Practical

Economics

In this exclusive interview, Esther Duflo and Abhijit Banerjee, winners of the 2019 Nobel Prize in Economics, share their thoughts on how their work can play a part in making the world a better place.

Now that you’ve won the Nobel Prize in Economics, what’s next?

Abhijit: There are constantly new questions for economics to tackle. Climate change, for example, offers huge potential for Randomized Controlled Trial (RCT) research — testing mitigation in some contexts and adaptation in others; testing ideas from the lab in the field and applying technologies that work to actual policies. Likewise, migration is another topic that is increasing in importance due to forced displacement rates rising around the world. As inequality continues to be a big problem, social protection requires focused effort.

We are also looking at big data as a tool to cut across all these and other thematic areas. Governments and private companies are collecting vast amounts of data; how can we leverage this for social good?

We are exploring ways to use this data for better, faster, and less expensive evaluations that can inform urgent policy questions, while partnering closely with governments to analyze this data. This will allow us to better understand the nature of each problem, and then collaboratively design, pilot, and evaluate innovative solutions. J-PAL — the organization that Esther, Sendhil Mullainathan, and I co-founded — is also actively working to help scale up the successful innovations.

Why did you choose a career as an economist?

Esther: I was an undergraduate student in history when I realized that economists are in a wonderful position — one that can change the world. They are able to take the time to study problems deeply, and when ready to share their conclusions, they can talk to policymakers and help inform their decisions with real evidence.

And yet, as soon as you mention the word “economics,” most people tune out. Why does economics have a reputation for being boring? As teachers and book authors specializing in the topic, how do you make economics interesting?

Esther: Many people have this perception that economics is only about GDP and interest rates. It can be hard to relate these concepts to everyday life. But what got me excited about economics — and what I think can generate more interest in the field (especially among women and other marginalized groups) — is realizing that economics can help us find solutions to issues that are on all of our minds such as climate change, poverty, immigration, and inequality. Often, our intuition about the best way to solve a problem is completely wrong, and experiments in economics can help us discover that what we thought was obvious is actually not obvious at all.

More specifically, how and why did you turn your attention to poverty alleviation?

Abhijit: I don’t know how one can work in economics and not work on alleviating poverty; in some ways, it’s the starkest economic problem you will ever encounter.

Having said that, I do think that my background played a role. My grandfather constructed our family home next to Kolkata’s largest slum. I played with children who lived in that slum and those families walked by my house every day. My mother, who has strong opinions about everything — including everything that is wrong in society — would run a commentary on what we saw, and made me aware of the challenges these families face. There was no escaping it.

Do you think it is possible to solve global poverty?

Abhijit: I believe that not only is it possible to solve global poverty, we have already made considerable progress in the last 30 years. Since 1990, you can see evidence of this in that the number of extremely poor people has been cut in half, infant mortality has also been cut in half, and maternal mortality has drastically reduced. Even in countries that remain poor, where GDP doesn’t increase, the quality of life for poor people has still improved because of good, pragmatic government policies that focus on human welfare and that are willing to look at the evidence.

Your latest book Good Economics for Hard Times, was described by Greece’s former finance minister Yanis Varoufakis in an article for The Guardian as “an excellent antidote to the most dangerous forms of economics bashing.” In your opinion, what does good economics entail?

Esther: Economics, at its core, is the study of what people value and why they make the decisions that they make. In the past, economics has been dominated by big ideas and complex theories, with little attention paid to the facts of people’s lives: Are they actually behaving the way economic models predict? Often, the answer was no.

But there has been an important shift in economics toward focusing more on the facts and realities that we can see and measure and test. Good economics is economics based in reality. Rather than creating abstract models and measuring whether people’s behavior matches up, let’s measure behavior first, and then develop the model.

In Good Economics for Hard Times, you also discuss the eroding legitimacy of government: “The state is perceived as unreliable or worse, by an increasing majority of the electorate.” What thoughts do you have on how that legitimacy might be restored?

Esther: It will have to be “show,” not “tell.” Many people in the United States (and elsewhere) are deeply suspicious of either the willingness or the capacity (or both) of the government to do anything to help them out. In part, this is because of actual incompetence, or past actions that have eroded trust (when, for example, the Indian government took away land to make dams without adequately compensating people, this made the public extremely reluctant to contemplate giving more land to build a factory, even when they were told the factory would bring jobs).

We believe that the government has an important role in dealing with many of the issues we are facing as a society. But it needs to start by choosing some area of action (for example, in richer countries this might be helping people adapt to disruptions caused by trade or by technology), design and implement successful policies, and then slowly move forward. This is why governments must continue to be willing to be innovative and to carefully evaluate their actions.

