Why Abhijit Banerjee won the Nobel Prize in Economics?

Today we try and see why the Indian origin economist was awarded the prestigious Sveriges Riksbank Prize in Economic Sciences aka the Nobel Prize in Economics

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In the opening paragraphs of their groundbreaking book “Poor Economics” Abhijit Banerjee and Esther Duflo write

"All too often, the economics of poverty gets mistaken for poor economics: Because the poor possess very little, it is assumed that there is nothing interesting about their economic existence. Unfortunately, this misunderstanding severely undermines the fight against global poverty: Simple problems beget simple solutions…To progress, we have to abandon the habit of reducing the poor to cartoon characters and take the time to really understand their lives, in all their complexity and richness."

Most of his work is premised on the idea that policy reforms aimed to improve the lives of poor people have traditionally been implemented based on misguided perceptions and vast generalisations. Its almost as if policymakers were trying to rid the world of poverty by making assumptions about the poor that wasn’t true, to begin with.

It’s also one of the reasons why he’s been a staunch proponent of using Randomized Controlled Trials to better devise policy prescriptions. Here’s how it works — Take a small group of people and divide them into two sets. In the first set you introduce a certain policy treatment, say, give them Rs. 100 every day for a month and the other group, you just let them be. At the end of the month you measure the outcomes — see whether the first group made any progress with the extra income. And if you see improvements here, maybe it’s worth exploring this policy at a much wider scale.

The idea is that this nuanced approach is a much better alternative to simply shooting in the dark. And if I am being honest with you, it kind of makes sense.

Let me illustrate this with an example from Abhijit’s book. When he and his fellow researchers started looking at farmers in Western Kenya, they realised that most of them still weren’t using fertilizers. The first prescription is the most obvious one. Maybe it’s because they don’t know how to use them.

But what about the farmers that did know how to use fertilizers and still wouldn’t touch them? Could it be possible they weren’t acutely aware of the benefits?

Well, then you try and educate them. In fact, through randomized trials, the group found out that the farmers using fertilizers made 70% more than the amount invested as opposed to the group that didn’t use them. So clearly, it makes economic sense. So why then wouldn’t they use it?

Well, it turns out most farmers simply did not save enough to buy fertilizers. Voila. So that's the reason. Subsidize the fertilizer then. Make it cheaper. Right?

Wrong. The farmers weren’t buying fertilizers not because it was expensive. No. They weren’t buying it because they were running out of money.

Abhijit and his team found out that most farmers had a hard time-saving, not for a lack of desire, but for lack of self-control. Most of them said they’d be very willing to save some money to buy fertilizers. However, between harvest season and planting season, they simply ended up spending everything because -"there’s always something that comes up that requires money (someone is sick, someone needs clothes, a guest has to be fed), and it is hard to say no." However, there were a few smart farmers who had imposed a certain amount of self-control. By buying fertilizers right at the end of harvest season they eliminated the need to save altogether. So how do they get by until the planting season if they ever need money?

Most farmers simply said they would figure it out — "perhaps borrow from friends, suspend the issue; or do something else." Not one said, they would resell the fertilizer. So the team working with an NGO came up with a plan. As Abhijit writes

“Right after the harvest — when farmers have money in hand — they are given the opportunity to purchase a voucher entitling them to fertilizer at sowing time… Fertilizer was sold at market price, and a field officer visited the farmers at home to sell the vouchers, and the fertilizer was delivered to their homes when they wanted it”

This subtle change increased adoption rates by atleast 50%. The effect of this program was greater than the effect of a 50% reduction in the price of fertilizers. Think about that for a moment. Governments were wasting thousands and crores of taxpayer money by refusing to pay attention to the poor until a small group of researchers went — You know what? Maybe we should actually understand the poor before we start creating pro-poor policies.

And that, in essence, is why the Nobel Prize went to these brilliant folks Because they took the time and effort to look at poverty up close and in the process helped thousands of people live better lives.

Anyway, that's it from us today. We will see you tomorrow. Peace