The debate is at the very crux of economic policies on poverty: Should philanthropies, aid organizations, and governments provide funds to push those in extreme poverty out of the poverty trap? Or do more lasting benefits ensue when the poor bear at least part of the economic burden of pulling themselves out of destitution?
Abhijit Vinayak Banerjee and Esther Duflo took on that dispute at an event sponsored by Columbia's Program for Economic Research in mid-September when they explained the premise of their new book, “Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty.” “Many aid programs fail not because poverty is a hard problem to solve,” said Duflo. “They fail because of ideology, because policies take the approach that there is one way to fight poverty. Policies can be blindsided by looking through one lens and ignoring the underlying issues.”
Instead of employing a single approach — simply giving or withholding money — aid organizations should examine each situation separately, according to the authors, who are also MIT economics professors and cofounders of the Abdul Latif Jameel Poverty Action Lab (J-PAL). The premise behind J-PAL and the book is similar: by analyzing detailed evidence, collected through randomized control trials in poor villages and on the streets of the poor neighborhoods, economists and policy wonks can place the fight against poverty on a more scientific footing.
Where the Numbers Point
Banerjee and Duflo do not argue for or against aid but, using data collected by J-PAL's 55 affiliate professors in 43 countries, they point to numerous instances where policies worked or failed. “It's not so much where the money comes from,” said Banerjee, “but where it goes. This is a matter of choosing the right kind of project to fund.”
The authors used anecdotes to illustrate why the poor need to borrow in order to save, why they miss out on free life-saving immunizations but pay for drugs they do not need, and why they start businesses but do not grow them. Take the millions who border on starvation who don't use food subsidies in the way aid organizations would like. “We asked a man in a Moroccan village what he would do if we gave him $100,” recalled Banerjee. “He said he would buy food. If we gave him another $100, he said, he would buy more food, or maybe better-tasting food.” Then the authors noticed that although his hut had neither sanitation nor running water, a flat-screen TV hung on the wall of his home. When asked why he had made such a purchase when his family was starving, he replied, “Oh, but television is more important than food!”
Rather than becoming outraged at his priorities, the authors argue, policymakers need to understand the Moroccan man's point of view. With no movie theaters or even places to sit to watch strangers stroll by, and not enough work to occupy the hours, boredom is an overwhelming fact of village life. The takeaway: aid organizations can't solve nutrition issues simply by providing people with food.
Money in the Middle
Assumptions made by a one-size-fits-all policy also explains why microcredit lending works only sporadically, said Duflo. The concept accepts that cheap loans will jump-start small businesses that will eventually employ others. “But this assumes that people are fundamentally entrepreneurial,” suggested Duflo. “Instead of plowing money back into their businesses, most people will more likely send their own kids to private school” or find other ways to improve their own lives. Without the ability to identify the truly entrepreneurial, she indicated, “either donate enough for someone to buy a sewing machine so they can make dresses in their own home, or spend enough to build a factory for exports. There's no point in providing money in the middle.”
Columbia economics professor Jeffrey Sachs, who moderated the evening, took issue with some of the author's claims. Without disagreeing with the data-based science, he said that, thanks to today's technology, some issues have become so nearly solvable that immediate action is called for.
Sachs's cause célèbre — the free distribution of insecticide-treated malarial nets accompanied by on-the-ground education and treatment — happens to be supported by evidence gained through Duflo's and Banerjee's randomized trials. Since 2007, when the United Nations approved the approach of distributing nets, which cost approximately $14 each and last five years, malaria has dropped worldwide by about 35 percent, Sachs said, indicating he expected a 70–80 percent reduction by 2015. Still, he maintained that time-consuming randomized trials just weren't necessary to back up the claims of malariologists who urged the adoption of the nets.
“My claim that we can end extreme poverty — the inability to meet basic needs — by 2025 is based on the premise that many issues are practically solvable” said Sachs.
“We may not be able to solve extreme poverty tomorrow,” countered Duflo, “but, if we know where to look, we can make important progress.”
Abhijit Vinayak Banerjee was educated at the University of Calcutta, Jawaharlal Nehru University, and Harvard University. He is currently the Ford Foundation International Professor of Economics at MIT. Banerjee is a past president of the Bureau for Research in the Economic Analysis of Development, a fellow of the American Academy of Arts and Sciences and the Econometric Society, and has been a Guggenheim Fellow and an Alfred P. Sloan Fellow. He is the recipient of many awards, including the inaugural Infosys Prize in 2009, and has been an honorary advisor to many organizations including the World Bank and the Government of India.
Esther Duflo is Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics in the Department of Economics at MIT. She was educated at the Ecole Normale Supérieure, in Paris, and at MIT. She has received numerous honors and prizes including a John Bates Clark Medal for the best American economist under 40 in 2010, a MacArthur “genius” Fellowship in 2009. She was recognized as one of the best eight young economists by The Economist magazine, one of the 100 most influential thinkers by Foreign Policy, and one of the “forty under forty” most influential business leaders under forty by Fortune magazine in 2010.