When economics rethinks poverty

By: Snigdha Nanda
Based on social experiments and field observations, Nobel laureate economist Dr Abhijit Banerjee’s coherent vision about the impact of antipoverty policies is quite influential in the domain of policy economics. Grounded to basics, his concept of the ‘Poor Economics’ offers a distinct idea on how psychological and social complexities affecting poverty. This article discusses the core concept of Dr Banerjee’s method of fighting global poverty by informed decision making.

In a world with over 700 million people still subsisting on extremely low incomes, the reduction of global poverty, in all its forms emerges as one of the most urgent challenges. In this scenario, the announcement of the Nobel Prize to Prof Abhijit Banerjee for his experimental approach in fighting poverty will trigger serious thoughts on practical alternatives to address the global concern.

 A Jawaharlal Nehru University and Harvard University alumnus, and founder of the Abdul Latif Jameel Poverty Action Lab (J-PAL), Prof Banerjee is the second Indian origin economist after Amartya Sen to win the prestigious prize for his contribution to the field. A professor of Economics at MIT, the Nobel laureate co-authored ‘Poor Economics’ with his co-researcher and wife Dr Esther Duflo. Based on his experiments in the field, Dr Banerjee’s concept reflects on the effectiveness of solutions to global poverty using an evidence-based randomised control trial approach to alleviate global poverty.

 Prof Abhijit Banerjee’s concept of ‘Economy of Poor’ revolves around a paradox in which, the poor are trapped in the web of wrong or misleading information, whereas the policy influencers are trapped in the web of prejudice notion and theoretical misconceptions of poverty.

 Contrary to the common belief, the nuances related to the economics of poverty are not limited to hunger. This misplaced perception is one of the major drawbacks of programmes designed to reduce poverty only with aid efforts. Economist Abhijit Banerjee argues that too much emphasis by international aid organisations focused only on providing food, ignoring other aspects of poverty, resulting in futile initiatives. 

 Despite dedicated funding to help the poor through thousands of charitable organisations and NGOs, there is hardly any improvement in the global poverty scenario. Based on misperceptions led by assumptions and untested generalisations about the poor is the main reason behind the failure of these poverty specific initiatives, making an adverse impact at worst.

 According to the Nobel laureate, poverty reduction programmes should be based on how the poor see their lives, not the other way. A strong critic of decisions based on assumptions about how the poor behave, Prof Banerjee’s concept advocates for programmes based facts on how the poor make decisions about when and where to spend and save. 

 Prof Banerjee’s book ‘Poor Economics’ reflects on the need for a radical and fresh approach to poverty with attention to the details and practical experiment to understand how people decide. He argues that to the poor masses, improvement of quality of life is just as important as food. ‘Food policies should work with human behaviour, not against it’, argues Prof Banerjee. Captivated with the concept of charity, most of the aid programmes are not designed to consider the psychology and preference of aid recipients, as if it does not matter. 

 Furthermore, Prof Abhijit Banerjee and his co-researcher and wife Esther Duflo’s vision for the economy of poverty and antipoverty policy are based on the economist’s two-decade-long field experiments to understand the economy through the lens of psychological complexities in the lives of poor people. 

 Far from entangled clichés, his method proposes field experiments as a reliable methodology to explore and establish a more causal economical approach to fight poverty. During his work at the Abdul Latif Jameel Poverty Action Lab, also known as J-Pal, Prof Banerjee initiated randomised controlled trials to find out what and why factors that influence poverty. His theory sheds light on the challenging factors that trigger poverty. 

 According to Prof Banerjee; misleading false beliefs and lack of information, bearing the burden of too much responsibility, the trap of superficial economies of scale by a system limiting options, lack of interest to check facts and verify their notion with statistics and the expectation of failure reducing risk-taking interest are the prime perpetrators that affect a poor person’s scope to make informed decisions. 

 There are factors of disadvantage, mostly lying in between the outlook of the unwillingness of the poor to validate facts and the fear of consequences of failures clubbed with the willingness to let big decisions be made by others. As the root cause of these challenges is related to psychology and perception of the poor; Prof Banerjee suggests persistence in changing false beliefs and continuous learning as an effective way in changing behaviour pattern of the poor to address poverty specific issues.

 Prof Banerjee is positive that governance and policy can be improvised to address poverty. It is a complex process that requires patience, he adds. The understanding of how the poor view their lives is a much-needed corrective of misplaced aid.

 Far from theoretical complications, Prof Banerjee’s concept of the ‘Economics of Poor’ strongly believes that poverty can be addressed by ensuring well-informed public policy based on scientific evidence and practical fact-based approach to inform, educate and encourage towards the behavioural change of the poor.  

 His study strongly suggests for policy involvement in small reforms by dividing the one major issue into specific and manageable questions — focusing on effective measures to obtain reliable solutions through carefully designed field experiments is a widely accepted approach in development economics to fight global poverty. According to him, the approach should be an accumulation of well thought out small steps.

 In spite of his grasp of the complex dynamics of poverty, Prof Banerjee’s concept has its share of criticisms. The method to fight poverty is often cited as a ‘guesswork out of policies’ lacking the understanding of how power works at every level to influence the social fabric, local economies and political systems. 

 Poverty is a dynamic and complex issue, often misunderstood by people who have never been poor. The insightful concept of the ‘economy of poor’ simplifies the poverty-related puzzles in developing countries. In just two decades, Prof Abhijit Banerjee’s approach to addressing poverty through practical experiments has added a new dimension to the development of economics research. 

 The path-breaking insights reflected in the works of this Nobel laureate are based on experimental facts explored beyond the boundaries of economics. It includes aspects of psychology, social science and randomised experimentation to explore the behaviours and systems that act are root causes of poverty. Apart from solving many questions and exploring new dimensions of socio-economical and behavioural aspects of poverty; Prof Banerjee’s experiments expands the horizon yet to be explored, raises several questions, yet to be answered. 

 A silver lining for the development goals, Prof Banerjee’s experiment demonstrates that “poverty is a battle that could be won” with a focussed and informed approach. Crucial in the current scenario, this anti-poverty intervention has the potential to improve the ability of the world’s poorest people to make them capable of improving their own lives contributing towards a sustainable boost to the global economy.

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