What the Banerjee-Duflo-Kremer Nobel in Economics Means for the Poor
As humans, most of us know that abject poverty is inhumane and immoral. It goes against the sacred kinship we all feel, down in the depths of our deepest biology, of being homo sapiens, and members of the same species.
When we witness or see images of our fellow humans suffering, no matter where they are or how different they may look from us, we feel empathy. In the last 15 years, the work of Banerjee, Duflo and Kremer, recent Nobel Laureates in Economics, have transformed the way development economists approach their work, using RCT (Randomized Controlled Trials — from the medical field) to test which solutions of development economics actually solve the problems of the poor.
The use of this technique, now called the “gold standard” of development economics, has transformed the way services are delivered to the poor in the poorest societies of our world. Banerjee, Duflo, and Kremer have lessened the amount of suffering around the world through the use and propagation of these techniques, and of course have impacted the most important SDG, the eradication of poverty.
The controversy here is that they have been criticized for the narrowness of their approach. That’s a short-sighted view, and to better understand what this Nobel award really means, we must go back to Easterly, on whose research and observations the Laureates have taken much of their inspiration.
In 2006, Easterly released the work “The White Man’s Burden,” a scathingly accurate portrayal of how badly the World Bank and others has used its ample resources to alleviate poverty. It must be strongly noted that the reduction in global poverty achieved before the SDGs were adopted in June 2012 in Rio de Janeiro was a direct result of the greatest poverty alleviating force in the history of humanity: the free market. (Check the historical data on capitalism’s role in reducing poverty around the world.)
Easterly masterly gave the world the mnemonic of “Planners vs. Searchers.”
1. They have good intentions.
2. They raise expectations.
3. They decide what to supply.
4. They develop global blueprints.
5. They know the answers.
6. They believe outsiders impose solutions.
7. They receive no feedback.
8. They are not held accountable.
9. They set priorities, but deny trade-offs.
10. They aid agencies.
1. They look for what works.
2. They take responsibility.
3. They ask, “What’s in demand?”
4. They deal with local conditions.
5. They don’t have answers in advance.
6. They believe only insiders have knowledge.
7. They receive instantaneous feedback.
8. They are held accountable for results.
9. They understand there are only trade-offs.
10. They are mostly NGOs and social entrepreneurs.
Planners are the consultants and employees of the World Bank who drop into some dirt-poor nation on earth, and tell the government which 5-year plan must be adopted to receive whatever aid money is promised.
These plans are in no way based in the reality of how the poor function in their existing free markets, and in many cases require governments to do things they have no hope of ever achieving. Easterly chronicles these failures well, and backs them up with real evidence about poverty reduction.
Searchers, on the other hand, develop solutions over time and through direct experience by trying things in the actual marketplace, using real solutions informed by ideas and feedback from the people actually in the market. Poor people may be poor, but they still participate in markets, sometimes more frequently than rich people. Banerjee, Duflo, and Kremer are clearly Searchers.
Markets grow because actors within the market, especially entrepreneurs, search for solutions to solve market needs, problems, or pain. The $80 trillion global economy that we have has grown so large because of the seemingly infinite expansion possible in free (or mostly free) markets powered by voluntary exchanges between users. Exchange happens voluntarily because market actors search for solutions to one another’s needs, problems, or pain.
When profit is made in each transaction, the market continues to expand. A rising tide lifts all boats. That’s why we have only ~12% of the world’s population living in abject poverty, compared to 80% in 1800. Not bad considering how long ago humanity transitioned from hunter-gatherers to agrarians 12 millennia ago (12,000 years versus 200). The Searchers have it right.
The criticism leveled on the methodologies of this year’s Laureates, to me, seem incredibly shortsighted. Like, ignoring-human-history shortsighted. Here’s why:
Their methodologies were only necessary because of the failure of the economic development establishment. The economic development establishment, extant since only the post-war years (really, since Bretton Woods (1944), the UN (1945), the World Bank (1944), and the Marshall Plan (1948)), was founded by a group of people that had been living by a much more planned way of doing things.
Whether it was because everyone was in the military during the war, or because many of the managers of large organizations in the post-war years were young professionals as the ideas of centralized management and planning by Alfred Sloan became popular, the post-war world was led by planners. So it’s no surprise that “Plannerism” is the methodology that took hold in development economics from the 50s through to the 90s.
But as Easterly correctly criticizes, the Planners have it wrong. Rarely in human history have so many resources been poured into something with so little results. From the 1950s, when development economics really got going, until the 1980s, while international trade was really getting going, poverty was reduced by only 24%, compared to 34%, which is what happened after globalization.