My own personal experience in the past two decades has been that there are many really competent, well-meaning and powerful bureaucrats who are very willing to greatly improve the responsiveness and efficacy of government programs. Often, all they need is access to the relevant evidence on what works and what does not, and dedicated technical advice and staff resources to help design, monitor, and execute a scale-up strategy based on that evidence.

“Good Economics for Hard Times”, by Abhijit Banerjee and Esther Duflo.
You have both mentioned that you are part of a movement that is changing development economics to focus on using randomized control trials to test and better inform government policy and practice. What, if any, role is there in this movement for philanthropists, social purpose organizations, and/or businesses?

Esther: A huge role! The movement is made of researchers, practitioners, NGO activists, people who are themselves living in poverty, and, of course, funders. Most directly, philanthropists like Mohammed Jameel and a number of foundations (such as Gates and Hewlett) have played a major role in the financing of J-PAL. This funding has allowed us in the last 15 years to build J-PAL into a professional organization with an incredibly strong management team that can very efficiently implement any program in dozens of locations worldwide. As a result, researchers can take on not only more projects, but also much more complex projects, and often receive seed funding for them.

Funding has also allowed J-PAL to build a really strong policy group that makes sure the lessons from this cutting-edge research are turned into action on the ground. And we have been able to invest in building the capacity of policymakers, donors, and researchers to use evidence in the fight against poverty. More indirectly, by insisting that what they fund is backed by evidence, philanthropists and social purpose organizations can contribute to create a culture in the development ecosystem where evaluation is the norm.

Your work involves building the case for government policy and interventions based on evidence. Can you share an example of how a socially minded organization has effectively partnered with government to help it adopt research-tested best practices and policies with great effect?

Esther: J-PAL partnered with the Gujarat Pollution Control Board (GPCB) to help it reform and revive a third-party environmental audit system. Gujarat is the Indian state with the fastest industrial growth, and, partly as a consequence, is also the state with the fastest growth in pollution. Some of the most polluted cities
on Earth are in Gujarat.

A few years ago, the Supreme Court ordered the government to set up a third-party audit system, where each plant in highly polluting sectors would have to obtain (and pay for) an annual audit administered via a private firm. The audit report would be shared with the GPCB, which could impose sanctions. This is a great idea in principle, since it forces the polluter to pay and allows the government to harness private competencies it does not possess. Unfortunately, the structure of the program created a natural conflict of interest between the auditor and the firm: since the firm chooses to hire and pays the auditor, the latter has every reason to give it a clean bill of health. The result was that while most audit reports showed pollution levels for firms to be just below the acceptable threshold, true levels of pollution that we measured via back-checks for the same firms were much higher. Following extensive conversations with GPCB over many months (which turned into a fruitful collaboration over several years), we proposed a three-part solution to alleviate the apparent conflict of interest and make the auditor loyal to society as opposed to the audited firm.

First, we proposed breaking the financial link between the audited company and the auditor, which was achieved by creating a central pool from which auditors would be paid. Second, we proposed making the monitor feel responsible for accuracy. In the first year, this was achieved by threatening to discontinue their participation in the scheme for low accuracy, and in the second year by rewarding them with higher payments for high accuracy. Finally, we began measuring accuracy through back-checks. We designed an RCT to test this new system: audit-eligible firms were randomly assigned either to the status quo system or to the new system. We found audit reports were much more accurate under the new system. Moreover, perhaps because of greater scrutiny, pollution (measured in an independent endline survey) also declined, particularly for the worst offenders.

Based on these results, GPCB successfully convinced the court and state administration to change the rules governing the scheme’s implementation. These changes came into effect in 2015, with new guidelines requiring the random assignment of environmental auditors to firms, instituting back-checks, and imposing a fee schedule for participating businesses.

Abhijit Banerjee, Esther Duflo, and Michael Kremer, co-laureates of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, at the Nobel Prize Award Ceremony 2019 in Norway.

What lessons do you hope philanthropists, social purpose organizations, or government actors might take from J-PAL’s work with governments?

Abhijit: The most important lesson is that evaluation is essential to move beyond instincts, ideology, and inertia that still drive so much of decision-making in governments. Things that seemed to be obvious wins to governments (like using technology to monitor and reduce absenteeism of frontline workers) turn out not to be as effective as they thought. And things that might have sounded like a waste of effort (like identifying and leveraging local social influencers to convince parents to immunize their children) turned out to have a big impact (even bigger than monetary incentives).

