An excerpt from ‘Good Economics for Hard Times’ by Nobel Prize winners Abhijit Banerjee, Esther Duflo.

Sacrificing the poor to promote growth not the solution Abhijit Banerjee Esther Duflo PTI
news Book Excerpt Friday, December 13, 2019 - 12:41

If this is the right story, India should start to worry about what happens when those opportunities begin to run out. Unfortunately, just as we don’t know much about how to make growth happen, we know very little about why some countries get stuck but others don’t—why South Korea kept growing but Mexico did not—or how one gets out. One very real danger is that in trying to hold on to fast growth, India (and other countries facing sharply slowing growth) will veer toward policies that hurt the poor now in the name of future growth. The need to be “business friendly” to preserve growth may be interpreted, as it was in the US and UK in the Reagan-Thatcher era, as open season for all kinds of anti-poor, pro-rich policies (such as bailouts for overindebted corporations and wealthy individuals) that enrich the top earners at the cost of everyone else, and do nothing for growth.

If the US and UK experience is any guide, asking the poor to tighten their belts, in the hope that giveaways to the rich will eventually trickle down, does nothing for growth and even less for the poor. If anything, the explosion of inequality in an economy no longer growing has the risk of being very bad news for growth, because the political backlash leads to the election of populist leaders touting miracle solutions that rarely work and often lead to Venezuela-style disasters.

Interestingly, even the IMF, so long the bastion of growth-first orthodoxy, now recognizes that sacrificing the poor to promote growth was bad policy. It now requires its country teams to include inequality in factors to take into consideration when providing policy guidance to countries and outlining conditions under which they can receive IMF assistance.

The key ultimately is to not lose sight of the fact that GDP is a means and not an end. A useful means, no doubt, especially when it creates jobs or raises wages or plumps the government budget so it can redistribute more. But the ultimate goal remains one of raising the quality of life of the average person, and especially the worst-off person.

And quality of life means more than just consumption. As we saw in the previous chapter, most human beings care about feeling worthy and respected; they suffer when they feel they are failing themselves and their families. While better lives are indeed partly about being able to consume more, even very poor people also care about the health of their parents, about educating their children, about having their voices heard, and about being able to pursue their dreams. A higher GDP may be one way in which this can be given to the poor, but it is only one of the ways, and there is no presumption that it is always the best one. In fact, the quality of life varies enormously between middle-income countries. For example, Sri Lanka has more or less the same GDP per capita as Guatemala but maternal, infant, and child mortality are much lower in Sri Lanka (and are comparable with those in the United States).

Delivering Well-Being

More generally, looking back, it is quite clear that many of the important successes of the last few decades were the direct result of a policy focus on those particular outcomes, even in some countries that were and have remained very poor. For example, a massive reduction in under-five mortality took place even in some very poor countries that were not growing particularly fast, largely thanks to a focus on newborn care, vaccination, and malaria prevention. And it is no different with many of the other levers for fighting poverty, be it education, skills, entrepreneurship, or health. We need a focus on the key problems and an understanding of what works to address them.

This is patient work; spending money by itself does not necessarily deliver real education or good health. But the good news is that by contrast to growth we know how to make progress here. One big advantage of focusing on clearly defined interventions is that these policies have measurable objectives and therefore can be directly evaluated. We can experiment with them, abandon the ones that do not work, and improve the ones with potential.

The recent history of malaria is a good example. Malaria is one of the biggest killers of small children and a disease preventable by avoiding mosquito bites. Since the 1980s, the number of malaria deaths had been rising every year. At the peak in 2004 there were 1.8 million deaths from malaria. Then in 2005 there was a dramatic turning point. Between 2005 and 2016, the number of deaths from malaria declined by 75 percent.

Many factors probably contributed to the decrease in the number of malaria deaths, but the widespread distribution of insecticide-treated bed nets almost surely played a key role. Overall, the benefits of nets are well established. In 2004, a review of the evidence from twenty-two carefully done randomized controlled trials found that, on average, one thousand more nets distributed contributed to a reduction of 5.5 deaths per year. As we described in Poor Economics, however, there was a big debate at the time on whether nets should be sold to beneficiaries (at a subsidized price) or given for free. But an RCT by Pascaline Dupas and Jessica Cohen, replicated since then by several other studies, established that free nets are in fact used just as much as nets that are paid for, and free distribution achieves a much higher effective coverage than cost sharing. Since Poor Economics was published in 2011, this evidence eventually convinced the key players that massive distribution was the most effective way to fight malaria. Between 2014 and 2016, a total of 582 million insecticide-treated mosquito nets were delivered globally. Of these, 505 million were delivered in Sub-Saharan Africa and 75 percent were distributed through mass distribution campaigns of free bed nets. The magazine Nature concluded that insecticide-treated net distributions averted 450 million malaria deaths between 2000 and 2015.

The accumulation of evidence took some time, but it worked. Even the skeptics were convinced. Bill Easterly who in 2011 was an outspoken critic of free bed net distribution, gracefully acknowledged in a tweet that his nemesis Jeff Sachs was more right than he was on this particular issue. The right policy choices were made, leading to tremendous progress against a terrible scourge.

The bottom line is that despite the best efforts of generations of economists, the deep mechanisms of persistent economic growth remain elusive. No one knows if growth will pick up again in rich countries, or what to do to make it more likely. The good news is that we do have things to do in the meantime; there is a lot that both poor and rich countries could do to get rid of the most egregious sources of waste in their economies. While these things may not propel countries to permanently faster growth, they could dramatically improve the welfare of their citizens. Moreover, while we do not know when the growth locomotive will start, if and when it does, the poor will be more likely to hop onto that train if they are in decent health, can read and write, and can think beyond their immediate circumstances. It may not be an accident that many of the winners of globalization were ex-communist countries that had invested heavily in the human capital of their populations in the communist years (China, Vietnam) or countries threatened with communism that had pursued similar policies for that reason (Taiwan, South Korea). The best bet, therefore, for a country like India is to attempt to do things that can make the quality of life better for its citizens with the resources it already has: improving education, health, and the functioning of the courts and the banks, and building better infrastructure (better roads and more livable cities, for example).

For the world of policy makers, this perspective suggests that a clear focus on the well-being of the poorest offers the possibility of transforming millions of lives much more profoundly than we could by finding the recipe to increase growth from 2 percent to 2.3 percent in the rich countries.

Excerpted with permission from ‘Good Economics for Hard Times’ by Abhijit Banerjee, Esther Duflo published by Juggernaut.

You can buy the book here

Show us some love and support our journalism by becoming a TNM Member - Click here.