Reproduced below is a 2011 blog by Indore-based activist Rahul Banerjee on “Poor Economics”, a widely acclaimed book by Abhijit Banerjee and Esther Duflo, who have been conferred this year’s Nobel Prize in economics. The blog has been recommended as a must read for those who wish to understand the economics of poverty alleviation suggested by the economists:
Recently I read a seminal book on development economics and especially on eradication of poverty that is a must read for all development practitioners. Poor Economics is exactly what its subtitle claims — “a radical rethinking of the way to fight global poverty”.
Radical in the sense that though the authors, Abhijit Banerjee and Esther Duflo of the Massachusetts Institute of Technology, are firmly positioned within the neo-classical development economics paradigm they nevertheless question large macro-economic policies and advocate instead the taking of small steps suited to local conditions and building these up into a quiet revolution.
In fact one can’t help wondering whether the title is a pun casting aspersions on the poverty of standard neo-classical economics! It is a very long time since I read such a sensible book about development put together from the results of high quality economic research in a readable narrative that is accessible to the lay reader also.
Long time grassroots practitioners of rural development will fully appreciate the way in which the authors have given weightage to the innumerable inhibiting factors that the poor face which are not easily removed through macro level magic bullets. They show tremendous respect for the poor and place the blame for their miserable situation squarely on the fact that they are provided little support to overcome the huge mountain of difficulties that they face.
Especially commendable is their analysis of micro-finance institutions and their conclusion that these are at best providing a much needed financial service to the poor for their small businesses whether farm or non-farm and cannot really dent poverty or address the inherent unprofitability of these businesses across the board.
The tendency of MFI buffs to quote a few success stories and paper over the huge problems of the sector has been ably critiqued by the authors through the results of their large sample randomised control studies.
In these studies conducted for a number of development interventions ranging from education and health to agriculture and microfinance, randomly selected households who are beneficiaries of some development intervention are studied and compared to another set of randomly selected households who have not received these benefits but are generally living in similar socio-economic circumstances.
It is the results of these studies which show that macro level policy initiatives even when seemingly successful do not really bring about massive positive changes. In most cases the results over a large sample are disappointing.
The book deals a lot with the work of NGOs and ignores the work of mass action based groups totally. Those who are engaged in rights based mass action work within the development sector will naturally be critical of this. The stark fact is that failure of judicious regulation or policy making by governments at the macro level takes place not only in developing countries but in developed ones also.
The meltdown of 2008 occurred due to both a regulatory and a policy failure and it continues to haunt not only the USA but all developed countries. Basically the problem is the dominance of financial capital and its rent seeking tendency (euphemistic economics jargon for just plain greed!).
This is why ultimately the small businesses of the poor cannot succeed because this rent seeking emanating from Wall Street seeps down through to the moneylenders and traders who dominate the local markets and also influence the local politicians and bureaucrats.
This is where politics and political economy are important even if in some cases they may not have the primacy that the Marxists are prone to give to them. Throughout the world and especially in India there are many grassroots movements of the people going on which, even if issue based, are basically fighting against the local manifestations of the rent seeking behaviour of global financial capital.
The authors have not seen fit to discuss these movements at all. If they could have designed large sample randomised control studies to test whether such people’s movements bring about improvement in the economic conditions of the people or not it would definitely enrich the discussions around micro development considerably.
They have mentioned the difficulty that the NGO Pratham faced in mobilising people to demand their rights from the administration under the Sarva Shiksha Abhiyan as opposed to just sending their children for the extra classes organised by the NGO. This is not easy but still there are innumerable examples of small organisations that have succeeded in mobilising people at the local level all over the world through effective rights based mass actions and the impacts are visible.
But these have not been systematically studied in the way the work of NGOs has been studied through randomised control methods. Thus, quite glaringly, in the final sentence of the book the authors do not include activists of mass movements in the list of well-intentioned people striving to eradicate poverty that they have provided! Consider for example the work of Babasaheb Ambedkar. He single handedly did more to improve the economic condition of the Dalits than anyone else has ever done!
At a higher level there is the question of the mode of development. The present mode of development guzzles resources and pollutes the environment in such a way that the very continuance of this mode is in question. and it is because of this resource guzzling and accompanying pollution and direct and indirect displacement that a lot of the small farm and non-farm businesses of the poor are unprofitable. Especially of concern is the crisis of agriculture.
Chemical agriculture has reached its limits and is being sustained only through huge subsidies worldwide. What we need is for these subsidies to be given to organic agriculture instead, which can be much more productive on a sustainable basis than chemical agriculture. However, for that the whole financial apparatus supporting modern agriculture, agro-processing and agro-trade has to be dismantled and decentralised sustainable agriculture, processing and trade have to be introduced.
It is extremely distressing to see that most people today eat food that comes from places very far away after expending a tremendous amount of energy. The Bhils for instance do not produce enough food on their farms and have to get rations from the Public Distribution System or buy food from the market and in both cases they are eating food produced in faraway places. As long as energy was cheap this passed muster but now with energy prices sky rocketing, the prices of food are also moving northward, helped not a little by speculation on world agri-product futures markets by the likes of Goldman Sachs.
After all as there is a law of conservation of energy or mass in a closed system so also there is one in the case of wealth. if wealth gets concentrated in a few hands then both nature and the vast billions of people will necessarily be impoverished.
Over the past sixty odd years or so since the second world war and especially since the 1980s there has been a huge concentration of wealth in the hands of a few and a corresponding huge rise in the proportion of people living on less than 99 cents a day and in the devastation of nature. No doubt small steps are necessary but unless a perspective is there regarding the nefarious character of global financial capital and a program to effectively counter its hegemony these small steps will never coalesce into a revolution to end poverty.
Coming back to topics covered there is no mention of the rigours of patriarchy that make poor women sustain a double burden and especially the lack of discussion of the ill effects of alcoholism too is a lacuna. There is also no discussion of the retrogressive effects of indirect taxation which is the main fiscal instrument in developing countries.
Reduction in indirect taxation and increase in direct taxes would be a progressive move not only by making the rich pay more taxes proportionate to their income than the poor (since the poor often borrow at usurious rates to buy household goods they effectively pay even higher than the nominal value of the taxes) but also because of the reduction in inflationary pressures which too hurt the poor more than the rich.
Nevertheless, as a single book can’t deal with everything, it has to be admitted that by making me think deeply about the work I have been doing all these years as an activist it has served its purpose of stimulating debate on one of the most challenging issues of our time.