The Big Mac Theory of Development

Its a question richer people have about their poorer neighbors: Why are they poor? Is it circumstances, or is it some kind of moral or intellectual failing? Is it that they never had a chance to cross from the wrong side to the right side of the tracks, or that they never had the motivation to cross? The subject colors thinking about international development as well. Is poverty in Africa and Asia the result of something about individual Kenyans or Pakistanis, or is it instead something about Kenya or Pakistan? Is it about the people, or the place? A new paper by Princeton Economist Orley Ashenfelter for the National Bureau of Economic Research sheds some light on this debate. It compares the wages earned by staff working at McDonalds (MCD) franchises around the world. Ashenfelter studies what McDonalds employees earn against the cost of a Big Mac in their local franchise. The Big Mac is a standard product, and the way its made worldwide is highly standardized. The skill level involved in making it (such as it is) is the same everywhere. And yet, depending on where they live, crew members from all parts of the world earn dramatically different amounts in terms of Big Macs per hour. In the U.S. a McDonalds crew member earns an average of $7.22 an hour, and a Big Mac costs an average of $3.04. So the employee earns 2.4 Big Macs per hour. In India a crew member earns 46 cents an hour while the average Big Mac costs just $1.29. Still, the employee earns just one-third of a Big Mac for each hour worked. Same job, same skillsyet Indian workers at McDonalds earn oneseventh the real hourly wage of a U.S. worker. Theres a huge place premium to working in America rather than India. The place premium is not limited to low-end service jobs. Economist Michael Clemens, a colleague of mine at the Center for Global Development, studied (PDF) a group of Indians working at an India-

based international software firm doing the same job on the same projects for the same pay. All of them applied for a temporary work visa to the U.S. but were separated by one factsome of them won the lottery by which the visas were issued; others lost. The workers still employed by the same firm and still doing the same type of job on the same projectssuddenly became very different in terms of their pay. The ones who moved to the U.S. started earning double what their colleagues back in India were earning (adjusted for purchasing power). They earned more not because they were different from the colleagues they left behindselection was random, not based on education, talent, or drivebut because they were in the U.S. rather than India. And once they returned to India they went back to earning pretty much the same as their colleagues who had never left. Clemens concludes that location alonethe place premium accounts for three-quarters of the difference in average pay levels between software workers in the U.S. and India. Differences in production technology, education levels, and levels of effort account for, at most, one-quarter of the difference in earnings between the two groups. Why do people in the U.S. earn so much more doing the exact same jobs as people in India? One reason is infrastructure: physical infrastructure such as (comparatively) good road and electricity networks, alongside economic infrastructure including a (somewhat) robust banking system. Institutions such as a (passable) set of commercial laws and (not completely capricious) regulatory regimes are another factor. The higher quality of these public goods allows the same amount of effort by the same quality employee to create considerably more value in the U.S. than in India. So the overwhelming explanation for who is rich and who is poor on a global scale isnt about who you are; its about where you are. The same applies to quality-of-life measures from health to education. And that suggests something about international development

efforts: If theres one simple answer to the challenge of global poverty, it isnt more aid or removing trade and investment barriers (though those can all help). Its removing barriers to migration. Harvard economist Lant Pritchett estimates that increasing the labor force of the OECD club of rich countries by just 3 percent through migration from the rest of the world would benefit people in poor countries to the tune of $305 billion a year. Compare that with an $86 billion annual payoff from the removal of all remaining trade barriers or the $125 billion the rich world already spends on aid to developing countries. The fastest and most foolproof way to make poor people in poor countries richer and healthier is to let them move to a rich country. Of course, theres the concern that if rich countries are flooded with poor people, those countries will just become poor, too. But thats based on a misunderstanding of what makes rich countries rich. It isnt scarce labor that makes Americans wealthy. Its those betterfunctioning institutions and networks which allow people with the same skills to get paid so much more here than in India. Thats why the evidence suggests even unskilled immigration to the U.S. actually increases overall domestic wages and employmentto say nothing of skilled immigration, where the benefits are even greater. Unfortunately, politicians dont seem to care about whether people born on the wrong side of the tracks have the motivation to cross over, or how much the planet benefits when they do. Instead weve erected a huge electrified fence to keep people out. The evidence on the place premium suggests immigration restrictions are probably the greatest preventable cause of global suffering known to man.

Will Egypt's Most Famous Beach Resort Survive the New Regime?
At a little past 1:00 a.m., the Ukrainian girls at Pacha start to mob the dance floor. Pacha is the glitziest, most over-the-top nightclub in Sharm el-Sheikh, on the southern tip of Egypts Sinai Peninsula. The interior of the club is typical of clubs: dark, cavernous, with a huge, constantly rotating, video montage behind the DJ, who is Egyptian and has a headset wrapped around his neck and stands atop his record-player throne rocking mechanically. There are also wind machines and long, orange-red flames made of crepe paper billowing out of two columns, and a sprinkling of Arab men along the perimeter of the dance floor, and a clutch of girls with dyed, flaxen hair, smoking and talking to each other and drinking vodka. As the girls stream onto the small swatch of dance floor, a voice bellows over the hi-fi: Were Brooklyn! Were Brooklyn! It was here that, long after the Islamists gained power in Cairo, the DJs kept spinning, the snorkelers kept diving, and the girls of the former Soviet Union kept turning up with their thongs and Vogue cigarettes. The Russian girls, excuse me, they are here for the sex with the Arab menthis is known, says Said Taha El Salled, who drives a taxi in the winter, when the tourists usually flock to Sharm. In the future, Sharm el-Sheikh may very well be called Egypts Last Bastion of Fun. The fate of Sharm hangs in the balance in the run-off election that will be held in mid-June, with Egyptians choosing their first president since former leader Hosni Mubarak was ejected in the wake of the Arab Spring. The finalists are Ahmed Shafik, a former prime minister under the Mubarak regime, and Mohamed Mursi of the Muslim Brotherhood. The winner will answer to a parliament elected in December 2011 with an Islamist majoritycomprised of Muslim Brotherhoods Freedom and Justice Party and the ultraconservative Salafis Nour Party.

