The Magic Bullet

The pioneering work of the Nobel-winning trio in alleviating poverty using the medical model of RCTs can help the government deliver services more efficiently and tackle difficult challenges

- Sanjiv Bhatia

The 2019 Nobel Prize in Economics was awarded to three economists, including one of Indian origin, Dr Abhijit Banerjee, for their unique approach to identifying effective ways of providing services like education and healthcare and delivering welfare subsidies like food rations, minimum employment guarantee and universal basic income.

Underlying their research is the development of what is known as experimental economics. Unlike the physical sciences, where one can get exact answers through repeated and controlled laboratory experimentation, economics deals with people and does not lend itself to such controlled testing. As a res ult, traditional economics has generally been normative, relying exclusively on theory, logic and analysis of past data.

The experimental approach proposed by Banerjee and his cohorts uses randomised controlled trials (RCTs) similar to those used in testing the efficacy of new drugs. Two groups of people are created, one the experimental group to which a new policy initiative is administered and the other a control group which is administered an alternative initiative. Differences between the responses of the two groups are then used to understand the efficacy of the applied policy initiatives. Such trials are being used to evaluate the impact of a wide variety of projects—everything from water purification tablets to microcredit schemes, financial literacy classes to teachers’ performance bonuses.