Esther Duflo is the 2019 Nobel Memorial Prize in Economic Sciences laureate together with Abhijit Banerjee and Michael Kremer, the prize was awarded for their experimental approach to alleviating global poverty. In the conversation with Kseniya Yudaeva, first deputy governor of the Bank of Russia, Duflo reflects on the findings of her research which could be relevant for central banking.
Yudaeva: So today we have a very good speaker, Esther Duflo, an American – French – Indian economist, and very well known, she is the last year Nobel prize winner. So Esther, thank you very much for agreeing to talk to us. Everybody characterizes you as a very pragmatist economist. So she is a pragmatic who does things which are very practical. And she says that economists should be plumbers rather than just visionary or engineers.
So, Esther, could you please elaborate a little bit more about this concept. Does it apply to monetary policy, banking, and financial center regulation and supervision? What do you think?
Duflo: Yeah, so, I think what I argue is a little less big than that, I don’t argue that all economists should be plumbers, but there is space for plumbing. There is also space for theory and big ideas, and there is place for engineering – which is, you know, if you want simulation or computational work, etc. And what I mean by plumbing is really engage in the main issue of the policy work and policy implementation which we have much less guidance about. And with a plumber, we are going into the real world, and we are just trying things out in a world that we know is much more complicated than what we can comprehend. The same way as a plumber we are trying to fix a leak somewhere and if it doesn’t work then try something else because we don’t have a full vision of the system.
And my argument is that policy work is often like that, to a large extent, that policymakers often are not so interested in that aspect of things and that economists are really rarely interested in that aspect of things, so in essence nobody is interested. And therefore you can have ideas that are great, and engineers that put in place some great systems, but then at the last step of implementation it fails. My work is mostly on development, but I think that insight applies very much to all policy work.
Yudaeva: Let’s go to your research agenda. How did COVID-19 change it?
Duflo: In the short run, I think like many economists I got consumed by the desire to do something on COVID-19 and this is amazing how everybody shifted on a dime and started doing COVID-19 related research. A lot of my work has been on preventive health and social networks, and how social networking can be harnessed to encourage preventive health behavior. Quite naturally my instinct was to pivot towards those types of projects which I have done both in India and in the US.
And I also happen to have, to be engaging a panel of old people in the south of India. And older poor people seem to be the most affected by COVID-19 you can think of. So we started surveying them and finding out how they are coping with the crisis and how the government had helped them cope with the crisis.
In the medium run, my business very much relies on being close to the people. And if you can’t go out in the field at all, that’s a little bit of an issue. Again, in the very short run, it’s not so much of a problem because everything that’s already ongoing, we basically shifted to talking to people on the phone. But for future projects, it will be quite interesting how things are going to rearrange.
Yudaeva: I’m actually quite sympathetic to what you are saying because we have this regular inflation expectations survey and we had to change it dramatically because we were not able to make it person to person for a few months. We are now back to the old technologies because many restrictions have been weakened in Russia, so we can do them in the old way but for a few months we had to do them by phone and we had to change methodology. And basically this few months’ information is not comparable to what we had done before.
A more general question about COVID-19. We all noticed a lack of trust in economists in the last maybe 10–15 years. Do you think COVID-19 is going to improve the situation or make it worse?
Duflo: I think it’s going to leave it in the same place for economists because although we should be very pertinent I don’t think people perceive us as being pertinent. I think that now people perceive that we should care, you know, for epidemiologists and doctors and all people can think about is the vaccine.
I think what’s more interesting is what’s going to happen to the governments. Not only, of course, there is mistrust in economists but there is also mistrust of government that is growing and growing and growing over the last few years. And what you saw with COVID-19 is evidently why do we need the government. You know, there can not be a mask mandate without the government, there can not be ventilators in hospitals without the government, there can not be an economic rescue package without the government. So on the one hand, we realize: “Oh actually that’s why we have a government!” You know, in some cases the market is not going to solve all of the problems that we have.
So then I think there is a kind of a crossroad which is either the government is successful and then that’s going to renew the trust that was withering away. So you see Korea where the trust in government was going down – I can totally imagine that it’s going to go up because they have done such a good job. And on the other hand, you have countries where… the US, where the government, trust in government was falling and falling and falling, and now the government is doing like a horrendous job of dealing with the pandemic.
Yudaeva: I see. What about NGOs and civil society?
Duflo: I don’t know if there is such thing as trust in civil society but at least…. so I sense that during the lockdown in Italy, in France, in New York people kind of got together a little bit. It seems to me there was a bit of a sense of commonality of purpose, that’s not there usually. Now whether that’s going to persist I don’t know. I hope it does because we have a lot of common purposes in societies, we have a lot of challenges that need to be addressed by collective action and if we can keep some of this spirit to sort bigger problems, like climate change, for example, that would be a good thing.
