News

10.24.2011

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Thibault Lescuyer

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“Poor economics” as seen by Esther Duflo

In her new book, which comes out in France in January, the famous economist calls on us to take a different view of poverty. In the view of this research specialist of the real economy, we should be suspicious of “miracle” solutions and global answers. Here are some extracts.

“Although we can discuss the true impact of microloans in transforming the life of the poor, the simple fact that microfinance has reached its current size is a remarkable feat in itself. There are very few programmes targeting the poor that have succeeding in reaching so many people.”“Poor Economics”(chapter 7)

Simple questions for a different way of looking at poverty

“Why does a Moroccan who doesn’t have enough to eat buy himself a television set?” – “To prevent malaria, is it better to give someone a mosquito net or to sell them it at a subsidised price?” – “And what if poor people didn’t really want to be entrepreneurs?”Esther Duflo and her colleague and accomplice from MIT(Massachusetts Institute of Technology) Abhijit V. Banerjee ask simple questions and play with the facts.

Their key idea: if so many development aid programmes have failed, it’s because their creators weren’t well enough acquainted with the predicaments and behaviour of the poorest people.

Duflo and Banerjee know what they are talking about and the action they’re supporting is radical, even if it takes time: “Poverty has been with us for thousands of years. If we have to wait another 50 or 100 to eradicate it, so be it!”

The result of ten years’ research on the effectiveness of development programmes

The book by Esther Duflo and Abhijit V. Banerjee summarises nearly ten years of research. Ten years marked by the trial, under Duflo’s supervision, of a new method to evaluate the effectiveness of development programmes: the famous Randomized Controlled Trials (RCTs), taken from medical research (here is an interview with Esther Duflo on this topic).

These two authors write that the RCTs are “a new powerful tool giving researchers, working with local partners, a chance to introduce experiments on a large scale to test their theories.” In practical terms, RCTs consist of setting up groups of “testers”, one of which will be a control group, while the others will test the programmes for fighting against poverty. Since the creation of the J-Pal Laboratory at MIT by the two authors, 240 RCT experiments have been carried out in 40 countries.

Does microcredit work?

After criticising the expertise of certain research groups, such as CGAP, as too quick to assert that “microcredit changes lives”, the two authors present as an example the results of their RCT research study carried out with the Indian microfinance institution (MFI)Spandana in the city of Hyderabad.

“Padmaja Reddy (founder of the Spandana MFI) modestly describes the potential benefits of her action. For her, access to microfinance is important because it gives poor people a means of building their future in a way that wasn’t accessible to them before. It’s the first step towards a better life. When they buy a machine, a tool or even a television set for their home, the fundamental change is that they are turning towards a vision of the life they chose for themselves.”

Esther Duflo and Abhijit V. Banerjee continue: “15 to 18 months after the first loans there was obvious proof that microcredit had worked. (…) Households were starting to make fewer “superfluous” expenses, such as tea, snacks, etc., perhaps proof of what Padmaja [Editor’s note: director of the MFI] had sensed: they had a better idea of the meaning their life was taking".

On the other hand, the authors state, they didn’t note any sign of a radical transformation in the borrowers’lives and the microloans haven’t strongly encouraged poor people to become entrepreneurs.

That being said, they add, “in our minds, microcredit had won its rightful place as one of the key tools for fighting against poverty.”

Surprisingly and most unfortunately, the authors point out that when these results were officially presented, the media and the blogosphere emphasised the study’s negative results – this occasionally provoked panic among some MFIs.

Following their work, the microfinance world agreed all the same that the sector had its strengths and its limits, and that it was important to be able to “provide more to its customers.”

Esther Duflo: a brilliant career in empathy with the poor

At the age of 39, Esther Duflo is surely the most famous French economist of her generation. After studying at the Ecole Normale Supérieure, Esther Duflo became professor at MIT in 1999. Her specialist subject is the economy of development and poverty, especially microcredit.

In 2010, she earned a place in history by receiving the prestigious Clark Medal, which rewards the “best” economists under 40 in the USA. On the list, she joins Joseph Stigliz (Nobel prize), Milton Friedman, Paul Krugman and Paul Samuelson.

However, unlike her peers she herself spent many months working alongside the poor on a daily basis in developing countries. She shared this experience with Abhijit V. Banerjee, the co-author of her latest book, who encourages her today to fight the myths spread about poverty.

We often hear her say: Because the poor have so little, we often see them weighing the impact of their choices more than others would. In order to survive, they have to become outstanding economists!”

Poor Economics: the French version is expected in January 2012

The book, whose French translation is due in January 2012, was greeted by a multitude of economists and several Nobel prize winners, including Amartya Sen and Paul Solow. It was also welcomed by Indian readers: Poor Economics reached the top 3 of the best non-fiction sales in India.

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

By Abhijit Banerjee and Esther Duflo
Published by PublicAffairs, USA (9th June 2011)

This article is part of the special report: