The Prize in Economic Sciences 2019: Research to Help the World’s Poor
What is the best way to design measures that reduce global poverty? Using innovative research based on feld experiments, Abhijit Banerjee, Esther Dufo and Michael Kremer have laid the foundation for answering this question that is so vital to humanity.
Over the last two decades, people’s living
standards have noticeably improved almost everywhere in the world. Economic
wellbeing (measured as GDP per capita) doubled in the poorest countries between
1995 and 2018. Child mortality has halved relative to 1995, and the proportion
of children attending school has increased from 56 to 80 per cent.
Despite this progress, gigantic challenges
remain. Over 700 million people still subsist on extremely low incomes. Every
year, five million children still die before their fifth birthday, often from
diseases that could be prevented or cured with relatively cheap and simple
treatments. Half of the world’s children still leave school without basic
literacy and numeracy skills.
A new approach to alleviating global
poverty
In order to combat global poverty, we must
identify the most effective forms of action. This year’s Laureates have shown
how the problem of global poverty can be tackled by breaking it down into a
number of smaller – but more precise – questions at individual or group levels.
They then answer each of these using a specially designed field experiment. Over
just twenty years, this approach has completely reshaped research in the field
known as development economics. This new research is now delivering a steady
flow of concrete results, helping to alleviate the problems of global poverty.
There has long been an awareness of the huge differences in average productivity between rich and poor countries. However, as Abhijit Banerjee and Esther Duflo have noted, productivity differs greatly, not only between rich and poor countries but also within poor countries. Some individuals or companies use the latest technology, while others (which produce similar goods or services) use outdated means of production. The low average productivity is thus largely due to some individuals and companies falling behind. Does this reflect a lack of credit, poorly designed policies, or that people find it difficult to make entirely rational investment decisions? The research approach designed by this year’s Laureates deals with exactly these types of questions.
Early field experiments in schools
The Laureates’ very first studies examined how
to deal with problems relating to education. Which interventions increase
educational outcomes at the lowest cost? In low-income countries, textbooks are
scarce and children often go to school hungry. Would pupils’ results improve if
they had access to more textbooks? Or would giving them free school meals be
more effective? In the mid-1990s, Michael Kremer and his colleagues decided to
move part of their research from their universities in the north-eastern US to
rural western Kenya in order to answer these kinds of questions. They performed
a number of field experiments in partnership with a local non-governmental
organisation (NGO).
Why did the researchers choose to use field
experiments? Well, if you want to examine the effect of having more textbooks on
pupils’ learning outcomes, for example, simply comparing schools with different
access to textbooks is not a viable approach. The schools could differ in many
ways: wealthier families usually buy more books for their children, grades are
probably better in schools where fewer children are really poor, and so on. One
way of circumventing these difficulties is to ensure that the schools being
compared have the same average characteristics. This can be achieved by letting
chance decide which schools are placed in which group for comparison – an old
insight that underlies the long tradition of experimentation in the natural
sciences and medicine. In contrast to traditional clinical trials, the
Laureates have used field experiments in which they study how individuals behave
in their everyday environments.
Kremer and his colleagues took a large number
of schools that needed considerable support and randomly divided them into
different groups. The schools in these groups all received extra resources, but
in different forms and at different times. In one study, one group was given more
textbooks, while another study examined free school meals. Because chance
determined which school got what, there were no average differences between the
different groups at the start of the experiment. The researchers could thus credibly
link later differences in learning outcomes to the various forms of support. The
experiments showed that neither more textbooks nor free school meals made any
difference to learning outcomes. If the textbooks had any positive effect, it
only applied to the very best pupils.
Later field experiments have shown that the
primary problem in many low-income countries is not a lack of resources.
Instead, the biggest problem is that teaching is not sufficiently adapted to the
pupils’ needs. In the first of these experiments, Banerjee, Duflo et al. studied
remedial tutoring programmes for pupils in two Indian cities. Schools in Mumbai
and Vadodara were given access to new teaching assistants who would support
children with special needs. These schools were ingeniously and randomly placed
in different groups, allowing the researchers to credibly measure the effects of
teaching assistants. The experiment clearly showed that help targeting the
weakest pupils was an effective measure in the short and medium term.
These early studies in Kenya and India were
followed by many new field experiments in other countries, focusing on important
areas such as health, access to credit, and the adoption of new technology. The
three Laureates were at the forefront of this research. Due to their work, field
experiments have become development economists’ standard method when
investigating the effects of measures to alleviate poverty.
Field experiments linked to theory
Well-designed experiments are highly reliable
– they have internal validity. This method has been extensively used in
traditional clinical trials for new pharmaceuticals, which have specially
recruited participants. The question has often been whether or not a particular
treatment has a statistically significant effect.
The experiments designed by this year’s
Laureates have two distinctive features. First, the participants made actual
decisions in their everyday environments, both in the intervention group and in
the control group. This meant that the results of testing a new policy measure,
for example, could often be applied on site.
Second, the Laureates relied on the
fundamental insight that much of what we want to improve (such as educational
outcomes) reflects numerous individual decisions (for example among pupils,
parents and teachers). Sustainable improvements thus require an understanding
of why people make the decisions they do – the driving forces behind their
decisions. Banerjee, Duflo, and Kremer not only tested whether a certain
intervention worked (or not), but also why.
To study the incentives, restrictions and
information that motivated the participants’ decisions, the Laureates used the
contract theory and behavioural economics that were rewarded with the Prize in
Economic Sciences in 2016 and 2017, respectively.
Generalising results
One key issue is whether experimental results
have external validity – in other words, whether the results apply in other
contexts. Is it possible to generalise the results of experiments in Kenyan
schools to Indian schools? Does it make a difference if a specialised NGO or a
public authority administers a particular intervention designed to improve
health? What happens if an experimental intervention is scaled up from a small
group of individuals to include more people? Does the intervention also afect
individuals outside the intervention group, because they are crowded out from
access to scarce resources or face higher prices?
The Laureates have also been at the forefront
of research on the issue of external validity and developed new methods that
consider crowding-out effects and other spillover effects. Closely linking
experiments to economic theory also increases opportunities for results to be
generalised, as fundamental patterns of behaviour often have a bearing on wider
contexts.
Concrete results
Below, we provide a few examples of specific
conclusions drawn from the type of research initiated by the Laureates, with
the emphasis on their own studies.
Education: We now
have a clear perspective on the core problems in many poor country’s schools.
Curricula and teaching do not correspond to pupils’ needs. There is a high
level of absenteeism among teachers and educational institutions are generally
weak.
The abovementioned study by Banerjee, Duflo, et
al. showed that targeted support for weak pupils had strong positive effects,
even in the medium term. This study was the start of an interactive process, in
which new research results went hand in hand with increasingly large-scale
programmes to support pupils. These programmes have now reached more than
100,000 Indian schools.
Other field experiments investigated the lack
of clear incentives and accountability for teachers, which was reflected in a
high level of absenteeism. One way of boosting the teachers’ motivation was to
employ them on short-term contracts that could be extended if they had good
results. Duflo, Kremer et al. compared the effects of employing teachers on these
terms with lowering the pupil-teacher ratio by having fewer pupils per
permanently employed teacher. They found that pupils who had teachers on
short-term contracts had significantly better test results, but that having
fewer pupils per permanently employed teacher had no significant effects.
Overall, this new, experiment-based research
on education in low-income countries shows that additional resources are, in
general, of limited value. However, educational reforms that adapt teaching to
pupils’ needs are of great value. Improving school governance and demanding
responsibility from teachers who are not doing their job are also cost-effective
measures.
Health: One
important issue is whether medicine and healthcare should be charged for and,
if so, what they should cost. A field experiment by Kremer and co-author
investigated how the demand for deworming pills for parasitic infections was
affected by price. They found that 75 per cent of parents gave their children
these pills when the medicine was free, compared to 18 per cent when they cost
less than a US dollar, which is still heavily subsidised. Subsequently, many
similar experiments have found the same thing: poor people are extremely
price-sensitive regarding investments in preventive healthcare.
Better service availability and stronger incentives improved vaccination rates
Low service quality is another explanation why
poor families invest so little in preventive measures. One example is that staff at the health centres that are responsible for vaccinations are often absent
from work. Banerjee, Duflo et al. investigated whether mobile vaccination
clinics – where the care staff were always on site – could fix this problem.
