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  1. Wealth
May 11, 2012

Esther Duflo and What Makes Aid Work

By Spear's

The unintended consequences of aid can often be larger than the intended ones, and have until now, remained embarrassingly understudied

Development aid has thankfully largely moved on from the traditional model of a suited donor handing out cheques and food parcels to grateful villagers — development organisations now look for local ‘partners’ and seek ‘national ownership’, the emphasis is on ‘capacity building’ (training by any other name) and ‘sustainability’, not on gifts.  

In its latest form the concept that ‘if you teach a man to fish you feed him for a lifetime’ has made its way into finance and ‘impact investing’ — the idea that aid works better when thought of as an ‘investment’ not as a gift, and that properly spent development money should deliver both social and even financial returns over time.

Development thinking is currently undergoing another revision, thanks largely to economists Abhijit Banerjee and Esther Duflo. In 2003 the two economist set up the ‘Poverty Lab’ to discover why so much foreign aid fails. The unintended consequences of aid can often be larger than the intended ones, and have until now, remained embarrassingly understudied.

The Economist recently ran a fascinating article based on a recent lecture by Duflo exploring the role of hopelessness in persistent poverty. She argues that some aid projects can yield surprisingly good results if they tackle the lack of hope experienced by many of the poor, which prevents them from taking small risks that could make them better off.  

Consider the following example: a microfinance scheme in Bangladesh offered people a small productive asset such as a cow or some chickens instead of a loan, and then offered training and financial incentives to the recipients to ensure that they didn’t sell the animals straight away. They discovered that the subsequent increase in the family’s income was far greater than could be explained by the cows or chickens alone.  

Duflo’s explanation was that the asset offered the recipients the opportunity to think about more than simply subsisting and offered cause for optimism, and that the recipients responded by working harder and exploring new lines of work.

Mainstream economics has long recognised that humans rarely act in a purely rational way, it’s high time that development economics recognised the same and adapted accordingly.  Insights such as these have the potential to transform the way development aid works.

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It’s also an important for philanthropists to take note, as it offers yet another reason to ensure that they properly monitor the effect of their giving. For every success story as described above there are countless examples of well-meaning projects yielding less than satisfactory unintended and unpredicted results.

Read more by Sophie McBain

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