Esther Duflo, an MIT economist, won the 2019 Nobel Prize in Economic Sciences for her experimental approach to alleviating global poverty. Duflos early life working at a non-governmental organization in Madagascar and volunteering in soup kitchens in her native France inspired her to study economics and research the root causes of poverty. With her fellow Nobel winners Abhijit Banerjee of MIT and Michael Kremer of Harvard, Duflo showed that effective policies often go against conventional wisdom and popular economic models. The only way to find out what works, she argues, is to rigorously test solutions on the ground, and she encourages businesses to do the same. With Banerjee, Duflo also wrote the new book Good Economics for Hard Times.
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CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. Im Curt Nickisch.
The annals of business are littered with products that bombed and companies that went bankrupt because of one key mistake: They failed to account for actual human behavior.
Whether its assuming that people would always rent movies from a store, or that if you just build a multibillion-dollar satellite network people will buy your expensive phones, how consumers were expected to behave was quite different from how they actually behaved.
Our guest today says the same goes for economic policy. Too often, economic models project how people will respond to incentives or constraints. When in reality, things are quite different.
And when youre talking about educating a countrys workforce or promoting economic development in a poor region, getting it wrong can have sweeping consequences.
Esther Duflo is a cowinner of this years Nobel Prize for economic sciences. Along with Abhijit Banerjee of MIT and Michael Kremer of Harvard, she was recognized for their experimental approach to alleviating poverty. Her work shows that rigorous field tests can arrive at effective solutions that go against conventional wisdom and popular economic models.
Duflo is an economist at MIT. And shes the coauthor, with her fellow Nobel winner Banerjee, of the new book Good Economics for Hard Times. Esther thanks for joining us.
ESTHER DUFLO: Thank you, most welcome.
CURT NICKISCH: How did you first get interested in the economics of poverty?
ESTHER DUFLO: Well, my mom was a doctor, and she was spending some time in developing countries, in particular in countries, victims of war, where kids were victims of war, to kind of help out those children. And she would go on missions for some weeks at a time.
We kind of were always made aware that they were children who were living very different lives than we were. And I was always bothered by the difference in lifestyle and the luck that I had, and the responsibility that is implied for me.
CURT NICKISCH: When did you see poverty for the first time yourself?
ESTHER DUFLO: I saw French poverty quite early on. I started to volunteer in soup kitchen, that kind of thing, since I had that feeding the world kind of speaking to me. International poverty, I was 18 when I went to Madagascar for the first time with the goal of learning and helping if I could from an NGO that, from a local NGO there. So in a sense, I was always looking for what is the part that Im going to play in the world one day.
CURT NICKISCH: What steered you to economics and actually working on understanding policy and its effects, rather than just helping people whose lives you could see?
ESTHER DUFLO: Well, even in the soup kitchen experience that I had as a teen, I found it to some extent unsatisfactory, because I felt like you just do a small, small bit here. But do very little to try to think about what brings these people here in the first place. Already then, I was sort of thinking whether there might be something else that could be done.
When working with the NGO in Madagascar, that was a local organization, and I could see that they were doing good work, and that the way that they were doing it was not charity. They were trying to do, they were trying to organize economic systems for the people they work with to lead more fulfilling lives on their own terms.
And I thought this was eye opening, because until then I was more thinking of, you know, especially international aid, as you grow you provide food, and then people have food. And then I realized that the local organizations, so in that case it was an NGO, but it was a big, big organization, a big NGO, but it was entirely local. The local organization tries to set up systems to organize, to improve peoples lives in a more systematic way.
To me, it was just this shift of perspective, of saying, you know, what is the actual problem we are trying to solve here? And is there a, whats the best way to solve it? So economics only came later. I had a chance to do spend one year in Russia towards the end of my undergraduate degree, and I saw economists advising the government. And I thought, wow, these people, they have so much say. They can actually influence policy. And I thought this is probably what would suit me the best.
CURT NICKISCH: How do you think your experiences at a young age influenced how you wanted to go about doing your research and maybe doing it differently than customary ways of doing economic research at the time?
ESTHER DUFLO: What made it very clear to me at this, what it made very clear to me at this stage is that you have to go to the field, because if you want to study issues of global poverty, in India or in Kenya or in Ghana or in Madagascar, there is no substitute for going to India or Ghana or Kenya or Madagascar because our intuition from the comfort of our offices and our lives here on how people live their lives on the ground are just mostly worthless.
As a result, as soon as I became an economist, I immediately went to the field and then, and in particular, spent a lot of time in India, and then I in fact had a chance to realize how wrong many of the ideas that I had on the poor where, and how to set them right.
