2019 Nobel laureates in economics

J. Soedradjad Djiwandono Emeritus Professor of Economics, Faculty of Economics and Business, University of Indonesia

IO – The recipients of the Nobel Prize in Economics for 2019 were recently announced by the Nobel Committee; the prestigious award was jointly shared by Professors Esther Duflo and her husband Abhijit Banerjee from the Massachusetts Institute of Technology (MIT), along with Michael Kremer from Harvard University. Their contribution consisted of an experimental approach, applying a powerful research method called “randomized controlled trials” (RCTs) in the effort to alleviate global poverty. Professors Duflo and Banerjee primarily work in India, while Professor Kerner focuses on Kenya; their studies cover a number of other countries as well.

“RTCs” customarily refers to clinical research in testing the effectiveness of new treatments or medicines. However, here it is used to test the effectiveness of methods of poverty eradication in education, health, access to credit and others, by eliminating bias to get a more accurate picture of the roots of poverty, as suffered by millions of people. According to a World Bank Report, more than 700 million people live in extreme poverty, defined as “…those living on less than $0.99 per day.

I am not familiar with the technique and I do not pretend to understand the technical details of RCTs. My discussion here concerns the contribution of their studies to poverty eradication (as development efforts and policy) and its significant to the study of economics itself.

Works of 2019 Economics Nobel Laureates
Let us briefly scan the works which became the basis for the decision to award this year Nobel Prize to the three academicians. Professors Banerjee and Duflo co-headed an institution which they founded at MIT in 2003, the “Poverty Action Lab”, which later became the “Abdul Latif Jamel Poverty Action Lab” or J-PAL. Their works have been summarized in a seminal book they jointly wrote and published in 2011, entitled Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty.

Using RTCs, the studies evaluate different programs of poverty eradication in education and health and access to credit, along with other issues. While their study was focused on India, research was also carried out in a number of other countries as well.  In fact, by 2010 240 experiments in 40 countries were conducted or engaged in, as reported in the book. Experiments also included studies in Indonesia. A large number of organizations, researchers, and policy makers have embraced the idea of randomized trials.

In Indonesia, Professor Duflo’s studies examined poverty and programs for its eradication, among others in an urban slum of Bandung – a kampong called “Cicadas” (erroneously transcribed in the book as “Cica Das”). The way she described the daily problems of poor is very interesting: how they were kept in a poverty trap, based on the experience of a man named “Pak Sudarno” who had nine children, along with the life of a woman named ‘Ibu Tina’, who later became a single parent; both resided in Cicadas, Bandung.  

Regarding Pak Sudarno, despite access to family planning services and his understanding of constraints from cultural values and social pressures, he ended up having 9 children and thus could not escape the poverty trap. At the beginning he wished for a big family, but ultimately feeling victimized by it. In the case of Ibu Tina, she had to accept being caught in a poverty trap, as a result of her bad luck: she had been a victim of check fraud, but when she tried to bring the case to the authorities she ended up having to spend more than the amount of money involved to pay off corrupt local officials and police. To add to the misery her husband abandoned her and she had to take responsibility for several children and a sick mother. The most telling aspect is the way the two academicians describe people stuck in a poverty trap as facing steep risks on a daily basis in their lives as “barefoot hedge-fund managers”; such an explanation is certainly helpful in understanding what those caught in a poverty trap must face (Duflo and Banerjee, 133).

I should also mention another study by Professor Duflo, as reported in Poor Economics, on Indonesia’s other cases that have been in the news and on social media. Professor Duflo basically attempted to demonstrate that making an evaluation based on generalized concepts and understanding may well result in distorted or even faulty conclusions. She cites cases running experimental tests using RTCs on the “New Order” program known as “SD Inpres”. This basically came into force based on a Presidential Instruction to erect primary school buildings all across Indonesia, particularly in those areas with high numbers of unschooled children.  The evaluation of such a program would tend to conclude that this top-down policy by an authoritarian President is inherently a recipe for failure. Instead, in her overall report on the experiments she conducted drawing comparisons between different groups, she concluded that the estimate of returns to education are very similar to what is commonly found in the United States (Duflo and Banerjee, p 82). In other words, it was a success story in spite of the way it was implemented and the ownership of the program. It is also curious to read Professor Duflo’s assessment on the program, commenting on the source of its financing that “Suharto was a dictator and was known for being particularly corrupt…[but] (my addition) it was in Suharto’s Indonesia that oil money was used to build schools” (Duflo and Banerjee, p. 254).     

