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‘Beyond Poor Economics’ with Esther Duflo and Abhijit Banerjee

In May 2018, the project, in conjunction with the School of Economics, was delighted to welcome Professors Esther Duflo and Abhijit Banerjee to Edinburgh for a public lecture, providing a synthesis of recent work in development economics, since the publication of their influential book Poor Economics in 2011. Much like the book, the lecture touched upon several broad themes, ranging from microfinance to nutrition, as well as education. Within each theme, a comparison was made between the current state of knowledge to that of a few years ago, to highlight both their similarities and differences. Here are three key takeaways from their talk.

Microfinance

Despite its early promise, microfinance has not yielded the transformative impacts many had hoped. A number of experimental studies across seven different countries have shown that most people do not voluntarily adopt the entrepreneurship route out of poverty. Instead, microfinance has mostly been used as a consumption smoothing device. This may still be worthwhile, of course, but may not lead to long-lasting changes in borrowers’ lives (e.g. business, consumption, labour supply, education).

This overall message does mask some important differences across individuals, however. In particular, recent research has highlighted huge benefits in targeting credit towards the best entrepreneurs. The good news here is that local business owners often have relevant information for predicting who among them have the highest marginal return on capital, and can be incentivized, to tell the truth. These results could, therefore, be used by microfinance institutions to improve their credit targeting in the future.

Nutrition

Malnutrition remains a widespread concern in parts of South Asia and Sub-Saharan Africa. It is likely both a symptom, as well as a cause, of persistent poverty. Conventional wisdom was that traditional food subsidy programs had significant difficulties to improve nutrition, because they often end up as income subsidies, which households typically use to purchase tastier (rather than more nutritious) food, or non-food items (e.g. a television set). In other words, earlier studies had suggested the income elasticity of nutrition is often quite low.

By contrast, more recent studies of conditional cash transfer programs have tended to find increases in the share of expenditure on food among program recipients. Consistent with this, stunting rates for children under five in India have declined from 48% in 2006 to 38% in 2014, a period of rapid growth in average household income.

While it’s difficult to pin down the exact reason underlying these different results, existing research suggests it’s unlikely to be due to the recipient’s gender, or potential framing regarding investment in children’s future. Instead, it may be that cash transfers can open up the possibility of going from pure subsistence to a more fulfilling, productive life, and better nutrition is a part of it.

Poverty Traps

The idea of poverty traps, where being resource constrained means individuals find it hard to make profitable investments (in either human or physical capital), underlies much of the argument for greater redistribution, both within and across countries. While the idea may be intuitive, until recently there hasn’t been any rigorous studies testing whether a one-time transfer of capital can have long-term effects.

Aimed at filling this gap in the literature, Professors Banerjee and Duflo, together with co-authors, report findings in their 2015 Science article from six randomized control trials in Ethiopia, Ghana, Honduras, India, Pakistan, and Peru with a total of 10,495 participants. The multifaceted program under study targets the poorest members in a village and provides a productive asset grant, training and support, life skills coaching, temporary cash consumption support, and typically access to savings accounts and health information or services. They found the combination of these activities was sufficient to obtain a persistent impact, in terms of income, consumption, household assets, and food security, measured one year after the conclusion of the program, and 3 years after the asset transfer. Importantly, in five out of six countries, the discounted extra earnings exceeded the program cost.

Summary

While the overall message is clearly positive, Banerjee and Duflo acknowledge that more can be learned about how to optimize the design and implementation of the program going forward. More specifically, unlike microfinance, we don’t yet know which individuals are most likely to gain from such a program.

Profiles

Professor Esther Duflo is currently Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics at MIT and Co-Director of the Abdul Latif Jameel Poverty Action Lab. Professor Duflo has ties to CEPR, NBER and BREAD. Professor Duflo’s research seeks to understand the economic lives of the poor, she aims to assist in designing and evaluating social policies. In 2010 she presented a TED Talk on social experiments to fight poverty.

Professor Abhijit Banerjee is Ford Foundation International Professor of Economics at MIT, Co-Director of the Abdul Latif Jameel Poverty Action Lab, and Trustee of Save the Children. His research focuses on development economics and economic theory. Professor Banerjee has previously served as a member of the United Nations High-level Panel on the Post-2015 Development Agenda, 2012 – 2013 and Panel for the Evaluation of World Bank Research. In 2011 Professor Banerjee was named in Foreign Policy Magazine’s top 100 global thinkers and was featured in The Economist.

– Written by Dr Liang Bai