Reality versus perception

October 21, 2019

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Conventional wisdom at times flies in the face of reality as shown by the experiments conducted by the Nobel laureate economic team. Below are examples of a couple of economic trials that run counter to popular beliefs.

Microfinance alleviates poverty

Microfinance is gift-wrapped as a panacea for poverty alleviation, with inclusion being the main hurdle rather than question its credibility as an effective tool to fight poverty. A 2017 paper by Banerjee, Duflo and Hornbeck, “How much do existing borrowers value microfinance? Evidence from an experiment on bundling microcredit and insurance,” presents a randomised controlled trial that, in part, refutes this opinion.

One of India’s leading microfinance organisations, SKS Microfinance began requiring clients to purchase a health insurance policy which proved to be extremely unpopular. However, the authors coordinated with SKS to leave out some of the villages. Thus their experiment was used to evaluate impact when clients opted out of microfinance facilities vis-à-vis when customers continued to avail it.

The authors found that microfinance had little impact on income, consumption, social outcomes, continuation of business ownership or starting a new business. While businesses that were operating before availing loans from SKS saw a decline in profit, sales and employment, there was no effect of losing microfinance on businesses that started after SKS started lending. In fact, for the latter group there was a substantial positive effect on consumption, particularly non-durable consumption.

Their findings indicate getting an extra loan does not necessarily make a household more productive which begs the question whether microfinance is as effective a tool to mitigate poverty as it is often painted to be.

Demanding curriculum guarantees better results

In Karachi at least, children younger than two years old are packed off to Montessori schools with the expectation that they will be able to rote learn their alphabets and phonics. This is indicative of the level of pressure students face in memorising daunting curriculums.

A paper by Duflo, Banerjee, and 6 other economists uses an RCT regarding education as a proof of its scalability. In “From proof of concept to scalable policies: challenges and solutions, with an application” the authors argue that in India, as in many developing countries, teachers are expected to teach a demanding curriculum regardless of the level of preparation of the children. Those who get lost in the early grades find it hard, if not impossible, to catch up.

The paper explores “teaching at the right level” where children are grouped according to what they know and not their age, for some period of the day or part of the school year. This trial was eventually scaled up to run in about 40,000 schools in Bihar and Uttarakhand.

Though student’s abilities significantly improved under the programme, the findings indicated that even private schools were not willing to implement it because of the high level of competition.

Interviews with teachers revealed that while they thought the method was interesting, it required time and patience which prevented them from completing the syllabus in time. Teachers and parents put more weight on covering grade-level curriculum than on making sure that everyone has strong basic skills.

Published in Dawn, The Business and Finance Weekly, October, 2019