternatives. But it's still not very much. And I think that--that's an issue we are not going to grapple with but I think it has to be mentioned.

26:23

Russ Roberts: But the point is that people do line up for these. As you say. And of course they line up for Walmart jobs in the United States. And people complain about that too. And I take the attitude that--I don't know how to solve all the problems of the world at one time, but when I see people desperately trying to do something, I assume they are trying to better themselves, and probably know more about their situation than I do.

Chris Blattman: Right. And I think on top of that I had the sense that, Okay, even if these jobs aren't much better than people's other alternatives, that, you know, a couple of things are going to happen. So, first of all, I thought these jobs were better than the alternatives. And then I thought, over time, this was going to be doubly the case: on the one hand, you would see the manufacturing sector advance over time--one hopes--and the quality of the jobs would improve and the skills they need and the worker commitment and productivity they need. And so you would see wages rising over time, potentially in the sector. So you might send people--the people who are lucky to get these jobs, in that moment the job might not be that much better but it might send them off on this virtuous cycle. And then the second thing: Which is where people like Paul Krugman and Jeff Sachs, two very prominent economists, had come out in the last 10 or 20 years: They'd said things like 'What we need is more sweatshops for Africa.' And their reasoning was not this reasoning that I necessarily thought was the case--that people are lining up because these are better jobs. But their point was that, you know, there's a lot of people who are underemployed in these relatively unproductive things like agriculture and all the other kinds of crummy businesses we've been talking about. And the more that factories grow and suck them up and export to other countries, then the more opportunities there are for farmers to--and the more incentives there are for farmers and these small business people to actually invest in capital and improve their opportunities. Because they are not competing with nearly so many farmers. And the returns to investing in that capital--like getting a farm combine or getting a better store are going to become more attractive. They get to specialize in producing those things, while these other people go off to work in factories and then buy their food and buy their haircuts and buy all of their other things. So there's that double effect. And, you know, we weren't in a position to measure that big macroeconomic effect where you are sucking up all this labor. We weren't going to be able to do that in the study. But we could test this idea of: How do people choose between occupations? And: What are the benefits and risks that come with this different occupations?

29:01

Russ Roberts: The last point I want to make before we get to the actual details of the research is that: It's clear that hundreds of millions of people--hundreds of millions of people--in China, in India, have improved their standard of living by leaving agriculture, coming to the cities, and working in factories, producing goods for people around the world. And that's just a reality. That's just phenomenal. Whether we can make that happen in Ethiopia, or Uganda or Kenya is a different question: whether someone can make that happen is a different question. But it's certainly true that industrialization is a, at least on a material basis, which is not the only thing that counts. You can call a business 'crummy'--it may be crummy by our standards. But there may be some dignity involved there for the person and their family that we're not aware of. And I guess what we're talking about. That's a--you can react to that if you want. And why don't you start talking about the study?

