Abhijit Banerjee, Nobel Prize in Economics: ‘There are important things that cannot be solved just with a money transfer ’

The experiment took place in Kenya and involved two groups of poor people chosen at random. Those in group A would receive a fixed payment every month for 12 years. Those in group B would be given the same monthly stipend but only for two years. Which of the two groups would be more likely to invest? Abhijit Banerjee, 63, was one of the people in charge of the experiment, and he was expecting to find more investors among those in group B. His reasoning was the following: in group B, where payments would end after two years, the urgency to develop a business venture allowing people to maintain the same level of financial well-being must surely be greater than in A, where the 12 years of payments would provide some peace of mind to the recipients.

As the reader may have already imagined, the result was just the opposite. “We were surprised to find that the people whose monthly payments lasted the longest were also the ones who invested the most,” Banerjee said in an interview with EL PAÍS during a recent visit to Madrid to talk about poverty at the Ramón Areces Foundation. Peace of mind was the key variable, yes, but not because it caused inaction, rather the opposite: the guarantee that payments would continue to arrive for 12 years worked as the safety net that allowed people to try out business ventures.

After more than 20 years devoted to the subject, Banerjee is no newcomer to the field of poverty alleviation. In 2019 he received the Nobel Prize in Economics together with his wife, Esther Duflo, and the academic who inspired them both, Michael Kremer, for their research on poverty following the method that the pharmaceutical industry uses to develop medicines: randomized controlled trials (also called RCTs) in which there is a treatment group and a control group to compare measurements.

In the Kenya basic income experiment, they observed the behavior of more than 22,000 people in 195 villages who received monthly payments (treatment group) and another 11,000 people who received nothing (control group). According to The Economist, the most striking result was seeing how those who received the money quit their jobs as wage earners on farms to open businesses. “When payments were scheduled for the full 12 years, the number of non-farm enterprises rose by a quarter, and their profits almost doubled. Recipients ate more protein and reported lower rates of depression. Land became more expensive, but it appears consumer goods did not,” said the British weekly.

Instead of becoming lazy or starting to consume in a crazy way, they behaved in a way similar to what might be expected in middle class people: they invested in health and preferred to have a support network before launching into a business adventure. “In many, many, many studies we have found the same thing, that when these people can access money they allocate a large part of it to do the things we consider right, such as investing in education or nutrition,” Banerjee explained. “What makes them have self-destructive behavior is precisely not having money; when they do have it, they become more optimistic and show a greater willingness to do things that are good in the long term.”

Prejudices

Perhaps the most surprising thing is not that poor people are governed by similar criteria as the rest, but that it was necessary to demonstrate it with experiments. What the French economist Michel Husson considered a stigmatization of the poor inherent to capitalism is, according to Banerjee, a widespread and long-standing prejudice. “Christianity is not the only religion with the idea that only if you work will you reap the fruits, in which it is implicit that if you do not have the fruits it is because you are lazy or you are doing something wrong.”

In addition to overturning prejudices about the poor in developing countries, RCTs have also helped them better frame the problem of many poor people in rich nations whose discomfort comes from having lost the place they occupied in the middle class. As Banerjee says, “It is not that money transfers are not important in this group, but that the measures cannot be limited to that. For a desperately poor person, getting something to eat is very relevant, but when you are not so poor, there are other important things that cannot be solved just with a money transfer because an important part of the discomfort is that your life has lost meaning. ” In his opinion, designing specific economic measures for this population that has lost part of its identity is more urgent than ever.

An example of a more comprehensive solution is the one that Banerjee and Duflo propose in their book Good Economics for Hard Times (2019), where they lay out the second set of findings from the RCT (the first was Poor Economics, considered the best book about economics of 2011 by the Financial Times). It involves helping U.S. communities harmed by international trade with much more generous assistance and education programs. But hasn’t that always been obvious? Was it a problem of economic ignorance or a lack of power?

According to Banerjee, in this case ignorance has been a problem. “In the United States, for example, there is a program called Trade Adjustment Assistance [to counter the effects of international trade] that is simply not used much, although the money is available,” he said. “Economists say, in theory, that people should be compensated, but no one makes much noise when it is not put into practice.”

RCTs have been around long enough to have received criticism. The Nobel Prize winner in Economics Angus Deaton, for example, has wondered if restricting economics to specific measures in limited populations is not a way of also limiting the relevance of a science accustomed to dealing with big questions. In economics, he says, you can go to big things and say that this or that factor caused the growth of the country, or prevented it, but in some way all that is still a fantasy. “The truth is that we generally don’t have very good answers to these questions, and I prefer to find answers rather than propose ideological or false solutions.”

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