Looking for the Virtuous Cycle
Tuesday, July 1, 2008
About one billion people live in what the World Bank calls “extreme poverty,” with incomes of less than a dollar a day. Often, they have little access to clean drinking water. Food is sparse and nutrient-poor. Sanitation and healthcare are rudimentary. The results are illness, misery, and shortened lives.
This tragedy is hardly obscure. Rock stars, business leaders, politicians, and academics have all offered advice—and, in many cases, action—to ease the plight of the global poor, but the problem persists.
“Unfortunately, we don’t know very much about what works and what doesn’t,” says Esther Duflo, a 35-year-old economist at the Massachusetts Institute of Technology. Along with Abhijit Banerjee and Sendhil Mullainathan, she founded the Abdul Latif Jameel Poverty Action Lab in Cambridge (the lab is supported with a gift from Abdul Jameel’s son, Mohammed, a Saudi businessman and philanthropist who graduated from MIT). Duflo’s research tries to discover, “on the most micro level, how people make decisions, and how poverty changes the way people make decisions.”
Effective aid not only has to make the world safe for small business and intermittent labor; it must also create the sort of capital markets that help larger businesses flourish.
Duflo and her colleagues seek answers primarily through their pioneering work in randomized experiments. Such experiments are common in medicine: one group, for example, gets a new asthma drug, while the other, a control group, is given the current standard of care. But, up until recently, randomized experiments have been rare in social science. The main reason is that, unlike in the case of medicines, it is quite difficult to control for the multitude of factors that go into economic decision-making.
For instance, economic theory says that people respond to incentives. So policymakers in a developing country might choose to pay poor families to have their children immunized. Perhaps immunization rates will rise. But do we know for sure that the payments are the cause? Other simultaneous but unrelated events—from a change in nurse absentee rates at health clinics, to better roads connecting those clinics with local villages—may be playing a larger role. And even if we can control for these factors, do we know whether the payments are being doled out in the most effective way? A better, randomized experiment might try a number of different approaches in neighboring villages. Perhaps if mobile immunization clinics come to the villages on a certain well-advertised day—and parents are paid—immunization rates will increase more than they would under other combinations of variables. Having good data will then let policymakers scale up what works best.
Duflo works with nongovernmental organizations (NGOs) or cooperative governments to create such trials. She also looks for places where natural randomized experiments are already taking place. For instance, the recently implemented Education For All Program in Kenya enabled 140 randomly selected schools in a western region to hire an additional first-grade teacher and thus cut the size of each class in half. Duflo and her fellow researchers found that just reducing class size had little effect on the overall performance of students. But if the same class were divided in two by academic ability—with one teacher taking the top 50 percent of achievers and the other teacher taking the bottom 50 percent—then children in both classes achieved better test scores. The teachers themselves were also more likely to show up for class.
Duflo cites three main benefits of such randomized experiments. For starters, “it’s the truth,” she says, or as close as one can come to it in our messy universe. Second, such trials may be “complicated to do right, but they’re very simple to explain.” Policymakers may choose to ignore the outcomes of randomized trials, but there are no fuzzy caveats to confuse them. Third, the experiments allow you to test many variables. Charge for malaria-preventing bed nets, or give them away free? Pay to immunize, or pay and immunize on a specific day each month using mobile immunization clinics that come to the families themselves?
When someone lands a good, middle-class factory job, the first thing he will purchase is a TV.
While committed to randomized experiments, Duflo has also been shaking up the world of development economics with some of her recent descriptive studies. In October 2006, she and Banerjee, a Ford Foundation Professor of Economics at MIT, published a paper on “The Economic Lives of the Poor,” defined as those living on $1 to $2 a day. Across 13 countries, they looked at how the very poor lived and the choices they made. In Udaipur, India, for instance, 37 percent of those living on less than $1 a day had gone without food for an entire day during the past year. In rural Udaipur, none of the extremely poor households had access to a latrine or tap water, and only 8 percent had electricity. With limited caloric resources and no ability to maintain good sanitation, some 43 percent of adults had a health condition that affected their daily living. As a result, they had a tough time working consistently, which exacerbated the problem. “When the poor come under economic stress, their form of ‘insurance’ is often eating less or taking their children out of school,” Duflo and Banerjee wrote.
Most of the extremely poor people the two researchers studied were self-employed. Women, for instance, sold dosas (rice and bean pancakes) or mended saris. The microfinance revolution of the past three decades has focused on giving small loans to poor entrepreneurs like these, so they can become more successful, middle-class business owners. But in a December 2007 paper on two segments of better-off people in developing economies—those living on $2 to $4 a day, and those living on $6 to $10 a day—Duflo and Banerjee concluded that these middle-class populations were not dominated by successful entrepreneurs.
“The single most important characteristic of the middle class seems to be that they are more likely to be holding a steady job,” they wrote. Unlike the occasional dosa sale, a salaried job with steady paychecks provides enough stability to encourage people to start investing for the future. They spend more on healthcare, which enables them to keep working. They keep their children in school, helping the children land middle-class jobs later on. “It’s a virtuous cycle,” Duflo says.
‘The single most important characteristic of the middle class seems to be that they are more likely to be holding a steady job.’
Since microfinance is the development topic of the hour (Grameen Bank founder Muhammad Yunus won the 2006 Nobel Peace Prize and was profiled last year in THE AMERICAN), this finding has some important implications. It’s not that microfinance is misguided, Duflo stresses; it “plays a role in helping the poor live a somewhat better life.” But a key difference between a solo dosa stand, and a packaged dosa factory that employs thousands of full-time workers across India, is more capital than any microfinance program is likely to provide. While the social benefits of entrepreneurship are undeniable, the world’s poor already bear an enormous risk in terms of their health and their children’s survival. Economists, “sitting there in their tenured positions,” like the idea of contract labor and flexibility, Duflo says. But few professors would want to piece together an uncertain income from a few adjunct gigs, a few speaking gigs, and an article here and there. Likewise, when it comes to the world’s poor, “what they want is a job.” Effective aid not only has to make the world safe for small business and intermittent labor; it must also create the sort of capital markets that help larger businesses flourish.
Duflo, who was born in Paris in 1972, says she has always been drawn to questions of poverty and development. Her mother, a pediatrician, worked with victims of war through an NGO. Esther took her first trip to a developing country (Tunisia) at age two. Since then, she has often found herself asking, “Why are some people living in these circumstances?” She began her academic life studying history at the École Normale Supérieure in Paris, but switched to economics after spending a year in Russia, when she worked with Jeffrey Sachs, now at Columbia University. She received her Ph.D. from MIT, attended Princeton when Ben Bernanke headed the economics department, and in 2002 won the Elaine Bennett Research Prize, which honors a woman economist doing outstanding work at the beginning of her career.
Now she travels every summer and winter to the developing world for research. She points out that even very poor people do not spend all their money on necessities. Families in Udaipur, for example, spend about 10 percent of their income on festivals and 5 percent on alcohol and tobacco. When someone lands a good, middle-class factory job, the first thing he will purchase is a TV. “People are not that different,” Duflo says, whether they live in the United States or in a developing country slum. “They all want to have a good life.”
Laura Vanderkam is a writer living in New York City.
Photograph by Jared Leeds.