Book Review: Poor Economics – Abhijit V. Banerjee and Esther Duflo

Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty

By Babak Moussavi

The debate over whether economics is a social science has often been an ideological one. Many who argue that it is, believe it can generate truths about societies in the same way that other branches of the broad family of subjects can. But those who argue that it isn’t, point to its use of modelling and post-hoc inferences, and lack of experimentation, to suggest that it doesn’t properly follow the scientific method and cannot make scientific claims.

At the micro-level, economics is changing, however, and experimentation is creeping in. This is altering the discipline in exciting ways. The publication of Nudge (a book which we promise to review on these pages soon), by Cass Sunstein and Richard Thaler, both of the University of Chicago, broke new ground in introducing the subject of behavioural economics, a strand that incorporates psychology, to the general reader. They showed that small changes to incentives and other aspects to the ‘choice architecture’ nudge people into making different decisions than they would otherwise have done. When designed correctly, these nudges can yield decisions that are better for people’s health, wealth or overall happiness. This is economics at its most scientific, and an understanding of behavioural economics can be deployed to benefit people and their decisions.

Poor Economics takes the tools of Nudge one step further. The authors, Abhijit V. Banerjee and Esther Duflo, two young Professors of Economics at MIT, specialising in development, seek to understand how the poor make decisions, and use this information to rethink “poverty and the ways to end it”. Their aim is not to write another tract on the merits of aid, or the faults of intervention, but to delve into the tiny details that affect the individual decisions that poor people make, in order to see how these can be adjusted to help the poor make optimal decisions that might let them break out of the poverty trap.

Ms Duflo and Mr Banerjee make great use of Randomised Control Trials (RCTs), which follow a typical format for social science experiments: two groups of poor villages, randomly composed and selected to eliminate possible bias in the design, are tested for the same set of results (such as percentage of children of a certain age who can read at a certain level), but where one group has one variable added, which the other does not. If the variable makes a discernible difference to the results, one can conclude that it has a substantively significant effect.

Ms Duflo and Mr Banerjee seem to have collected data from a huge number of RCTs. One great example is of an NGO, Seva Mandir, which offered five-shot immunisations against basic diseases in the Indian city of Udaipur. Normally, only about 6% of children were brought for full immunisation (all five shots), but when the authors tried offering a meal of dal (dried beans) costing 40 rupees with each shot, the uptake increased to 38%. Similar positive impacts have been shown to occur elsewhere, such as in the case of the Mexican government’s PROGRESAwelfare scheme, which gives the poor benefit payments on the condition that they send their children to school (although, the authors suggest that on some occasions, this could have a similar impact even without the strict conditionality).

The results are often startling, but the authors’ aim to understand why it is that the some variables have made a difference to behaviour and results, and what effect different incentives have on decision-making. Indeed, that is their main question: How do the poor make choices? The answer: just like the rest of us. The Victorians, and their modern-day descendants, could not have been more wrong about human decision-making: people, rich or poor, tend towards inertia, default biases, procrastination, error through misinformation or lack of information, and are swayed by incentives and gentle nudges. They are not feckless, or idle, and certainly do not deserve their lot. Nor is the effort to alleviate poverty futile. But the devil is in the (unattended) details.

The poor make as rational decisions as everyone else

One of the strengths of the authors’ approach is that they don’t merely rely on RCTs. They have anecdotes of NGO efforts that have yielded enormous benefits, such as Gram Vikas, also based in India, which gains the consent of whole villages before installing sanitation systems, thus reducing the cost per household by a whopping 80%, and even corroding caste prejudice (as they all have to share the same water!). The authors have also spoken to a large number of ‘people on the ground’, inquiring directly into the concerns and choices of individual people living in poverty. They meet people who have many children because they hope one of them will ‘make it’ and look after the parents in old age, as well as people who have started up their own small businesses thanks to small microfinance loans.

Indeed, microfinance is a topic they cover in some depth, showing that it is a useful tool in the fight against poverty, but that its impact should not be exaggerated. Micro-lenders’ loans are always tiny (because they must guard vigilantly against default), and always short-term, which does not encourage risk-taking or entrepreneurship. Here, Ms Duflo and Mr Banerjee demolish the claim that the poor constitute “one billion bare-foot entrepreneurs”. For the poor set up their own businesses because they have no other option. In the vast majority of cases, their businesses make just enough to survive, and in very rare instances are the poor’s business’s profitable enough to even hire an employee. To properly expand, they would need a large investment, but this is something they do not have access to. As a result, most poor people surveyed by the authors, whether they are in India or Morocco, say they want (at least one of) their children to have a secure, boring, well-paid government job, which they hope will lift the whole family out of poverty.

The authors frequently cite the debate between Jeffrey Sachs and the aid advocates on one side, and William Easterly and the aid critics on the other. While that battle has raised interesting points to consider in the development debate (especially to do with political economy), Ms Duflo and Mr Banerjee are approaching it from a different angle. There’s much more to this book than can fit in one review, but the overriding philosophy advocated throughout is “attend to the details, understand how people decide, and be willing to experiment”. Through this rigorous approach, we can break through the problem of the “three Is” that plague development efforts: ideology, ignorance and inertia. None of these allow for good policy.

Eliminating global poverty is not a futile endeavour. We just need to know the right levers to pull. They may often be very small, but they are there. Ms Duflo and Mr Banerjee’s brilliant book is an excellent place for policy-makers to start, if they are really intent on finding them.

(Like this review? Please consider buying the book, and others that we have mentioned from SJF’s own Amazon store.)

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