Expert Speak India Matters
Published on Oct 18, 2019

Abhijit Banerjee and Esther Duflo have been more concerned with measuring what happens in the real world, at the very bottom level than sophisticated theoretical modelling.

Nobel Laureate Abhijit Banerjee believes in thinking “small”

India-born Abhijit Banerjee has won the Nobel Prize in Economics. Another Bengali Amartya Sen, won the Nobel Prize in Economics in 1998. Both Banerjee and Sen live abroad (in the US) but their focus of attention is India, where they return for their studies from time to time. Banerjee is a professor in MIT (Massachusetts Institute of Technology) and as is his Paris-born wife Esther Duflo. The third Nobel Laureate is Professor Michael Kremer who teaches at neighbouring Harvard University. The Royal Swedish Academy of Sciences said that they were awarded the Sveriges Riksbank prize in economic sciences in memory of Alfred Nobel (who invented dynamite) for research findings that have “dramatically improved our ability to fight poverty in practice.” The fact that development economics has taken a centrestage in front of the Nobel Prize committee, it shows that despite all the esoteric new branches of economics, improving the human condition and alleviating poverty remain most important today.

Though poverty has declined in the world over the years, there were still 1.4 billion poor people as of 2005 (according to a World Bank report). Around 267 million of the world’s poor are in India. That is why Banerjee and Duflo have spent long periods of time in India trying out their grassroots level experiments to find the real causes behind poverty.

Development economics for decades was based on theory and macroeconomic modeling. Abhijit Banerjee and Esther Duflo have chosen a different path to tackle poverty by making the poor and their decision-making vital to the development process.

Development economics for decades was based on theory and macroeconomic modeling. According to W.W Rostow’s theory of ‘Take off’ to Hirschman’s Theory of Balanced and Unbalanced Growth, development theory meant prescriptions for a big top-down change in the underdeveloped economies. Abhijit Banerjee and Esther Duflo have chosen a different path to tackle poverty by making the poor and their decision-making vital to the development process. They have gone more deeply into finding out the nature and causes of poverty by undertaking a series of field experiments to measure credibly what sort of policies can make a difference to poverty and related outcomes.

As mentioned above, twenty years ago there was a lot of emphasis on economic theory and more macroeconomic questions on development were asked. The two Nobel Prize winners have broken down these big questions of development and studied them like scientists running clinical trials.

For example, they found that there were teaching methods in India that were insufficiently shaped by the students’ needs. Tutoring the low performing pupils improved their achievement in a more lasting fashion. More than five million children have benefited from effective remedial tutoring during their studies because the poor may have books but they are unable to learn from them. They have also managed to inspire state governments to go for more public investment in preventive health care. The Nobel Committee highlighted how their ‘experiment-based approach’ has transformed development economics of the past.

Thus Banerjee and Duflo have been more concerned with measuring what happens in the real world, at the very bottom level than sophisticated theoretical modelling. But their experiments are deeply anchored in theory and they see the poor as autonomous decision-makers who are constrained by institutional, informational, monetary and logistic limitations from doing what could improve their condition. The Banerjee and Duflo team seek to learn how the economic policy of a country can relieve these constraints. They have shown that there is a need to adopt new approaches in the fight against poverty that are based on field trials rather than the failed methods of the past. Randomised Controlled Trials (RCT) simulate laboratory experiments in real life settings draws on practices from medicine, agronomics and social sciences in order to break down bigger policy interventions into smaller easier to test studies. They break issues into smaller questions and search for evidence about which interventions work to resolve them and seek practical ways to bring these treatments to scale.

The Banerjee and Duflo team have shown that there is a need to adopt new approaches in the fight against poverty that are based on field trials rather than the failed methods of the past.

The essence of their book, Poor Economics, can be summed up by their own sentence in the foreword: “We have to abandon the habit of reducing the poor to cartoon characters and take the time to really understand their lives, in all their complexity and richness.” The book describes and analyses the choices made by people living on less than $2 a day in India; Those choices which make a lot of sense in reality. For instance, it is common for poor families to invest their entire education budget on just one child, usually a son, hoping that this child will make it through secondary school and even college. They do not pay as much attention to the other children because they think it would be a waste of resources to spread the family’s educational budget among all the children rather than making sure that at least one child reaches his goal. But helping parents understand the value of education is important and has a big impact on the running of schools in villages as it can change their educational choices. Recognising their contribution the Nobel Academy said: “Their experimental research methods now entirely dominate development economics.”

Poor people’s decision-making is thus important for solving the malaise of poverty, as Duflo said recently: “Poor people are supposed to be either completely stupid, desperate, lazy or entrepreneurial. But we don’t try to understand the deep root, the interconnected root of the problem. So what we try to do in our work is unpack the problem one by one to better understand the reason for particular problems. What works, what doesn’t work and why.”

One common critique of Banerjee and Duflo’s work is that they don’t appreciate how hard it is to change policy and implement the kinds of changes that their insights suggest. They do believe that big changes do not work and that the path forward lies not in “big thinking” but in thinking small. Just like the way he has advised Rahul Gandhi on the NYAY scheme for which he suggested that the poor should be given Rs 2,500 a month instead of Rs 6,000.

Improving the lives of the poor is primarily a matter of making a series of small changes in lots of different domains, changes that don’t require major political battles or dramatically changing the financing structures. The two Nobel Laureates are thus essentially and radically, ‘small thinkers’!

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Author

Jayshree Sengupta

Jayshree Sengupta

Jayshree Sengupta was a Senior Fellow (Associate) with ORF's Economy and Growth Programme. Her work focuses on the Indian economy and development, regional cooperation related ...

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