Duflo and Banerjee’s Poor Economics is a developmental economics book which aims to change the way we think about alleviating poverty in developing countries, shifting our focus from the ‘big questions’ and ‘big policies’ towards evidence-based changes and nudges at the margin. It does this by clearly establishing the conditions in which the poor live and how they react to certain changes in their environment, and with these in mind, then considers the changes that each policy will bring about, therefore being able to effectively consider the efficacy of policies in certain areas, such as consumption habits, income growth, and health. Through the abandonment of the emotional approach, that can often permeate such debates, for a calculated analytical approach and lots of evidence, this book is a highly successful evaluation of such attempts to improve the lives of the poor in developing countries, with meaningful policy implications.
The book ends with the statement that although we are largely unable to predict when and where rapid growth will occur in developing countries, we can make it more likely that when there is a ‘spark’ with the potential for causing growth, it will catch. It suggests that if citizens are well fed, healthy, and properly educated, while also feeling secure and confident enough to invest in their own children and let them leave to the cities to find jobs, then the chances of rapid growth suddenly occurring are raised.
Due to the unpredictability of the growth, Duflo and Banerjee suggest several features of a general social policy which would make life bearable in the meantime. These include providing the poor with information through engaging campaigns; reducing the risk and areas of their lives over which the poor bear too much responsibility; and that where markets are missing for the poor, in the absence of technological or institutional developments making these markets available, government provision may be necessary, or even just the creation by the government of the conditions for the markets to develop. They assert that poor countries are not doomed to failure, but that normally failure results from three aspects of faulty policies, namely ideology, ignorance and inertia, with failure and low expectations feeding on themselves to an extent.
However, they also suggest that success feeds on itself, and therefore the government should not be afraid of handing things out, even cash, in order to kick-start virtuous cycles. Their overall message is that poor countries need to make informed decisions about their policies, looking at data, normally from randomised control trials, and thinking about incentives, such that reforms can be made at the margin of both new and existing structures.
My favourite argument was that against the use of microcredit as a revolutionary tool, and the analysis of the tiny businesses of the poor that fed into that conclusion. Duflo and Banerjee present the many businesses of the poor as tiny and totally undifferentiated from those around them, such that although loans to the poor will initially produce very high marginal returns, the overall return will stay very small unless a much larger loan is provided subsequently in order for the entrepreneur to make the jump to a new production technology. Unfortunately, the very structure of microfinance loans prohibits these large jumps from being made, as they require little uncertainty and strict repayment schedules, meaning that, for the most part, microfinance has a very limited ability to drive growth, and that the poor’s businesses are destined to stay small. Furthermore, despite the claims of microfinance’s proponents that the poor constitute billions of revolutionary untapped entrepreneurs, evidence shows that the poor in would actually prefer to have the less risky option of a salary or wage, shown by the fact that most of the poor in India want their children to grow up to be government workers. Therefore Duflo and Banerjee suggest that what is needed is both a way to fund medium-sized businesses in developing countries, and the creation of the conditions whereby young adults can safely move to the more dynamic cities, where they are more likely to end up in a job with a wage, rather than tending to a family-owned farm.
Minor flaws are that the book does little to differentiate between the poor in different countries, assessing the conditions for all countries as being very similar, despite varying customs, political structures and religious structures meaning that the poor will react differently to the same stimuli from country to country, and that despite the discussion of poverty traps and how they work, the question of the extent of their existence is never fully answered or resolved.
However, in spite of these, this book is a highly accessible, interesting, and thorough assessment of developmental microeconomics which, in its consideration of marginal changes, adds a more precise and reasoned aspect to a debate which until now had largely concerned big questions and big responses.