When it was announced in October that Abhijit Banerjee, Esther Duflo, and Michael Kremer had won the 2019 Nobel Prize in economics for their experimental work in alleviating global poverty, I eagerly turned to reading their works, hoping to glean policy recommendations about steps governments should take.
However, I must say I have been disappointed so far in this search for implementable policy guidance. Although China has had the most success in reducing poverty, the institutions and government programs that made this possible have, in my view, not been properly considered by international poverty scholars.
China’s investments in building infrastructure even in remote areas may appear uneconomic to outsiders, but it has been an essential way of providing opportunities to hundreds of millions of people.
China’s State-run banking system is criticized for being inefficient, but it has given many millions the opportunity to save conveniently and safely. China’s long-term emphasis on manufacturing gave young people the steady incomes they needed to invest in themselves. And, local government officials who are graded on economic growth and poverty reduction have a strong incentive to help people escape poverty.
China accounted for nearly 75 percent of the world’s reduction in people living in extreme poverty from 1990 to 2010, according to 2014 research by the United Nations.
In those years, China’s rate of extreme poverty tumbled from 60 percent to 12 percent. By 2018, only 1.7 percent of China’s people were living in extreme poverty, and they are expected to be out by 2020. China’s definition of poverty is higher than the World Bank’s global standard.
The Nobel committee described Banerjee, Duflo and Kremer’s work as “new approach to obtaining reliable answers about the best ways to fight poverty. In brief, it involves dividing these issues into smaller, more manageable questions – for example, the most effective interventions for improving educational outcomes or child health. They have shown that these smaller, more precise, questions are often best answered via carefully designed experiments among the people who are most affected”.
Many of the issues dealt with in these studies could better the lives of the poor, but policies based on them are unlikely to be transformative. For example, in his book Small Changes, Big Results: Behavioral Economics at Work in Poor Countries, Michael Kremer describes a Mexican government program that increased the enrollment of girls in secondary schools by 14.8 percent by giving their families $20 per month in cash transfer.
Other studies look at how to encourage poor people to disinfect their drinking water using cheap chlorine tablets or to add micronutrients to their children’s food. Much of the research focuses on ways to use psychology-based behavioral economics to “nudge” people to take steps to become healthier or more productive.
There is an ongoing debate in economics about the value of micro-studies designed to mimic the blind trials used in medicine. In social sciences, including economics, the results are often not reproducible in subsequent studies and also are vulnerable to slight changes in statistical assumptions.
The Chinese approach of trying out new policies in local areas may at first appear to be less scientific because it does not include the control group needed for a blind study. But, these regional experiments give leaders the experience to find out what can work nation-wide.
I was struck by the amount of research devoted to finding ways to encourage the use of sleeping nets to protect against malaria. In contrast, China devoted large resources to eliminating malaria starting in the 1950s.
In their book Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, Banerjee and Duflo extensively discuss the difficulties poor people have establishing bank accounts in most countries – not getting loans, just depositing money.
They explain that banks in most countries don’t want to take small accounts because the costs to manage them exceed any possible profits, so they charge poor depositors large fees just to take money out of their own accounts. This makes it very hard for poor people to save money – so they can’t escape poverty.
On the other hand, the Chinese large State-owned banks have a branch easily reachable by almost everyone in the country. People can make small deposits without trouble – even receiving some interest on their account.
This easy access to the financial system is one reason the Chinese rate of saving has been much higher than that in any other country. So, poor people can plan their finances and save for investment, education, or other expenses. It may be that the Chinese banking system is not “efficient”, but it has been a remarkably effective handmaiden to economic development.
Earlier, Japan, with its Postal Savings Bank, and Germany, with its city-owned banks called sparkasse, also effectively used State-owned banks to promote development and allow even poor people to carry out financial transactions.
Similarly, urbanization is key to finding decent job opportunities for the hundreds of millions of un-needed farm workers around the world. China’s large investment in urban infrastructure has prevented the growth of the kinds of dangerous and unhealthy shanty slums that have developed in most developing countries.
Li Xiaoyun, dean of the China Institute for South-South Cooperation in Agriculture and professor of development studies at China Agricultural University, has long worked as a senior adviser on poverty reduction to the Chinese government. He said that poverty reduction is a complicated political process, social process, economic process, and even cultural process. It will not be solved by economic growth alone. Therefore, to tackle the poverty problem requires a comprehensive approach.
“Poverty reduction is the area where we need to set high priorities; we need to overcome structural constraints. We need to break through the interest-groups’ control over bureaucratic and technocratic constraints. We need to overcome many, many barriers. Poverty reduction requires less argument, not more,” Li said.
“The most important factor that led to the success of China’s poverty reduction is the political commitment through political institutions. It is not simply that there is a strong State. It is the political commitment and the political capacity of the ruling party to exercise its power through a strong State mechanism.
“Of course, everything is not perfect. But, my point is that the political system China has now actually has the strength to overcome political, social, and economic barriers and, after much consultation and planning, to implement transformative policies that sharply reduce poverty.”