Part 1 of Review available here.

“To progress, we have to abandon the habit of reducing the poor to cartoon characters and take the time to really understand their lives, in all their complexity and richness.”

I’d heard before that on average, tall people earn more money. What I hadn’t heard was that apparently if you control for IQ, that difference disappears – tall people are smarter and so have higher wages. A suggested explanation is malnutrition, which both reduces height and lowers IQ, and poses a significant challenge to poverty. This and other fascinating studies make up the bulk of Poor Economics, as Banerjee and Duflo follow their own advice and turn to the data to understand the challenges of development.

If you want to help the poor, say Banerjee and Duflo, you need to give up grand theories and ideas of structural change, no matter how appealing a silver bullet may be. Rejecting Why Nations Fail, they argue that poverty is not the product of grand institutional failures, but rather is an individual or local condition, making cookie-cutter remedies useless. Development must be achieved by a series of small, well-thought out and well-tested steps, gradually accumulating into big changes, not grand designs with little relevance to the lives of the poor.

To do so, they point out, it is essential to first actually understand the lives of the poor. Arguments often rage over whether the poor are in a poverty trap, the concern being that had they only a little more money for health, schooling, or business, they could invest and increase their wages, starting a positive cycle of investment and returns. B&D, however, dismiss the arguments of Sachs, Easterly, and others, and point out that the answer can only be found in the data, through randomized control trials and empirical work, not through theory or ideological debates.

They do make some broader claims. Without a stable job, for example, they suggest there is little incentive to save, invest, or plan for the future. As a result, the creation of jobs with job security may be justified even if it is an inefficient method of job creation, because of the indirect benefits. I’m not sure if I agree or not, but it’s an interesting point.

Perhaps the one criticism I have of Poor Economics is that their attempt to stick to economic rationality, though understandable, can feel forced. At several times in the book, as when they’re discussing how some households will borrow at a 24% rate of interest in order to save it at 2%, psychological or behavioural explanations seemed like a natural next step in the discussion, and I was disappointed when they neglected them. Still, the book adds a much-needed voice in the discussion of economic development, one driven by data, not ideology.

Still interested? You can read my summary of their lessons for development here, or sign up for the Subtle Illumination reading list to your right! Or, you could always head to Amazon and get the book your yourself (or in the UK or Canada).