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

This is an excellent book, that brings their research - and that of others - to the intelligent but not expert reader. (Think: broadsheet newspaper reader)

I am an economist (I teach at LSE), but I am not a development economist. I have no vested interested in the area. I found this a straightforward read - 2 days worth of holiday reading. I think it spot on for the target market - my wife is currently reading it.

The conclusion are broad: poor people are rational, but often ill informed, and that becoming well-informed takes time and effort. As a result, unless everyone understands what the poor think, and why they think it, policies may not work. If poor people don't believe immunisation works, they won't want it whether it is free or not. If poor people think that education is only worthwhile for the brightest, they won't send their kids to school unless they think that they are bright. And if teachers have the same views, their efforts in teaching weaker students will be weak, and universal education will not achieve much. In contrast if schools and parents believe in education, universal education will work much better, for any given level of staffing, funding, etc. We therefore need to understand - and sometimes work to change - beliefs.

The authors are great fans of "random controlled experiments" whereby policy is applied to one group and not to another, and the results compared. This is obviously a good idea, but it would be nice to know a bit more about whether the results are replicable. After all, if beliefs matter, results from one place in India may not travel to another in India, let alone to Africa, etc.

I make two mild criticisms. The books intellectual "straw men" (Jeff Sachs and Bill Easterly) are very American. British academic Paul Collier (Bottom Billion - a great book) gets the odd mention, but Sachs and Easterly are the reference points. I am not sure that they are the best reference points, although they are big names people are likely to have heard of.

Finally, some historical awareness would make this a better book still. For example, the authors argue that human capital, laws, etc are useful when the growth spark arrives - which sounds like a lot of the "why england, why not France?" and "Why Europe, why not China?" economic history literature. Similarly their (surely correct) argument that micro businesses and self employment are what poor people do when they can't get steady employment is matched by studies of the Great Depression (or street vendors in Greece today, for that matter). Such parallels would also make us understand that poor economics has a lot in common with the economics of poor people in history, and the economics of poor people in rich countries.

Professors Banarjee and Duflo have produced a stream of high quality papers over the years using the most innovative and illuminating empirical techniques to show us how the world's poor can benefit greatly from small changes in current policy administration.

This book is not simply a summary of their seminal work, although their previous research applied appropriately. Rather, it shows how the status quo approaches are not working effectively yet are still used despite obvious flaws.
For example, various aid packages do not have the structuring incentives to encourage entrepreneurship and innovation.

Concurrently, the failure of the market to support some of the mechanisms for development is also discussed. A prominent example of this is the lack of insurance provision for the activities that generate output in poorer economies. Insurance is extremely helpful for farming when weather variation is crucial to the success of failure of the product, yet it is rarely found in such countries.

Definitely a top work, from 2 top economists.

I just hope politicans have the guts to implement it!

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.

CONCLUSION
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.