Poor Economics: A Radical Rethinking of the way to Fight Global Poverty

LaRae Long Trendspotting, Beyond GDP, Transforming Finance, Latest Headlines

“These three new Bank of Sweden Prizewinners (often confused with actual Nobel Prizes): MIT’s Abhijit V. Banerjee, Esther Duflo, and Michael Kremer were a surprise to many, including this author, see my review below of their book,  “Poor Economics“ (2011).   Many also questioned their reliance on using the method from medicine of Randomized Control Trials (RTC) to try to precisely target interventions to bring people out of poverty.

I thought that this pursuit of exactitude in reporting results and outcomes of their specific micro interventions that author Banerjee and Duflo described in their book, seemed to ignore larger contexts of culture and politics in determining societal rules from the top, many of which are arbitrary, capricious and changing with new administrations in many countries. Financial rules and models, the role of central banks, “ austerity policies, etc.  are overlooked, but would weigh heavily on their results.

The Nobel Committee has often run athwart of the original donor Alfred Nobel’s  descendants, particularly lawyer Peter Nobel, with whom I wrote several editorials  critiquing the Bank of Sweden for lobbying in the 1960s  to  get the Nobel Committee to  adopt this new prize, to legitimate the neoclassical economics profession and its models  as a  science. (see www.hazelhenderson.com ).  Peter Nobel and the current Nobel family finally dissociated from this  Bank of Sweden Prize in Economic Science (sic) in Memory of Alfred Nobel, on the grounds of usurping their intellectual property and that Alfred Nobel himself did not think the economics profession should be considered for an actual Nobel Prize.

So in this new round of Bank of Sweden prizes to Banerjee, Duflo and Kremer, its seems that politics has once again entered the deliberations of the Nobel Committee, as it has in the past, when other researchers and scientists from other disciplines have been claimed as “ economists” in a form of intellectual colonization I noted in my earlier books , such as  psychologist, Daniel Kahneman, political scientist, Elinor Ostrom  recently.   Ostrom was the only woman ever to receive this Bank of Sweden prize and one suspects the Nobel Committee under intense criticism, felt pressure to find another.   This is unfortunate for Esther Duflo, a brilliant researcher dedicated to alleviating global poverty.

However, since the Bank of Sweden Prize is not actually a Nobel, perhaps this is just a storm in a teacup.

~Hazel Henderson, Editor, author of Paradigms in Progress: Life Beyond Economics (1991, 1995) and other books“.


Poor Economics: A Radical Rethinking of the way to Fight Global Poverty

by Abhijit V. Banerjee and Esther Duflo, PublicAffairs 2011


Review by Hazel Henderson© 2011

The authors are both professors at MIT’s Poverty Action Lab with the laudable goal of re-thinking the way to fight global poverty.  These are no chair-born, ivory-tower boffins.   They have scoured the world for evidence in hundreds of randomized control trials and other studies and come up with surprising conclusions – particularly about microfinance, now seen as a major asset class for mainstream finance.

Banerjee and Duflo have performed the kind of due diligence needed if microfinance is to expand further an attract more investments from Deutschebank, Citibank, Bank of America an other TBTF banks looking for new cash cows.  Their research shows the immense progress of Bangladesh’s famous Nobel prize-winning Grameen Bank and founder Muhammad Yunus and the less-known but even more successful BRAC, as well as FINCA and ACCION in Latin America and Women’s World Banking with affiliates in many countries in Africa, Asia, and Latin America.  They affirm the entrepreneurial skills of millions of small business owners and their stellar loan repayment performance.  They explain why such microcredit lenders offer high-interest rates, but lower than traditional money lenders.

Yet the authors conclude that microfinance offers no mass exit from poverty.  Many small businesses don’t account for the time and labor of their operators or family members and can only appear profitable if these workers opportunity costs are zero.  Many of these micro-businesses offer a similar meager inventory of products in the same villages or neighborhoods at the “Bottom of the Pyramid” envisioned by C.K. Prahalad.

There are success stories such as Grameen Phone, a partnership with Nokia which leases cell phones to hundreds of thousands of women, who then offer them to phoneless neighbors for a small fee.  This business model is transforming many African countries and cell phones are used for checking market prices, business communications, and banking services.  The issue is scale and whether micro-businesses can scale up to the successes of the cooperatives in India, Europe and the some 50,000 cooperatives in the USA.

The authors also compare economic theories.  Jeffrey Sach’s view is that poverty traps exist in geographic locations (tropical climates, lack of access to sea coasts or rivers) as well as endemic health problems of underdevelopment, epidemics and lack of clean water and food.  This view is compared with William Easterly’s defeatist view that few if any interventions have made a difference.

The authors’ conclusion is that politics is primary over economic theories – most of which are too highly abstract based on the heroic aggregations of macroeconomics.  They emphasized that all markets need rules.  Their field research is thus a welcome reality check.  They examine the power of educational media, used most effectively in Latin America, and the conditional cash transfers (CCTs) provided in Mexico and Brazil to poor families directly which have lifted many into the official economy as consumers.

While probing the limits of markets and governments, it is striking that no mention is made of the global financial markets which arguably have, since the Asian meltdowns of 1997, plunged millions back into poverty.  Nor do the authors examine the 2007-8 financial crises which plunged millions more middle-class people into joblessness, home foreclosures, loss of pensions and today’s persistent recession (Transforming Finance).

Understandably, the kind of economics underlying MIT’s Poverty Action Lab is unlikely to challenge the sources of poverty emanating from the casinos of global finance, the CDS bets on bond defaults in Greece, Ireland and other PIIG countries in Europe, nor the commodity ETFs pushing up gasoline and food prices.  These, apparently, are taboo subjects with MIT.  Neither is any vision offered as to the next technological breakthroughs which will undergird the evolving global economy which we at Ethical Markets Media (USA and Brazil) see as the shift to low-carbon futures and measured on our Green Transition Scoreboard®.