‘The perfect can be the enemy of the good’ Poor Economics has been hailed as a radical book on addressing poverty. The book argues that anti-poverty policies are flawed because of lack of understanding of poverty and its reasons. Emphasising that poverty can be eradicated, MIT professors Abhijit V Banerjee and Esther Duflo, who have first-hand experience of working with poor people worldwide over the past 15 years, have laid down a fresh approach based on learning from past experiences. Excerpts from an email interview with FE’s Rajiv Tikoo:
If we address poverty by breaking it down into smaller boxes, is it not one more problem to add up a critical number of complementary boxes to get an effective set of solutions?
Our approach has nothing against the idea that two thingssay improving schools and changing parental attitudes should go together, though we often caution taking this on faith and, therefore, recommend trying them out separately as well as together. Indeed there could be 15 elements in the ultimate school reform package that comes out of the process of experimentation and learning. The main point is not to get stuck because you think that the ideal package should have 15 elements, but we can only have two right now, and, therefore, you give up on the whole thing. Many interventions do lots of good even on their own, and it is always worth remembering that the perfect can be the enemy of the good.
Since the reasons of poverty are usually context-specific, does it mean we would be better off focusing on local solutions rather than global policies?
The fact that they are context-specific just tells us that we should not expect that there will be one solution to the problem of poverty everywhere and that we should try to identify the problems before trying to solve themit does not say that we cannot transport lessons from one location to another, once we recognise their specificities. Our findings suggest that the solutions to a specific problem that work somewhere often work elsewhere as well. For example, it is clear that you do need to treat children for intestinal worms if there are no worms in the area, but on the other hand if children in that area seem to have high levels of anaemia (not because of worms, presumably) then the general lesson that treating anaemia would make those children more productive in school (just like deworming does where there are worms) still applies.
What do you think of the Indian governments emphasis on financial inclusion as a solution for poverty alleviation?
Is there really such an emphasis One could be fooled. The way the microfinance sector got treated by the state of Andhra Pradesh and the fact that the government at the centre did not do more to protect it suggest that as of now financial inclusion for the poor is not really on the front-burner.
Having said that, financial inclusion is definitely very important. Poor households are definitely hurt by the lack of access to a cheap and easy way to save and borrow. However, it is worth saying that mere access will not fix all the problems of the poor, or even all their financial sector problems. For example, access to insurance products is probably not going to be sufficient to ensure that most households that need them take them up. The same is true of savings accounts.
You have found modest results in microfinance What is the way to make it deliver better?
Microfinance is very effective at delivering small amounts of credit under conditions that offer little flexibility to the borrower with regards to when and how she repays. The effect that we find on household businesses and welfare are relatively modest, but they are real (and you have to remember that microcredit has been reaching a lot of people; so this modest impact needs to be multiplied by millions!). Research by Rohini Pande and co-authors has shown that the impacts could be greater if credit was structured a little differently, in particular if there was more flexibility in the terms of repayment in the loans. But this might create other problems. Moreover, it is possible that in order to have really substantial effects on poverty reduction, the loans have to be large enough for a substantial expansion of the business, and at least right now, most MFIs are unwilling to offer such large loans.
How can Indian banks get more buck from priority sector lending without compromising the purpose of having it in the first place?
The trade off, as you imply, is that when you expand the set of firms that are eligible to receive priority sector credit, you might get more credit-worthy firms, but that might go against the goal of helping small firms and firms in sectors that have other benefits (creating employment, for example). There are two things to emphasise here: one is that while the default rates and servicing costs for priority sector loans are higher in our work, we did not find them as large as you might think based on the amount whining that goes on about them. Second, as India grows, more and more firms will need to adopt cutting-edge technologies just to survive and therefore even small firms will need to be much larger. Therefore, the definition of what is a viable small firm will need to be adjusted upwardsincluding bigger firms into the priority sectormay be necessary for this reason.
That said, we have always said the priority sector inclusion should be partly based on age of the firmnew firms need to get priority over ageing firms that have failed to grow.
Perpetuating poverty is also in the interest of some sections. How important and viable is it to address this perversity?
It is easy to overstate this case. We dont mean to say that there is no one who benefits from perpetuating poverty. But quite often, poverty persists or programmes fail even when no one particularly wants that outcome, just because the solution was not well thought out, or not well implemented: We call this the 3I problem in the book (the three Is are ideology, ignorance, inertia). In some sense, saying that poverty persists because that is what the powers that be want, can become a way to shield ourselves from our collective responsibility to do what we can. When we see a programme failing, we should resist assuming that it is the result of a conspiracy and ask ourselves whether the programme has been implemented in a way that makes it likely to succeed. Or can we do better
You have taken a different position in a space dominated by people like Jeffrey Sachs and William Easterly. Did it make the work doubly challenging?
Not really. We have always tried to do the research and the work that we thought was important, without paying much attention to what is being said in the public discourse. In our day to day work in the field or on specific programmes, they dont come in.
How would you compare Poor Economics with Dean Karlans More Than Good Intentions?
We were, as Dean very generously points out in the book, his PhD advisors, so it is no surprise that the books share a common approach and point of view. However, More Than Good Intentions is more focused on describing the process of doing research in the field and more specifically, randomised experiments (and does an excellent job of conveying the joy and the energy that Dean brings to his work), while Poor Economics tries to draw general lessons from a range of studies, not all randomised experiments.
Source: The Financial Express
Published on 26 June 2011