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September 4th, 2011

Book review: poor economics: a radical rethinking of the way to fight global poverty.

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A highly readable and enjoyable presentation of eight years of field research in developing countries which covers issues around representation and the lack of aid evaluation, reviewed by Arnaud Vaganay.

Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. Abhijit V. Banerjee and Esther Duflo. Public Affairs. 2011.

But there are others, equally vocal, who believe that this is wrong. William Easterly (New York University) and Dambisa Moyo (World Bank) argue that aid is pretty much as effective as a plaster on a broken leg: it might give the injured person the comforting feeling that someone is taking care of him, however it’s not going to make him walk again. Worse, aid would prevent people from searching for their own solutions, while corrupting and undermining local institutions and creating a self-perpetuating lobby of aid agencies. Their best bet for poor countries is thus to rely on one simple idea: when markets are free and the incentives are right, people can find ways to solve their problems.

To those who do not have so strong opinions on the matter but none the less care about building a world free from poverty, I recommend Poor Economics . Co-authored by MIT economists Abhijit Banerjee and Esther Duflo (winner of the 2010 Clark Medal for the best economist under 40), the book is a highly readable and enjoyable presentation of eight years of field research in villages of India, Morocco, Kenya, Indonesia and other developing countries. Poor Economics stands out in the literature on development economics in that it stays away from the ‘big questions’ to investigate the incredibly multi-faceted and complex lives of the poor, and imagines the policies that could have a real impact.

Drawing on a very rich body of evidence, including hundreds of randomised controlled trials (RCTs) pioneered at the Abdul Latif Jameel Poverty Action Lab (J-PAL) , Banerjee and Duflo explain us why the poor need to borrow in order to save, why their children go to school but often don’t learn, why they miss out on free life-saving immunisations but pay for drugs that they do not need and why they start many businesses but do not grow any of them.

Are these ideas really new ideas? Development practitioners could argue that economists are discovering now what they have known themselves for some years. In this respect, the subtitle of the book – A Radical Rethinking of the Way to Fight Global Poverty – sounds a bit presumptuous. Moreover, it does not really do justice to the very humble and meticulous approach of its authors, which is clearly a big plus of this essay.

This said, Poor Economics’ achievement is less in showcasing turn-key policies that would put an end to poverty than in drawing our attention on two disgraceful issues that beset development aid. The first is that the effectiveness of aid is often not evaluated at all. Even when aid is evaluated, the methods are often biased, such as before-and-after analyses that don’t take into account factors that have nothing to do with the aid itself. Development aid is doomed to failure as long as it is not based on solid, credible evidence.

The second issue is that we do not pay enough attention to what the poor say and do. Kenyan farmers know that if they use fertilizers their crop yields will be larger and more than cover the cost of the fertilizer, and yet they don’t use fertilizer. Experiments show that simple steps – such as offering coupons right after the harvest season as opposed to shortly before the planting season – often make a difference in the life of the poor. Accepting the short-term irrationality that is part of human nature rather than fighting it (or ignoring it) is one of the many underlying policy messages of Poor Economics .

In short, if there is one thing for which Banerjee and Duflo deserve their overwhelmingly positive reviews , it is for bringing the people back in the design of development aid initiative. Their message is that, even if it takes time, careful thinking and persistence, the battle against poverty can be won.

Arnaud Vaganay is an independent policy research and evaluation consultant. He is a PhD student at the Methodology Institute at the LSE.

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

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• Volume 24 , pages 832–834, ( 2012 )

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Poor Economics

A Radical Rethinking of the Way to Fight Global Poverty

by Abhijit V. Banerjee and Esther Duflo 

Why would a man in Morocco who doesn’t have enough to eat buy a television?

Why is it so hard for children in poor areas to learn even when they attend school?

Why do the poorest people in the Indian state of Maharashtra spend 7 percent of their food budget on sugar?

Does having lots of children actually make you poorer?

