Finance & Development, March 2020, Vol. 57, No. 1 PDF version

Webcast Esther Duflo: Poverty Not Only Lack of Money

Webcast Poor Economics with Abhijit Banerjee

Book Reviews

Facts for Change

Abhijit V. Banerjee and Esther Duflo

Good Economics for Hard Times
Hachette, New York, NY 2019, 403 pp., $25.98

The authors set out to use what economists can say with some certainty to find common ground in the great debates of our time, such as those about migration, trade, economic growth, climate, and social policies. They use simple prose to demonstrate how rigorous economic thinking accompanied by careful empirical work can be brought to bear on a myriad of concrete policy problems. The authors, already very well known for their earlier work promoting the use of randomized controlled trials in empirical development economics, use this method to shed light on many controversies that often rage with little or, even worse, misleading factual support. Throughout the book they explore many examples of otherwise similar groups that differed only in their exposure to exogenous events or different policies. One example—visa lotteries in New Zealand whose applicants were from the same Pacific island of Tonga—reports that winners tripled their income within one year of receiving a visa, which supports the conclusion that differences in wages are “caused by difference in the location and nothing else.”

The many randomized controlled trial discussions are placed in a wider context, however. The chapter on trade starts with basic theory from Ricardo’s comparative advantage to the Stolper-Samuelson theorem on the effects of trade on factor income. The chapter on growth takes us from the Solow model with diminishing returns to Romer’s views on spillover effects from innovation, which can overcome diminishing returns for an economy as a whole. For trade, once it is recognized that neither capital nor labor reallocates with the ease often assumed, the predicted benefits weaken. For growth, the authors conclude that “despite the best efforts of generations of economists, the deep mechanism of persistent economic growth remains elusive” and recommend a focus on poverty reduction using the insights from randomized controlled trials.

The chapter on climate argues that warming will have huge costs for poor countries closer to the equator, but surprisingly says that “if the world warms by a degree centigrade or two, residents of North Dakota will mostly feel perfectly happy about it”—ignoring other effects of climate change, such as extreme weather events.

The book is written with both ambition and realistic modesty. The authors hope that their critical scrutiny of narratives that are too “easy” will help reduce polarization and allow improved design of specific policies based on sound evidence and rigorous analysis.

KEMAL DERVIȘ , senior fellow in the Global Economy and Development Program, Brookings Institution

Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.