Poor Economics: Radical Rethinking

John R. Brock, Ph.D.

Since the start of the Industrial Revolution in the mid-1700s, the world has made progress in its battle against extreme poverty (hereafter, “poverty”), experiencing a steady decline in the percentage of the global population living on less than $1.90 per day in today’s U.S. purchasing power (the World Bank’s current poverty threshold). It’s hard to imagine, but in 1820 roughly 90% of the world’s population lived in such poverty. Today however, the world has reached the lowest incidence of poverty ever recorded in human history—about 8%. There’s even more good news: Since 1980, not only have we witnessed a decline in the percentage of poor, but we’ve also seen a significant reduction in the total number of people living in poverty from over 1.2 billion to less than 600 million. While this news is certainly encouraging, there is a long way yet to go.

The gains in poverty alleviation have occurred largely in Asia—China, India, Indonesia and other countries in the region. Sub-Saharan Africa, however, has regressed, with an increasing number of poor people there now accounting for over 70% of the world’s poverty. While there’s been much success pursuing the United Nations’ goal of eliminating poverty by 2030, the disheartening news is that the rate of poverty reduction has recently slowed and is expected to continue slowing over the next decade.

We might draw some optimism from recent research by this year’s recipients of the Nobel Prize in Economics: Esther Duflo and Abhijit Banerjee of MIT and Michael Kremer of Harvard. These three development econo­mists have been studying the social and economic forces perpetuating the cycle of poverty for the poor in Africa and South Asia. Combining randomized control trials (used extensively in drug testing) with empirical analysis, they’ve discovered causal relationships between policy, behavior and poverty. The approach has reshaped the field of development economics by shifting the focus from how to best funnel resources to poor countries, to what kinds of assistance are most effective in helping improve the lives of the poor.

While the experiments of the Nobel Laureates have focused on specific policies, the potential to bring these promising approaches to scale is quite encour­aging and may help move the world closer to the 2030 goal of eliminating the worst of global poverty. Notwithstanding the value of this creative research, its success may also depend upon the ability of countries to restrain excessive regulation, deep-seated corruption, and macroeconomic mismanagement.

If you want to read more about this interesting work, Banerjee and Duflo’s Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty is included in our 11th Annual Complimentary Book Offer for Clients. As an aside, Dr. Duflo, at age 46, is the youngest economics Nobel winner ever and only the second woman to be awarded the economics prize in its 50-year history. After receiving a MacArthur Fellowship in 2009 and the John Bates Clark Award as the top economist under 40 years old in 2010, Duflo’s Nobel Prize is yet another milestone accomplishment.