Economics of the poor

The Royal Swedish Academy of Sciences awarded the Sveriges Riksbank Prize in Economic Sciences in memory of Alfred Nobel for the year 2019 to Abhijit Vinayak Banerjee, Esther Dufflo and Michael Kremmer. With this award, the issue of poverty has come into sharper focus in global discussion forums.

To us in India, and more importantly to those of us who are committed to microfinance movement, this award has a special significance. The award also adds to the, in an extended sense, a special place for the microfinance movement as it did when Mohammad Yunus won it.

The question, therefore, that we need to answer now is why. The works of the three emphatically point out that the issues related to poverty are not homogeneous and, therefore, cannot be addressed through a uniform intervention. The aspirations vary across groups and individuals.

To prove their point they borrowed a widely used scientific method called randomised control trial or RCT and used it in the field. In order to isolate the outcome of a specific intervention method, they selected two groups of people with similar characteristics. They used the intervention in one group while leaving the other group function under usual conditions. The difference in the outcome between the two groups was impact output of the intervention.

To understand the issues better, let us take the baffling egg and chicken issue in development economics – do the poor save less because they have low income or do they have low income because they have no or little savings. To find an answer to this issue application of the RCT is considered highly useful.

In framing interventions to boost development the policymakers so far had to work largely on an intuitive basis. The results have, therefore, been again largely a toss-up between success and failures with huge revenue cost implications. With RCT in play, there is now a defined method to taste the success possibility of an intervention. For example, the remedial tutorial, result of RCT, is said to have benefitted millions of students in India.

When Mohammad Yunus put microfinance at the centre stage of development policy interventions, it provided an operational model for creating non-state development agencies for the alleviation of poverty. What the works of this year's Nobel laureates endorse is the effectiveness of microfinance agencies in raising the welfare level of the poor. This is where their work turns out to be a milestone, the qualifications notwithstanding.

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1 comment

  1. Savings and thrift are different while entrepreneur saves out of surplus, poor postpone consumption needs to meet the rainy day what is called thrift. RCT is not sacrosanct and universally approved tool for poverty impact studies.


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