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Why a top-down approach works well for poverty reduction

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The Economic Times
08th November, 2019 23:22 IST

by Ajay Chibber

The Nobel Committee, this year, refocused its attention to global poverty by awarding the 2019 Economics Prize to Abhijit Banerjee, Esther Duflo and Michael Kramer — who have pioneered randomised control trials (RCTs), used earlier mainly for drug trials, to study poverty.

They are credited with having created a ‘Randomistas’ movement across the world, by which they have conducted almost 900 RCTs in which they study the success of an intervention by applying it to a sample of people and comparing the outcomes with a control group.

RCTs are largely focused on South Asia and Africa. Many of them are so contextualised that their findings are not easily transportable or replicable to neighbouring countries, or to neighbouring districts, because the power structures and resource endowments vary. It is by now well understood that institutions matter — and matter hugely — in explaining economic development. Unfortunately, it isn’t possible to randomise institutions. You either have them or you don’t. And it takes time to build sound institutional frameworks.

There is no easy way to measure how much poverty reduction in the world can be attributed to RCTs. The work has no doubt given us a better understanding of how the poor live, and has been lauded as a ‘bottom-up’ approach to poverty eradication. But if the UN’s Sustainable Development Goal (SDG) No. 1of eradicating poverty by 2030 is to be achieved, will the Randomistas get us there?

Global evidence on poverty eradication shows that a top-down approach works. A bottom-up approach sounds good, but people need a handup, not a hand-out. The biggest reduction in poverty over the last three decades has come in places like China and Vietnam, and Bangladesh, Ethiopia, India and Rwanda, and has very little to do with RCTs.

In China, which has seen the largest reduction in global poverty in the last 30 years with over 800 million people coming out of extreme poverty, RCTs are unknown. A major factor for China’s huge success in eradicating poverty is rapid growth, rising agricultural productivity and export-driven industrialisation. China followed the playbook followed by the East Asian tiger economies of Singapore, Taiwan, South Korea and Hong Kong, which had earlier copied Japan. These success stories proved an earlier Economics Nobel winner, Gunnar Myrdal — who had predicted in his 1968 three-volume Asian Drama: An Inquiry into the Poverty of Nations, that Asia was doomed to poverty — badly wrong.

No Poverty of Ideas
Vietnam is another dazzling success story in poverty eradication, perhaps even more spectacular than China. Since 1990, it has reduced poverty from 60% of the population to below 10% today. Vietnam’s approach to poverty eradication has followed the China playbook with heavy emphasis on rural infrastructure — electricity and roads, education and attracting foreign investment to set up a manufacturing base for exports — employing millions of rural workforce in factories to supply to the rest of the world.

None of these East Asia success stories has come from RCTs — although many of them had pilots that they scaled up, and had very simple but effective learning mechanisms. Unsurprisingly, there is no mention of these success stories in Banerjee and Duflo’s landmark 2011book, Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, that was cited by the Nobel Committee. These countries are now forming one of the world’s largest trading blocs, the Regional Comprehensive Economic Partnership (RCEP), which India is unable to join at this stage, given its lack of competitiveness.

To some extent, Bangladesh is now trying to emulate this playbook, with success in textile exports helping lift millions out of poverty, and with a focus on health and education made more effective by the use of NGOs. Even in India — one of the epicentres of RCTs — the biggest reduction in absolute poverty came after 2000, when earlier economic reforms that liberalised the markets, followed by good infrastructure programmes (rural roads, electrification) helped lift growth and drive poverty down.

Mexico and others are directly addressing multi-dimensional poverty indicators like access to water, sanitation, housing — not just income poverty — without RCTs. And, in Africa, countries with spectacular reduction in poverty like Ethiopia and Rwanda are following a top-down China playbook.

But with this year’s Nobel, the worry now is that all the attention will turn to more and more RCTs. The major factors that drive poverty eradication — rural productivity, the creation of manufacturing and service sector jobs to pull people out of rural areas, building of institutions that make markets work — especially needed now in South Asia and Africa, will be given less importance.

Penny Wise, Penury Foolish
Big picture reforms and programmes will eradicate poverty by 2030, not small tweaks to existing programmes that boutique RCTs can, at best, hope to provide. They can be a supplemental help to improve programme effectiveness. But they are no substitute, as the evidence for the last 50 years of development shows, for the structural transformation needed to move countries up the ladder of development and eliminate extreme poverty.

If India wants to eliminate poverty, it needs to move 300-400 million people out of the rural areas into more productive manufacturing and service sector jobs (by focusing on greater competitiveness and export promotion), and bring about the massive structural transformation that China and East Asia managed to wipe out poverty.

The writer is distinguished visiting scholar, George Washington University, US

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