Economy

Explainer: What Abhijit Banerjee, Esther Duflo, Michael Kremer Won the Economics Nobel For

All three winners argue that using randomised controlled trials can lead to better public policy interventions.

New Delhi: The 2019 Nobel prize for economics has been given to three economists whose focus has been on framing policies by first measuring the outcomes of alternative interventions on randomly chosen samples from the target population.

Abhijit Banerjee, Esther Duflo and Michael Kremer have all worked on using this method to argue that randomised controlled trials (RCTs) can lead to better poverty reduction interventions.

Using randomised control trials in development economics

Before being popularised as a public policy research tool by the winners of this year’s economics Nobel – officially called the ‘Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel’ – RCTs were largely used in the field of medicine, to test the effects of drugs. As Banerjee, Duflo and Kremer themselves pointed out in a 2018 article, though, they weren’t the first ones to think about using that tool for policy evaluation.

So how does it work? A chosen sample is randomly split into two or more groups – one or more “treatment” groups and a “placebo” group. The entire sample is taken from the group which would be the target of the policy intervention being tested. The two groups are studied both during and after the intervention, and the results are used to determine how effective the policy measure is, or how it may best be implemented.

Ever since the publication of Banerjee and Duflo’s wildly popular book Poor Economics in 2011, RCTs have become a common tool in development research across the world.

Also read: Modi Government’s Economic Policies Look Like UPA-III: Abhijit Banerjee

While the Royal Swedish Academy clearly thinks RCTs are the “best way to design measures to reduce global poverty”, not all economists out there agree. Over the past decade, against the backdrop of well funded and largely popular work involving RCTs, economists including Angus Deaton, Nancy Cartwright, Martin Ravaillon, Jean Dreze and Sanjay Reddy have questioned the methodology involved.

Deaton and Cartwright, for instance, have said, “… the lay public, and sometimes researchers, put too much trust in RCTs over other methods of investigation. Contrary to frequent claims in the applied literature, randomisation does not equalise everything other than the treatment in the control groups, it does not automatically deliver a precise estimate of the average treatment effect, and it does not relieve us of the need to think about (observed or unobserved) covariates.”

Banerjee and Duflo have responded to these critiques saying they are helpful in better defining their methodology even if they may not agree on all contentions. “Much of this criticism has been useful, even when we do not entirely agree with it, both in helping us think through the strengths and limitations of what has been done, and in clarifying where the field needs to go next. However, we will argue that much of this criticism misses (or at least insufficiently emphasises) the main reasons why there has been so much excitement surrounding experimental research in development economics,” they have argued.

The three 2019 economics Nobel prize winners have collaborated often, and taken together their work has covered a wide range of topics including education, healthcare, microfinance, fertiliser subsidies and more.

The laureates’ work: Education

Michael Kremer began using RCTs in the form of experimental field trials in the mid-1990s in rural western Kenya to understand the impact of interventions on learning outcomes. The idea was to understand which interventions – free meals, free textbooks, deworming children or financial incentives for teachers – worked better.

A large number of schools were randomly chosen and divided into different groups which were then provided with the different resources. Schools in one group would be given free books, while another group got free meals, for instance.

The outcomes could thus be compared. The problem of comparing schools with different average characteristics is solved in RCTs by picking a large number of schools and thus using the law of large numbers which ensures that, on an average, the characteristics of the schools are similar.

Kremer found that free meals and free books did not have any significant impact on learning outcomes. Textbooks had some positive impact but that was limited to the best students.

He concluded that the education system in Kenya needed large scale reforms instead of input interventions at the level of individual schools. This was because the curriculum, according to Kremer, focussed excessively on the strongest students.

Watch: Interview with Economist Abhijit Banerjee

When Abhijit Banerjee and Esther Duflo built on Kremer’s experiments in India, they also found themselves criticising the Indian education system on similar grounds. In the government schools that they conducted their RCTs in, they found that the focus of teachers was on the best students and the incentives to improve the learning outcomes of average students were very few.

According to Banerjee and Duflo, the focus in schools is on ‘finishing’ the syllabus and as an outcome of that focus, teachers shy away from techniques that would improve learning outcomes for the average child as this would be a distraction in the way of finishing the syllabus.

They have also criticised the Indian education system for its emphasis on clearing ‘difficult’ exams and getting students ready for jobs, creating a situation of losers and winners – those who do well in these exams and those who don’t. According to Banerjee and Duflo, and Kremer too, this approach ignores the fact that even small improvements in learning outcomes for all can have positive impacts on their ability to negotiate the world.

The laureates’ work: Healthcare

Some of Kremer’s best-known work is on vaccinations and deworming. During a study on deworming in Kenya, the Harvard professor and his co-authors found that even a very small change in price could have a large effect on demand for deworming pills. While 75% of the parents who were given the medicine for free administered the pills to their children, only 18% of parents who had to pay a small amount – less than $1 – did the same.

Other experiments – by him and by others – have had the same result, the Swedish Academy has noted: that the poor are very sensitive to pricing when it comes to healthcare facilities.

This is why, in an article detailing their results, Kremer et al have argued that it makes sense for governments to subsidise healthcare to a large extent. Mass deworming, they found, increased children’s school attendance as well as their performance in tests and employment in the short-run and income levels in the long-run.

Kremer and others had also argued against the World Health Organisation withdrawing from mass deworming programmes, saying that the benefits were not restricted only to the domain of healthcare. The WHO took their findings seriously, and now “recommends that medicine is distributed for free to the over 800 million schoolchildren living in areas where more than 20% of them have a specific type of parasitic worm infection,” the Swedish Academy has said.

Banerjee and Duflo have also worked on vaccinations in India, particularly on how to deal with the absence of staff members at various primary health centres. They conducted an RCT in rural Rajasthan, for instance, which found that when services such as mobile vaccination clinics and primary health centres were more reliable, parents were slightly more likely to get their children immunised. If the reliability also came with a small incentive – such as one meal being provided – parents were far more likely to make sure their children were vaccinated.