Economists, like the rest of humanity, see the world through ideological lenses. Therefore, it is not surprising that economists' prescriptions against poverty (defined as the condition of living on less than $1 per day) are tinted by political affiliation. Well-meaning intellectuals on the political right, exemplified by William Easterly, push a bottom-up anti-foreign aid agenda while equally well-meaning economists on the left such as Jeffrey Sachs advocate a top-down aid-driven approach to tackling poverty. Which camp is right? "It depends", say Abhijit Banerjee and Esther Duflo, the authors of this book. They argue that careful field experimentation, not political ideology, is the most credible way to illumine the causes of poverty and guide our attempts to alleviate human misery.
Abhijit Banerjee and Esther Duflo are two of the finest economists alive. Their work has been published in the most prestigious academic journals. They are not only ivory tower theorists; they also serve as advisers to governments and international institutions such as the World Bank. Therefore, they are no strangers to the world of politics and policy implementation. Perhaps, most importantly, they are excellent field researchers. The book draws on the authors' extensive fieldwork in eighteen developing countries including India, Benin, Kenya and Bangladesh to answer apparently mundance questions such as: (1) Do the poor value mosquito nets (2) How effective are anti-HIV education campaigns (3) Are the poor entrepreneurial (4) Why do poor people not save for a rainy day?
FIVE IMPORTANT LESSONS
The authors draw five important lessons from the data:
1. The poor lack information and believe things that are not true. For example, they are unsure about the benefits of immunisation and fertiliser use.
2. Poor people bear too much responsibility for many aspects of their lives due to the absence of effective governments. For example, the poor must find their own water, purify it and, if necessary, distribute it. These are tasks that even die-hard small government idealists in the West do not perform. Due to the burden of providing these services, the poor often proscratinate on decisions about health, education and welfare.
3. Markets for health insurance and other financial services fail poor people.
4. Contrary to the expectation of institutional economists, poor countries are not condemned by their histories. Yes, institutions are notoriously sticky and difficult to change, but, despite the poor institutional contexts, change has occurred at the margins of those societies. A good example is Indonesia. In the 1980s, the dictator Suharto established schools across the country to consolidate his rule. An unintended consequence of this act was widespread education.
5. Expectations of the poor in a society can become self-fulfilling prophecies. If a country's education system is geared towards training the children of the elite - with the tacit assumption that the children of the poor are not smart enough to compete - the children of the poor give up on education. The result: an even more stratified society.
The lessons in the book are communicated by drawing insights from behavioural economics and weaving a very human tale about actual people that the authors met/interviewed as part of their research.
MINOR TECHNICAL FLAW
The authors mistake production for rate of return on the production function shown on page 216. The graph shows production (on the y-axis) versus capital invested (on the x-axis). The authors label the height of the graph as overall return and a small change in the height of the graph as the marginal return. This is wrong. The correct interpretation of the curve should be thus:
1. The vertical height is production.
2. The overall return at any point is the average slope of the curve from the origin to the point on the curve.
3. The marginal return is the instantaneous slope at any point on the curve (i.e. the tangent to the curve).
These errors are minor and do not detract from the message of the book.
By championing experimentation and fieldwork in addition to theoretical modeling, the authors demonstrate that the fight against poverty cannot be won with one intellectual magic bullet. Economic prescriptions need to be backed up and validated/refuted by field data. Would you rather have a surgeon that recommends surgical procedures based on medical theory without the guiding hand of hard empirical data? If not, why would we provide 'economic surgery' to poor countries without reliance on field work and data?
Abhijit Banerjee and Esther Duflo remind us (economists, policymakers, governments) to be humble and to embrace experimentation - with its attendant successes and failures. Bureaucracies abhor words like experimentation and 'trial and error', but experiment we must. With a little luck and critical thinking, humanity will chip away at the problem of poverty and provide dignity to the majority of the world's population. This message deserves four glittering stars.