Abhijit V. Banerjee

Can microfinance solve poverty?

Abhijit Banerjee is the kind of economist who refuses to glorify his profession, even though he’s partially responsible for a massive shift in how economists approach and use data, has published several best-selling books, and has been awarded the highest honor in the field. For Banerjee, the work is always evolving, always improving, and always reaching more people. You won’t be catching him resting on his laurels anytime soon.

Photo of Abhijit V. Banerjee

Abhijit V. Banerjee

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 2019

At a glance

Born: 1961, Mumbai, India

Field: Development economics

Awarded: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 2019 (shared)

Prize-winning work: Experimental approach to alleviating global poverty

Food as medicine: In addition to eight economics-based books, he’s also written a cookbook, Cooking to Save Your Life

The couple that researches together: He and his wife and longtime collaborator, Esther Duflo, were co-awarded the prize making them the sixth couple to win jointly

A fresh view: While getting his PhD, he tried to connect economic theory, models, and stories to some of the reality of people in India which led him to focus on poverty within his career

A Smaller Group to Better Represent the Masses

Banerjee, along with his co-Laureates Esther Duflo and Michael Kremer, are seen as the pioneers of experimental economics. Fueled by randomized controlled trials, an approach similar to clinical trials in medicine, smaller scale experiments are conducted to take specific action on an otherwise complex issue.

“We often look at millions of people rather than 68 or something,” says Banerjee. “So, it's just an order of magnitude in terms of size that raises many statistical issues and many implementation issues which we need to wrestle with. But in the end, the philosophy is very similar, which is that we want to make sure that we haven't selected the group of beneficiaries in a way different from the way the non-beneficiaries were selected. And therefore, we could legitimately claim that if we see a difference, it's the causal effect of the intervention.”

Banerjee doesn’t always identify with the popular thinking within his profession, but it goes deeper than ascribing to a different school of thought. He doesn’t think much of economics actually fits the real world.

“Good economics means economics that engages with the reality of the world we live in,” he says. “A lot of economics lives in a land where people are extremely calculating, extremely self-centered, and very good at foreseeing consequences of their actions. I don’t know many people like that.”

Good economics means economics that engages with the reality of the world we live in.

To Banerjee, the world is more nuanced than that. And in his view, there’s more evidence to suggest much more scope for trying to do things that might be in the social interest, rather than the individual one.

“Policies can only be made if there is popular support for them and I think as long as people misunderstand the economics, the policies will all be wrong,” he says. “We can do all the research, we can claim here is the knowledge, but the knowledge has no validity until people believe that we have something useful to say.”

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Does Microcredit Lead to Micro Benefits?

In the early 2000s, the idea of microcredit exploded in popularity. By giving people who lacked access to collateral very small amounts of money, the idea was that people could start or expand their business with these loans, and when the loans were paid back, it could go back into a pool that would help lift other people out of poverty. Banerjee, who did see some value in the approach, questioned the evaluation of these types of programs. But the microcredit community rejected the idea that they needed to provide evidence; they saw their product as inherently good.

“At some point, we managed to persuade microcredit organizations to do a randomized controlled trial,” he says. “The first really credible evidence that was on this question was from our study. It was one that was received with a lot of hostility. We found that at least for the median person, it didn't do anything to raise their level of consumption.”

Although Banerjee and his co-researchers weren’t trying to say these programs weren’t useful, their study showed that actually most of the loans went to buying products, things like refrigerators and televisions, and not to starting or expanding a business.

“There’s nothing wrong with that, and their lives were probably better because they had television, but it wasn’t the transformative ingredient that’s going to save us from the scourge of poverty. They were putting the money into other things and they were not getting richer.”

The second step of their study was to reexamine people who received microcredit several years later. Banerjee said that they weren’t actually expecting to find much in the data here but they were greeted with a surprise.

“We find that while it’s still true that the median person is no better off, there is five percent who by getting microcredit for a few more years somehow are transformed,” he says. “The benefit wasn’t universal as had been originally claimed. It was very selective. In fact, these were people who already had businesses.”

These types of insights allow for refinement of programs, both in terms of the selective process, and how success is measured.

The Cost of Climate Change: Who’s Picking Up the Tab?

Another area that Banerjee has been focusing on is climate change and how this disproportionately impacts people in developing countries. World temperature records are routinely broken, reaching unlivable levels, and for many countries this not only destroys agriculture, but it also wreaks havoc on the people. Industrialized countries are a major cause of greenhouse gas emissions that are driving climate change and leading to heat waves, droughts, and massively destructive storms.

“What I think the climate debate needs to put front and center is this idea that somehow we have to think hard about how we will deal with the losers in this,” he says. “A lot of very poor people will lose if we let climate change happen and we don’t take certain types of action. If we raise energy prices, it's not going to be the rich who are going to really be hurt. It's the poor who will be hurt. Now, how do you compensate them?”

This is a question being asked by many people, organizations, governments, and NGOs. In fact, climate compensation was added to the COP27 negotiations in 2022 and for the first time in history, the UN is working on a climate agreement and fund that intends to address this. The logistics of how, and how much, are still areas that need more research.

“A lot of the work that I've been doing in the last 10 years has been about the design of anti-poverty programs. There should be a clear conversation between the climate change policy design and then how would I compensate people,” he says. The first part according to Banerjee is a global fund for compensation, something that the UN is actively pushing for. The second piece he says is identifying the victims within a country, and then finally, implementing a rule for how transfers are given.

“That’s going to be very political even within the country because everybody is going to say I am also a victim and you have to somehow make the choices there. I think the knowledge base for doing that is also something we need to develop.”

A lot of very poor people will lose if we let climate change happen. How do you compensate them?

Letting Your Intuition Guide You

As Banerjee was getting his PhD, he felt a disconnect between the economics he was studying and the world he grew up in. He began to explore ways to link the economic theory with the lives of people he knew, particularly the people he saw living in poverty, as a young boy in India.

“I could start to see how one could tell stories and what we would need to tell stories about those lives,” he says.

This was part of the motivation behind setting up the Abdul Jameel Latif Poverty Action Lab, or J-PAL, an organization and research center focused on reducing poverty. J-PAL was founded by Banerjee along with Esther Duflo and Sendhil Mullainathan in 2003. Today, they have offices around the world.

“J-PAL was set up to help make better policies against poverty by encouraging the better use of high quality evidence. That sentence is a bit of a mouthful but it's really what we do,” he says. “We try to encourage people to generate the evidence, but we also then summarize it. When the evidence shows something that's worth scaling, we try to work with policymakers to make that happen.”

When the evidence shows something that's worth scaling, we try to work with policymakers to make that happen.

According to Banerjee, J-PAL has around 1,100 active randomized controlled trials as an organization. That’s a lot of smaller scale experiments dedicated to moving towards a happier, healthier, and wealthier world. For now, he doesn’t mind that he’s asked the same questions repeatedly. He’s happy that the conversations are happening at all.

“Part of what we are fighting is always that,” he says reflectively. “I've learned to not trust my own intuition. Maybe that's the thing I've learned most.”

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