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Economics Photo: Nobel Prize Economics

Abhijit Banerjee, Esther Duflo and Michael Kremer are the winners of this year’s Nobel Prize for Economics recipients. Photo: Nobel Prize
WHY IS THE NOBEL PRIZE IN

ECONOMICS IMPORTANT FOR

THE PACIFIC?

It’s changing the way we ‘do’ development

By Samantha Magick undesirable outcome on both fronts.”
Hoy has also worked with PNG’s central bank to test its long-running financial
Last month three development economists won the 2019 Nobel Memorial Prize literacy and financial inclusion program aimed at getting people to move into the
in Economic Sciences, working in an area of economics that is only now gaining formal financial sector and save funds for the future. The team surveyed 40 East
traction in the Pacific region. Sepik villages who were selected to be involved in the program via a lottery, and 40
Abhijit Banerjee and Esther Duflo of the Massachusetts Institute of Technology ‘almost identical’ communities who were not, to measure its impact. The program
(M.I.T.) and Michael Kremer of Harvard won the award—which is technical- had three main components; a two-day training course on budgeting and saving
ly known as the Sveriges Riksbank Prize— “for introducing a new approach to within villages, the offer of a fee-free bank account for these trainees, and consistent
obtaining reliable answers about the best ways to fight global poverty,” the Nobel reminders over the six weeks following the training.
committee said in its citation. “What we actually found was that the training was incredibly popular, people
Writing for the Brookings Institute, World Bank Lead Economist, Development really wanted to participate in this program, and when offered bank accounts people
Research Group, Karla Hoff said: “Their experimental work has changed the culture would jump at the chance. But it didn’t actually lead to any, what we would call,
of economics… It helped change deep assumptions about how individuals make downstream outcomes. There weren’t any more savings, they weren’t any more likely
decisions and about what economic development is. It changed the way many devel- to formalise their businesses, and they weren’t even any more likely to budget, even
opment economists work, where they work, and the kinds of people they work with.” after doing the training.
The prize winners’ experimental work is in the use of Randomised Controlled “They were going out to really remote communities where most people were
Trials or RCTs. This methodology is traditionally associated with medical trials, living in a non-monetary setting, and they just don’t need to be part of the formal
and entails giving a ‘treatment’ or development intervention to some people but financial sector. So our suggestion was, look there’s evidence around the world that
not others, and then comparing the outcomes for both groups. The ‘R’ in RCTs is suggests that among people who are part of the cash economy, there could be some
critical; treatments are randomly allocated and in sufficiently-large sample groups, benefit on this sort of program, so maybe you need to focus in the next phase of the
this means the treatment and control groups will be very similar. Treatments can program on those people who are part of the cash economy. So instead of moving
include handing over policing powers to the community, distributing cash vouchers people from being unbanked to banked… we should be focussed on people who are
rather than block funds, or changing the methodology and location of cervical cancer already relying very heavily on cash.”
tests (see sidebar). Hoy says there is a strong desire amongst government stakeholders to support
Australian National University academic, Chris Hoy is currently working on two RCTs, and that it believes this will only grow going forward.
RCTs in the Pacific; in Fiji on ‘the impact of a secured transaction framework’ and “The PNG tax office has a clear mandate. They need to increase the amount of
with Papua New Guinea’s tax office to test the effectiveness of SMS messages (or revenue being collected, and they want do whatever it takes. And if something is not
“nudges”) that remind Small and Medium Sized Enterprises (SMEs) of lodgement working, then they want to stop doing that.
due dates, or inform them about the public benefits of paying tax. “The donors, at least in my experience, could really come to the table more in
“People don’t want to be owing tax, and don’t want to be investigated by the tax coming to support this kind of mindset. Maybe donors tend to take a more process
office, but due to behavioural biases you can sort of end up in that situation [e.g. evaluation, a focus on policies, wanting to know ‘did money get siphoned off for
forgetting deadlines]. And the tax office obviously wants people to pay tax, so we’re corruption’ etc, as opposed to outcome or impact based evaluations, that, is, did this
looking at other ways in which the tax office can engage taxpayers to minimise this program lead to what it was intended to do? The policy makers are there, they are

16 Islands Business, November 2019