suzanne wang

Book Review-- Poor Economics

May 07, 2018

In 2006, the Nobel Peace Prize was awarded to Muhammad Yunus and the Grameen Bank in Bangladesh for providing microloans to the poor. You may have heard the story: a poor woman in Bangladesh receives a small loan that gives her just the break she needed to start her own business and earn her own income. She is able not only to repay her loan, but also provide better food and healthcare for her children, send them to school, and lift her family out of poverty. By helping aspiring entrepreneurs start their businesses, Yunus believes that microloans give people the power to rise out of poverty and empower women. Seen as innovative tool, the idea took off around the world and provided billions of dollars in small loans to the world’s poor since its inception.

Not so fast, say MIT economists Esther Duflo and Abhijit Banerjee. In their book, Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, Duflo and Banerjee offer a highly accessible, engaging read offering a new perspective on helping the global poor. They rely not on anecdotes or sweeping theories, but hard evidence. For example, their research examining microloans in Hyderabad, India shows that women did not gain more spending power in the household, nor was there any difference in spending on education or health. Within a little over a year, families that started new businesses went up from 5% to 7%—a miniscule amount. Though there was also some evidence that microloans were working, it was not the solution poverty in Hyderabad let alone to global poverty as Yunus and others claim. Poor Economics is filled with such research-backed examples that challenge assumptions about solutions to global poverty. Drawing from rigorous economic research in countries including India, Nigeria, Kenya, Malawi, and Indonesia, Duflo and Banerjee emphasize the importance of data-driven evaluations in order to better understand and actually help the poor.

Around 1 in every 10 people on this planet lives in extreme poverty—less than $1.90 a day— according to the World Bank’s most recent estimates. 9 million children die before their fifth birthday each year from malaria, diarrhea and other preventable diseases . For many individuals, the scale of these issues often seems helpless. For many experts and organizations, the answer often lies on an equally large scale. Some say that countries are trapped in poverty and need more foreign aid to tackle problems like endemic diseases, hunger, education and get out of the trap. Others—pointing to the trillions of dollars in foreign aid that hasn’t led to economic growth 22 over the past decades—believe that aid undermines local institutions and poor countries need to lift themselves up in order to escape their poverty.

Behind all of these views are well-intentioned people, but Duflo and Banerjee argue against such speculation on a grand scale. They are not concerned with these big questions, but the small ones such as whether or not microloans work, if free bed nets decrease malaria in Mali, or how to get mothers to fully immunize their children in Udaipur, India. In order to best help anyone, one must first deeply understand human behavior and circumstances with evidence. Though it takes longer, the impact can be stronger.

Take the example of textbooks in schools. Most policy makers and aid organizations assumed that providing textbooks to local schools would unequivocally improve student outcomes. Harvard economist Michael Kremer conducted a study in western Kenya to test this out in the early 1990s. He found that on average, there was no difference in test scores between children who received textbooks and those who did not. While the best students were benefitting more from the English textbooks, they were not useful for the majority of students whose main languages were their local tongue and Swahili, not English.

Instead of relying on anecdotal evidence, Kremer was one of the first to use a randomized approach that Duflo and Banerjee espouse throughout the book as the basis for evidence. When testing a new drug, medical researchers use randomized control trials to understand its effects, randomly selecting people who receive the drug and people who do not. Since the only notable difference between the two groups is the drug, researchers can clearly observe the impact. Kremer applies this simple yet powerful technique to questions in development economics. In this case, he randomly selected 25 schools out of 100 to receive textbooks, while the other schools did not. If Kremer decided to study a government intervention that handed out textbooks to everyone, then any test score improvements he observes may not be entirely due to the textbook intervention. Other economists have since repeated Kremer’s design to show that inputs to the classroom—textbooks, flip charts, teacher ratios—matter much less than the systems of education itself. In order to improve schools for everyone, pedagogy and incentives in education need to benefit all students, and not just the wealthiest or most exceptional.

Armed with the careful approach of RCTs, Duflo and Banerjee show that knowing how certain interventions work also uncovers the intricacies of human behavior. The poor are not “cartoon characters” or helpless—they face decisions like any other person in the world, only in different conditions. A parent might want to send a child to a good school, but they are concentrating the few resources they have on a single child who seems to have the most potential. A mother might want to take her child to receive a full course of immunization, but when she walks several miles to the health clinic the nurses are missing from duty, discouraging her from going again. A family might prefer the enjoyment of watching television over more nutrients and spend increased income on entertainment instead of food. Poor Economics stands out because it humanizes its subjects and makes the case for their seemingly irrational behavior which really isn’t irrational at all.

Building upon the evidence-based understanding of human behavior, Duflo and Banerjee describe how it informs policies. For example, simply offering immunization is not enough. People are often not aware of the benefits of preventative medicine, and in Udaipur, India, they are against the idea of taking their children out in public during their first year due to superstition in their culture. 80 percent of children in Udaipur were still not fully immunized, despite a wellrun monthly immunization camp. Seeing this issue, Duflo and Banerjee suggested that the camp offer 2 pounds of dal—dried beans—for each course of immunization as well as stainless steel plates upon full completion. Immunization rates increased dramatically as a result, by a factor of

  1. With this small nudge, people end up making the best decision for themselves and their community in the present.

Poor Economics offers insights on the small-scale solutions that work. There is no sensationalized message or idealist narrative as is often seen in stories like the Grameen Bank and microcredit. The authors are not attached to one ideology of how to help the poor. They instead look at the evidence to see how lives can be improved on a smaller scale and help implement policies to do so: Duflo and Banerjee’s lab at MIT works globally to use RCT-based evidence in international development.