CURT NICKISCH: What youre saying sounds so familiar, probably, to people in a business audience, because this is just reminiscent of customer research and design thinking and really trying to understand the customer before you develop products for them. And essentially that was what you were doing maybe as an economist, seeing how people lived and behaved in the real world, and then trying to get those economic models to match up in a way that practically has impact. Does that sound right?
ESTHER DUFLO: Yes, it sounds absolutely right. The one difference is that when you are in business, in particular in customer-facing business, suppose your product is actually useless, then its going to be clear reasonably quickly. Its just not going to sell.
So once youve done your customer research and tried to come up with your product and come up with your product, say, you know, like an apple that folds itself, or something like that, like if nobody wants it, then the apple that folds itself is going to stay on the shelves, and then you are going to move to the next idea.
So the difference with policy is that in particular with some antipoverty programs is that that market test is usually absent, because when people say go to a school, even if its a terrible school, what are they going to do? They have nowhere else to go.
So you are, have to test your ideas and any impact of your idea yourself. You have to set up an impact evaluation test because there is no automatic market test which you would get in a business setting. So I think thats a crucial difference between the business setting and the policy setting that in general that market test is not there.
Once youre lost your customer in the policy setting, then you know your product is really, really, really awful, so for example in some parts of India people have basically abandoned the public school system. But thats a bit late. It would have been better to intervene earlier and to try to make the public schools better. But you wouldnt be able to do that by just relying on people walking away from your schools.
CURT NICKISCH: A lot of what your research has done is tried to apply rigorous experimentation and market test it, in a way, to some of these questions, how to alleviate poverty. Can you talk about what youve learned by doing that?
ESTHER DUFLO: So precisely, its because you dont have this automatic markets there that you have to replace it with impact evolution of your idea. And whats an impact evolution is asking what happens, you know, how much better is the situation of this particular person with my idea than without my idea?
So we take an example of lets say you want to improve school quality, and youre saying, well Im going to provide remedial education to the kids who are reaching grade three and cannot read. Then the idea is, we would say, well, it might be a good intuition. It has a chance to work. But if you know, you want to know whether it works, you have to set up a test which is as rigorous as the way you would test a new drug.
So you take 100 schools or 200 schools, divide them in two. In half of the schools provide your program. In the other half you dont, or maybe in half of the schools your program, you provide a program for grade four students, and in the other half you provide it for grade three students. And then you compare the kids who were exposed to the program to the kids who were not exposed to the program.
So thats kind of the idea of the mass-controlled trial. So we started doing that about, or I started doing that about 20 years ago. Michael Kremer and Abhijit Banerjee who won the Nobel Prize along with me, started just before me, and initially it was a very small confidential, very few people were doing that, but one of the things we worked on is create infrastructure and a movement around that, so that now its really hundreds of researchers along with their partners, government, NGOs.
Together this has produced a very, very large number of those projects. And each of these projects is one answer to one specific question, like for example, would it work to provide remedial education? But together, they also have given us a much clearer understanding of what are the key constraints that the programs face in succeeding in their lives, and what are the levers we have to remove those constraints and allow them to lead their best possible life?
CURT NICKISCH: Can you give me an example of how applying this kind of thinking or experimentation can have really surprisingly good results?
ESTHER DUFLO: So we can use that example, if you take malaria, ever since the early 2000s, its been known that insecticide bed nets are a very good solution to prevent malaria cases. Less good than having a vaccine, and it is great that some people are working on a vaccine. But in the meantime, we dont have a vaccine yet.
So malaria, so to prevent malaria, the bed nets is a good solution. But then there was a lot of discussions of what is the best way to provide a bed net. Should they be provided in a big or large scale for free, or should they be sold? And there were arguments either way, and people were kind of arguing on that. And then there was a series of experiments showing that giving them away is actually the best way to proceed, because you cover many, many more people, and actually once people have the bed nets, they use it very well.
That had been the doubt before. Would they use it well? And it showed that even if people get a bed net for free, they use it very well. And thanks to this piece of research, which was then replicated in several ways, people, there was kind of a consensus formed around the idea of mass bed net distribution, which occurred in African countries in a massive way and was responsible for the decline in malaria deaths. So I think this is a good story, because it illustrates the, A, the importance of a focus on the problem, which is, lets try and get, reduce the number of malaria deaths while the scientists are working on the vaccine. Lets not just wait for that day. In the meantime, we have to act now. B, lets figure out the best way to do it and be practical about it, not be blinded by our intuition or ideology, and C, once we have the answer, lets go for it.
