CID Faculty Spotlight: Jaya Wen on Why Politics Matter in Development Economics

For Jaya Wen, assistant professor at Harvard Business School, ideas matter. They have shaped the trajectory of the world we live in, and the way in which we live, circumscribing the choices and constraints in our lives: our level of health and education, the jobs available to us, the decisions we make.

“Whether or not we are aware of, or agree with them, economic and political ideologies [capitalism, communism, populism, liberalism to name a few] have shaped the course of nations, and shape our everyday lives,” she says.

Understanding how ideologically motivated state policies create or impede economic growth drives Wen’s research. Working at the intersection of development economics and political economy, she is particularly interested in how political incentives to stay in power align with, or diverge from economic incentives to maximize productivity.

In a recent project, she provides novel, empirical evidence to explain China’s use of a policy that appears, at first glance, to be counterintuitive.

On the surface, investing in state-owned-enterprises (SOEs), which are 25 to 50 percent less productive than private firms, may seem contradictory for a nation that prioritizes growth. Indeed, there was a marked decrease in SOE employment following China’s economic reforms in the 1990s. Yet, SOE hiring has remained steady since 2006, accounting for one-fifth of the labor force, about 70 million people, Wen writes.

Wen noticed that SOEs tended to hire more men and male minorities compared to private firms, and that the state increased hiring subsidies to SOEs during periods of instability (trade shocks, natural disasters, ethnic conflicts). Tracking these patterns, she pioneered an approach that isolates unrest as a causal variable in the state’s hiring of male minorities – the demographic group most likely to participate in conflict – and quantifies the implicit subsidy that state firms receive for hiring them.

“State firms are less productive, but they serve a political purpose – they prevent unrest and help regimes stay in power,” enabling China to maintain autocratic control during destabilizing periods, she says.

Her current project agenda includes understanding and measuring a new type of state influence (not based on ownership or equity) on Chinese firms; analyzing how civil conflicts in other parts of the world drive Chinese industrial policy (providing subsidies to firms whose trade is affected by the Tigray War in Ethiopia for instance); and the impact of the Green Revolution – the introduction of new varieties of wheat, rice, and other crops that dramatically increased production and reduced hunger – on political movements in India.

Wen and graduate students Shivram Viswanathan and Sachet Bangia are testing whether the Green Revolution, which was funded by organizations such as The World Food Program, US Aid, and the Rockefeller and Ford foundations helped contain communism by curbing hunger and discontent, or if, on the contrary, it may have fueled the communist movement in India by exacerbating inequality.

Wen’s commitment to better understanding the interplay between politics and economics comes at a time when the world is entering a bipolar power dynamic between the U.S. and China with large potential for misunderstanding on both sides – one of many reasons Wen, who also serves as director of research for the China Econ Lab, a consortium of leading U.S. and Chinese economists, focuses primarily on China.

Another compelling reason: China is the greatest development story in human history. Over the last 40 years, China, the world’s second largest economy, and currently the most populous nation, has lifted 800 million people out of extreme poverty, accounting for 75 percent of global poverty reduction. As the world’s largest autocracy, it also has very distinct institutions and governing rules, offering economists an important, differing point of comparison.

An enthusiast of both numbers and words, Wen is drawn to economics for its mathematical rigor, insights into people’s day-to-day lives, and potential for social impact. After graduating with a B.A. in economics from Yale, she researched “the financial problems that regular households face in the real economy” as an analyst at the Federal Reserve Bank of New York, leading to one of her first publications, and a PhD in economics (also at Yale).

Over time, she has come to realize that one’s potential to effect change is limited. “I’m lucky to be born in the right country [the U.S.] at the right time, with a particular set of opportunities,” she says. “I have relatively more agency but not infinite agency. The thing that keeps me up at night is: What responsibilities do I have because I have that agency? How should I use that agency to better people’s lives?”

She sees one of her responsibilities as helping her business school students, future leaders in diverse arenas, to critically examine the political and economic structures of the world they operate in.

“Future CEOs need to understand why labor strikes happen, people working high in liberal governments need to understand why populism is attractive, and people at the highest levels of capitalist policymaking need to understand why some countries choose to be communist,” says Wen.

Working at an intersection between fields offers Wen a unique perspective: she can see where paths fork and come together. Even if you disagree deeply with an ideology, “it’s important to understand what it is, how it functions, and why others like it,” she says. That is, we must see what is profoundly human.