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The God of Small Things

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Using RCTs, Evidence-Based Action and Economic Plumbing to Understand How Charitable Organizations and Research Groups can Help Solve Global Poverty

The Devil in The Details

It’s been a long time since we’ve bandied around the devastating statistics that indicate the nature of global poverty today. Billions in destitution, countless others barely surviving, and most importantly, a hopelessness and mental trauma that makes the problem generational, and thus never-ending.

Let’s throw in some more numbers. Around 8.5% of the global population live on less than $1.90 a day, comprising almost 800 million people. There’s no doubt that there has been a steady decrease over the years, but poverty alleviation is nowhere near the level we expect it to be.

However, the solution to these issues may be that there isn’t one sole solution. We need to think from a grassroots level. The advent of behavioral economics and nudge theory are important in evaluating the poverty problem differently. As J-PAL founder and behavioral psychologist Sendhil Mullainathan puts it aptly, there is an enormous psychological side to poverty.

How do we understand this side better? The one solution that charities have started and must continue to adopt is evidence-based action. The numbers don’t lie, and more often than not, they offer unrequited, and sometimes unexpected, truth.

Implementation and the Challenge of Public Policy

The problem? Charities and social research organizations have been highly involved in their commitment towards fighting the scourge of global poverty, but their policies are aimed towards long-term reconstruction and wieldy goals that may be several years away from fruition or ineffective, nonetheless.

Economists, think tanks, and philanthropists are largely in the process of constructing theories and large infrastructural/ideological plans that lack one core aspect: instant benefit.

It’s not to say that the long-term solution is irrelevant, but as we will go to show, it is incredibly important to hit the ground running with frequent, day-to-day implementation.

The Abdul Latif Jameel Poverty Action Lab (J-PAL) is committed to implementation, using apt research, statistical modeling, and behavioral analysis. Its founders are the aforementioned Sendhil Mullainathan, as well as MIT professors Abhijit Bannerjee and Esther Duflo. In their groundbreaking book Poor Economics, Bannerjee and Duflo examine why evidence-based action is the solution we need if we are to achieve any of our goals.

Public policymakers must move away from the pure theory and get to work on quantitative implementation, as these economists strongly urge. More often than not, we must go for the small victories in poverty alleviation, because they emphasize on immediate action.

Role of Evidence-Based Action and Randomized Control Trials

Charity groups, social entrepreneurs, and anyone engaged in philanthropy or public policy need to understand that there is no one reducible formula to solve poverty.

While it may not be incredibly academic, Bannerjee, Duflo, and countless other stalwarts of the field argue that when it comes to social benefit, it is totally alright to make educated guesses. They argue that it is essential to start by asking questions, and making estimations about possible remedies, based on what we already know.

How do we verify these estimations? Enter Randomised Control Trials (RCTs). These scientific experiments, designed in the form of social trials, are designed to realistically test out theories and guesses among a sample set of individuals/ people in a particular area, to determine whether a solution works, whether it is realistic, and whether it contributes to the global poverty fight.

While its usage was originally limited to medical testing, it has now expanded to a field that must be commended for its reliability. RCTs emphasize on localized groups and a decentralized approach to poverty alleviation. Once again, it’s these emerging small victories that offer us the most hope for our future.

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101-ism: Are charities a victim?

It’s a dreary question, but one that we must ask nonetheless: Do most of us actually understand real-world economics?

Countless economists, working at J-PAL and elsewhere, have attributed the slow pace of economic growth and individual success in various countries to 101ism, i.e. the tendency to take financial and economic decisions based on primitive knowledge that one would acquire in an Econ 101 class. While the phrase may seem informal and random, it is an issue that plagues countless aid organizations and charities.

The ‘supply and demand’ concepts or the ‘indifference curve models’ that we theoretically derive have very little weight in the real world unless it is combined with real-world thinking. 101ism destroys the validity of economic policies by ignoring nuances and relying on notions of pop psychology or pop economics to take decisions that impact people’s lives.

