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Economics

Nobel prize's focus on poverty is welcome, but incomplete

von Hans Dembowski

Blog

MIT professors Duflo and Banerjee.

MIT professors Duflo and Banerjee.

It was announced yesterday that Esther Duflo, Abhijit Banerjee and Michael Kremer will win this year's economics Nobel Prize. The three scholars are brilliant intellectuals and have pioneered important research on poverty. Nonetheless, I am afraid that their work is actually less helpful than generally assumed. The elegance of their microeconomic research must not distract us from the fact that we need macro-level action to achieve the Sustainable Development Goals (SDGs).

Duflo and Banerjee are professors at the Massachusetts Institute of Technology (MIT) and Kremer teaches at Harvard University. They are known for an approach called randomised control trials. The idea is to find out what best helps people to escape poverty by testing a policy intervention in one group and comparing the results with what happens in a very similar group without that intervention. Basically, this is how the pharmaceutical industry tests innovative medications.

In recent years, the three economists caused quite a stir with this approach. Now the Nobel committee is amplifying the praise they have been getting. No doubt, their influence will grow further. In some ways, this is good. First of all, poverty is a huge challenge and certainly deserves the attention of economists who mostly focus on other issues. Moreover, they all too often only stick to the mathematical models they design, showing little interest in empirical reality. No one can accuse Duflo, Banerjee and Kremer of doing that. Alleviating poverty is their core concern, and they show a keen interest in people's real lives. In this sense, the Nobel committee has made a very good choice.

However, there are downsides too. Jim Rugh, a specialist in the evaluation of development programmes, pointed out several of them in an interview we published in D+C seven years ago. The main points are still valid:

  • It can be ethically problematic to split a needy target group in two and only provide promising support only to one of the subgroups.
  • Randomised control trials require a lot of resources, and those resources are not available for poverty alleviation.
  • This method is only useful for assessing micro-level interventions, but many development challenges arise at the macro level, including institution building, infrastructure or climate action.
  • There is a potential tendency of searching for silver bullets that prove effective in specific circumstances. That is problematic if spending is then focused only on those interventions because action is needed in other areas as well.
  • Randomised control trials are increasingly seen as something like the gold standard for evaluation purposes, which implicitly means that action in fields where they are not useful are considered somewhat less legitimate.

I am neither saying that this evaluation method is not valid nor that it should not be applied. What I worry about is that it is becoming overrated. This is not the only way to do research on poverty. Poverty is a multidimensional and complex phenomenon. What Duflo, Banerjee and Kremer are doing, does not help us to understand what causes it or what makes inequality grow.

The evidence their research method provides is only of limited use, moreover. It is useful if the goal of a policy intervention is to improve the situation of a specific target groups who is particularly disadvantaged. It is of little help, however, for building universal social protection systems that make investment climates better, political systems stronger and national societies more cohesive.

I see a risk of a new paradigm emerging according to which proper development studies apply the methodology developed by the three Nobel laureates. That would be a disaster. To achieve the SDGs humanity needs more than well-targeted micro-level interventions. We need macro-level change, and must not let the Nobel committee distract us from that truth.

 

Correction, 16 October: I just noticed that randomised control trials was misspellt several times as randomised controlLED trials. I apologise. The backgroudn that I am increasingly using a computerised voice recongnition system instead of the keyboard to write, and then I do not always notice what the system misunderstood. Technology has upsides and downsides ;-)  (dem)

 

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