Vaccination rates tripled in the villages that were randomly selected to have
access to these clinics, at 18 per cent compared to 6 per cent. This increased
further, to 39 per cent, if families received a bag of lentils as a bonus when
they vaccinated their children. Because the mobile clinic had a high level of
fixed costs, the total cost per vaccination actually halved, despite the
additional expense of the lentils.
Bounded rationality: In the vaccination study, incentives and better availability of care
did not completely solve the problem, as 61 per cent of children remained
partially immunised. The low vaccination rate in many poor countries probably
has other causes, of which one is that people are not always completely
rational. This explanation may also be key to other observations which, at least
initially, appear difficult to understand.
One such observation is that many people are
reluctant to adopt modern technology. In a cleverly designed feld experiment,
Duflo, Kremer et al. investigated why smallholders – particularly in sub-Saharan
Africa – do not adopt relatively simple innovations, such as artificial
fertiliser, although they would provide great benefits. One explanation is
present bias – the present takes up a great deal of people’s awareness, so they
tend to delay investment decisions. When tomorrow comes, they once again face
the same decision, and again choose to delay the investment. The result can be
a vicious circle in which individuals do not invest in the future even though
it is in their long-term interest to do so.
Bounded rationality has important implications
for policy design. If individuals are present-biased, then temporary subsidies
are better than permanent ones: an offer that only applies here and now reduces
incentives to delay investment. This is exactly what Dufo, Kremer et al.
discovered in their experiment: temporary subsidies had a considerably greater
effect on the use of fertiliser than permanent subsidies.
Microcredit:
Development economists have also used field experiments to evaluate programmes
that have already been implemented on a large scale. One example is the massive
introduction of microloans in various countries, which has been the source of
great optimism.
Banerjee, Duflo et al. performed an initial
study on a microcredit programme that focused on poor households in the Indian
metropolis of Hyderabad. Their field experiments showed rather small positive
effects on investments in existing small businesses, but they found no effects on
consumption or other development indicators, neither at 18 nor at 36 months.
Similar field experiments, in countries such as Bosnia-Herzegovina, Ethiopia,
Morocco, Mexico and Mongolia, have found similar results.
Policy influence
The Laureates’ work has had clear effects on
policy, both directly and indirectly. Naturally, it is impossible to precisely
measure how important their research has been in shaping policies in various
countries. However, it is sometimes possible to draw a straight line from
research to policy.
Some of the studies we have already mentioned
have indeed had a direct impact on policy. The studies of remedial tutoring
eventually provided arguments for large-scale support programmes that have now
reached more than five million Indian children. The deworming studies not only
showed that deworming provides clear health benefits for schoolchildren, but
also that parents are very price-sensitive. In accordance with these results,
the WHO recommends that medicine is distributed for free to the over 800
million schoolchildren living in areas where more than 20 per cent of them have
a specific type of parasitic worm infection.
There are also rough estimates of how many
people have been affected by these research results. One such estimate comes from
the global research network that two of the Laureates helped found (J-PAL); the
programmes which have been scaled up after evaluation by the network’s
researchers have reached more than 400 million people. However, this clearly
underestimates the total research impact, because far from all development
economists are affiliated with J-PAL. Work to combat poverty also involves not
investing money in ineffective measures. Governments and organisations have
released significant resources for more effective measures by closing many
programmes that were evaluated using reliable methods and shown to be ineffective.
The Laureates’ research has also had an
indirect influence, by changing how public bodies and private organisations
work. In order to make better decisions, increasing numbers of organisations
that fight global poverty have systematically begun to evaluate new measures,
often using field experiments.
This year’s Laureates have played a decisive
role in reshaping research in development economics. Over just 20 years, the
subject has become a flourishing, primarily experimental, area of mainstream
economics. This new experiment-based research has already helped in alleviating
global poverty and has great potential to further improve the lives of the most
impoverished people on the planet.
This article is first published by The Prize in Economic Sciences 2019. The Royal Swedish Academy of Sciences. www.kva.se. Look the original version here