Details matter

Details matter

Economics Nobel for Abhijit Banerjee and others as they developed a tool for impactful policy.

Abhijit Banerjee yesterday became the second Indian origin economist to win a Nobel prize, 21 years after Amartya Sen was awarded one. Banerjee will share the prize with Esther Duflo, his partner in both professional and personal spheres, and Michael Kremer. They have been awarded the prize for their work on developing and refining an experimental approach to design programmes of poverty alleviation. One way of looking at it is that their contribution has been pragmatic. The tool they have evolved, randomised control trials (RCT), is widely used by researchers in development economics.

Banerjee and Duflo, 47, only the second woman and the youngest ever to be awarded the prize, have carried out extensive field trials in India. Their work has been used to design policy. The Delhi government’s education reforms are based on suggestions made by Banerjee. For policy makers RCT can be a useful tool to separate the signal from the noise and increase a policy’s efficacy. RCT has been adapted from medicine to gain an understanding of how people make decisions. Once policy makers understand the motivating forces underlying people’s choices, it becomes possible to improve policy designs. It is the bedrock of evidence based policymaking.

As a tool which improves policy design, RCT is based on theoretical foundations from multiple strands of economics, including behavioural economics. However, it is rare for work which fetches an economics Nobel to be free of criticism. RCT has its share of critics. It can be drilled down to the complaint that its efficacy is overstated and it is faddish. In contrast, significant amounts of economic theory seeks to answer big questions and work out general theories. The debate is between efficacy of micro level policy interventions and macro institutions.

From an Indian standpoint, this debate is misplaced. Big ideas do matter. They produce a coherent economic vision which can guide us. But India’s complex development experience shows much is lost between an idea and its implementation. It’s in this context that the work of Banerjee, Duflo, Kremer is important. Details matter. Policy design can make all the difference between success and failure. RCT is not a panacea for poverty alleviation. It is, however, an essential tool in getting things right. Therein lies the real contribution of Banerjee, a product primarily of the Indian education system.