Poor Economics--- By Abhijit Banerjee and Esther Duflo

 

 

Almost a decade ago,long before they won the Nobel Prize,Economists Abhijit Banerjee and Esther Duflo published 'Poor Economics'.The book was a runaway success and remains immensely relevant today.

'Poor Economics' is written simply and clearly -- not one econometric model or Game Theoretic theorem in sight -- and argued convincingly with solid data backup. For anyone concerned about the issue of poverty and all that goes with it, the book is an essential read -- both educative and deeply disturbing.

The authors begin by highlighting a seemingly obvious but oft disregarded proposition -- to tackle a problem one needs to understand it in painstaking detail. And if it involves human beings, one needs to get up close and personal and understand the mind sets, the motivations and the basic emotional drivers of the people involved. In practice, despite pious protestations about the emergent need for poverty alleviation by both academics and policy makers, poverty tends to be studied from a distance and the poor set up as two-dimensional caricatures.  ‘Ideology, ignorance and inertia’ appear to be the key determinants of both theory and policy and the result is that the outcomes are less than satisfactory, to say the least.

Such trenchant criticisms are not simply a radical rant of fringe looneys -- these are mainstream Ivy League economists and, besides, they offer logical argument to counter ideological theories and  also a practical method, the much hyped Randomized Control Trials, to evaluate  policy measures. To top it all, they present an 18 country database derived from field level studies to back up their conclusions.

The authors are suspicious of broad, simple and sweeping solutions that promise to wipe out poverty in one fell swoop. They insist that a more appropriate approach is to focus on particular issues in specific environments and design policy measures after rigorous testing in the field using RCT for validation. Randomized Control Trials, brilliantly borrowed from the medical field, are best described in the authors’ words:

 ‘In an RCT…individuals or communities are randomly assigned to different “treatments”— different programs or different versions of the same program. Since the individuals assigned to different treatments are exactly comparable (because they were chosen at random), any difference between them is the effect of the treatment.’………

 

‘A single experiment does not provide a final answer on whether a program would universally “work.” But we can conduct a series of experiments, differing in either the kind of location in which they are conducted or the exact intervention being tested (or both).’

The authors don’t confine themselves to general assertions; instead they examine a series of poverty related issues ranging from nutrition, public health, primary and secondary education to fertility and finance and throughout, the focus is on the poor – their circumstances, their compulsions and deriving therefrom their life decisions.

The process is simple and immensely powerful—from grass roots investigation and interaction to comprehensive understanding; from understanding to policy formulation; from formulation to validation and from validation to implementation or acceptance for implementation.

In every one of these explorations one finds fascinating insights. One revealing conclusion relates to ‘time inconsistency’ in human behaviour. Most humans tend to place a higher value on present gratification as opposed to future gratification and this impacts many decisions including those relating to present consumption versus saving. “I’ll consume today and save tomorrow, definitely!” But that tomorrow never comes. This tendency is aggravated when the future is both uncertain and unpromising or frankly bleak and resources are obviously inadequate to make any difference even in the medium to long run. Some of the seemingly ‘irrational’ consumption and savings decisions of the poor may well be very rational given their circumstances! 

The same logic applies to a tendency to avoid the immediate inconvenience of standing in line for a child’s vaccination today and postponing it to some undefined future occasion. Even when the benefits of vaccination for future health of the child are known, the immediate ’headache’ of getting it done is small but significant. But since it is small it can be overcome with a slight ‘nudge’— a small but significant incentive. This was tested and found effective -- a gift of a modest amount of dal was enough to tilt the balance in favour of immediate vaccination instead of postponing it in a study done in Udaipur district in Rajasthan.

A whole series of other poverty related issues are examined by the authors. What are the consequences of the ‘Elite Bias’ in primary education? Has the focus on the best and brightest and the neglect of the rest in school education severely damaged educational outcomes? Is cheap food through the public distribution system the best way of dealing with poor nutrition amongst the poor or are there other areas that should be focussed on? Why have the plethora of nationalized banks not met the credit requirements of the poor? How come the money lender is still important in their lives?

 Are microfinance institutions the new miracle cure for the credit requirements of the poor wannabe entrepreneur? A detailed study of this issue reveals that while MFI’s do help significantly, the miracles are few and far between. The rags to riches stories peddled by these institutions are exceptions not the average rule. The ‘businesses’ most of the poor run are simply not profitable enough to transform their lives, MFIs notwithstanding! Other solutions have to be found.

Why are preventive health measures which are both cheap and effective neglected and expensive cures focussed on? What makes the admittedly inadequate state expenditure on health largely infructuous? What are the consequences of asymmetry of information amongst the poor, and moral hazard amongst medical practitioners, for the health of the poor?

The list goes on and on.

The best that the blog format adopted here can do is to give a brief glimpse of the insightful nature of this work. The book is long and by no means a light read but the effort to work through it is enormously rewarding.

Happy reading!