CURT NICKISCH: Many people think about poverty as, you know, an intractable problem. But you know, the world has actually improved a great deal for the worlds very poor over the last few decades. You know, with millions upon millions of people moving out of poverty. Why in your view has that been happening?
ESTHER DUFLO: So there has been tremendous progress in the lives of the poor over the last three decades. Some of it has been due to economic growth in China and India, which are not things that any individual person or policymakers control very well. So its hard to emulate to say, well, lets just be like China. But its great that it happened, and its not something we can directly copy, because we dont know even what to copy.
But another thing that happened is also an improvement, enormous improvement in the quality of lives of the poor, even in countries where GDP didnt increase as much as it did in China and India. For example, there was a reduction in about half of infant mortality, and of maternal mortality. There was also something like a reduction in about 450 million deaths were averted from malaria. Almost all of the children are now in school, at least at the primary level, worldwide.
So you have a bunch of improvements in the quality of lives of the poor over and above just an improvement in the income of the poor. And even in countries where the income of the poor didnt increase. And that I think has come from a greater policy focus on those issues, and in particular, willingness to go from despondency or poverty is too much of an intractable problem. There is nothing we can do. To a certain kind of can-do optimism, to say, OK, we can just focus on the problem, and we can make real progress. And we can do that by figuring out what works and then implementing it.
CURT NICKISCH: What can business leaders do to alleviate some of this poverty? If an individual comes up to you and says, what can I do where I am in my company, or country, what do you tell them?
ESTHER DUFLO: So it depends on in what capacity they are coming to me. It could be that the first thing you want business leaders can do in their capacity as a business leader is to run their business at some level, I mean, depending on what the business is. But one way in which people become less poor is by getting jobs.
And one of the constraints that exists certainly in many African countries is people finding good jobs that fit with what they are wanting to do in life, and with their skills. There are now more and more people who are actually educated to get jobs. And businessmen and firms, etc., companies are the ones that are going to provide the jobs.
And then sometimes business leaders are despondent because they could not find the people that they want to hire. So we are trying to work with farms and companies to think about what are, what makes it difficult to run a business in one of these countries. And what type of barrier exists to finding the right people, to retaining them, to giving them good wages and the like? What kind of stands in the way for business to operate in this way? So thats work that, to kind of improve their business, which will create the jobs that will employ people.
The second thing, sometimes people, businessmen come more in their corporate social responsibility, with their corporate social responsibility hat. And there I would say many businesses, in particular, the companies that have potentially a lot of money to spend on CSR, in a country like India its because its required by law. It is lots of money. Could, honestly, spend his money a little bit better in the sense that that money is often not used as thoughtfully as you might think. You have business leader who will be very careful for any business decision, and then as soon as its the corporate social responsibility to just like spend anything, any first idea that comes to mind. And here, applying the same kind of scrutiny and intelligence that apply in business to your corporate social responsibility investment would be great.
CURT NICKISCH: In your new book, Good Economics for Hard Times, that you wrote along with your fellow, your fellow Nobel winner, Abhijit Banerjee, you argue that the lessons from your research in developing nations, you know, that rigorous experimentation and clearheaded economic policy can have surprising gains. You argue that those should be applied more in developed nations as well. Can you talk about that?
ESTHER DUFLO: So in developed world as well, I think a lot of our policymaking has been dominated by a sort of basic understanding of economics that was not necessarily fitting with the facts. So in the same way that all my intuitions about what it is to be poor and the poor live their lives were shown to be inaccurate as soon as I set foot in Madagascar and then later on in India and in Kenya, likewise a lot of the intuitions that policymakers operate on in this country are also wrong, I think.
And a lot of the intuitions that also sometimes the public has are also incorrect. And in fact, sometimes the intuitions that economist have, and that they base their models and their policy recommendations on also are incorrect in the sense that they are not born out by fact. So what we are trying to do in this book, Good Economics for Hard Times is to do a little bit the same exercise that we did with development of saying, this is what the facts tell us, and this is how to understand them, and this is how we have to rethink some of our presumptions for how people behave, and therefore how we should do policy.
CURT NICKISCH: I mean, one thing you talk about in your book is that human behavior goes against a lot of standard economic theory, like people staying in the same place when there are no jobs, versus moving away. And how that, you know, those behavioral things go beyond financial concerns, maybe. How might that be useful for managers and policymakers to think about?
