Pranab Bardhan: Little, Big

Boston Review — Pranab Bardhan: Little, Big http://www.bostonreview.net/BR38.3/pranab_bardhan_global_developme... MAY/JUNE 2013 Little, Big Two Ideas About Fighting Global Poverty Pranab Bardhan Dean Karlan and Jacob Appel, More Than Good Intentions: How a New Economics is Helping to Solve Global Poverty Plume, $16 (paper) Timothy Besley and Torsten Persson, Pillars of Prosperity: The Political Economics of Development Clusters Princeton University Press, $29.95 (paper) Esther Duflo, coauthor with Abhijit Vinayak Banerjee of Poor Economics, Abhijit V. Banerjee and speaking at PopTech 2009. / Kris Krug Esther Duflo, Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty PublicAffairs, $15.99 (paper) Daron Acemoglu and James A. Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty Crown Business, $30 (cloth) The classical economists, from William Petty and Adam Smith to John Stuart Mill, were all development economists. They offered general theories of markets and growth and wrote about a particular developing country (typically Britain) going through a process of industrial transformation. Then, for more than a century, development shifted from the economic and intellectual core to the periphery. Debates about development focused on controversies over Soviet industrialization and on the need for protectionist policies to defend infant industries in places—such as the United States, Germany, Eastern 1 of 11 5/24/2013 1:54 PM Boston Review — Pranab Bardhan: Little, Big http://www.bostonreview.net/BR38.3/pranab_bardhan_global_developme... Europe, Australia, and India—trying to “catch up” with England. After the Second World War, as a large number of countries became independent (or “liberated,” as in China), development economics blossomed but remained at the intellectual margins of the economics discipline. Underdevelopment was conventionally understood as the product of market and institutional failures. In the prevailing paradigm, such failures were regarded as exotic exceptions or as the remediable results of bad policies instituted by new governments. The challenges of persistent poverty and underdevelopment eventually undercut this intellectual marginalization. In the last three decades of the 20th century, economists recognized that standard market- equilibrium models—with their smoothly functioning invisible hands—break down in the context of information failures and dysfunctional institutions in all economies. So economists started paying more attention to rumblings from the periphery. As Joseph Stiglitz put the problem in a 1989 essay: A study of less developed countries is to economics what the study of pathology is to medicine; by understanding what happens when things do not work well, we gain insight into how they work when they do function as designed. The difference is that in economics, pathology is the rule: less than a quarter of mankind lives in the developed economies. In the past decade, development economics has grown to extraordinary prominence, not just in academia but also in the public arena. This new development economics has moved in two strikingly different directions. The first focuses on micro-level policy interventions. It uses the tools of field experiments and randomized controlled trials (RCT) to evaluate focused strategies for alleviating persistent poverty. The second trend focuses on macro institutions: the structures of democracy, autocracy, centralized and diffused power, and legal protections of property and contracts that organize politics and markets. Drawing ideas from the burgeoning field of institutional economics, this second stream of work has addressed grand, old historical questions such as why some countries have succeeded in the march to prosperity while others have languished. In the past two years, some of the brightest minds of the new development economics have published books exploring these two trends. A critical appreciation of these works may give us some insight into the high points and pitfalls of the emerging micro and macro approaches. • • • Field research has long been part of development economics, but Abhijit Banerjee and Esther Duflo, as well as Dean Karlan and Jacob Appel, have taken this work in novel directions. With striking singularity of purpose, they evaluate micro-level policy interventions that might, if scaled up, reduce global poverty. They use randomized controlled trials, a field experimental method relatively new to economics, to correct for biases in earlier statistical inquiries. They also rely on team effort and an almost missionary zeal to carry out experiments and find out what works. In Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty (2011), Banerjee and Duflo, two of the best economists around, aim to disabuse readers of the notion that there is a magic bullet for poverty. Extreme poverty is such a crushing burden on so many lives that we are often tempted by sweeping solutions. But instead of offering grandiose principles, Banerjee and Duflo direct attention to the lives of poor people in all their richness and complexity. 2 of 11 5/24/2013 1:54 PM Boston Review — Pranab Bardhan: Little, Big http://www.bostonreview.net/BR38.3/pranab_bardhan_global_developme... Drawing on the results of field experiments, Banerjee and Duflo isolate concrete deficits that the poor face. For example, they find that the poor often lack basic information about the benefits of children’s immunization and nutrition, the dangers of over-medication, the risks of HIV infection, how much fertilizer to use, and the quality of politicians vying for election. Moreover, the poor suffer from the usual human weaknesses of will, intensified by the special pressures their oppressive lives put on their decision-making abilities. In response, Banerjee and Duflo suggest nudging poor people in the right direction by establishing various default options: savings accounts in which money is easy to deposit but somewhat difficult to take out, simple chlorine dispensers at drinking water collection points, and easy availability of salt fortified with iron and iodine. Of the various RCT findings, the two most cost-effective programs seem to be de-worming children in areas where intestinal worms are rampant and providing remedial education for poor children who fall behind in class. Karlan and Appel cover similar ground in More Than Good Intentions: How a New Economics is Helping to Solve Global Poverty (2011). While Banerjee and Duflo are more wide-ranging and substantive in their analysis, Karlan and Appel offer more detailed human-interest stories and a special focus on microcredit. The provision of small loans to the poor has captured public imagination and generated a great deal of hype. To evaluate the enthusiasm, Karlan and Appel carefully sift evidence from different parts of the world. The results are decidedly mixed. Microcredit is not a panacea, though it generates real benefits in some cases. But even when rates of return on investment run high, there are not many borrowers, and so the impact of the loans is small (Poor Economics and More Than Good Intentions both explain why). In many cases the poor may be helped more by micro-saving products, and nudges that facilitate them, than by microcredit products. East Asian growth was not simply a product of political centralization. Banerjee, Duflo, Karlan, and Appel all brim with enthusiasm, as the subtitles of their books suggest. Much of this enthusiasm for a good cause is justified and heart-warming. The RCT approach is modeled on clinical drug trials in medicine, where RCT is an old technique. In a field experiment, people are randomly assigned to treatment and control groups. The treatment group might, for example, have access to a savings plan, while the control group does not. This approach provides a relatively clean way of deciphering the average impact of a policy intervention. In older studies of savings, a new savings plan might have looked effective because people with strong predispositions to save decided to use the plan. But if the plan had not been available, they might have saved just as much in some other way. RCTs thus appear to avoid some of the issues of selection and bias that afflict the older statistical studies in development economics. The methodological innovation does not, however, fully justify the holier-than-thou attitude that many users of RCTs adopt vis-à-vis the results of earlier research. RCTs face five problems that limit the force of findings based on them. First, it is very hard to ensure true randomness in setting up treatment and control groups. So even within the domain of an RCT, impurities emanate from design, participation, and implementation problems. Second, RCTs face serious challenges to their generalizability or “external validity.” Because an intervention is examined in a microcosm of a purposively selected population, and not usually in a randomly sampled population for any region, the results do not generalize beyond the boundaries of the study. For all their internal flaws, the older statistical studies, often based on regional samples, permitted more generalizable conclusions. Neither method has a monopoly on correctness. Third, for many important policy issues, RCTs are not very useful. You cannot run experiments in order to decide where to put power plants or ports. You cannot do a controlled test on the advisability of tight money, 3 of 11 5/24/2013 1:54 PM Boston Review — Pranab Bardhan: Little, Big http://www.bostonreview.net/BR38.3/pranab_bardhan_global_developme..

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