Many ultraconservative Salafis want an end to alcohol, gambling, mixed-sex beaches, and bikinis. There has even been talk of razing the Pyramids (the better to squash idol worship). While few expect them to get their way, the recent kidnapping of two Americans outside Sharm wont exactly boost tourism. Business in Sharm had already been gradually slowing for several years. In July 2005, a string of Islamist terrorist attacks left 88 dead and were among the bloodiest in the countrys history. Then, in December 2010, a shark killed a 70-year-old German woman. (Oddly, one of Sharm el-Sheikhs biggest beaches is called Sharks Bay.) Islamist rhetoric has had a chilling effect. For sure this is bad, says Zaki Hassan, the 26-year-old manager of Pacha. Were down 50 percent this year. Normally, we have people from Brazil, Argentina, Turkey. Not now. At the Grand Rotana, a five-star resort nestled along Sharks Bay, occupancy rates are at an all-time low. (Waiters, towel boys, bellboys, and fitness-club staff all say this, but no one will speak openly about it.) The water slide, usually clogged with kids, is empty; the hotels Zen Spa, a ghost town. Pulse, the Rotanas answer to Pacha, appears to have been shuttered for the season. Sky Lounge, which was once overflowing with sunburned Brits and Italians smoking hookahs and sipping raspberry-flavored vodka, no longer stays open past 8:00 or 9:00 p.m. Mahmoud Ibraheem, who makes a living driving Jeep-loads of tourists around the desert, says business is off 25 percent. Whats happening in Cairo, its a problem, of course, he says. But Ill tell you somethingthis is talk. When they [Islamists] arrive in government, they will not do these things. Most Islamist leaders are aware that tourism is Egypts biggest businessan estimated 15 million foreigners visited the country in

2010and they have sought to quell fears that theyre going to turn it into Saudi Arabia, where movie theaters are verboten, to say nothing of, say, massage parlors. Shadi Hamid, the Brookings Doha Centers director of research, says the Brotherhood, which controls the largest bloc of seats in parliament, is focused on the economy. Clamping down on tourism would only hinder growth, so, for now, seaside getaways are safe. Also, Hamid notes, Red Sea resorts like Sharm and Hurghada are far from Cairoand the public eye. (Nearly 240 miles of desert separate Cairo and Sharm, and even if they were closer, Sharms Western hotel rates mean most Egyptians cant afford to visit.) Its possible to have an enclave strategy, Hamid says.

The Surprising Global Shortage of Skilled Workers

Want to find a job? Thats not a problem if you are trained as a technician and looking for work in China or Brazil. Ditto for sales representatives, who are in hot demand in Taiwan and Hong Kong. In Japan, engineers wont sit idle. Meanwhile, in Ireland, IT workers are needed. In the Netherlands, its laborers. Even with unemployment running at an historic high of 8.1 percent in the U.S., dont worry if you are a plumber, welder, or electrician. Theres plenty of demand for your skills. Even as economists and politicians fret about the problem of global unemployment, those with the right rsums are in hot demand. Thats leading to talent shortages around the world, according to a survey released on May 29 by Milwaukee-based ManpowerGroup (MAN), one of the worlds largest temporary workers agencies. All told, over one-third of the 38,000 companies Manpower surveyed earlier this year in 41 countries and territories reported that they were unable to find the workers they needed. That is 4 percentage points higher than it was in 2009, during the global financial crisis. The figure is still well below the 41 percent that reported shortages in 2007, before the crisis.

Companies have gotten sophisticated about who they need and when they need them. In todays world, its stretch out your workplace a bit more and [only] then hire, says Jeff Joerres, ManpowerGroups chairman and chief executive officer. Even if we had a robust recovery, I dont think you are going to see that change. Companies have had too many lessons about how you can get whipsawed the other way. Not surprisingly, the largest number of employers reported shortages in Asia, where economies have been relatively resilient to date. Some 45 percent of employers surveyed there cited difficulties in finding the right people to hire. Thats the same number as in 2011, and its 17 percentage points above the total when the first survey was carried out in 2006. In the Americas, 41 percent faced challenges getting the right workers, up from 37 percent last year and 34 percent in 2010. In Europe, as well as the Middle East and Africa, only one-quarter of employers reported labor shortages, similar in number to last year and not much different from pre-crisis levels. That probably reflects the still-precarious nature of the European economy. The reason companies said they face shortages? The largest share, or 33 percent, said they simply couldnt find the workers they need. A key issue was a lack of such hard skills as IT knowledge or facility with a foreign language. Insufficient work experience, a dearth of soft skills, or what the survey called employabilitymeaning characteristics like motivation and interpersonal skills, wanting more money, and being unwilling to work part-timewere also factors, in descending order of importance. Companies will continue to face challenges regarding talent shortages unless educational systems are changed, argues Joerres, who says a major problem is the skills mismatchthe gap between job-seekers abilities and what employers need. One way to fix this is to vastly expand the size and number of trade schools, he says.

The honor of doing and going through a vocational technical program has diminished. Those who would have gone to that school are now going to a four-year university because parents and society say that is what you should do, says Joerres. There are not enough welders, plumbers, and draftsmen. We are seeing shortages in these areas. And the pendulum takes a while to swing back.