I think we all exhibit a tendency to rely on our own perceptions, which may not be accurate and differ from the way people really experience a reality like being poor and living in a poverty trap, and we thus confirm an erroneous understanding of the issues. If such a misunderstanding or inaccuracy involves those who are in power as decision-makers in poverty eradication policies, it could easily lead to a wrong diagnosis on the issue of poverty and the subsequent failure of poverty eradication policy implementation. Professors Duflo and Banerjee mentioned three things, which play some roles in why and how of this development, they called them 3 Is, Ideology, Ignorance and Inertia. Many policies specifically intended for poverty eradication fail in achieving their objectives, in general due to faulty understanding regarding the problems at the outset. This is the message I derived from the findings of the works as narrated by the two academicians in Poor Economics.  There are many more narratives that explain why the wife-husband professorial team subtitled the book “a radical rethinking”. 

I have yet to study any of the works of Professor Michael Kremer. My only information at this point is that he is a chaired professor at Harvard University, with the title of “Gates Professor of Developing Societies”, and that his work also relies on RTS, mainly about poverty eradication in Kenya.

Understanding the Nobel Prize in Economics
A Nobel Prize in Economics is awarded for outstanding contributions to the field of economics, but also in social sciences (including political science, psychology and sociology) if they impact economic issues. It is not part of the original field of awards that Alfred Nobel stipulated in his will in 1895. Instead it was established only in 1968, by a donation from the central bank of Sweden, Sweriges Riksbank, the oldest central bank in the world. The first Nobel Laureate in Economics was awarded jointly to Professor Jan Tinbergen from the University of Rotterdam (later Erasmus University), The Netherlands and Ragnar Frisch from the University of Oslo, Norway.

What is so special about the 2019 Nobel Laureates in Economics is that the three recipients are relatively young. Prof Duflo, at 46, is the wife of Prof Banerjee, 58, and Prof Kremer is 56. Their works in poverty eradication are of course very special as poverty, which goes hand in hand with inequality, have become a subject of intense discussion in mainstream economics, particularly after the publication of the book titled Capital in The Twenty-First Century, written by French Economist Thomas Piketty, in 2017.

As a development economist from an older generation I was inculcated with Professor Kuznets’ assertion in the 1950s that income inequality in development forms a bell curve, i.e. that it goes up during the early stages of development, plateaus at some stage and slopes downward afterwards. Accordingly, income inequality was a problem of poor and developing economies and one which would disappear with development. The Piketty study, bolstered with powerful support of modern computer technology able to process enormous data of tax returns from OECD countries, including data on both income and wealth, demonstrated that inequality did not in fact subside with development. It follows that income (and especially wealth) inequalities are also faced by developed and advanced economies. In fact, in its 2011 report on the map of global risks, the World Economic Forum put income inequality as one of primary social risks that any economy faces, together with other clusters: economics, climate change, geopolitics and technology.

It is also special as at the age of 46, Professor Esther Duflo is the youngest recipient of the Economics Nobel Prize, either male or female, and only the second woman to be thus awarded. The first was the late Professor Elinor Ostrom, the University of Indiana academic who was recognized jointly with Professor Oliver Williamson of the University of California, Berkeley in 2009. Their works were on economic governance as “new institutional economists”.

Final Notes
If we perceive the annual announcement of winners of Nobel Prizes as messages that the Nobel Committee wishes to convey to the world (as I assume), this year’s decision should be interpreted as signalling to the world that all should take efforts to eradicate poverty more seriously. So far, public debate on this issue has flared up only in a few cases, primarily in controversy aroused by the award of the Nobel Peace Prize.  

As mentioned above, studies of the current recipients’ awards reveal they indeed claim a radical rethinking way of the fight on poverty. The description of the roots of poverty take into consideration the way the poor think, understand and perceive the issues. In the Preface to Poor Economics, the authors specifically mention that “the book is ultimately about what the lives and choices of the poor tell us about how to fight global poverty”.

In this way, the diagnosis of the problems and challenges of poverty could be made sharper, and ultimately provide a better chance for success in efforts to eradicate poverty. They do not claim to offer any “magic bullets” in solving complex poverty problems, but I think they are right to state that their studies with the methods applied resulted in positive results and hope. And they are right in stating that hope is vital and knowledge critical in poverty eradication policy (or any policy, for that matter).

I think that even if the pace were very slow, economists are reminded by the Nobel Committee that they should be more down-to-earth in terms of how economics can contribute to human efforts for welfare and development.  If decisions about who the Nobel Prize should be awarded to are interpreted as mentioned above, we should look at the list of the last few years.  Last year, the award went to Professors William Nordhaus and Paul Romer for their works on sustainable growth, which was more specifically on how climate change and technology have affected economies. Both climate change and technology are considered by the same WEF report as part of the global map of risks. 

In 2017 the Nobel Prize for Economics was awarded to Prof Richard Thaler for his work in behavioral economics. His book Nudge and Duflo and Banerjee’s Poor Economics were in fact both winners of best book awards and best-sellers. I think this reminds us that economics is not an exact or hard science as many in the past have accused it of being. After all, economics is a theory or science about how one makes choices in the face of alternatives constrained by limits. In other words, it is a study about behavior – of how one decides to make optimal choices. It is thus a “behavioral science”. Let’s hope economists get the message right.