Chris Blattman: Well, I guess I'll only say, I'll give some context: it is happening. So, for example, I, when I was working in Ethiopia, when I first started working there in about 2009, what was interesting: First, there were a lot of, like, Ethiopian-owned factories that were expanding operations; and they were starting to export things to Europe. So, there were a lot of companies that were starting to send chives or spinach or, you know, t-shirts, to European markets; and shoes. And these were just growing and growing and growing. In part, in response, I think, to basically like a stable--well, basically, they are close to Europe; there's a lot of, you know, Ethiopia, a lot of people think of Ethiopia as--they remember these, you know, bomb killed off and Ethiopians singing about starving children. And there is a little bit of that: in the periphery of Ethiopia, toward Somalia, toward Sudan. These are lowland areas. They are very hot. They are very dry. And people--there's a lot of drought. And so there's a lot of problems. People--there's a lot of famines, from time to time. But the middle of Ethiopia, the highland area, is incredibly prosperous by comparison. It's green, it's the source of the Nile. There hasn't really ever been any kind of problem with getting people fed. And the levels of state organization and the levels of education and the levels of sort of capabilities of firms and civil society are very, very high. And so there are all these companies. And then not only were these domestic companies screwing up, but you had--what was so interesting to me at the time was you had all of these Indian, Bangladeshi, and Chinese companies--and some American and European companies--starting a toe-hold. So, you'd see this huge, vast area, this industrial park that was empty. And there was one factory. And this factory basically was an Indian entrepreneur, a Chinese entrepreneur. And they had maybe 500 or 1000 employees. And you'd say, 'Why do you have all of this land?' And they'd say, 'Well, we're getting ready. We're trying this out. We think this is a pretty good place to be. There's lots of people. There's a domestic market. We can export to Europe; it's very close by.' Especially at the time oil prices were high, so being closer to Europe was helpful. 'And the wages are going up in China. And the wages are going up in India. Just like the wages went up in Mexico, as these areas got more productive. And so, this is where we are going to plant our foot next, we think. And so we are going to test it out; and if things go well, in a few years you'll see 10,000 or 20,000 people working here.' And there's a lot of that going on. And it's not just going on--you know, the capital is going on in sort of the rural hinterlands, and in this northern city and in that small town, in agriculture and textiles. So it's--you know, you kind of have this feeling of, 'Wow, we are on the cusp of something maybe really big.'

Russ Roberts: And we are talking about Ethiopia. I don't know anything about Ethiopia, or very little. What kind of government do they have? And did it change, to make this kind of investment imaginable? Or is this more--why is it Chinese or Indian? Why isn't it internal? Something's going on there.

Chris Blattman: Right. Well, so, this is happening in a number of countries. So, the short answer--it's difficult to give a short answer on Ethiopia, there. But I'll try. I will say that it's going on in a lot places where there's different kinds of government. So, Ethiopia is relatively authoritarian. It's sort of taking as its model, trying or to some extent Vietnam, where it's going to have some--you know, it's sort of a Communist and Socialist influence, government that came to power and as part of a revolution, as part of a civil war, and is repressive in many ways. But is also very serious about sort of this marriage of private sector and public sector development. And some state influenced development, but one where there is a humongous amount of private investment. But it's also happening in Kenya, where you have a much more democratic regime--with other problems, corruption and things of this nature--but it's happening across a wide number of regimes. It tends to be happening in places where there is really good infrastructure, where there is proximity to Europe. You talk to some of these factory owners and the thing they complain about is not the quality of [?] or the quality of roads--they do complain about the quality of roads and the quality of infrastructure and things. They complain about everything: but this is the thing. It's always a struggle and they are always taking risks. But one of the things they really complain about is the availability of good managers. They need middle managers; they need accountants; they need somebody who can run their factory floor; they need someone who can run the HR (Human Resources) department; they need someone who can handle mergers and acquisitions; they need someone who can help them do due diligence on buying and acquiring new companies; they need all of these skills that we don't usually think about as poverty or development economists. And that's where they feel really tight. They say, 'I can only do so much. I have all this capital; I made all this money,' in real estate or trading or mine money [?] or ill-gotten gains or wherever they got this money. And they only have so much time. So they really need people who can organize. And they need people who can help them execute transactions, whether it's buying a company or helping them build sales contacts and do things overseas. So that's why places like Kenya and Ethiopia I think are really attractive, because these are places that are pretty politically stable--whether they are democratic or not--but they also have a, like, a middle class, however small, and an upper class who are pretty educated, pretty capable people who can do this kind of a thing for them.

Russ Roberts: That's just fascinating. I don't know why it came to my mind, the analogy with the football team: you can have a great offense, a great defense, but if your special teams get all their punts blocked and everything gets thrown back for a touchdown, or everything gets run back for a touchdown, you don't win any games. You've got to have that--there's a certain supportive cast that you don't think about when you think about a factory, because we're only economists and academics: We tend to think about, 'Welp, there's a manager and there's a bunch of workers.' But of course there's that huge level of other folks who help make the thing go. And that's very interesting.

