Story Of The Week

Nobel Prize For Noble Efforts: The Economics Of Poverty

The husband-wife duo Esther Duflo and Abhijeet Banerjee along with Michael Kremer were awarded The Nobel Prize for Economic Sciences for their work in alleviating the poor using the experimental approach. This indeed is a great win, this is the second time an Indian origin economist is winning a Nobel prize and also, a woman is winning the Nobel Prize in Economics for the second time. This is going to inspire a generation of female economists who have long been sidelined in the University of Economics, both as students and as academia.

But, what is more significant is how their work has brought about a transformation in the field of developmental economics. Let us see how.

nBP

Source: Business Insider

Developmental Economics Redeveloped

Developmental Economics is the branch of economics that focuses on improving the social, economic and fiscal conditions of the world’s poorest countries. Often development economics has been criticized for displaying insensitivity towards the very people that it aims to uplift – the poor. They have either been treated as lifeless objects that can be moved around to satisfy the grand plans of the master builder or as those unable to make the best of the opportunities offered by the wise government. 

The work of Abhijeet Banerjee, Esther Duflo, and Michael Kremer brings a transformation to the field through the use of an experimental approach that puts them in direct contact with the poor. Thus, enabling them to provide real-world answers about what works in alleviating poverty. 

Their work has brought about three major shifts to the field. First, they shifted the focus from large statistical models to viewing the development challenges through the appropriate lenses, the lives of the poor. Second, their approach allowed the use of evidence rather than assumptions in the formulation of policies. Third, the use of randomized control trials (RCT) has solved the problem of causality in poverty research and lent credibility to it. In such research works, the statistical models use correlations between variables to indicate a relation. Let’s say, our models indicate that there is a high correlation between the sale of ice-creams and the sale of sunglasses i.e as sales of ice cream are increasing so is the sale of sunglasses.  This does not mean that an increase in the sale of ice cream is causing an increase in the sale of sunglasses. RCT tackles this problem by using a more realistic approach. 

What Is RCT?

Randomized control trial, borrowed from medical research is a trial in which there are two groups, an experimental group, and a control group. The intervention is tried out in the experimental group not in the control group and then the difference between the outcomes of the two groups is attributed to the treatment.  So, say, to study the effect of a new teaching tool, 100 schools chosen by lots from 200 will get the tool, while the rest will continue to use the status quo method. The results would indicate whether the new pedagogy makes any difference or not. This was the tool that was used by these three Nobel laureates in their research work. 

They set up J-PAL (Abdul Latif Jameel Poverty Action Lab), a network of researchers around the world who are united by the mission to improve the quality of policies that affect the poor worldwide by ensuring that such policy decisions are based on scientific evidence.  These J-PAL researchers have conducted about 850 RCT’S in 80 countries. Their research has covered many areas including health, education, finance, labor market governance, environment and the design of social support programs. 

rct

Source: Emergency Medicine Journal

Findings Of The Research

The findings of the research have generated practical insights into how poor people respond to education, health care and other programs meant to lift them out of poverty.

Some of their most insightful work has been on the way these marginalized people spend their money. It is usually assumed that poor families are generally hungry and would spend their money to buy additional calories. But the findings of the Banerjee and Duflo’s study has, in fact, showed that the income-constrained people who may not be getting enough to eat would, if they were given more money, spend the money on mobile phones or television rather than buying more or better-quality food. This is because their desire to escape boredom is as much of a motivation as hunger. For well off-economists who have never been either hungry or bored, figuring this out would be difficult. But an RCT which examines how money is spent solves this conundrum.

Another finding, in the area of education, has been that more textbooks and free school meals have small effects while the measures that specifically target the weak students improve significantly the educational outcomes. Their recommended program of remedial tutoring is now benefitting 5 million Indian children.

In the area of health, Duflo and others found that providing free health care makes a big difference. The results of a study showed that only 18% of parents gave their children deworming pills for parasitic infections when they had to pay for them, even though the heavily subsidized price was less than $1. But 75% gave their kids the pills when they were given for free. Additionally, a finding depicted that microcredit programs, which provide small loans to encourage poor people to start businesses, did little to help the poor in the Indian city of Hyderabad. 

development

Source: News18

Towards A More Inclusive Development

This experimental approach of the three laureates has yielded fresh insights and answers to good questions. Questions like: Why do poor people spend so much on entertainment? Does microfinance actually boost entrepreneurship amongst the poor? Does subsidized healthcare have a significant impact? But their approach is not without critics. Some argue that by reducing the problems to manageable sizes for an RCT, it avoids the really big and hard question, whether a structural change is needed for growth and development. But for a country like ours, where the resources are limited, particularly in the less developed states, the results of RCTs provide important inputs into decisions. Another critique has been that the findings of these experiments may not be universally applicable.

Well, nothing pathbreaking is without critics. People and firms in developing economies are unable to adopt modern tools and make the most of all that is available because they are held back by things such as government failure, lack of access to credit, behavioral snags and sundry factors beyond their control. These three laureates have taught us that the aim of development policy should be to identify these constraints and figure out how to ease them. This is one of the most important lessons from their work.

Billions of dollars are spent every year on programs meant to help the poor but poverty still remains an unsolved economic problem. The reason is that neither the government nor the aid agencies seem to have a sense of what works and what does not. And these findings have helped in this regard, by showing what works and what would not.

They have shifted the spotlight from grand plans to actual poverty as a lived reality in all its microscopic detail. For that, they deserved the Nobel Prize in Economics. As another famous economist has said, the award is actually a celebration of ideas. Ideas that will challenge the orthodoxy and help solve the complex problem of poverty.

References

  1. Livemint
  2. MIT.edu
  3. Business-Standard
  4. News18
  5. TheWire
  6. TheHindu
  7. EconomicTimes

 

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Categories: Story Of The Week