We hope that philanthropists bring more of a venture capital mindset to the fight against poverty and climate change. This has two dimensions: first, by funding research that helps design, pilot, evaluate, and scale-up innovative approaches and making this an important part of their overall investment; and second, be prepared to be surprised, or frankly to fail! Like other innovations that raise venture capital funds, the fact that some potential innovations fail is normal; the key is knowing why they failed so we can learn from the mistakes before we go about funding the next big program. And when they succeed, use rigorous evidence to prove it, to attract funding and support, and share key lessons on how best to scale it up. Doing all of this within the context of a government system can help to unlock enormous leverage on the initial investment.

In fact, this was the motivation to launch J-PAL’s Innovations in Government Initiative (IGI) in 2019. We now have a substantial and growing body of rigorous evidence on what works or not in poverty alleviation and climate change. Our hope is that IGI can work with national, state, and local governments around the world to take many of these innovative proven programs and policies to scale. Our experience working with partners as diverse as the United States federal government,  state governments in India, and national departments in Mexico or Zambia has been that often all it takes is relatively inexpensive but expert technical advising from J-PAL’s staff embedded on these projects to leverage the massive scale and resources of the government. For all these reasons I am very excited to be co-leading IGI with Iqbal Dhaliwal, our Global Executive Director, who has extensive experience working in and with governments. We hope to use collaborative philanthropy to raise the resources to greatly expand this very important work.

What motivates you to press ahead with your work at J-PAL and what advice do you have for young researchers who wish to follow in your footsteps?

Abhijit: With J-PAL, we get to work on the most pressing questions of our times (from poverty to climate change), partner with incredible people all over the world (the researchers and community members who are part of the “movement” we described), and work alongside our truly extraordinary staff. We are surprised, humbled, and learning all the time. We work with the poor and listen to what they have to say. Sometimes we even feel that we are contributing to making the world a better place. We even get a salary and honors and awards to boot. It is hard to imagine a better job!

Esther:
The most important thing young researchers and social investors can do is get out in the world and get experience in developing countries in some way — volunteer with an NGO, find a job with a research project, or even just travel the world with a backpack. I don’t think you can start to understand how people live their lives, the problems and opportunities and beauties that exist in the world, without having seen it and really living it.

Finally, you are partners in life and work. What have you learned from each other?

Abhijit: Esther is an amazing person. Being with someone you can look up to is always great. It is not that we talk about work all the time. But when we want to, we can talk shop very efficiently. We immediately understand each other and don’t have to spend time explaining concepts or talking around ideas — we can speak bluntly. I always knew that Esther was amazing, but working with her really proves that. She has the ability to keep 100 balls in the air at the same time. That is a talent that is really valuable in the kind of work that we do. She has an amazing capacity for detail.

Esther: I have learned many things from Abhijit. One of the most important is that it is not enough to keep the train running. You also need to keep in mind where you want it to go. Sometimes you must be willing to change its course, even if you started with the most detailed plan.

Esther Duflo is the Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics in the Department of Economics at the Massachusetts Institute of Technology and a co-founder and co-director of J-PAL. In her research, she seeks to understand the economic lives of the poor, with the aim of helping to design and evaluate social policies. She has worked on health, education, financial inclusion, environment, and governance.

Duflo has received numerous academic honors and prizes including 2019 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (with co-Laureates Abhijit Banerjee and Michael Kremer), the Princess of Asturias Award for Social Sciences (2015), the A.SK Social Science Award (2015), Infosys Prize (2014), the David N. Kershaw Award (2011), a John Bates Clark Medal (2010), and a MacArthur “Genius Grant” Fellowship (2009).  With Abhijit Banerjee, she wrote “Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty,” which won the Financial Times and Goldman Sachs Business Book of the Year Award in 2011, and the recently released “Good Economics f or Hard Times.”

Duflo is the Editor of the “American Economic Review,” a member of the National Academy of Sciences, and a Corresponding Fellow of the British Academy.
Abhijit Vinayak Banerjee is the Ford Foundation International Professor of Economics at the Massachusetts Institute of Technology. In 2003, he co-founded J-PAL and remains one of the Lab’s directors. Banerjee is a past president of the Bureau for Research and Economic Analysis of Development, a Research Associate of the NBER, a CEPR research fellow, International Research Fellow of the Kiel Institute, a fellow of the American Academy of Arts and Sciences, and of the Econometric Society. He has been a Guggenheim Fellow, an Alfred P. Sloan Fellow and a winner of the Infosys Prize.

Banerjee has directed two films and is the author of numerous articles and four books, including “Poor Economics,” which won the Goldman Sachs Business Book of the Year, and “Good Economics for Hard Times,” both co-authored with Esther Duflo. He has served on the U.N. Secretary-General’s High-level Panel of Eminent Persons on the Post-2015 Development Agenda and is a co-recipient of the 2019 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.