For more than fifteen years Abhijit V. Banerjee and Esther Duflo have worked with the poor in dozens of countries spanning five continents, trying to understand the specific problems that come with poverty and to find proven solutions. Their book is radical in its rethinking of the economics of poverty, but also entirely practical in the suggestions it offers. Through a careful analysis of a very rich body of evidence, including the hundreds of randomized control trials that Banerjee and Duflo’s lab has pioneered, they show why the poor, despite having the same desires and abilities as anyone else, end up with entirely different lives. Through their work, Banerjee and Duflo look at some of the most surprising facets of poverty: why the poor need to borrow in order to save, why they miss out on free life-saving immunizations but pay for drugs that they do not need, why they start many businesses but do not grow any of them, and many other puzzling facts about living with less than 99 cents per day. POOR ECONOMICS argues that so much of anti-poverty policy has failed over the years because of an inadequate understanding of poverty. The battle against poverty can be won, but it will take patience, careful thinking and a willingness to learn from evidence. Banerjee and Duflo are practical visionaries whose meticulous work offers transformative potential for poor people anywhere, and is a vital guide to policy makers, philanthropists, activists and anyone else who cares about building a world without poverty.

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. Together with Esther Duflo and Sendhil Mullainathan of Harvard University, he founded the  Abdul Latif Jameel Poverty Action Lab  in 2003.

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 since the list exists, and one of the “forty under forty” most influential business leaders under forty by Fortune magazine in 2010. Together with Abhijit Banerjee and Sendhil Mullainathan of Harvard University, she founded the  Abdul Latif Jameel Poverty Action Lab  in 2003.

Esther was six when she read in a comic book on Mother Teresa that the city then called Calcutta was so crowded that each person had only 10 square feet to live in. She had a vision of a vast checkerboard of a city, with 10-foot squares marked out on the ground, each with a human pawn, as it were, huddled into it. She wondered what she could do about it.

 When she finally visited Calcutta, she was twenty-four and a graduate student at MIT. Looking out of the taxi on her way to the city, she felt vaguely disappointed; everywhere she looked, there was empty space—trees, patches of grass, empty sidewalks. Where was all the misery so vividly depicted in the comic book? Where had all the people gone?

At six, Abhijit knew where the poor lived. They lived in little ramshackle houses behind his home in Calcutta. Their children always seemed to have lots of time to play, and they could beat him at any sport: When he went down to play marbles with them, the marbles would always end up in the pockets of their ragged shorts. He was jealous. 

This urge to reduce the poor to a set of clichés has been with us for as long as there has been poverty: The poor appear, in social theory as much as in literature, by turns lazy or enterprising, noble or thievish, angry or passive, helpless or self-sufficient. It is no surprise that the policy stances that correspond to these views of the poor also tend to be captured in simple formulas: “Free markets for the poor,” “Make human rights substantial,” “Deal with conflict first,” “Give more money to the poorest,” “Foreign aid kills development,” and the like. These big ideas all have important elements of truth, but they rarely have much space for average poor women or men, with their hopes and doubts, limitations and aspirations, beliefs and confusion. If the poor appear at all, it is usually as the dramatis personae of some uplifting anecdote or tragic episode, to be admired or pitied, but not as a source of knowledge, not as people to be consulted about what they think or want or do. All too often, the economics of poverty gets mistaken for poor economics: Because the poor possess very little, it is assumed that there is nothing interesting about their economic existence. Unfortunately, this misunderstanding severely undermines the fight against global poverty: Simple problems beget simple solutions. The field of anti-poverty policy is littered with the detritus of instant miracles that proved less than miraculous. To progress, we have to abandon the habit of reducing the poor to cartoon characters and take the time to really understand their lives, in all their complexity and richness. For the past fifteen years, we have tried to do just that. 