Chris Blattman: I think that's one of the biggest constraints on these companies--it's that, at the end of the day, I think some of the reasons that we saw some of these factories doing well and some doing very poorly is they really struggled. Especially the middle management, the people who would manage human resources and organize the factory floors. I think they just really struggle to get good people. It's also an early stage: because these firms are new there's just a lot of learning going on. So, we're really careful to sort of scope what we're doing. We're talking about an early industrializing society, a place that has--in some ways it's had a long history of manufacturing. Ethiopian firms have been making shoes for 70, 80 years and exporting to Italy. An awful lot of shoes have also been made in Italy; but there's also a decent chance that if you bought a pair of Italian shoes, it was made in Ethiopia, and then somebody in Italy stitched on the tag that said 'Made in Italy.' And there you have it. So there's been a long history of private sector production in Ethiopia, but not on this scale. That's what has been new. And indeed, even in the last 8 or 10 years there have been ups and downs. Not just because of the ups and downs in the global economy. That's affected Ethiopia, Africa less, in part because they haven't been so integrated with the world economy. It's been going up and down with domestic politics, which actually right now, for example, which look really stable are actually not right now. We've actually--some stuff I'm doing in Ethiopia right now we've had to stop, because there's a lot of unrest right now, some popular unrest and opposition with the government. And so this is actually not just crippling research projects, it's crippling a lot of industrial production.

38:55

Russ Roberts: So, let's move to the study. What were you trying to figure out here? What was the goal? What were you trying to understand?

Chris Blattman: Well, so, in some sense--it was pretty simple. If we have this belief--if I'm right that this--if I was right that these jobs are better than the alternatives, what we wanted to do is to say, 'Well, let's test that out.' Since you have 300 people lining up for these jobs, why not look at--take the ones who are qualified and instead of taking the first 50 in line who are qualified for the job and hiring them and everybody goes home--which was really what was typically done--why not see if we can find a factory owner who will say, 'Okay, let's find the 150 who are qualified and instead of taking the first 50, we'll flip a coin. And we'll take the 50 people out of those 150 qualified applicants as random.' And we'll follow them over time. And we'll look at what happens to their incomes and their health and their career trajectories over time. I mean, if we have to, we'll follow them for 10 or 20 years. And we'll see: Is it hard to get a job if you don't get this job? Are they really queuing and if they aren't lucky enough to get the job from that queue, do they find another job or are they forced to go back to agriculture? How long do they stay in this job? Are there short term risks? Are there long term risks? And let's sort of get something that both the activists and the boosters can say, 'Yeah, we're curious what the result is.' And so that's what we did. Yeah. Well, I guess you can say--what I did is I had this idea as a graduate student 10 or 12 years ago. And I always thought, 'Well, every time I meet a factory owner, I'm going to feel him out.' And I did. Once in a while I got on a plane to Uganda to work on one of my projects, usually related to poverty or conflict, and I'd maybe sit beside a factory owner. And I'd say, 'Oh, here's this idea that I have.' And they'd usually sort of look at me a little funny, or--they wouldn't leap at the possibility. But also, I was just this person they met on a plane; and I was a graduate student. I probably didn't approach it well. And so it never really materialized.

Russ Roberts: And then?

Chris Blattman: Oh, and well, so, I wanted to pause because I feel like you might want to jump in with something else.

Russ Roberts: You want to jump in with something? What should I have asked?