ESTHER DUFLO: So this idea that people are much more stuck in place than we think is really essential, because all of our economic policies, and to some extent, business decisions, are based on the idea that people respond to incentives.
So there is geographical movement, and movement across sectors. So if you were working in coal, and coal is losing jobs, but fracking is gaining jobs, then you will move into fracking. And if these jobs we have in the Appalachia, and then now they are not anymore, then you will move to New York.
And of course, by introspection or just looking around, we should have known that its not true, that for people, its extraordinary costly to switch careers, to kind of shed the identity and the pride that they had in one line of job, to shed the social relationships that they had formed in the community, and pick up and start somewhere else, we know that most people are not like that, in fact maybe we wouldnt be like that.
But this is not how we think about policy ever. We started thinking, well, you know, if we open to trade with developing countries, the wages of the low skilled worker will fall a little bit, but just a little bit, on average. And we can compensate them in other ways. Without realizing that the problem is not that the average wage will fall a little bit. The problem is that for some particular people, individual people, its going to be a catastrophe, because not only their job will disappear, but the job of all their neighbors will disappear, and the community in which they live is going to go into a tailspin, etc.
And that this individual suffering are going to be perceived as such, and people are not going to feel fine because on average it would have been OK. This would only be true in a world where people are mobile easily. And I think we need to put back the cost of transition, not only the financial cost, but also the psychological and social cost of transition, at the same time how we think about any policy. And also how we think about how we are, as a society we support the people who pay these costs in their body and in their lives.
CURT NICKISCH: Economists are often criticized for being out of touch with peoples feelings and always looking at everything through a strict macroeconomic model. And it sounds like the same way that you have to really listen to the people on the ground in places like Madagascar and India, and really respect their dignity, youre saying that we need to apply that same kind of approach to developed nations where inequality is growing, and where there are winners and losers, just like other places.
ESTHER DUFLO: Yes, and where the losers of the economic games also are often considered to be just plain losers, in the American middle school sense of the term. Which is, you know, add, I think, insult to injury in ways that contribute to fueling anger and polarization and difficulty to have conversations.
CURT NICKISCH: Esther I have to ask you a kind of a career question, a personal question. You, I think at 47 years old, are the youngest person ever to win a Nobel Prize in the economic sciences. Youre only the second woman to win one. Do you think of yourself as a role model?
ESTHER DUFLO: I think almost by construction I am by now, because just being a relatively young woman, and therefore Im at least an example of that its possible. And I studied actually women accessing for the first-time political position at the local level in India, since there is a reservation for women in political position at the smaller level of government, at the Panchayati level in India, and I
CURT NICKISCH: When you say reservation, like
ESTHER DUFLO: A set aside.
CURT NICKISCH: A quota, or a, yeah.
ESTHER DUFLO: So typically every third village must elect a woman as a head. And then it will take. So I studied the impact that it had, and that actually made me change my mind on the role of quota of a woman. Because Ive seen number one, that women, these young, these women, often young, make different decisions than men, and in particular, they invest more in good that women care about. I also found that after one cycle of reservation, people become much more willing to consider that a woman might be competent as a leader. And after two cycles of reservation, they actually vote for them in large numbers.
Once the seat goes back to regular general competition, women are more likely to run and to be elected. So in places that have never elected a woman ever, you have reservation for a while, and then women can run and be elected. And finally, it has, the fact of having a woman in position of power changes what parents think that their kids might do. And it makes them more ambitious for their girls. It makes them want their girls to have a career and to stay in school. And in fact, they stay in school longer.
So, in my own work, Ive seen the impact that there is in having women being in positions where you dont expect them. So in that sense, the very fact that there is a woman as a Nobel Prize winner in the type of work that I do also that is more socially minded than most Nobel Prizes before us, I think will have a consequence, and Im, I certainly hope it will, because I do think there are not enough women in the economics profession, and economics is a social science. And we need a diversity of experiences and perspectives. And I hope that I can contribute to making that happen.
CURT NICKISCH: Esther, thank you so much for coming on the HBR IdeaCast to talk about your research. And congratulations on your win.
ESTHER DUFLO: Thank you so much.
CURT NICKISCH: Thats Esther Duflo of MIT, and the newest winner of the Nobel Prize in Economic Sciences, along with Abhijit Banerjee of MIT and Michael Kremer of Harvard University. With Banerjee, she wrote the book Good Economics for Hard Times.
This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Adam Buchholz is our audio product manager.
Thanks for listening to the HBR IdeaCast. Im Curt Nickisch.
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A Nobel Prize Winner on Rethinking Poverty (and Business) - Harvard Business Review