We are academics, and like most academics we formulate theories and stare at data. But the nature of the work we do has meant that we have also spent months, spread over many years, on the ground working with NGO (nongovernmental organization) activists and government bureaucrats, health workers and microlenders. This has taken us to the back alleys and villages where the poor live, asking questions, looking for data. This book would not have been written but for the kindness of the people we met there. We were always treated as guests even though, more often than not, we had just walked in. Our questions were answered with patience, even when they made little sense; many stories were shared with us. 

Back in our offices, remembering these stories and analyzing the data, we were both fascinated and confused, struggling to fit what we were hearing and seeing into the simple models that (often Western or Western-trained) professional development economists and policy makers use to think about the lives of the poor. More often than not, the weight of the evidence forced us to reassess or even abandon the theories that we brought with us. But we tried to not do so before we understood exactly why they were failing and how to adapt them to better describe the world. This book comes out of that interchange; it represents our attempt to knit together a coherent story of how really poor people live their lives. 

Our focus is on the world’s poorest. The average poverty line in the fifty countries where most of the poor live is 16 Indian rupees per person and per day. People who live on less than that are considered to be poor by the government of their own countries. At the current exchange rate, 16 rupees corresponds to 36 U.S. cents. But because prices are lower in most developing countries, if the poor actually bought the things they do at U.S. prices, they would need to spend more—99 cents. So to imagine the lives of the poor, you have to imagine having to live in Miami or Modesto with 99 cents per day for almost all your everyday needs (excluding housing). It is not easy—in India, for example, the equivalent amount would buy you fifteen smallish bananas, or about 3 pounds of low-quality rice. Can one live on that? And yet, around the world, in 2005, 865 million people (13 percent of the world’s population) did. 

What is striking is that even people who are that poor are just like the rest of us in almost every way. We have the same desires and weaknesses; the poor are no less rational than anyone else—quite the contrary. Precisely because they have so little, we often find them putting much careful thought into their choices: They have to be sophisticated economists just to survive. Yet our lives are as different as liquor and liquorice. And this has a lot to do with aspects of our own lives that we take for granted and hardly think about.

Living on 99 cents a day means you have limited access to information—newspapers, television, and books all cost money—and so you often just don’t know certain facts that the rest of the world takes as given, for example, that vaccines can stop your child from getting measles. It means living in a world whose institutions are not built for someone like you. Most of the poor do not have a salary, let alone a retirement plan that deducts automatically from it. It means making decisions about things that come with a lot of small print when you cannot even properly read the large print. What does someone who cannot read make of a health insurance product that doesn’t cover a lot of unpronounceable diseases? It means going to vote when your entire experience of the political system is a lot of promises, not delivered; and not having anywhere safe to keep your money, because what the bank manager can make from your little savings won’t cover his cost of handling it. And so on. 

All this implies that making the most of their talent and securing their family’s future takes that much more skill, will power, and commitment for the poor. And conversely, the small costs, the small barriers, and the small mistakes that most of us do not think twice about loom large in the lives of those who have very little. 

It is not easy to escape from poverty, but a sense of possibility and a little bit of well-targeted help (a piece of information, a little nudge) can sometimes have surprisingly large effects. On the other hand, misplaced expectations, the lack of faith where it is needed, and seemingly minor hurdles can be devastating. A push on the right lever can make a huge difference, but it is often difficult to know where that lever is. Above all, it is clear that no single lever will solve every problem. 

Poor Economics is a book about the very rich economics that emerges from understanding the economic lives of the poor. It is a book about the kinds of theories that help us make sense of both what the poor are able to achieve and where, and for what reason, they need a push. Each chapter in this book describes a search to discover what these sticking points are, and how they can be overcome. We open with the essential aspects of people’s family lives: what they buy; what they do about their children’s schooling, their own health, or that of their children or parents; how many children they choose to have; and so on. Then we go on to describe how markets and institutions work for the poor: Can they borrow, save, insure themselves against the risks they face? What do governments do for them, and when do they fail them? Throughout, the book returns to the same basic questions. Are there ways for the poor to improve their lives, and what is preventing them from being able to do these things? Is it more the cost of getting started, or is it easy to get started but harder to continue? What makes it costly? Do people sense the nature of the benefits? If not, what makes it hard for them to learn them?  

