There’s been a long standing debate why living standards are so different around the world. Even with talented workers, labor and capital investment, for example, there are clear economic disparities between East Africa and the United States.
UC Berkeley economics Professor Miguel’s research indicates that part of the answer could be something called “slack.” This occurs when workers or resources are underutilized due to low or inconsistent customer demand.
Professor Miguel focused his research on Kenya in particular, where he’s had a field team in place since 2014 to collect data and survey businesses, households and firms to measure productivity, income, consumption and slack.
They discovered that slack is higher in small, rural areas compared to busy cities like Nairobi, Kenya’s capital, where there is more wealth and resources. For instance, if people have more money to spend, shops get more customers, workers stay busy and there’s less slack. But cutting slack also depends on boosting demand, improving productivity, raising incomes and making transportation better.
"In settings like rural Kenya, there may be lots of small entrepreneurs and not that much demand for their goods, and that leads to slack,” Miguel said. “Interventions that improve consumers' purchasing power could be really important [in reducing slack].”
Professor Miguel’s team also worked on a cash transfer experiment that took place in Siaya County, a rural area in Western Kenya. The nonprofit GiveDirectly gave each impoverished rural household $1,000. This helped families buy more goods, which boosted demand and increased business activity, ultimately reducing slack. This kind of boost to the economy is called a "multiplier effect."
Another idea to reduce slack is for small businesses to combine into bigger businesses. This streamlines workflows, making better use of available labor. But Professor Miguel noted that this is difficult to do because business owners want to make their own profits and run their own businesses.
One common type of business in rural Kenya is a grain mill. People bring their grain to a worker who uses a big machine to turn it into flour for making a dish called ugali (a kind of porridge). However, there can be long gaps of time between customers. Since workers need to be present whenever someone arrives, they can't just come and go at will. This problem — having expensive equipment and workers idle due to an imperfect match between supply and demand — is called “input indivisibility.”
“That could be a reason why these countries remain poorer than they could or should be,” Professor Miguel said.
Beyond rural Kenya, Professor Miguel’s research also applies to underutilized labor and slack in rich countries during recessions. Due to a drop in demand for goods as people’s incomes fall, businesses slow down, causing workers and resources to be underutilized.
For Kenya, solutions to reduce slack include technological innovations, according to Miguel’s research, such as the gig-economy, online marketplaces, and more flexible work arrangements that can allow businesses and customers better coordinate their transactions.