Wednesday, August 17, 2011

the richer you are, the more 'right' decisions are made for you

TechnologyReview | Around 865 million people worldwide live on the daily equivalent of what 99 cents buys in the United States. To create effective aid programs for these people, it helps to grasp the nuances of life in extreme poverty. For instance, hunger does not necessarily drive the poor to obtain more food whenever they can; in India, they allot about 50 percent of their income to food and will resist spending more if it only means consuming larger quantities of the same bland grains they usually eat.

In financial matters, the poor often use microcredit in unexpected ways: some women in Hyderabad, India, take out small loans at 24 percent, then put the money into savings accounts that pay 4 percent. Receiving the high-interest loan compels them to cut costs enough to make this dubious transaction worthwhile.

"We are not rational, fully informed people," says Esther Duflo, PhD '99, professor of poverty alleviation and development economics. "That's true for us, and that's true for the poor."

Now, Duflo and economics professor Abhijit Banerjee have distilled their insights about global poverty into their first book together, Poor Economics.

As directors of MIT's Abdul Latif Jameel Poverty Action Lab (J-PAL), which they helped found in 2003, Banerjee and Duflo have become highly influential in development economics, which studies the world's poorest countries and recommends ways to spur growth. They are leading exponents of running randomized trials—field experiments—to see which programs are most effective and affordable. J-PAL brings the results to governments and nonprofit organizations.

One reason well-designed aid programs matter, the authors believe, is that the poor are often faced with an overwhelming number of difficult decisions—far more than the well-off must contend with. "The richer you are, the more 'right' decisions are made for you," Banerjee and Duflo write. Many of these decisions involve essentials we take for granted, such as the quality of drinking water. J-PAL-backed research has, among other things, laid the foundations for efforts that have inexpensively treated millions of African children for intestinal worms, improving their school attendance in the process.

Surprisingly, Banerjee never deeply explored development economics until he was an assistant professor at Harvard in the early 1990s. After designing a course on the subject there, he moved to MIT, where interest in development economics was soon on the rise. "That was very fortuitous," says Banerjee. One of his students was Duflo. "You could see that she had the ability to get a huge amount done and done right, very quickly," he says.

Since 2003, economists affiliated with J-PAL have conducted 267 research projects in 42 countries, and the lab now has offices on five continents. "It's exceeding expectations," Duflo says of the lab. "Our objective for J-PAL is to serve as a flagship for a larger global movement toward development economics projects."


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