On 14 October 2019, the Royal Swedish Academy of Sciences issued a press release announcing the winners of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2019. The winners were Abhijit Banerjee, Massachusetts Institute of Technology, Cambridge, USA, Esther Duflo, Massachusetts Institute of Technology, Cambridge, USA and Michael Kremer, Harvard University, Cambridge, USA.
The communiqué said: “The research conducted by this year’s Laureates has considerably improved our ability to fight global poverty. In just two decades, their new experiment-based approach has transformed development economics, which is now a flourishing field of research. This year’s Laureates have introduced a new approach to obtaining reliable answers about the best ways to fight global poverty. In brief, it involves dividing this issue into smaller, more manageable, questions – for example, the most effective interventions for improving educational outcomes or child health. They have shown that these smaller, more precise, questions are often best answered via carefully designed experiments among the people who are most affected.”
Development Economics
According to Investopedia, development economics is a branch of economics that focuses on improving fiscal, economic, and social conditions in developing countries. Development economics considers factors such as health, education, working conditions, domestic and international policies, and market condition with a focus on improving conditions in the world’s poorest countries. Some of the typical issues that development economics tries to address are: industrialisation, agriculture, income distribution and poverty, relationship of population growth, urbanisation on economic growth, role of education and healthcare in the process of development, the engagement of countries in global trade and its impact on employment and income levels, meeting the challenge of sustainable development and impact of epidemics, quality of food, etc. on economic and human development.
Global movement
Abhijit, Esther, and Sendhil started a ‘Poverty Action Lab’ at the Department of Economics, MIT in 2003. Interestingly, the Lab was renamed in honour of Sheikh Abdul Latif Jameel when his son, MIT alumnus Mohammed Abdul Latif Jameel, supported it with three major endowments in 2005. J-PAL was established to support randomised evaluations measuring interventions against poverty on topics ranging from agriculture and health to governance and education.
Although J-PAL was founded as a research centre, its activities have expanded to encompass three areas: impact evaluations, policy outreach, and capacity building. J-PAL has regional offices in Africa, Europe, Latin America, North America, South Asia, and Southeast Asia that are hosted by local universities. They run programmes in eight areas namely agriculture, crime, education, energy and environment, finance, health, labour markets, political economy and governance. In the words of Abhijit, J-PAL is now a global movement against poverty.
The nitty gritty of J-PAL research
An important contribution of Abhijit and Esther is that they have brought a much-required scientific approach to the field of development economics. The experimental approach of J-PAL towards poverty alleviation is based on Randomised Control Trials (RCTs). These trials are usually carried out in the field of medicine to test the effectiveness of new treatments. Groups are selected randomly and classified into two categories. One called the control group that receives no intervention. Second which receives the intervention is called the intervention group. For example, we randomly select patients having a history of diabetes type 2. One group called the control group is not given any new medicine. The other intervention group is supplied a new medicine for a given period. Their sugar levels are regularly monitored, analysed, and compared (for the same period) to check the efficacy of the new medicine.
This RCT approach was adapted by J-PAL, targeting specific interventions (like a particular methodology in teaching or a particular kind of diet to pregnant mothers) to a randomly selected group (schools, mothers, etc.) The results were then compared to how specific outcomes change in the recipient (intervention) group versus those who did not receive the treatment (control group). As the groups are assumed similar for all practical purposes, the difference in outcomes can be then attributed to the intervention.
This methodology was first implemented in the 1990s in Kenyan schools but now the approach is very popular and is highly influential with governments, social-service agencies, and NGOs. One example of these RCTs was the experimentation of using Direct Cash Transfer to teachers in order to reduce their absenteeism at school.
Another example of J-PAL in action was the experiment in a Rajasthan police station. It showed that ‘intervention’ visits by field officers disguised as citizens trying to register cases gave police constables incentives to behave more professionally. The registration of the cases increased from 40% to 70%, improving the readiness of the system to listen to grievances of the citizens.
Scientific approach applied to economics
Since a long time, programmes, and policies, to help the poor were tailored based on certain assumptions. For example, since children in poor countries cannot afford textbooks, giving them free ones will improve their school grades. Poor women do not get jobs easily, so giving them soft loans to start their businesses will improve their income levels. However, these interventions are based on assumptions and so even if they might work, it is important to measure them, as the funds to any development programme are limited.
Other interventions may be more effective. The Nobel laureates can be credited to have insisted on evidence-based policy rather than one, which is based on assumption. This has greatly enhanced the success of poverty alleviation programmes throughout the world and brought out millions out of extreme poverty.
Abhijit Banerjee was one of the architects of “NYAY” (Nyuntam Aay Yojana) / Minimum Income Guarantee Scheme, the Direct Benefit Transfer scheme announced by the Congress party as part of its manifesto for the 2019 parliamentary elections. Some of its features included clauses such as: a) Poorest 20% of families will be guaranteed Rs.72,000 a year. b) No Indian family will fall below a minimum income threshold of Rs.12,000 a month. c) Fiscal prudence will be followed d) Beneficiary identification at every decile is possible. e) Will be a federal scheme with state participation. g) Will be rolled out in phases. J-PAL is tying up with various state governments in India for their anti-poverty schemes.