Small Change

The big theories of economic development turned out to be wrong. Finding out what works on the ground offers a path to curbing global poverty.

We’ve cycled through many theories of economic development over the past 60 years, with some championing investment in infrastructure and industry, others stressing spending on education and social welfare, and still others touting the expansion of trade and the market. But none of these models has fit particularly well with the facts of global growth—in particular the problem that some countries appear to be persistently poor.

That’s perhaps why the dominant theory of development today is that slow-changing institutions determine failure or success. Based on studies of world history, growth economists conclude that whether a country today is rich or poor, democratic or autocratic, developed or underdeveloped can be traced to factors such as the mortality rate of colonial settlers, which among them had oceangoing ships in 1500, or even the shape of the continental landmass that was home to their ancestors. The mechanism by which history determines success is through the laws, rules, and customs that emerged as a result of who was the colonizer and who the colonized, and how local conditions shaped the form of colonial rule. And these laws, rules, and customs are very slow to evolve.

If history is destiny, and development is due to slow-changing institutions, then there would seem to be little hope for countries that were on the losing continents back when Pangaea split up. Because of this theory, doubts about the effectiveness of foreign assistance have never been stronger—if it is all about history, the role for aid is unclear. And even if there is progress, it will be slow and halting. Dreams of a world free of poverty will remain just that.

And yet, over the last 20 years, the proportion of the world living on a dollar a day or less has halved. The percentage of children fully vaccinated against childhood disease worldwide climbed from 5 percent to 80 percent between 1974 and 2000. Partially as a result, child mortality in developing countries has dropped by a third since 1990. The children who survive are far more likely to be in school. Primary enrollment has climbed from 47 percent to 87 percent since 1950. This progress has been truly global—Africa, for instance, has seen literacy rates more than double since 1970.

How to reconcile all of this rapid, ubiquitous, historically unprecedented global progress with an empirically supported theory that suggests such progress should barely happen, if at all? Many of the clues are to be found in Abhijit Banerjee and Esther Duflo’s wonderful new book, Poor Economics. Banerjee and Duflo, co-directors of the Poverty Action Lab at MIT, show that a whole range of small and cheap interventions can make a big difference to the quality of life, and even the quality of institutions. These interventions are behind the unlikely progress that we’ve been seeing.

Take three of the examples they offer regarding education. Providing iodine capsules to pregnant mothers is an intervention that helps brain development in fetuses. It costs around 51 cents per dose—and leads to kids who stay in school about five months longer because they are cognitively better able to learn. De-worming pills that cost $1.36 for a course of treatment have such an impact on school attendance that they raise lifetime earnings of treated kids by as much as $3,269. Or just publishing in local newspapers the amount of money that is meant to get to Ugandan schools from the central government increased the proportion of funds that actually arrives at the school from 13 percent to 80 percent. It doesn’t have to take a government full of Franklins, or a treasury full of Benjamins, to see dramatic improvement in a country’s education (or health or infrastructure) outcomes.

Banerjee and Duflo are most widely known for introducing the randomized controlled trial (RCT) to the field of development economics. This technique, originally used for medical trials, tests the efficacy of development projects by taking test subjects and dividing them by lottery into groups that get the treatment or intervention and those that don’t. When the division between those who get the treatment and those who don’t is random, it is fair to assume that any difference in outcomes between treated and untreated test subjects is due to the intervention itself. So, if many more kids get vaccinated in randomly selected villages where parents received a reward than in randomly selected control-group villages where they didn’t, one can conclude that the reward was responsible for the higher rates of vaccination.

Banerjee and Duflo’s evaluations have had them spending much time in developing countries, devising experiments and working with government officials and civil society organizations across a range of sectors. They’ve been widely lauded for their work—Duflo won the John Bates Clark Medal in 2010, given to the best economist in the United States under age 40 and often seen as a stepping-stone to a Nobel. Accessible and largely jargon-free, Poor Economics is in large part a summary of what Banerjee and Duflo have learned from the development experiments that they and their colleagues have run.

A central theme of Banerjee and Duflo’s work is an effort to take people as they are and the rules as they might be (to misquote Rousseau). And that means much of their work is about better understanding people—the poor themselves, as well as the government officials and non-government actors who provide them services. What emerges is a rich understanding of the poor not just as agentless, passive recipients, but as people who make complex and demanding choices every day. Poor people are people, too. They want sweets along with spinach, they make mistakes, and they suffer from the usual range of cognitive biases. But because they are poor, and because they live in poor countries, the help they get in making these decisions is limited, and the cost of mistakes is high.

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