Finance & Development, March 2020, Vol. 57, No. 1 PDF version
Esther Duflo: Poverty Not Only Lack of Money
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.
Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.