Chris Blattman: No, no, no, no. I--no, I think that's probably--so what happened is, I was at a conference in London, and there was an Ethiopian businessman who--I used to say he was the Donald Trump of Ethiopia because he was sort of a real estate mogul--

Russ Roberts: Can't say that any more--

Chris Blattman: and that just seemed inappropriate. Yeah. That's no longer the first thing that people associate with Donald Trump any more. But back in 2009, he'd made a lot of his money in real estate. He'd also--actually originally he'd made a lot of his money in investment banking in the United States. He sort of grew up as an expatriate Ethiopian. And he was giving a talk to a group of Development Economists, something called the International Growth Centre. And he was saying--the thing I just told you about where I said what firm owners want, is they want managers; and they want M&A (Mergers and Acquisitions) specialists: he was lecturing this group of economists, saying, 'You guys, you don't quite get it. This is what we--this is the big deal and this is what we need and I just want to help you understand what I think the real problem is.' And so, so I just channel him and many other firm owners I met after that. And I approached him afterwards and said that was terrific and I really enjoyed talking to him; we kept chatting, and I said, 'I've had this idea: you know, I think that [?] firms not only help achieve growth but I they might actually be tools of poverty mitigation. Here's an easy way to answer the question.' And he said, 'That sounds great. Let's do it.' And so, literally, 5 or 6 weeks later we were on the ground in Ethiopia, launching, doing the first randomization. He had a water-bottling plant. And he was adding a new line. I think he had been producing like the small bottles and the 1-liter bottles, and I think he was adding like a 5-liter-bottle manufacturing line and he needed 30 new people. And so, there we had it. We just scrambled and it all came together.

Russ Roberts: So, the idea--the 3 categories, what's important for people to keep in mind--so, you have a group of people you hope are similar, in that they all are qualified to work at the plant. A third of them are going to work at the plant. A third of them--talk about how you divide up the sample. How many people [?] end up being across so many firms.

Chris Blattman: Right. So, well, the first thing I should say because I love this story is, even--this is an example of where things are. There weren't a lot of manufacturing firms. Beverages are like one of the first things that people produce locally--and not for export, for domestic consumption. You know, it's really heavy to send water around; and water is usually around. So bottling water is like Step 1. And this wasn't done--when he went to Ethiopia sort of around 2005, 2006, back, and thought, 'I'm going to become this mogul,' and when he drifted from real estate into this stuff, he would go and he would buy a bottle of water at the store: [?] it was $3. And it would come from Yemen or Israel or something like that. And he said, 'We are the source of the Nile. And we are importing water from the Middle East. This is patently ridiculous.' And so he started the first water bottling plant. [More to come, 44:57]



COMMENTS (8 to date)
Bob writes:

Russ, if you haven't already heard about it I think you might enjoy taking a peek at a new kind of direct charity via mobile phone app called DonorSee. I heard about it on the Tom Woods podcast Ep. 751 Help People Around the World by Going Over the Heads of Governments and Aid Groups, though of course they also have a website. The premise and slogan is "Give directly. See impact." and they pitch it like so:

DonorSee is the best place to give your money. Whenever you give on DonorSee, you get to see exactly where your money goes via our aid workers who take pictures and videos of your money making an impact.
I'm not affiliated with them at all, though you've mentioned your interest in related ideas several times and I know you're skeptical of many existing approaches, so I thought I'd share. Maybe this one is bunk, too, though so far it seems to be working (at least at a modest scale), and the idea is interesting in any case. (late) Merry Christmas!

jw writes:

An interesting podcast. Notes:

- The middle level management observation was unexpected and enlightening.

- The Chinese that Russ mentioned have a similar problem with factory workers. Young people from barely above subsistence agricultural areas go to the factories for the promise of more money. But the nature of the work and after expenses return are such that during the annual Golden Week where everyone returns home, a significant percantage never come back to work.

- When studying cohorts, people often forget that they are different people. Over the course of their lives, people generally move a few income quintiles, both up and down (think of an eighteen year old starting out, a fifty year old in prime earning years, and a retiree). This study gets it right by following people.

I first learned this distinction from reading Thomas Sowell, who my father introduced me to 30 years ago by telling me he should be President. I started reading him then and he has taught me more than any other person in my life, aside from my father. I note this as this week is his last column (here). I know that no one does this, but reading his old columns will result in a wealth of knowledge about economics and life. He will be missed.

