16 October 2015

If you want to fight poverty, you have to understand it in the first place


A theory in search of evidence. These few words may summarise quite fairly the work of Angus Deaton, who this week was awarded the 2015 Nobel Laureate in Economic Sciences.

According to the Royal Swedish Academy of Sciences, “Deaton’s research has greatly influenced both practical policymaking and the scientific community. By empha­sising the links between individual consumption decisions and outcomes for the whole economy, his work has helped transform modern microeconomics, macroeconomics and development economics”.

Deaton performed fundamental research both on individual consumption behaviours and on the development of new empirical tools to better understand them. The focus of his contribution has been mostly on poor countries.

One of the most widespread applications of his work is the so called Almost Ideal Demand System (AIDS). AIDS allows to estimate how the demand for a given good changes as the consumer’s income, demographic factors and other goods’ prices vary.

The extraordinary impact of Deaton’s demand model on policymaking is not foregone. AIDS still receives an extensive acknowledgement in assessing the effect of policies on people’s consumption and different social groups. Similarly, AIDS are widely employed in antitrust practices to assess the impact of mergers on competition.

However, the Scottish economist has perhaps provided his most passionate contribution with respect to the empirical analysis of poverty. In particular, “one size doesn’t fit all” is the main message arising from Deaton’s research. He showed the importance of developing a comprehensive dataset, choosing the appropriate methodology of estimation and the adequate variables to understand consumption and development in poor countries.

Deaton’s research also focused on the social aspects of poverty by studying, for example, gender discrimination within poor families. To this purpose, his research showed for example that the consumption of adult goods like clothes decreases as the number of family members increases. But that, under hostile conditions, this reduction is greater when the new born is a girl rather than a boy.

As recognised by the Royal Swedish Academy, the Laureate’s work has been influencing not only in relation to scientific research but also to policymaking. Deaton’s contribution has been crucial in disentangling the relationship between poverty and growth and, ultimately, in addressing policymaking. In his recent book “The Great Escape”, Deaton is very explicit on this point: the ultimate solution to poverty may only lie in economic growth, for which aid is not a substitute. Giving money to the poor via international aid may help them to escape the poverty trap in the short run but, in the long-run, it is ineffective, if not harmful.

A better approach, he argued, is to allow poor countries to develop their own model of economic growth. Exporting developed countries’ growth paradigms or supporting poor countries with unsuitable receipts is wrong. In some cases it may even be be counterproductive as it ends up in financing ineffective government policies  rather than addressing the most fundamental problems of poverty.  To alleviate poverty, it is necessary that rich countries step aside and stop undertaking actions which jeopardize, rather than help, poor countries’ development. Rich countries should remove obstacles to poor countries’ growth, such as the protectionist measures that are still in place.

This year’s Nobel Prize is an acknowledgement to the importance of empirical economics in providing a useful contribution to a better world, insofar as economists step out of the Ivory Tower and perform evidence-based research. It is a prize for those who says that a necessary condition to understand poverty is to look at data. The sufficient condition is to be able to understand it and design the appropriate policies.

A previous version of this article was published in the daily magazine Il Foglio.

Simona Benedettini is fellow of Istituto Bruno Leoni and Carlo Stagnaro is chief of the technical staff of Italy’s Minister of Economic Development. The authors write in their own personal capacity.