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Unpacking Nobel Prize laureate, Abhijit Banerjee's economic philosophy

By Finserv MARKETS - Dec 18,2019
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Unpacking Nobel Prize laureate, Abhijit Banerjee's economic philosophy

On October 14, 2019, Abhijit Banerjee made India proud when he was awarded the Nobel Prize in Economics for his exemplary work in discovering effective ways to tackle poverty in the developing world. He is an Indian-American economist and one of the 3 recipients of the Nobel Prize in Economics this year. Though he is an Indian-American, Abhijit’s work has revolved around Indian economic policies and research. He specializes in the areas of micro finance and financial inclusion.

Now that Abhijit Banerjee has become the second Indian, after Amartya Sen, to win the Nobel Prize in Economics, it’s important for us to unravel his economic philosophy and understand the effectiveness of his strategies in the real world, especially India.

Understanding Abhijit’s approach

Nobel laureates Abhijit Banerjee, his wife Esther Duflo, and economist, Michael Kremer, joint recipients of the Nobel Prize for economics this year, ​have popularized a methodology that employs RCT (Randomized Controlled Trials) as a tool for economic policy making​ and research. RCT is a method similar to randomized clinical trials carried out in the field of medicine and psychology.

When Abhijit was asked to research why a large number of students in an African country were not attending school, he ran a simple survey with his research team instead of getting into theories. The survey revealed that most of the students had developed whooping cough as they walked barefoot.

Banerjee used the RCT method and separated the students into two groups. One group was asked to wear shoes to school while the other group remained barefoot. After a certain period, the report showed that those wearing shoes had no whooping cough, were healthier and regularly attending school. This approach was the hallmark of Abhijit’s experimental research work that relied on data, surveys and trials.

Understanding Abhijit’s philosophy

In his book, “Poor Economics,” the Nobel laureate opines that the economics of poverty is more nuanced than just feeding the poor population. He especially addresses the drawbacks of aid programs and suggests a radical new approach to poverty elimination.

Banerjee, after many surveys and studies, believes that improving the quality of life is just as important for the poor as food. In fact, the poor are even ready to live off less food in exchange for things such as television, music systems, etc. He also suggests changing food policy according to deficiency of particular vitamins or minerals in a particular region.

Banerjee’s take on the state of the Indian economy

Banerjee received a rousing welcome on returning to India and even the Prime Minister spared time from his busy schedule to meet him. That brought to the spotlight how Abhijit Banerjee had criticized PM Narendra Modi’s note ban or demonetization drive in 2016 and said that the nation will feel the pain for a long time to come. After 3 long years of agony, India is still nursing the pain of demonetization. It’s no coincidence that Amartya Sen, India’s first economics Nobel Prize laureate was also a vociferous opponent of demonetization but all his warnings fell on deaf ears.

Even this time, after his return to India, Banerjee was quite vocal about his opinion on the Indian economy and said that it’s “doing very badly.” According to Banerjee, it’s a warning sign that average consumption in both urban and rural areas has declined between 2014-18.

The Nobel laureate’s solution for reviving the Indian economy is not different from other economists. He feels that the government has to focus on boosting demand and not worry about monetary policy at this moment.

As Banerjee opined, the economy is, indeed, going into a tailspin. The worst-hit are most MSMEs. With the ongoing credit crunch, businesses are struggling to find lucrative financing options. In the present slowdown and accompanying credit crisis many financial institutions are reluctant to disburse loans to businesses. If you are in need of funds to grow your business, apply for a Bajaj Finserv business loan up to Rs. 30 lakh available on Finserv MARKETS. Enjoy flexible tenures, attractive interest rates, faster approvals and access to financial fitness reports.

Not everyone is impressed…

Though the media has been quick to shower adulation on Banerjee and the opposition is using his Nobel prize to slam the government for its flawed economic policies, not everyone is impressed with Banerjee’s approach to development economics, especially the use of RCTs. Influential economists in the past have criticized this method because they believe it creates almost a lab-like environment for carrying out economic experiments. In such a method, the evidence is generally too small to succeed in real-world environments. [2]

Unless Banerjee’s research work is implemented on an economic policy level, we are not in a position to assume whether his policies are flawed or effective. However, some writings on the wall are very clear, India has to work on eliminating poverty and right now we are already in a slowdown.

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