Bridging scientific approach with economics
When a Nobel prize was awarded to Muhammad Yunus of Bangladesh in 2006 for his concerted effort to “create economic and social development from below,” the Nobel Committee said: “Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty.”
According to Yunus, “poverty is an artificial creation” and it can be “sent to the Museum” with good institutional support policies.
This year’s Nobel prize in economics — awarded to professors Abhijit V. Banerjee, Esther Duflo and Michael Kremer — was awarded for the reiteration of the same emphasis and reassurance that fighting back poverty is essential for shared prosperity, as an agenda item for the United Nations’ Sustainable Development Goals. What then is the difference? What is its relevance at the current juncture? The difference lies in the application of the scientific approach via field experiments — randomized controlled trials (RCTs) combining microscopic analysis for each miniscule problem with a macro “lens” view — for evidence-based policy-making from their experimental approach to alleviating global poverty.
The economics profession has often been criticized for its esoteric nature of theorizing cocooned in an ivory tower. Unlike theoretical analysis with rigor, which offers a ground for practical policy intervention to cure the economic malaise just like a medical practitioner approaches a patient burdened with disease. The work done by Banerjee, Duflo and Kremer throws light on conducting such scientific experiments. We can learn that country-level solutions to combat extreme poverty and other associated problems could catalyze inclusive economic growth. This can enable elite policymakers to design policies.
What is novel in this year’s Nobel is their contribution in marrying the scientific approach of experimentation — just like in a scientific laboratory — with the theoretical rationale of social science. This uniqueness in dealing with the problem could ameliorate the health fallout, educational deficiency, mental health, infant mortality, maternal health, technology choices and entrepreneurial capability, etc.
The welfare of a society depends on the eradication of poverty, and the contribution of this “trio” opens new vistas of research in this regard. Three facets of development — poverty, prosperity, and hence, peaceful coexistence — the trinity of human well-being, are important. Their joint contribution opens horizons for analyzing the effectiveness of specific policies and programs for improving development outcomes in health, governance, educational attainment, impoverishment and inequality.
They established the Jameel Poverty Action Lab (or JPAL) with more than 190 researchers and have almost completed ongoing RCTs in areas ranging from governance problems in Indonesia, maternal health or mosquito net problems in Africa, and school absenteeism in India under the “Education for All” program. J-PAL has research active across the World. “Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty” documents this approach.
By applying the elegance of theory with voluminous data, the fundamental questions they addressed and answered are deep-rooted. Despite limitations this is the “gold standard” for evidence-based solutions in tackling poverty, health and educational outcomes. Thus, it is helpful research for improving the lives of the have-nots.
Although the world has made significant progress by reducing extreme poverty (1.1 billion fewer than in 1990), the upcoming challenges born out of conflict, nationalism and populism could threaten this progress, and cause a reversal of fortune. A recent World Bank report said that by 2030, the situations of fragility, conflict, and violence will push half of the world’s extreme poor further down the path of huge inequality.
Therefore, the needs of the hour are effective development approaches to address root causes, constructing measures for resilience, and helping provide a “Great Escape” from poverty. With the advent of the Fourth Industrial Revolution aided by information and communications technology (ICT) — encompassing techniques of Machine Learning and big data — conducting such large-scale field experiments via RCT is useful.
The significance in the context of India, China and the two Koreas is enormous. The broader lesson for countries like India, Korea and those in Africa is that for solving complex development challenges we require cost-effective policies based on careful analysis of data and evidence. Especially, when the economies such as those in South Korea and India among others are slowing down, this prize is quite timely for reorienting a focus to field experiments in a bottoms-up approach. For South Korea, the furor about the minimum wage hike and income-led growth as well as climate change is widespread. Going beyond ideology and preconceived notions, a scientific approach to evaluate development policies is important to judge their effectiveness.
South Korea, being an advanced nation, has the potential to create synergy between financial inclusion, micro credit and ICT; incentivizing entrepreneurship; creating employment via job growth; effective training; decentralized decision-making versus leadership of local governments; social enterprise policy-making, to name a few. That, in turn, will facilitate coming out with a cornucopia of “effective” policy interventions, as necessary.
Recent problems related to flexibility in the labor market and the reduction to a 52-hour workweek coupled with hikes in the minimum wage, deregulation, an aging population and a falling birthrate are damaging Korea’s pursuit for shared prosperity. Conducting an evidence-based policy analysis in these areas and synthesizing them are imperative for constructive debate without ideologically driven polarized viewpoints.
However, the paucity of such concerted research efforts in this direction is hampering “good policy” based on informed debate. The importance of the evaluation of major government programs is crucial for the judicious use of the public budget.
As the prize has brought into the limelight the role of RCT, governments could use such analyses to harness the power of such policy tools to make best use of scientific reasoning for improving social outcomes. Liberation from financial bondage is a sine-qua-non for development, and the “trio” of laureates have helped in policy-designing.
And, we must not forget what Adam Smith propounded: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice; all the rest being brought about by the natural course of things.”