Economics Nobel rewards the experimental approach to fighting poverty

On 14 October 2019, the Royal Swedish Academy of Sciences awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, known as the Economics Nobel, to Abhijit Banerjee and Esther Duflo of the Massachusetts Institute of Technology (MIT), and to Michael Kremer of Harvard University, “for their experimental approach to alleviating global poverty”. The prize is 9 million Swedish kronor, shared equally.

What they have done

The Academy points out that more than 700 million people still subsist on extremely low incomes, that every year around five million children under the age of five die from diseases that could often be prevented or cured with inexpensive treatments, and that half of the world’s children leave school without basic literacy and numeracy skills. Against that background, the laureates proposed dividing a huge problem into smaller, more precise questions, for example which interventions best improve educational outcomes or child health, and answering them with carefully designed experiments among the people concerned.

The method resembles a clinical trial: chance decides which schools or people receive an intervention and which do not, so that, when they are compared, differences can be attributed to the intervention and not to other causes. In the mid-1990s, Kremer and his colleagues applied it in western Kenya: more textbooks and free school meals had small effects, while targeted help for weaker pupils significantly improved results.

Banerjee and Duflo, often with Kremer, later applied the approach in other countries, for example in remedial tutoring programmes in Mumbai and Vadodara, in India. According to the Academy, as a direct result of one of those studies more than five million Indian children have benefited from effective remedial tutoring programmes, and many countries have introduced heavy subsidies for preventive healthcare. Their experimental methods now entirely dominate development economics.

Banerjee and Duflo have also noted that productivity differs greatly not only between rich and poor countries but also within poor countries, where some individuals and companies use the latest technology and others use outdated means of production. Their approach helps ask whether the cause is a lack of credit, poorly designed policies or the difficulty of making entirely rational investment decisions.

Duflo, the second woman and the youngest

Esther Duflo, born in Paris on 25 October 1972, was 46 on the day of the announcement: she is the youngest person to receive this prize and the second woman, after Elinor Ostrom, in 2009. Banerjee, born in Mumbai in 1961, and Kremer, born in New York in 1964, complete the trio.

What a business can learn

The underlying idea is not only for development cooperation. Before generalising a decision (a training programme, a sales incentive, a change of process), a company or foundation can try it out on a small scale, with a comparison group, and measure what result it really produces. The Academy itself notes that the experiments showed that something that seemed obvious, such as providing more textbooks, barely changed results.

For families and companies with philanthropic or social-responsibility projects, the message is similar: it is worth defining what you want to achieve, how it will be measured and what you would do if the data said otherwise. A well-designed experiment does not replace judgement, but it helps avoid confusing good intentions with results. Ask your adviser how it applies to your case.

Testing before scaling is a way of managing risk: the data arrives before the big spending.