Charities, for one, have various subsidies, aid policies and growth models that fall victim to this same dilemma. The advent of RCTs ensures that through social experimentation, we account for errors of human judgment and behavior in standard economic theory, thus arriving at solutions we can actually implement in the real world.

Economic Plumbing and High Impact Philanthropy

Duflo and Bannerjee – along with any economists that have ventured outside classrooms, academic debates, and IMF halls – are strong advocates of economic plumbing.

In their view, when it comes to effective giving and philanthropy, it is essential for us to be technicians first, and academics second. Plumbing is derived from the emerging notion that the actual details of public policy, or the nitty-gritties as one might say, are often ignored by politicians, academics and policymakers, and are left to technicians. A technician-like role helps us focus on implementation, which is severely lacking in mainstream economic circles.

global poverty

The Raskin Program in Indonesia is an example of the importance of plumbing. The program was designed to provide subsidized rice to low-income households. But the policymakers realized that even after this program had begun, it wasn’t nearly as effective as they would’ve liked. They realized that a large majority of the population was not aware of the program, or did not have appropriate access to it, and were thus unable to reap its benefits.

The plumbing question that arose was: Does program transparency increase the amount of subsidy that eligible households receive?

Technical solutions were soon devised. Now, sample cards were introduced, with an individual’s personal information and degree of eligibility given, along with the price and amount of subsidized rice. Colour variations were added to differentiate between various income brackets.

The result? A dramatic improvement in subsidy rates and bolstered economic growth. Rather than satisfying themselves with the 101-ist notion that ‘subsidies lead to growth’, plumbing ensured that the subsidies were actually accessible and transparently delivered to households.

Most importantly, it was devised in response to a request. If charities all around the world adopt a similar plumbing approach, they can develop deeper ties and connections with governments and policymakers, thus helping achieve their goals faster. Plumbing increases reliability, and policymakers and philanthropists, by uniting through this notion, can speed up progress.

Researchers are staunch proponents of this approach to high impact philanthropy and poverty alleviation – in their view, you only fix a problem by doing, not just thinking. And while that thought may seem cliched and primitive, it is undoubtedly true.

The Effectiveness of Inequality

Can RCTs really determine the veracity of educated guesses? Does it eliminate our biases and help us arrive at more effective solutions? And does it help catalyze social entrepreneurship in the future? As we will see, the answer is an overwhelming yes.

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A major area where RCTs have been highly successful is the realm of microfinancing. Pioneered my Muhamad Younus (even winning him a Nobel Prize), microfinancing is essentially the act of providing tiny loans to whoever wants it at a low-interest rate. If one were to expand it to the realm of charity and philanthropy, it is essentially similar, in that organizations are providing funds and credit to trigger economic growth in impoverished regions.

Microfinancing has been an important aspect of effective giving because rather than acting as a form of unconditional aid, it incentivizes people to actually act on the credit they receive and become a wage-earning member of society.

Microfinancing is most importantly credited with promoting entrepreneurship and small businesses among the poor and downtrodden. In India itself, we see a large number of kirana stores and local businesses that are a massive source of livelihood for individuals. Whether microfinancing is a significant contributor to this is a matter of concern.

The Failure of Microfinance and its Justification

After Younus’ Nobel Prize win, microfinancing was all the rage. But Duflo and Bannerjee conducted various experiments and discovered that there was zero evidence that microfinancing itself actually made individuals richer. In regions where it was in widespread usage such as Bangladesh, there was no direct poverty alleviation or noticeable improvement in standard of living gained through providing easy credit (i.e. low-interest loans) to the poor. In many cases, people were worse off, struggling in debt or just financially untouched.

In many cases, microfinance schemes were offered by philanthropic organizations and coupled with health insurance schemes to increase well-being. What was the result? When people were coerced into taking health insurance as a byproduct of this microcredit, they eventually started giving up microcredit. It was almost comical that what had been hailed as a solution for so many was being regarded so distastefully.

However, there is an intuitive justification for the notion of microcredit itself. Microfinancing isn’t actually useless. With the help of a minute amount of plumbing and technical improvement, it can be overwhelmingly successful.

