Untying the knot

New ideas about an old problem

Apr 20th 2011 | from The Economist

Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. By Abhijit Banerjee and Esther Duflo. PublicAffairs; 336 pages; $26.99. To be published in Britain in June by PublicAffairs; £15.99. Buy from Amazon.comAmazon.co.uk

A stitch in time

ESTHER DUFLO grew up in France pitying Kolkata’s poor, based on what she had read in a comic book about Mother Teresa. Abhijit Banerjee grew up in Kolkata envying them: poor kids always had time to play and they routinely beat him at marbles. As economists at the Massachusetts Institute of Technology, both remain fascinated by poverty. In an engrossing new book they draw on some intrepid research and a store of personal anecdotes to illuminate the lives of the 865m people who, at the last count, live on less than $0.99 a day.

The two economists made their names (and remade their discipline) by championing randomised trials. These trials test anti-poverty remedies much as pharmaceutical firms test drugs. One group gets the remedy, another does not. The two groups are chosen at random, so the remedy should be the only systematic difference between them. If the first group does better, the benefit can be attributed to the project and not the many other factors that might otherwise obscure the result.

These trials proved immensely appealing. They promised to sift nuggets of truth from the slurry of received wisdom and wishful thinking that characterises much aid-talk. The hope was that once a trial proved the worth of a project or programme, governments and donors would back it and prescribe it more widely.

The approach has caught on. Another book, “More Than Good Intentions” by Dean Karlan and Jacob Appel of Innovations for Poverty Action is also out this month. But the approach has also attracted criticism. These trials, the critics point out, show whether a drug or remedy works, but not how it works. Even in medicine, a randomised trial can only show whether the average patient benefits; not whether any individual patient will benefit. Human physiology differs from patient to patient, so does the physiology of poverty.

“Poor Economics” should appease some of their critics. It draws on a variety of evidence, not limiting itself to the results of randomised trials, as if they are the only route to truth. And the authors’ interest is not confined to “what works”, but also to how and why it works. Indeed, Ms Duflo and Mr Banerjee, perhaps more than some of their disciples, are able theorists as well as thoroughgoing empiricists.

They are fascinated by the way the poor think and make decisions. Poor people are not stupid, but they can be misinformed or overwhelmed by circumstance, struggling to do what even they recognise is in their best interests. The authors recount (with grudging admiration) how nurses in rural Rajasthan outwitted the two professors’ efforts to stop them skiving off work. They also describe how borrowers in south India exploited a contractual loophole to avoid taking out health insurance, which their microlender insisted they buy for their own good.

The poor, like anyone else, can also succumb to inertia, procrastination and self-sabotage. The authors discovered it was quite normal for poor women in the Indian city of Hyderabad to take out a microloan charging 24% interest only to deposit it in a savings account that paid 4%. This seems mad, except that the obligation to repay the loan ensured the women did not squander the money. Farmers in western Kenya miss out on the benefits of fertiliser because, by the time the planting season arrives they have often spent their earnings from the previous harvest. But farmers far-sighted enough to buy the fertiliser straight after the harvest, when they do have money, do not sell it, despite facing all the same demands on their resources. In other words, farmers cannot save the money to buy fertiliser, but they can save the physical fertiliser itself.

Poverty is often linked in the public mind with dependency. But, as the authors point out, the poor bear more responsibility for their lives than the rich, who coast along, enjoying chlorinated water, drawing a regular salary, paid directly into a bank account, perhaps with contributions to their pension and health care automatically deducted. The rich can indulge their weakness for cigarettes and alcohol without fear of financial ruin. The poor, in contrast, have to watch every cup of sugary tea. Mr Banerjee and Ms Duflo recommend a variety of nudges, props and subsidies that will make it as easy for poor people to make the right decisions as it is already for the rich.

If it is a mistake to equate poverty and dependency, it is equally mistaken to believe the poor will lift themselves up by their bootstraps. The book crosses swords with the business gurus and philanthropists who project their own enthusiasm for Promethean entrepreneurship onto the poor. Yes, the poor are more likely to run their own business than the rest of us. But that is because they have no other choice. When asked, most of them aspire to a government post or a factory job. Developing countries are not full of billions of budding entrepreneurs; they are full of billions of budding salarymen.

The authors also dissent from the “melancholy view” held by some economists, who argue that bad politics will always trump good policy. Why bother figuring out the best way to spend a dollar on education, when $0.87 will be diverted into the pockets of officials? These economists argue that you can’t do anything in a country with bad institutions—and you can’t do much about these bad institutions either. You just have to wait for a revolution.

But Mr Banerjee and Ms Duflo advocate what they call a “quiet revolution”. They insist that things can be improved “at the margin”, which is an economist’s way of saying that things can get better, even if they are very bad. They also make the case that improved policies can contribute to better politics. Once constituents see that good policymaking can make a difference to their lives, they raise their expectations, and demand more.


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