We might never know the real pain of note ban: Esther Duflo

Economist Esther Duflo on demonetisation impact, role of randomized control trials in policymaking, low priority assigned to health and education in India

Development economist Esther Duflo. Photo: Ramesh Pathania/Mint
Development economist Esther Duflo. Photo: Ramesh Pathania/Mint

New Delhi: India’s demonetisation of high-value currency notes is a dramatic example of a policy announcement made without any serious thought given to implementation, said Esther Duflo, one of the leading development economists of the world and a professor at the department of economics at the Massachusetts Institute of Technology (MIT) in the US.

Duflo, whose research has focused extensively on India, said the real impact of the currency-scrapping gambit may never be known because India’s statistical machinery does not capture data on the informal economy on a regular basis.

Born in France, Duflo studied history and economics at the Paris-based Ecole Normale Supérieure before moving to MIT, where she finished her doctorate in 1999. A few years after finishing her doctorate, Duflo became one of the leading architects of a new kind of experimental economics, which relied on randomized control trials (RCTs) to answer questions of public policy. For her ‘definitive contributions’ to the subject, she was awarded the John Bates Clark Medal in 2010, one of the most prestigious awards in the discipline, awarded annually by the American Economic Association to an economist below the age of 40.

In 2012, Duflo and her MIT colleague Abhijit Banerjee wrote the best-selling book Poor Economics: Rethinking Poverty and the Ways to End it. Duflo and Banerjee are also the co-founders and directors of the Abdul Latif Jameel Poverty Action Lab (J-PAL) at MIT, which is the fountainhead of the new and experimental turn in development economics.

In an exclusive interview to Mint, Duflo spoke about demonetisation and its impact, the role of RCTs in economic policymaking, and the low priority assigned to health and education in the country. Edited excerpts:

In your book Poor Economics, you talk about the fad of the moment being converted into policy with little thought for implementation. Do you think the cashless economy justification for demonetisation is one such case?

I think it is a very dramatic example of very little attention paid to implementation before it (demonetisation) was launched. The fact that more than a hundred rules have been issued shows there is little clarity on the nitty-gritty of how it would play out. For example, the UPI (unified payments interface) platform would have been the logical way to carry forward the cashless thing instead of something like a Paytm. But banks are still unprepared and reluctant to endorse them. This is just one example of jumping into a cashless economy without having the gears in place.

Demonetisation’s biggest effect is expected to be on informal sector, which mostly employs poor people. How would such a temporary income shock affect the battle against poverty in India?

We do not know that yet and we might never know. This is because there is no effective mechanism to measure GDP creation in the informal economy. I was told that informal economy GDP is calculated by indexing it to the formal economy GDP. If that is the case, we might never know the exact magnitude of loss. And the government might use these figures to argue that there was no significant setback. People are claiming workers are returning from construction sites to their villages. But there isn’t much high-frequency data on these kinds of things, which would capture the short-run pain.

What is your take on the divide in economic thinking between focusing on growth and welfare spending?

The biggest problem with just focusing on growth is that we have no idea what causes growth. And this does not hold just for me, but a whole lot of macroeconomists who have studied numerous determinants of economic growth. So focusing on just growth can be a bit useless. Another issue which has become important vis-à-vis growth is its failure to guarantee upward social mobility for future generations. In the US, this factor explains a lot of discontent which manifested itself in support for Bernie Sanders in the primaries or election of Donald Trump. I think even if one knew about what exactly leads to growth, focusing on it while ignoring larger gains for people can be very counter-productive.

J-PAL recently announced a Micromasters programme which provides for online learning followed by education at MIT. However, there is no course on macroeconomics in the curriculum. There is also criticism that the RCT method is not very useful in understanding larger economic issues.

There is definitely a role of macroeconomics in policymaking and day-to-day management of the economy. In fact, the field of macroeconomics is currently very unsure and experiencing very lively debates. However, it is also important to realize that without understanding microeconomics, there cannot be any sound macroeconomic wisdom. Both experience and data shows that same factors have had very different impact on growth in different places.

What do you have to say about criticism of the RCT method vis-à-vis issues of replicability and actual policymaking on the ground?

To me, the question is more empirical than conceptual in nature. With an increase in number of experiments being carried out, we are finding that their results are more or less similar in drastically different places. In some cases, it has also challenged the conventional wisdom. In the wake of such evidence, the replicability criticism does not hold. As far as the question of usefulness in policymaking is concerned, if a pilot policy experiment does not work on a small scale in many places, it does tell us about its limitations. Also, in many projects, we are already working at a large scale. For example, some of our immunization-related studies are spread across various districts in India. These can have important lessons for policymaking.

Does working on such large-scale projects, which involve active collaboration with the government limit the ability of independent academics to critique the state? Is there a conflict of interest here?

I believe flagship programmes of any government cannot be evaluated due to this reason. However, conflict of interest does not matter in most of our experiments. This is because we often focus on aspects which are hardly of a polarizing nature and deal with minute details of implementation policy. For example, whether advance payment is more efficient than payment after furnishing certificate of spending in a public works programme is not an issue which figures in the political discourse.

You have been tracking India’s development record for quite some time now. What do you think should change in India’s development priorities?

Of course the country is richer and poverty has declined. But there are also things which have not moved. I feel a deep sense of crisis when I think about education and health, especially for poor. These concerns are not shared widely enough at any level of government and that’s unfortunate. While policies like moving to a mass health insurance programme might be a great idea, one does not know how it would work out in practice.

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