Economics Nobel
October 25, 2019 Source : The Hindu
Manifest pedagogy: Recognition of Poverty eradication and its balance for growth has grown in importance as a policy prerogative. The Nobel prize in Economics Science 2019 is in recognition to this very fact. Moreover, The connection with various experiments carried out from an Indian perspective makes it paramount in the journey toward exam preparation.
In news: 2019 Nobel Economics prize has been awarded
Placing it in syllabus:Poverty alleviation (explicitly mentioned)
Static dimensions:
Poverty definitions (Tendulkar, Rangarajan) Amartya Sen on poverty and economics Nobel
Current dimensions:
Experimental economics Suggestions for india Nobel prize 2019
Content:
Poverty definitions:
Poverty is a social phenomenon in which a section of the society is unable to fulfill even its basic necessities of life. The World Bank defines poverty as living on less than US$ 1.90 per day.
The methodology to measure poverty was first devised by expert group headed by Y K Alagh in 1979, which was further improvised by the expert group headed by D T Lakadwala in 1993.
Tendulkar committee on poverty:
Tendulkar, an economist, devised a formula to assess the poverty line in 2005, which the Planning Commission (PC) used to estimate poverty in 2009-10 and 2011-12.
It defined poverty not in terms of annual income, but in terms of consumption or spending per individual over a certain period for a basket of essential goods. This methodology set different poverty lines for rural and urban areas. The poverty line figure was Rs 27 for rural India and Rs 33 for Urban India.
Rangarajan Committee:
The PC had set up the five-member expert group under Rangarajan to review the methodology for measurement of poverty. The new poverty line defined was Rs 32 in rural areas and Rs 47 in urban areas.
The Rangarajan committee used different methodology wherein a household is considered poor if it is unable to save. The method included on certain normative levels of adequate nourishment, clothing, house rent, conveyance, education and determination of non-food expenses. It also considered average requirements of calories, protein and fats based on ICMR norms differentiated by age and gender.
Amartya Sen on poverty and Nobel prize:
Amartya Sen has made significant contributions towelfare economics (for which he was awarded the 1998 Nobel Prize in economics), including his development of more sophisticated measures of poverty, and for his work on the causes and prevention of famines. According to Sen, being poor does not mean living below an imaginary poverty line, but having an income level that does not allow an individual to cover certain basic necessities, taking into account the circumstances and social requirements of the environment.
E.g. A woman with more education, according to him, tends to have a better paid job, better control over her fertility, and better health indicators for herself and her children.
According to Sen, poverty analysis should focus on an individual’s potential to function rather than the results the individual obtains from functioning.
His theoretical work on inequality provided an explanation for why there are fewer women than men in some poor countries in spite of the fact that more women than men are born and infant mortality is higher among males. Sen claimed that this skewed ratio results from the better health treatment and childhood opportunities afforded to boys in those countries.
Rather than measuring poverty by income level, Sen recommended calculating how much an individual can achieve with that income, taking into account that such achievements will vary from one individual to another and from one place to another.
Experimental economics:
Experimental economics is a branch of economics that studies human behavior in controlled conditions rather than just as mathematical models. It uses scientific experiments to test what choices people make in specific circumstances, to study alternative market mechanisms and test economic theories. These market experiments, involving real people making real choices, are a way of testing whether theoretical economic models actually describe market behavior and how participants respond to incentives—usually cash. The field was pioneered by Vernon Smith, who won the Nobel Prize in Economics in 2002, for developing a methodology that allows researchers to examine the effects of policy changes before they are implemented, and help policymakers make better decisions. Participants in an experimental economics study are assigned the roles of buyers and sellers and rewarded with the trading profits they earn during the experiment. The promise of a reward acts as a natural incentive for participants to make rational decisions in their self- interest.
Examples of Experimental Economics:
1. The design of carbon trading emissions schemes. 2. Different perspectives of political science have also come to surface through exposure to experimental economics. 3. The Give It Up campaign specifically targeted people of certain income level. 4. Community-led sanitation schemes which are part of the Swach Bharat Misson (SBM) included steps to bring behavioural changes among people. 5. Advertising campaigns such as theBeti Bachao Beti Padhao scheme targeted skewed sex ratio states and was effective in Haryana, Punjab which had a very poor sex ratio. 6. Mass media and advertising campaigns such as the Jan Dhan Yojana with messages were aimed at unbanked individuals, whose behaviour policy seeks to change. 7. The recent Economic Survey 2018-19 suggests the pre- filing of income tax forms as a useful way to reduce the effort associated with filing returns and has proposed for easing the process of filing tax returns, acknowledging that taxpayers are inherently cognitive misers, as behavioural economics suggests.
Suggestions for India:
The Government of India (GOI) has recognized the relevance of nudge theory (behavioral economics and psychology) in the Economic Survey 2018-19. Its chapter on ‘Policy for Homo Sapiens…’ makes a strong case for setting up a nudge unit in the NITI Aayog. As nudge units are highly experimental, GOI should start from smaller units and study the impact of interventions on select policies in a short trial period. A pilot would help understand how to scale up operations and bring diverse stakeholders on board. In a diverse country like India, an agile and adaptable network of nudge units across ministries and levels of government would be better placed to suggest nudges than a centralized body. Public support can be mobilized for proposed changes through public consultation. E.g. the GOI could test a sample of the public’s reaction to the proposed BADLAV (Beti Aapki Dhan Lakshmi Aur Vijay Lakshmi) campaign before a full-scale launch.
Nudge units place great importance in the power of out- thinking the irrationality presented by everyday human behaviours. However, nudge theory can never be a panacea for everything that is wrong with society. It would be better to decentralize authority, giving nudge units the power to develop policies at a local level.
Nobel prize, 2019:
The winners of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2019 are Abhijit Banerjee, Esther Duflo (only the second woman to win the economics prize and the youngest in the prize’s 50-year history) and Michael Kremer for their “experimental approach to alleviating global poverty.”
Their distinctive contribution was to use experimental methods to learn about theeffectiveness of small-scale policy interventions aimed at helping improve the lives of some of the world’s poorest citizens.
They applied experimental method called randomizeda controlled trial, or RCT which is different from other research methods such that it involves random assignment of treatments to the people, places, or other objects of study involved in a research project.
The analyst collects information about a sample of people and attempts to draw conclusions about the effects of naturally occurring environmental or policy differences that are believed to affect the behaviors or outcomes of sample members.
In the mid-1990s, Michael Kremer and his colleagues conducted field experiments to test a range of interventions that could improve school results in western Kenya. Abhijit Banerjee and Esther Duflo, often with Michael Kremer, soon performed similar studies of other issues and in other countries.
As a direct result of one of their studies, more than five million Indian children have benefitted from effective programmes of remedial tutoring in schools. Another example is the heavy subsidies for preventive healthcare that have been introduced in many countries.
More than 700 million people still live on extremely low incomes. The research conducted by them has considerably improved the ability to fight global poverty and has revealed that field trials are better in getting desirable outcomes rather than conventional methods.