So, why is microfinancing intuitively justified? Well, just because there isn’t evidence that it makes people richer, in general, doesn’t mean it doesn’t have a positive impact. Human behavior has a major role to play in this concept. People consume the way they want to, and that is desirable in itself. When people receive unconditional aid via charities like GiveDirectly, or when they receive microcredit, they have more money to spend. People then buy to increase their standard of living. In other words, people buy without getting rich.

global poverty

Microfinancing, by increasing people’s disposable income, actually enhances their real standard of living, but quantitatively they may be untouched or even worse off because they haven’t saved or invested.

An RCT helped confirm this. When microcredit was reduced in a village in Andhra Pradesh, India, there was a huge fall in aggregate consumption, and the resulting low-level equilibrium trap left sellers and buyers even poorer. Thus, there is an implied benefit to microfinancing.

The question then turned to: If microfinancing actually can help, then why doesn’t it help? Further RCTs were conducted in developing regions to understand this.

RCTs: What we learned

While it is easy for individuals to look at the evidence and jump to conclusions, we must conduct further RCTs to understand why exactly the system isn’t working like it is supposed to.

When this notion was applied to the microfinance crisis, an interesting observation was made. Duflo, Bannerjee and various J-PAL researchers conducted trials regarding the rise of small businesses and the nature of business people who had been given microcredit.

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What were the outcomes of the RCTs? An incredibly interesting observation was made. On aggregate, people who started businesses after being given microcredit were worse off than they had been before. But individuals who already had businesses beforehand, and simply used the microcredit to improve their businesses, had emerged significantly richer through microfinancing.

What does this mean? Well, the conclusion is disturbing, but it seems that in general, the best entrepreneurs benefit from microfinancing, because they know how to use their funds, whereas the worst entrepreneurs may get hurt by microfinancing or remain indifferent, i.e. unaffected.

Researchers Hassam, Roth and Rigol wanted to bolster this conclusion, and conducted an experiment where they gathered a group of small-business entrepreneurs in India and Bangladesh and had them objectively choose who they thought was the best entrepreneur in the group (there was no scope for bias, as they were promised a reward for giving an honest answer).

The entrepreneur who was adjudged the best by the group was then given $100 through easy credit, and one of the other entrepreneurs in the group was also given $100. The best entrepreneur almost always had a significantly higher return, while the other entrepreneurs in the group may even have suffered because of the microcredit.

The evidence thus gathered from the randomized control trials thus has an unexpected implication for philanthropy and financial aid – don’t microfinance everybody. There is a certain effectiveness to inequality of aid.

Charities and philanthropic organizations can adopt a similar metric. By analyzing who the best entrepreneurs are, and by predicting who will be more successful with their money, charities can thus selectively provide aid to individuals who can make use of it. This ensures their economic growth, and the growth of their businesses means more jobs and employment for the people around them. Giving microfinance or unconditional aid to everyone only exacerbates the problem.

Randomized controlled trials thus provide us with evidence in unexpected places, which may inspire actions that lead to widespread societal benefit.

From Vicious to Virtuous: Why RCTs necessitate Charity Participation and Effective Giving

RCTs and the notion of economic plumbing are complementary and provide a real-world basis to carry out poverty alleviation programs. But more than anything, the quantitative evidence provided by RCTs is actually incredibly encouraging for both organizations and civilians alike.

When people have the evidence upon which to act, they are more incentivized to give. Lofty theories and blanket statements often fall upon dead ears. Numbers have the allure of being reliable. They provide us with a mental justification for our actions and waive unpredictability. Other issues like food subsidies, education, corruption and generational poverty can also be better understood through evidence0based action.

While evidence-based action may not offer long-term solutions and benefit everyone on the ground immediately, maybe it doesn’t need to. Maybe we have to understand that social change takes time. When charities and philanthropic organizations start embracing the power of small victories, humanity will embrace the power of progress – and perhaps, the recklessness of wishful thinking.

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