The failures of those 3 decades led Easterly and Sachs to question if the way we had always been doing things in development economics was in fact the correct way — the best way — of helping the poor. We needed Easterly’s 2006 indictment and research to understand that the rich economies, in all of their do-gooder desires, had really screwed things up. Hence the white man’s burden (NOTE: the phrase “White Man’s Burden” is actually from an 1899 poem by Rudyard Kipling written about American colonialism in the Philippines during the Filipino-American war from 1899–1902).
Easterly’s research (begun in the 90s), led younger economists like the Laureates (Banerjee is only 3 years younger than Easterly, but Kremer is 7 years younger, but Duflo is 17 years younger than Easterly), upon the embarkation of their careers, to question the methods they were applying in their field work.
And the conclusion that they came to was that the old way of planning solutions… ahem… sucked! A better way was needed. And they took their inspiration from entrepreneurs like Mother Teresa and common Indians that Banerjee grew up with. It was time to search for the Searchers.
They found them. You can read the book “Poor Economics” to gain a better understanding, but many NGOs were taking inspiration from their in-country, native staff, instead of HQ back in the West. Now, searching is seen as the only effective way to serve the poor.
Furthermore, if you’re a do-gooder and going for a grant from the Bill & Melinda Gates Foundation, make sure that there’s a whole lot of searching in your presentation. The Gates foundation set the stage for the application of market-based solutions in global philanthropy.
Market-based solutions to help the poor, and the application of RCT in most philanthropic or development programs, is now the only way to do things in the world of economic development. Because it works.
But it must be remembered that both of these things — market solutions and RCT — simply are what Entrepreneurs have been doing to build businesses for millennia. The Laureates and their followers are just bringing the hustle to the world of development economics.
There has been criticism of these methodologies. Angus Deaton in particular has leveled criticism on RCT and market-based solutions as too narrow, arguing that narrow success can’t be transported. That’s bullshit, and our own experience at Fair Trade Outsourcing proves that.
The cultures and Purchasing Parity Power may be different between societies where the numbers of the poor are large, but the poor share many common traits as actors in markets. I won’t go into them all here; it should be obvious. So, the assertion that a narrow market solution to solving one problem of the poor isn’t portable is just not based on the history of markets and voluntary exchange.
Voluntary Exchange, and the markets that voluntary exchange between humans create, is the same across the planet. You know why? Because we’re all humans, of course, acting in our own rational self interest (see: Smith, Adam). Doesn’t matter where we live or what language we speak, rational self-interest is a human trait.
Now that the debunking of that ridiculous criticism is out of the way, here’s why this year’s Nobel prize is so important: It’s a recognition that we’re getting there, we’re finally understanding how to solve poverty — at scale. While market-based globalization has done a lot of good work, it approaches poverty reduction in purely market-based terms, meaning many are left behind or dealing with incomplete solutions to reduce poverty.
The Laureates and their followers aim to correct that with specific cures to problems that lie at the fulcrum of why someone is in poverty. Solve the fulcrum problem of an individual’s poverty (and there are many with the same fulcrum), and you tip the scale with a large amount of impact on their lives. That’s what the world no longer needs to search for — we have it and we should now apply it.
But Deaton isn’t completely wrong either. In our work, we see abundantly what Deaton also criticized — the narrowness of an individual solution. Getting a family unit out of poverty is a multi-year, multi-pronged process involving basic needs, personal advancement, and certain factors that contribute to building a healthy household.
As an entrepreneur who is dedicated to developing a market-based solution to get families out of poverty at scale, I can tell you that multi-year and multi-pronged is what is needed. This year’s Nobel in Economics will be remembered for putting a very definite stake in the ground refuting all the skeptics out there — that market-based, searched-for solutions can’t work at scale.
They can — but sometimes more than one solution is needed, over time, to get families out of poverty. We’ve seen it in our work at Fair Trade Outsourcing with specific cases like Alemar, Nica, and Cathy. As we continue to compile multi-pronged solutions, we too will be searching for evidence that we are curing poverty at scale for our Agents and their families.
I encourage the development economics world to recognize that the work of Easterly, Banerjee, Duflo, and Kremer was a very significant 1–2 step forward for the world to eradicate inhumane poverty.
But I also think that, for entrepreneurs like me who apply the market to make money and cure poverty at the same time, we should keep searching. When it works, it’s a beauty to behold.