- Throughout the discussion, I kept wondering what a US McDonalds franchise owner would say. "Of course 20% don't show up the first day", "of course we turn over 100% of our employees a year", "of course sick days are through the roof". And on top of that, they have to compete with a generous welfare state that doesn't exist in Ethiopia (never mind minimum wage laws, US regs and corporate franchise regs).

- Based on back of the envelope annualized incomes, the US equivalents would be about $16K for a minimum wage job cohort and $20K for the lump sum investment cohort. Would a US lump sum cohort spend 1/3, save 1/3 and be able to invest 1/3 in an owner operated business and then make $21K/yr off of that investment? An interesting (although expensive) future study.

J. D. writes:

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William Pocklington writes:

For an American audience, the lead of the Blattman/Dercon paper is buried five pages from the end: The managers... made efforts to add non-wage benefits, such as free transport, free clinics, and in some cases a free meal at a canteen. They appeared less likely to raise wages, however, and often failed to keep pace with inflation and keep real wages constant.

While the authors are right to question the generalizability of the study, it's hard not to draw comparisons to practices even in developed countries.

Instead of seeking real wage improvements or the opportunities from "informal employment", US workers are quick to opt for the perceived benefit of stability from institutionalized formal employment offerings.

Floccina writes:

At first, I was surprised and a little disheartened by the revaluation that the factory jobs are not better than other alternatives but it is not a bad thing. Many people say that x country needs to industrialize, get factories but I have for at least 20 years said no they just need to find some way to earn. I was thinking of places like the Cayman islands, they never had much of what most people think of as industry but they prosper. Maybe this story shows that I have been correct.

Robert Swan writes:

Interesting, but I think Prof. Blattman might be a little too sure of the results. On the surface, the trial is randomised, but I wonder if some people who would really have performed well were eliminated by the qualifying hurdle.

In the early 1900s, my grandfather diversified his flour milling business to generate electricity for the local town (Buncrana, Ireland). One of his most valued staff members was known around the town as being dull-witted. His job was mostly to watch a small number of gauges, to turn various knobs to keep them all in the happy zone, and to let other people know if any of them were nearing a limit (so they might fire up another generator or whatever). A boring job in which "brighter" people quickly became inattentive, and their inattention occasionally led to expensive machinery being damaged.

These African factory workers were required to have a Grade 8 or 10 education. I gather that was considered a relatively high level for the area. You're taking some of the brighter people and giving them a job where there isn't much call for initiative; should you be surprised that a fair number walk away? Perhaps the first randomised trial ought to have been on how good the qualifying test actually was.

Liked the quote on being exploited vs. not being exploited at all. Exploitation is in the same bucket as discrimination: once benign words that are now pretty much always steeped in evil.

Greg Alder writes:

Excellent comments, Robert Swan. I taught at a rural secondary school in Africa for three years, and as I was listening to this interview I was thinking of the myriad paths that my former students have taken over the last decade. One went to work for one of the Chinese-owned garment factories in the country (Lesotho), and she is now a manager. Another worked in one of those factories for a day and quit. He thought he was overqualified for the dull work, which he also thought paid too little. He turned to selling cowbells as a small-time entrepreneur. He wasn't making much money, but at least it was of his own initiative and he wasn't working for pennies under the thumb of a Chinese boss, as he put it.

ApeMan writes:

I couldn't help to wonder during the podcast whether the opening up, or expansion, of a factory had an indirect effect on those not working in the factory.

If an industrial area is expanding then there is more income generated in the area. The income is then spent in the area making entrepreneurial endeavors more likely to succeed.

Kind of makes me think of the '49ers and the gold rush. It was more profitable to sell shovels and jeans than to mine for gold. In areas of expansion it may be that it is better to offer services/goods to those involved in the expansion than to be a direct part of the expansion itself.

To test this a better control group may be to use an area not undergoing expansion and see how their lives improve, etc.

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