Experimenting His Way To The Nobel Prize ⁠— Abhijit Banerjee’s Recent Work On India

Indian-American economist Abhijit Banerjee, who won the Nobel prize for economics on Monday, along with fellow economists Esther Duflo and Michael Kremer, has often relied on an experimental approach to development economics. From a study of microfinance to drunk driving, Banerjee, Duflo and Kremer have used this approach across a number of economies and subjects, eventually winning the most coveted Nobel prize for their work.

“The 2019 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel has been awarded to Abhijit Banerjee, Esther Duflo and Michael Kremer for their experimental approach to alleviating global poverty,” read the citation from the committee.

Papers authored by three, available on Banerjee’s Massachusetts Institute of Technology webpage, include a number of recent studies on India. BloombergQuint compiles some of the takeaways from their work.

E-Governance: Impact On India’s Rural Employment Guarantee Scheme

The most recent paper authored by Banerjee and Duflo, along with three others, studies the impact of a payment reform on the Mahatma Gandhi National Rural Employment Guarantee Scheme. The reform linked fund flow to incurred expenditures and reduced the number of intermediaries involved in fund disbursement.

The paper examined the impact of such a reform through a large-scale field experiment in Bihar. It found that the new payment structure significantly reduced fund leakage, which benefitted the exchequer. However, it failed to help workers and in fact led to further delays in payments. It also added to the burden of the local administration.

“...an increase in payment delays further reduced the value of the program for villagers who were directly affected by the reform. Finally, the nature of program implementation caused the administrative burden of running the program to increase for local officials,” the paper concluded.

While benefits from the governance reform were mixed, the government has subsequently expanded the use of the ‘public finance management system’, the authors noted.

“The perception of e-governance as an anti-corruption tool is heralding significant reforms for India’s government payment architecture. The next important step is to ask how these gains can be leveraged to better ensure timely delivery of program funds to the targeted beneficiaries, without which local support for such reforms will remain limited,” the paper said.

Microfinance: Who Benefits And How?

Another recent paper co-authored by Banerjee, dated October 2019, is a study on the effects of microfinance. The team of four economists studied the benefits of credit access from microfinance and found that they differ widely.

Individuals with an existing business before the entry of microfinance (who the authors called gung-ho entrepreneurs or GEs), saw “economically meaningful” positive effects from the access to microfinance. The positive impact was more pronounced for households that escaped the “fixed-cost-driven poverty trap.”

For others, such as those who started new businesses with microfinance or used the funds for consumption, the study found little long-term positive impact. “These reluctant entrepreneurs and consumption borrowers do not experience benefits from microcredit access, neither do they appear to experience harm.”

In the same study, the authors also studied the intersection of microfinance with the informal credit market.

The study found evidence that access to formal finance reduces these households’ take-up of informal credit. While microfinance may reduce borrowing costs, overall demand for credit may change very little for some groups. For the more entrepreneurial borrowers, microfinance crowds in other sources of borrowing. “It is therefore essential for policymakers to understand these interactions when designing financial inclusion policies and when targeting financial products to specific groups,” the authors said.

In conclusion, the study found that there are indeed sizable benefits from microfinance for some people, but it takes time for these benefits to accumulate.

Efficient Use Of Police Resources: The Drunk Driving Experiment

Banerjee, Duflo and co-authors, in a September 2019 paper, went about testing whether police activity should be narrowly focused and high force, or widely-dispersed but of moderate intensity. The idea was to understand how best state resources can be deployed.

As part of their research, the team studied data from an anti-drunk driving campaign in Rajasthan. The study showed that a police force is better served by spreading out its area of activity rather than concentrating its range of operations.

“The central conclusion is that there is clear evidence of learning, hence police interventions focused on the single location with the highest prior concentration of criminal activity are rapidly undone by the diversion of criminal activity to other areas,” the authors wrote. “In contrast, an intervention spread across multiple, initially less promising, locations causes a significant decrease in road accidents and deaths.”

The paper found that rotating sobriety checkpoints reduced night accidents by 17 percent, and night deaths by 25 percent, while fixed checkpoints had no significant effects.

“However, just as drivers learn about the beginning of police enforcement, they also learn that it has come to an end–we see a slow reversion of driver behavior and a return to drink and driving after the intervention,” the study concluded.

Universal Basic Income

Banerjee has also waded into India’s basic income debate in recent times and is among the prominent proponents of the idea.

His 2019 working paper on, “Universal Basic Income In The developing World,” co-authored with Paul Niehaus and Tavneet Surithey, provides multiple instances of the positive impact of cash transfers in developing countries on a very wide range of outcomes – education, health, entrepreneurship and so on.

The UBI debate is not simply a debate about whether small, regular, transfers are an effective way to achieve some policy objective, the economists wrote in their paper. It is as much a debate about what kind of society people want (and will vote for) as about how to get there, they added.

Weighing in on the issue earlier this year, Banerjee told BloombergQuint that a basic income avoids the contentious issue of targeting, among other things. “A UBI means everybody is entitled. No one needs to quit their job to get it, or lobby to be a beneficiary,” Banerjee had argued after the Indian National Congress proposed a NYAY basic income program as part of its election agenda.

Banerjee, however, had acknowledged that India does not have the fiscal space for a large-scale basic income program. “In terms of budget, we will need to make the fiscal space of 2-3 percent of GDP, which is currently not there,” he said.