Book Review: Poor Economics – A Radical Rethinking of the Way to Fight Global Poverty by Abhijit V. Banerjee & Esther Duflo

Andrew Do

Leaving aside death and taxes, there is at least one more thing that I am confident we can add to the list of life’s certainties, at least in the world of policy schools: thoughts on how to help the very poor in the Global South.   The World Bank defines extreme poverty as those living on less than $1.25 a day; these are the living conditions of 1.3 billion people worldwide.  Developmental economist Paul Collier calls them the “bottom billion.”

Allow me to indulge in a presumption and say that plenty of us have probably thought of some ways to help the poor in less developed countries.  Indeed, there is an academic discipline that has arisen out of this, with many smart people coming up with grand theories on how to alleviate poverty.  We have the pro-foreign-aid side, embodied in academics such as Jeffrey Sachs.  Then we have the “trade, not aid” philosophy, embodied in such economists as Dambisa Moyo.  Then of course, we also have some academics whose views would raise a few eyebrows, like Paul Romer’s idea of establishing “charter cities.” 

It would be tempting to conclude that every book on international development issues seems to propose some grand theory on how best to help the poor in the Global South.  Admittedly this is how I felt the first time someone recommended that I check out Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, by Abhijit V. Banerjee & Esther Duflo.  Doesn’t every book on international development always propose “some radical solutions” and pay homage to the notion that the “system is broken”?  Suffice to say, I was a skeptic, despite it being the winner of the Financial Post’s Business Book of the Year award in 2011.  Instead, as I began reading, I quickly abandoned my idea of the book as being yet another effort in grand theorization. 

What is striking about the book is how modest its entire premise is.  The authors make references to the grand theories surrounding international development to frame their book, situating themselves as somewhere outside the whole “supply wallahs” (pro-foreign aid) versus “demand wallahs” (anti-foreign aid) debate.  Their entire answer to the question on what works in helping the extreme poor is a well-known cop-out answer to every question: “It depends.”  They argue quite persuasively that international development strategies aimed at alleviating poverty in the Global South tend to be prescribed at a universalized level.   This fails to take into account more micro-level structures that extend all the way down to the end-user themselves – the extreme poor that these strategies are intended to help.  The poor in the global south are not a monolith, and development strategies need to take this into account.   

In many ways, what they argue is not particularly new and it is hardly radical.  It is after all hard to disagree with an answer like, “It depends.”  Yet how they arrive at this conclusion offers rich insights.  The authors articulate a vision for testing anti-poverty strategies in a vein similar to the way one would conduct a clinical trial when testing out the effectiveness of a new drug: randomized controlled experiments.  In fact, this is perhaps what is radical about the book and it is probably the closest thing to the book’s grand theory, albeit more of a methodological point than a substantive one.  If you want to help the poor, you better know how to design and conduct a randomized controlled field experiment.  Designing and conducting randomized controlled field experiments is what Banerjee and Duflo, by pioneering the Abdul Latif Jameel Poverty Action Lab (J-PAL), have dedicated their academic careers to doing.  By drawing on the rich body of evidence created through J-PAL, one can evaluate the effectiveness of pursuing a certain anti-poverty strategy.  J-PAL’s work has been internationally recognized, with Esther Duflo winning the John Bates Clark medal for the economic insights generated by J-PAL. 

As you can imagine, the book draws upon numerous examples of randomized controlled field experiments conducted by J-PAL.  It pays homage to arguably the first demonstration of the power of conducting randomized controlled experiments: Mexico’s PROGRESA initiative, Mexico’s cash transfer program has been a model for other countries’ anti-poverty strategies, most notably Brazil’s Bolsa Familia.  Since then, many other type of experiments have been conducted to measure the effectiveness of certain anti-poverty strategies. 

If using randomized controlled experiments to evaluate anti-poverty strategies is one major theme of the book, the other is its constant focus on the end-user – the very poor who are purported to benefit from these aforementioned anti-poverty strategies – their experiences and motivations.  The question of “What will help the poor?” is never divorced from the question of “Will the poor use the help?” What motivates the end-user is what is often missing from discussions of anti-poverty efforts and this book brings the end-user back, making them a central figure in the analysis of why certain anti-poverty strategies work, and why others do not. 

With an emphasis on micro-level considerations and what is motivating the poor, Poor Economics could be considered the Freakonomics of the Global South.  In conducting randomized controlled field experiments, Banerjee and Duflo look to answer many interesting questions. Why do poor people spend their tightly constrained budgets on TVs? Why do the poor borrow money from loan-sharks over banks?  Why do the poor invest in costly unnecessary drugs when prevention is a lot cheaper?  In short, why do those living on less than $0.99 a day make the choices they do?  Poor people’s motivations are often not considered thoroughly.  Indeed, as Banerjee argues, much of international development is premised on the belief that people, including the poor, are rational actors.  When the poor do make choices that are at face value not conducive to their long term economic well-being, there is a tendency to revert to the idea that the poor are somehow irrational and must be coddled.

What Banerjee and Duflo show through their extensive controlled field experiments is that poor people are in fact being rational, given the incentive structure and the specific social context they are operating in.  It is the failure to recognize how incentive structures differ depending on different contexts that has limited the end-user utilization rates for certain anti-poverty efforts; these efforts have thus been ineffective. 

To take one example, Banerjee and Duflo critically examine microfinance, which is being hailed as a panacea in international development.  In fact, the United Nations called 2005 the Year of Microcredit. As an anti-poverty international development strategy, microcredit is appealing for encouraging self-sufficiency and entrepreneurship in the poor.  Furthermore, it is premised on fairly low interest rates and thus has the potential for generating long-term economic returns for the poor at a very low cost.  Randomized controlled trials ran by Banerjee and Duflo demonstrate that the poor are better off taking a loan from a microcredit program than a traditional lender.  There is evidence to support the fact that microfinance is a sound anti-poverty strategy and that it would be rational to borrow from a microcredit program.  Why then is it that utilization rates of microfinance are so low and that the poor are more likely to turn towards predatory lenders?  The answer the authors provide is that those who borrow money find the microcredit framework inflexible with respect to repayment schedules, and they do not know the microcredit loaners on a personal level.  Traditional lenders on the other hand are more likely to be embedded in personal networks and, while the interest rates are significantly higher, the repayment schedule is also a lot more flexible.  This is the kind of insight that Poor Economics offers, and the authors are able to do so by drawing upon a rich body of evidence gathered through randomized controlled field experiments.

Poor Economics provides fascinating insights into the decision-making processes of the extreme poor, grounded in a sound mix of social sciences and hard economics.  It is not just a critique of the big anti-poverty strategies dominating international development.  It is also a study into the lived experiences of those who are poor, making this book a very readable, relatable, and ultimately human.  I strongly recommend that anyone who is interested in international development or understanding some of the motivations of the poor, pick this book up.  The claims Poor Economics makes are not quite as radical as its title makes them out to be, but it will at the very least make you rethink your perception of the poor.  It is this purpose that the book sets out to achieve, and it most definitely succeeds.    

Andrew Do is a 2014 Master of Public Policy candidate at the School of Public Policy and Governance.  He holds a BA Hons. degree in Peace and Conflict Studies from the University of Toronto.  He has previously worked at the Global Ideas Institute at the Munk School of Global Affairs to engage high school students in policy issues.  His interests include innovation promotion policy, foreign policy and labour market policy.

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