Yudaeva: Let’s switch to communications. You know central banks in the last maybe 20 years changed the paradigm significantly. [Former Chair of the Federal Reserve Alan] Greenspan used to say that being clear is not good for monetary policy. But now we communicate a lot. So do you have any advice for us, for monetary and finance, which comes from your research?
Duflo: You know communication by central banks is not so different than communication by another business. You want to think about it as marketing and you need to really try things out. So for example, see if people respond to inflation targeting with their view on inflation, with their consumer confidence, respond to various kinds of announcements. In a few years, very few, I think 2–3 years, we’ll start to have much more clarity on what people respond to, this or that announcement, and therefore what announcements matter.
One thing that I think we found which might be relevant is that people respond, even when there are a lot of messages around, people still respond to a credible voice. So in this paper where Abhijit Banerjee (India-born American economist, professor at MIT, Nobel Prize winner-2019, Esther Duflo’s spouse. – Econs) was our credible voice and we sent those messages to.. COVID-19 messages to millions of people in West Bengal. And it’s an environment where they have several messages a day telling them what to do. And despite that, getting this one message changed their behavior and changed their willingness to report symptoms to the local health worker. This very much fits in the literature in psychology and marketing – that credible people make a difference.
Yudaeva: Okay, that’s very interesting. Let’s speak about finance more generally, there is this old question whether finance is good for development or not and what can we do as economists to sort of improve the effect of finance on development?
Duflo: In the COVID-19 crisis the rich countries were able to borrow tons of money at almost zero interest rate with no impact on the credit rating. But the poor countries couldn’t really do that because if they had done that they would have damaged their credit rating. I think that’s an example of the problem with finance, the way that the financial world is approaching poor countries. Right now, you know, the need for borrowing in a country is not related to some mismanagement on their part, is related to a worldwide pandemic, so there is no moral hazard. Yet they cannot borrow.
Yudaeva: Yeah, but that’s also an issue of international financial architecture and this is why the IMF is trying to work quite heavily… Let’s speak about micro problems in finance. Microfinance was very popular as an idea because it was believed that it will help entrepreneurs to develop. But now many countries like Russia, for example, faced the problems that microcredit usually provide very expensive credit for consumption purposes, it’s not clear whether it’s good or actually bad for welfare. So, is this problem of design or the problem with the idea?
Duflo: Over the years we managed to do a number of evaluation of microcredit programs in many countries going from Bosnia and Herzegovina, Mongolia to Ethiopia, India, and in all of these countries what we find is very much what you describe which is microcredit typically is used for consumption purpose and therefore does not lead to any expansion in businesses, and therefore it doesn’t help people to get out of poverty. What it does is that it helps them buy, you know, something that they couldn’t have like a fridge or a cycle.
That doesn’t mean that it’s useless, I think it has some value. Maybe if your idea is to help people finance consumption there are other products that are better appropriate for them, for example, saving products. And if your objective is to help the people who really feel, really want to be entrepreneurs then there are probably also better products to do that.
Yudaeva: I see. So it should be more tailored products to entrepreneurs…
Duflo: I think much more. You know, the idea that every poor person is an entrepreneur? And it’s just not true. Most poor people like most not so poor people are not entrepreneurs, they would rather have a wage job and peace of mind. In fact, some effort in identifying who wants to be an entrepreneur really pays off because once you can find those people they actually have huge attempts to do their business. It’s just that it is a very small minority of the borrowers and most of the borrowers borrow for consumption purposes.
Yudaeva: Thank you very much, Esther. I think the time is up more or less for our talk. And I remember the last time we saw [each other] you just opened your laboratory (The Abdul Latif Jameel Poverty Action Lab (J-PAL). – Econs), that was a long time ago when I met you when I went to MIT. And right now it’s really a [global] movement, so I think that it’s very important that such passionate people like you, they manage to actually realize their passion and create a movement around it, this is what’s changing the society in any case. Because when I prepared for this interview I read a lot about what you have done over the last 20 years and it’s quite impressive, so let me congratulate you on that and let me thank you once again for this conversation.
When I read what you’ve been doing I started to get ideas that I probably need to think about what we do following your example. Because there are many questions in regulation like how do you set up a pension system. Nobody actually used the approach which you have to this kind of questions.
Duflo: Thank you so much and congratulation to you for your own excellent work.
Yudaeva: Thank you very much! Good luck with the job! Good luck with your movement! And thanks again for this talk.
On September 16 Esther Duflo will deliver an online lecture "Good Economics for Hard Times" which is a part of a Series of Guest Lectures organized by the New Economic School. Registration is available via link.