Speech

Open Forum: Good Economics for Hard Times

December 2, 2019

Good morning, and welcome to this Open Forum.

It is my privilege to welcome and introduce our speaker: professor Esther Duflo, winner of the 2019 Nobel Prize in economics. As you know, she is one of three laureates this year, along with her husband, Abhijit Banerjee, and Michael Kremer.

On behalf of the IMF, congratulations on this major achievement!

Esther is the youngest-ever and only the second woman to be awarded an economics Nobel. She and Abhijit are professors at MIT, while Michael is a professor at Harvard University.

They were awarded the prize for developing new, experimental methods to identify more effective policy interventions to fight poverty. The Nobel committee said their work had “completely reshaped” development economics, with great potential to further improve the lives of people around the world.

What is so remarkable in their approach? It starts with the idea of randomized controlled trials, which are at the forefront of a lot of modern medical research. In addition to testing whether a certain intervention works, they also investigate why it works, using contract theory and behavioral economics to better understand the driving forces behind people’s decisions.

A good example is their work on the so-called “ learning crisis.” By using field studies, they found that providing textbooks, or even new, bigger schools would not by itself help children learn more, without better and more tailored teaching practices.

This one and many other experiences were documented in the first book Esther and Abhijit wrote together, called Poor Economics. It was the Financial Times’ book of the year in 2011 and was translated into 17 languages.

Today, she will present their new book, Good Economics for Hard Times, which broadens the range of analysis and questions conventional views on some of the world’s most pressing issues – including some of our own views.

We at the Fund have known Esther for a long time. Our Finance & Development magazine published a profile of her back in 2003. She had just founded the Poverty Action Lab, with Abhijit and other MIT colleagues, and they were busy studying inequality and gender issues. An MIT PhD alumna herself, we also learned that she is a historian turned development economist and a mountain climber.

Clearly, Esther is willing to take some risk, which also means speaking candidly to her audiences.

In the 2003 article, she pointed to limitations in the Fund’s approach to alleviating poverty. She said: “[This approach] can be evaluated in a very useful but narrow sense of accounting for the money. But you cannot know what difference your actions made, because you have no counterfactual—what would have happened had the money not been made available.”

It is no exaggeration to say that developing a methodology for having a counterfactual earned Esther and her colleagues a Nobel Prize.

Her observation continues to be relevant for the IMF. And the question is whether we can learn something from this approach.

The fact is that policies affect people's well-being. Everything we do, from surveillance to lending, affects people's lives. And it's not just our traditional monetary, fiscal and structural policies, but issues like inequality, corruption, gender discrimination and climate change that have all now become part of our core work because they increasingly affect populations in our member countries.

This all means that the key to really making a difference and promoting sustainable and more inclusive growth is what we should focus on. And that requires keeping in mind the people we serve and how our advice affects them as we try to design good policies.

Now, unfortunately, the Fund’s work doesn’t always have room to test for the counterfactual. It would not be possible to do a Fund program in only one part of an economy, to compare with what doctors would call the “control” part – or in one country, but not another.

But there is certainly room to better understand what drives people's decisions. We need to ask ourselves, is there room to better understand the political economy of reforms? How do we take lesso ns from one country's experience and draw lessons for another?

The key is to be open to new methods and fresh perspectives, especially when they challenge long-standing assumptions. In their book, Esther and Abhijit do exactly that: provide a wealth of thought-provoking insights on how economies work, and don’t work.

For instance, they find that increased immigration of workers does not result in lower salaries for native workers. They show that trade is not always beneficial for developing countries. And they challenge widely held assumptions on growth, automation, and even social media.

The good news is that economists get many things, or at least some things, right. But it is also true that nowadays good arguments and facts are no longer enough and are often drowned out by misinterpretation, manipulation and misunderstanding. How can policymakers communicate more effectively? How can we “experts” regain the trust of and increasingly skeptical public and make a tangible difference in people’s lives?

These are only some of the issues that Esther is putting on our agenda. We are fortunate to have you here today, Esther, and we look forward to hearing your thoughts. Thank you!