Poor Economics is ultimately about what the lives and choices of the poor tell us about how to fight global poverty. It helps us understand, for example, why microfinance is useful without being the miracle some hoped it would be; why the poor often end up with health care that does them more harm than good; why children of the poor can go to school year after year and not learn anything; why the poor don’t want health insurance; and it reveals why so many magic bullets of yesterday have ended up as today’s failed ideas. The book also tells a lot about where hope lies: why token subsidies might have more than token effects; how to better market insurance; why less may be more in education; why good jobs matter for growth. Above all, it makes clear why hope is vital and knowledge critical, why we have to keep on trying even when the challenge looks overwhelming. Success isn’t always as far away as it looks. 

Archived Poor Economics Website

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Economics society.

• Karis Quinlan
• Jan 11, 2021

Book review: 'Poor Economics' by Abhijit Banerjee and Esther Duflo

Poor Economics is an important read for anyone who wants to understand (and ultimately end) poverty, not least because it won the authors the 2019 Nobel prize in economics in “for their experimental approach to alleviating global poverty” the total benefits of which are almost immeasurable. The extensive number of case studies that can be found within Poor Economics is a direct result of numerous experimental programmes that the pair set up across developing countries in the span of 15 years. Each of these as an attempt to solve the smaller issues, hoping that these will one day also resolve the bigger issues that the poor face. In conjunction with Michael Kremer (who won the Nobel alongside them), the pair are responsible for a new approach to fighting global poverty, one which begins with individual communities. One of their many successes has been that they recorded and published the results of a successful education programme in India which involved extra support and tutoring for students who were falling behind. It has since been recorded that more than 5 million Indian school children have benefitted from similar programmes.

In their introduction, Banerjee and Duflo outline the aim of Poor Economics which is to encourage people not to be defeated or intimidated by the issue of world poverty. I would claim that Poor Economics fulfils this role completely through their engaging and impactful analysis of the economic activities of those living in poverty. This is largely because it introduces two entirely new concepts to the study of global poverty, making the book both an easy read and impactful on the way that economists approach global poverty.

Esther Duflo, courtesy of NPR

Esther Duflo is only the second woman to win the Nobel Prize in economics, the first female economist, and the youngest person (46) to do so. It is perhaps for these reasons that the book offers such a new approach to the economics of poverty, and consequently, has changed the attitudes of economists towards the issue of poverty worldwide.

A refreshing aspect of Poor Economics is the author’s tendency to defeat many of the polarised arguments between economists, while introducing their fresh new view. For instance, on the issue of aid, economists are often for or against aid in poor and developing countries, but Banerjee and Duflo argue that these polarising arguments are ‘too big’ and will not help those in poverty. This belief has lead to their new approach towards the issue of global poverty.

The first stage of Banerjee and Duflo’s new approach was to claim that in order to resolve big issues such as ‘how can we end poverty?’ we must start by solving smaller, more localised issues, such as persuading the poor to use bed nets for protection from Malaria. Although this may not seem likely to solve the issue of global poverty, it attempts to solve one of many ‘poverty traps’. The idea being that the bed nets will increase the health of the population and enable people to work and escape poverty. It is only when these smaller issues have been addressed that we can start to think about the bigger picture. This approach makes the book accessible for everyone because instead of trying to wrap your head around complex and abstract economic thought, the issues that the book deals with directly are simplistic, while still making a large difference to the lives of the poor and the study of economics.

