With the Nobel Prize for Economics in 2019 going to Abhijit Banerjee, Esther Duflo and Michael Kremer, the Nobel Committee has formally recognised two decades of pioneering economic work that has direct implications for policymakers around the world, none more so, than those in developing countries like India.
India has constantly struggled with the endemic crises of poverty and gross wealth inequality, and the work done by Banerjee and Duflo through the Jameel Poverty Action Lab (J-PAL) has looked at tackling the former, in a manner that breaks away from traditional classical approaches to the dilemma.
As Banerjee and Duflo note in their book “Poor Economics”, traditional dogmas in the policy field often create a constraining dichotomy of what they call the “Supply-wallahs” and the “Demand-wallahs”; i.e. policy practitioners and economists who definitively hold standard positions that look to fix complex policy problems. They proceed to illustrate this with the example of education policy, where supply-wallahs consistently, advocate state intervention to increase the supply of children to classrooms (measured by the Gross Enrolment Rate), while demand-wallahs argue that if the benefits accrued from schools are high enough then demand will create itself, without any need for state intervention.
In this case, particularly, the authors refer to the efforts of Santiago Levy, a former Professor of Economics at Boston University who served as the Deputy Minister of Finance of Mexico between 1994 and 2000. His decision to offer families money on the condition that their children regularly attended school (with an increased payout if it was secondary school or if it was a girl child that was attending) was the first Conditional Cash Transfer of its kind that had a swift and significant impact. In his first pilot project, Secondary School enrolment increased from 67% to 75% for girls and from 73% to 77% for boys.
Later, when the World Bank attempted a similar experiment in Malawi to evaluate the impact of conditionality, it was discovered that regardless of whether the pay-out was conditional (on enrolment) or fixed (regardless of enrolment), the dropout rate fell to the same extent. The economists concluded that as incomes rise, families make better choices with regards to investing in their children’s futures, hence corroborating an essentially demand side position.
In much the same vein, however, when studying the role of State intervention through the school building, both authors take the example of Indonesia where the government intervened by aggressively building schools in areas with the highest number of unschooled children. The program was a great success, with the younger generation (that benefitted from the new schools) earning 8% higher wages than the older generation in the same areas. Mandatory schooling in Taiwan (another supply side intervention) yielded similar results.
As demonstrated by the success of two entirely different models in different contexts, for Banerjee and Duflo, the solutions to most poverty dilemmas, however, lie not in pre-existing policy positions but in creating innovative localised solutions that can be scaled in contexts conducive to such a move.
By advocating close observation, and localised contextual solutions, developed through a process of Randomised Controlled Trials (RCT’s), Banerjee, Duflo and Kramer have pioneered a form of quantified, “what works” economics that looks to maximise the impact of the capital committed, by minimising information asymmetries that emerge from a lack of contextual knowledge.
Understandably, however, RCT’s have come under criticism from many quarters in India for treating the poor as simple subjects of study, and for trivialising concerns about the structural roots of poverty. This criticism is one that has been levelled against the larger field of behavioural economics as a whole, for its tendency to treat its “subjects” as irrational specimens that can be nudged towards rationality and personal fiscal prudence, at the cost of dismissing real concerns about structural inequities within which they are embedded.
Reducing RCT’s and Behavioural Economics to these criticisms, however, would be a case of tossing the baby out with the bathwater for a field that has raised genuine concerns with how our policymakers and economists go about resolving some of our most serious problems. While one hopes the government doesn’t take this award as tacit approval for further technocracy and top-down policy design, there are other lessons that one may take away from this success.
For a country like India, where one-size-fits-all solutions have consistently failed for a lack of contextual knowledge and little to no stakeholder consultation, behavioural economics has been useful, not only in providing an alternative to the traditional supply-demand binary but also in promoting localised functional solutions that carry the caveat of being scalable only in appropriate contexts.
Secondly, by focussing on the multi-dimensional nature of poverty, Banerjee, Duflo and Kremer, take the focus away from economic orthodoxy to the role played by external socio-cultural factors that may affect one’s ability to escape it. In India, it must guide discussion towards seriously looking at SDG 16 and the role that Peace, Justice and Strong Institutions play in an individual or a community’s ability to escape poverty.
Finally, at a time when the roles of intellectuals and education have been sacrificed at the altar of populism, the Indian government is desperately in need of quality economic guidance. With Banerjee one of the recipients of this year’s Nobel in Economics, perhaps the government may finally acknowledge that while hard work may often be better than Harvard, it would be useful to listen to a hard-working Harvard grad occasionally.
Vineet is an independent public policy researcher and commentator based out of Bangalore