Kick-off on the west coast

Starting up a research project is always an exciting process. When everyone has cleared the calendar, there is finally an opportunity to think about and discuss shared interests. It is also a challenging process where different visions should become a common plan. As most good things, it is fun, exciting, and occasionally frustrating.

The starting point of our research project are the huge income gaps in the world – Liberia’s per-capita income is 98% lower than Sweden’s. While these income gaps are one of the most well-known -- and probably most important -- characteristics of the world economy, they lack a comprehensive explanation. 

The aim of our research project is to explore to what extent differences in the degree of market integration can explain the large observed differences in income levels. Our shared interest in the role of market integration for economic development brought us together as a research group. But we came to the project with different and complementary backgrounds: Timo Boppart and Hannes Malmberg have worked with macroeconomic theory and trade data; Ingvild Almås has worked on income inequality and the measurement of cost of living and consumption in poor countries, and Konrad Burchardi has worked on the misallocation of resources in developing countries. 

During the past week the four of us got the opportunity to discuss and kick-off our project. Thanks to the Ragnar Söderberg Foundation we could do this on Sweden’s beautiful west coast. Luckily, these days were also endowed with some wonderful late-summer sun. While obviously being a pleasant work environment, the Bohuslän also provided us with shelter from the distractions of the usual daily schedule full of calls and meetings. It gave us the opportunity to spend a considerable amount of time to share our knowledge, take stock of what is known, and – crucially important for any project – shape a clear view of what is still to be explored. 

One paper that we discussed during the weekend was the seminal paper The Digital Provide: Information (Technology), Market Performance, and Welfare in the South Indian Fisheries Sector by Robert Jensen. The paper illustrates well how market integration can be beneficial for both producers and consumers.  The paper discusses how the fish market in the Indian state of Kerala changed when mobile phones were introduced in the late 1990’s. Before mobile phones were introduced, local fishermen sold any fish caught in their home ports’ markets. If the catch was good one day, it was likely also good for other fishermen from their home port. Upon selling their catch to the market, prices would fall, and frequently fish would just be thrown away. Similarly, if a fisherman’s catch was small, prices would be high for buyers and many consumers would not be able to purchase any fish. In the pre-mobile phone times, this created large price variation and substantial waste. Crucially, the situation in neighboring ports might be just reversed – but the fisherman would not know this before coming home from the sea. 

The introduction of mobile phones changed this. Fishermen could now obtain information about the catch provided to other ports and the prevailing prices while on the boat and before deciding where to sell their fish. While previously the local markets for fish had been almost entirely segregated, the fishermen could now know exactly where to go to get the highest price for their fish. Prices equalized across the different local markets, and waste of fish was entirely eliminated. Consumers were better off as they could buy fish at more stable prices, and producers were better off as they could sell their fish at more stable prices and avoid waste.

As such, Jensen’s research provides a stark illustration of the potential gains of market integration as predicted by standard economic theory. However, there are many aspects of development, illustrated by the gap between Liberia and Sweden above, that cannot be understood by the focused analysis in Jensen’s paper. What are the effects of market integration on productivity and specialization in other markets, how do these materialize in the long term, why do markets integrate in general? The economic history of how Sweden developed is also a story about education, specialization and the development of ideas, among other things. What was the role of market integration for these? The goal of our project is to shed light on how markets integrate, how efficiency gains in a local markets spill over across space and over time to other markets, and how this process might generate large income differences. The current state of knowledge lacks a fundamental explanation of the mechanisms at play. We are enthusiastic to finally start digging into these issues. And we are grateful to the Ragnar Söderberg Foundation for sharing our view that this research project can yield potentially important insights – and, last but not least, their generous support.

Photos: While getting started on the west coast, spending time discussing papers and enjoying the environment, we also tried our skills as – highly non-specialized – fishermen and -woman. The catch of 14 mackerel made us quite proud. The price was nothing to brag about, we ate it all, but there was certainly no waste either.