Similarly, the second stage of their new approach is that Poor Economics contains many case studies of experiments that have been carried out to understand and improve the lives of those living in poverty. These case studies allow us to quantitively see the benefits of some interventions, and the downfall of many others. A particularly memorable example being that people are less likely to buy subsidised healthcare products, and more likely to buy them full price. The main point to be taken away from these case studies is that the actions of those living in poverty often do not match up with the actions that the rich of the world would expect of the poor. One such example is that when the poor find themselves with additional money, they would not choose to spend it on more nutritious or calorific food, but rather on more expensive brands of food. These case studies are what makes the book engaging because they allow people to relate and understand easily. Poor Economics is rife with excerpts from conversations that Banerjee and Duflo had directly with people living in poverty, adding an authenticity to their findings.

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Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty Paperback – March 27, 2012

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Review of Chapter one of "Poor Economics" by A. Banerjee and E. Duflo

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ABSTRACT There is currently much debate about the effectiveness of foreign aid and about what kind of projects can engender economic development. There is skepticism about the ability of econometric analysis to resolve these issues, or of development agencies to learn from their own experience. In response, there is movement in development economics towards the use of randomized controlled trials (RCTs) to accumulate credible knowledge of what works, without over-reliance on questionable theory or statistical methods.

Jason Parisi

Aid to SSACs, given the right internal and external conditions, and expectations, can be successful. The limits to aid however, must also be fully recognised; in some cases aid may help people overcome poverty traps by providing capital for an entrepreneur to start an enterprise, educating parents of the benefits of sending one’s children to school, or vaccinating enough people in an area to overcome a disease. In other cases, aid may reinforce patrimonial political structures, and breed dependency and limit people’s incomes. On the one hand, asking big questions such as whether aid supports or undermines democracy in Africa, or whether aid is good or bad for economic growth may be too generic to formulate effective aid policy. Since there are so many variables to track, and there is so much variation in the samples under investigation, specific answers about how to increase accountability of local representatives in small villages in Lesotho, or what is the best way to prevent interracial conflict will never be solved with this approach. On the other hand, it is important to understand the macro trends behind aid, to understand a country from the top down. These bottom up and top down approaches can be mutually reinforcing. We should not retreat to the micro only view advocated by Banerjee and Duflo; many countries such as Japan, South Korea, Botswana, The United Kingdom and France at some point had large scale industrial policy, partly or wholly financed by aid. In this paper I will first show how in some cases, aid may be necessary for economic growth, and in others, it may not. Aid is however, never sufficient. Second, I will cover some of the prevalent arguments against aid, arguing that if the obstacles detailed are overcome, foreign aid can positively affect economic and social development. Finally, I will then look at two projects in SSA, one very large, and one small. In the context of the challenges described with foreign aid, I shall consider how to maximise the effectiveness of these two projects, whether aid is necessary to finance them, and if so, how to ensure that it is used effectively. Throughout the paper, I shall compare and contrast the views of various academics.

T'Vaughn Lewis

This essay attempts to address the efficiency and efficacy of Official Development Assistance with respect to other from of Official Development Financing within the Caribbean region. A comparative analysis is performed between Pro-Aid and Anti-Aid supporters to assess the merits and demerits of both schools of thoughts and whether either is relevant to the Caribbean.

Abstract: There is currently much debate about the effectiveness of foreign aid and about what kind of projects can engender economic development. There is skepticism about the ability of econometric analysis to resolve these issues or of development agencies to learn from their own experience. In response, there is increasing use in development economics of randomized controlled trials (RCTs) to accumulate credible knowledge of what works, without overreliance on questionable theory or statistical methods.

Tereza Rodrigues

Susan Engel

There are only a small number of attempts to classify and understand the latest round of the ‘Great Foreign Aid Debate’. This paper builds on heuristic classifications of the debate but not to simply classify the aid debate, rather to explore how the debate is perhaps not as ‘great’ as claimed and, in fact, is contributing to a narrowing of thinking about development possibilities. The paper explores the Aid Debate through the books released in the ten years from 2001 that and made both an academic and media impact. It analyses what gets discussed and why and, equally importantly, what does not get discussed. In terms of what is missing, the paper posits that ‘left’ has disappeared and the progressive critique and support for aid has been left to scholars like Jeffrey Sachs and Jonathon Glennie.

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