NBER researcher shares Nobel Prize in Economics.

• Position: Bureau News

NBER Research Associate Edward C. Prescott of the University of Arizona will share the 2004 Nobel Prize in Economics with Finn Kydland.

Prescott has been affiliated with the NBER since 1988 and is a member of the Program on Economic Fluctuations and Growth. He and Kydland were awarded the prize for their research on central banking and on the causes of business cycles.

He now joins a long list of NBER researchers who have received the Prize, including: Robert F. Engle, 2003; George Akerlof, Michael Spence, and Joseph E. Stiglitz in 2001; James J. Heckman and Daniel L. McFadden, 2000; Robert C. Merton and Myron S. Scholes, 1997; Robert E. Lucas, Jr., 1995; and Robert W. Fogel, 1993. Other NBER researchers who have won the Nobel Prize in Economics are Simon S. Kuznets, Milton Friedman, Theodore W. Schultz, George J. Stigler, and Gary S. Becker.

Besley, Pande, and Rao use data on the functioning of elected village councils in South India to examine the politics of public resource allocation. They stress two facets of the political process: access to political authority and the use of political power. They find in favor of a model in which public resource allocation, both across and within villages, reflects politicians' self-interest. They also find evidence that the extent and type of political opportunism in resource allocation is responsive to the design of political institutions. Thus, local democracy in India displays all the hallmarks of "politics as usual."

As in many countries (Canada, France, Germany, Japan, Italy, Sweden), concentrated ownership is a ubiquitous feature of the Indian private sector over the past seven decades. Yet, unlike in most countries, the identity of the primary families responsible for the concentrated ownership changes dramatically over time, perhaps even more than it does in the United States during the same time period. It does not appear that concentrated ownership in India is entirely associated with the ills that the literature has recently ascribed to concentrated ownership in emerging markets. If the concentrated owners are not exclusively, or even primarily, engaged in rent-seeking and entry-deterring behavior, then concentrated ownership may not be inimical to competition. Indeed, Khann and Palepu argue that at least some Indian families--the concentrated owners in question--have consistently tried to use their business group structures to launch new ventures as a response to competition. In the process, they either have failed--hence the turnover in identity--or reinvented themselves. Thus concentrated ownership is a result, rather than a cause, of inefficiencies in capital markets. Even in the low capital-intensity, relatively unregulated setting of the Indian software industry, the authors find, concentrated ownership persists in a privately successful and socially useful way. Since this setting is the least hospitable to the existence of concentrated ownership, these findings are seen as a lower bound on the persistence of concentrated ownership in the economy at large.

Empirical evidence on the relative efficacy of farm and non-farm growth as sources of reduction in rural poverty and inequality has been inconclusive despite the fact that a large share of the world's poor reside in rural areas. Foster and Rosenzweig address the limitations of the existing literature by developing and testing a general-equilibrium model of the farm and non-farm sector that distinguishes between different types of non-farm sector activities and income classes. They find, consistent with the model, that although the non-tradable sector is positively influenced by growth in agricultural productivity, factories enter rural areas with relatively low wages; thus factory employment is negatively influenced by growth in agricultural productivity. As a consequence, non farm growth tends to reduce inter-village rural inequality induced by agricultural technical change. Also, the growth in factory employment increases the incomes of the unskilled poor relative to better-off landed households.

Most conventional accounts of India's recent economic performance associate the pick-up in economic growth with the liberalization of 1991. Rodrik and Subramanian demonstrate that the transition to high growth occurred around 1980, a full decade before economic liberalization. The authors investigate a number of hypotheses about the causes of this growth--favorable external environment, fiscal stimulus, trade liberalization, internal liberalization, the green revolution, public investment--and find them wanting. They argue that growth was triggered by an attitudinal shift on the part of the national government towards a pro-business (as opposed to pro-liberalization) approach. They provide some evidence that is consistent with this argument. They also find that registered manufacturing built up in previous decades played an important role in influencing the pattern of growth across the Indian states.

Bhalla looks at the role, and interaction, of three key variables in the Indian development process: growth, inequality, and poverty. With growth having averaged 3.6 percent per capita for the last 25 years, and with no evidence (yet) of any significant worsening in inequality, the Indian experience conservatively can be described as a miracle, certainly in the same league as the high growth experiences of several countries in the last 50 years. Why this miracle has not been recognized as such may largely be attributable to the political economy of research on poverty, and its reduction. Bhalla discusses two questions in some detail: first, what caused India's growth to accelerate in the early 1980s? Second, what prevented India's growth from accelerating in the 1990s? The Indian story is about both factor accumulation and productivity growth. Bhalla finds that factor accumulation (particularly capital) explains about two-thirds of the higher growth in the 1980s; economic reforms add about 1.3 percentage points of growth in the 1990s. Growth decelerated in the late 1990s because of the policy of administered interest rates. Keeping nominal interest rates fixed led to a sharp increase in the real cost of capital (because of a decline in worldwide and domestic inflation rates). This increase prevented GDP and productivity growth from maintaining the high growth levels of the early to mid-1990s.

The rise of globalization is often met with fear that it will undermine existing long-term relationships in the domestic labor market. By increasing the reward for opportunistic behavior, the net effect of opening up to foreign competition could be a reduction in efficiency. Banerjee, Duflo, and Topalova provide evidence on the effect of globalization on worker's opportunism in the Indian customized software industry focusing on inefficient separations. Using detailed information that they collected on 500 projects carried out by 138 software firms between 2000 and 2002, they identify shocks to labor demand, such as the seasonal availability of U.S. work visas, the bursting of the "dot com" bubble, and the hiring patterns of the largest Indian software companies, that significantly affect quits. These shocks, combined with varying scheduled completion date of projects, allow the authors to credibly estimate the cost of quits to the project, measured by project delay and cost overrun. The effect of the departure of one person from the team leads to about a 27 percent cost overrun and a 25 percent longer delay. These costs appear too high to be justified by the increase in value for the receiving firm. Moreover, firms seem unable to control separations: good human resources practices (higher salaries and benefits, lower inequality within the firm) are associated with an overall lower level of separations but do not weather the high demand pressures.

Schott exploits product-level U.S. import data to assess the relative sophistication of China's exports along two dimensions. First, he compare China's export bundle to the relatively skilled and capital-abundant members of the OECD and asks how China's OECD overlap compares with those of similarly endowed U.S. trading partners. Then, he examines prices within product categories to determine whether China's varieties command a premium relative to its peers. Both comparisons indicate that China's exports are more sophisticated than its relative endowments would predict, and that its "excess" sophistication is increasing with time.

Benjamin, Brandt, and Giles explore the linkages between income inequality and growth in rural China in the post-reform period. Since the early 1980s, China has experienced high rates of growth accompanied by increases in income inequality. As long as living standards rose for everyone, widening income gaps were viewed as the inevitable, temporary consequence of the transition process. However, there is now concern that recent increases in inequality threaten future growth. This paper asks whether there is any evidence from recent experience confirming that inequality can hinder growth. The analysis is based on a large-scale, detailed household survey from over 100 villages, spanning the period 1986 to 1999. The authors create a panel of 100 villages for this time period. Taking the village as the unit of observation, the authors estimate models relating a village's growth rate to its initial level of inequality, and a set of covariates. Within a dynamic panel-data specification, this study finds no evidence suggesting that inequality reduces growth. However, the authors argue that the potentially long-run relationship between inequality and growth is better detected in a cross-section framework. Within the cross-section framework, they find that levels of inequality in 1986 are negatively related to the growth of village incomes through 1999, suggesting that higher inequality indeed can hurt growth in the long run. Further, they find...