Theory-Free Foreign Aid

Two warring camps have divided the field of development economics in recent years. One side, led by Columbia University professor Jeffrey Sachs, argues that massive infusions of foreign aid can bring the developing world out of poverty. On the other side, led by William Easterly of New York University and economist Dambisa Moyo, are those who criticize foreign aid, saying it has not helped poor countries create jobs or industry but fostered dependence on Western handouts.

Could it be time to look at foreign aid and just test which strategy works best?

Now a group of young economists based at the Abdul Latif Jameel Poverty Action Lab (J-PAL), at the Massachusetts Institute of Technology (MIT), are staking out a third position: Enough with your grandiose theories, they say. Let’s look at very small, specific actions (subsidies for mosquito nets, for example, or incentives for vaccines), and test which strategies work best for the least cost. Established in 2003 by Esther Duflo, Abhijit Banerjee, and Sendhil Mullainathan, J-PAL has quickly grown to include 46 professors at about a dozen universities conducting at least 200 randomized control trials in 33 countries.

Duflo won a 2009 MacArthur Foundation “genius” grant for her work, which “is so minutely focused that its importance is not easily grasped at first glance,” observes journalist Maureen Tkacik. In one representative study, Duflo found that Kenyan farmers were just as likely to buy fertilizer if free shipping were offered as they were if offered the fertilizer at a heavily subsidized price. Since the shipping discount was cheaper, the discovery should allow aid givers to get more bang for their buck.

Empirical economists have been criticized for focusing on situations that are too “narrow” or trivial to have any useful implications for policy, note economists Joshua D. Angrist of MIT and Jörn-Steffen Pischke of the London School of Economics in The Journal of Economic Perspectives. But over time, the cumulative results of many small empirical studies may supply the building-blocks for bigger theories, as has happened in the field of medicine, in which “clinical evidence of therapeutic effectiveness has for centuries run ahead of the theoretical understanding of disease,” Angrist and Pischke explain. In their study of the increased use of empirical tools, not just in development economics but in labor economics and public finance as well, they assert their hopes that the fields of macroeconomics and industrial organization will find uses for these methodologies too.

For their part, the “randomistas” (as Duflo and her associates are sometimes derisively called) are not discouraged by critics, Tkacik reports. Many of them grew up watching big-name economists issue sweeping but “ultimately ineffectual” policy prescriptions. As Duflo puts it, “Ideology doesn’t really matter so much when the objective is getting kids to show up for school or immunizing children.”

THE SOURCE: “The Pragmatic Rebels” by Maureen Tkacik, in Bloomberg Businessweek, July 2, 2010, and “The Credibility Revolution in Empirical Economics: How Better Research Design Is Taking the Con Out of Econometrics” by Joshua D. Angrist and Jörn-Steffen Pischke, in The Journal of Economic Perspectives, Spring 2010.

Photo courtesy of the UK Department for International Development