Eradicating poverty and the Buddhist dilemma: An Interview with Dean Karlan

Is there a sure-fire solution to eradicating global poverty? The experts generally fall into two camps: those who believe what is needed is more money in more places; and those who think that too much has already been spent too inefficiently and ineffectively, requiring a new and smarter approach to aid. Hence the Buddhist dilemma that Dean Karlan and Jacob Appel allude to in the introduction to their new book, More Than Good Intentions: How a New Economics Is Helping to Solve Global Poverty. Karlan, a development economist at Yale and co-founder of FAI, and Appel, a researcher at Innovations for Poverty Action, founded by Karlan, argue that there is a third way ---combining behavioral economics with rigorous evaluation. Their new book takes readers around the globe –where economic theory collides with real life – and offers a new way to understand what is working (and not working) in the fight to reduce poverty. FAI talks to Dean Karlan.

Solving poverty—checking your preconceptions at the door

FAI: Millions of dollars have been spent at alleviating or eradicating poverty. What’s wrong with what we’ve been doing? Why hasn’t it been working, or has it been working?
Dean Karlan (DK): So, Some of it has been working, some of it has not –and I think what has been wrong is that it’s not always easy to just intuit whether something is working or not – it’s not a matter of whether it sounds good. There’s lot of things sound good and then turn out to have some unintended consequence that just aren’t as good as we thought they were. And there are some things that are frankly kind of boring that we never would have thought have the impacts they do, but yet they do.

FAI: Can you give an example?
DK: Savings accounts I think is actually one of those things that for some reason did not hold the lure of credit in terms of the rhetoric, in terms of the popular attention to it, and I think it didn’t because of one simple erroneous fact that people would throw out which is to say if you’re poor, it means you don’t have any money. When you take that very simplistic view of the world you just categorically dismiss savings as not possibly a good intervention for helping somebody build up money to invest in your enterprise. Clearly the issue is to give them outside capital to make it work. What is striking is that when we look at actual studies we can see that even when people are poor, they do save.  They just don’t have very good savings products, but when savings products are introduced, money accumulates. It’s not to say they weren’t poor, but it means that none of this categorical ‘they’re poor, thus they don’t have money, thus we have to lend them money’ is just the wrong way of thinking. 

FAI: So it’s about preconceptions?
DK: It’s about checking your preconceptions at the door, it’s about saying ‘you know, I got ideas, I have gut, I have heart, but at the end of the day I want facts – I want to find out, is this right is that not?’ It doesn’t mean we can’t all have our opinion going in, but let’s be careful about what we’re assuming to be true and we actually have evidence of.

The Last Mile Problem

FAI: Tell us about a study that used randomized control trials—the research methodology used in medicine to test the effects of drugs before they are made widely available, and currently used widely to evaluate the effectiveness of programs or particular interventions—to show us something surprising.
DK: So, one of the lessons that we saw in the study in South Africa had to do with how loans were marketed and there’s some lessons I’ll come to in a second about behavioral economics, but I think the overarching point is that whenever we talk about poverty levels, and this is one of the things we talk about in the book, there’s this thing called the last mile problem. And the last mile problem refers to the idea that we have the idea, we have the technology, and that often times we’ll talk about development aid, we stop there and just assume, well, of course if it’s good people will want it. But in fact we do have to sell things. Even if we’re giving out bed mats, we do have to sell them. Even if we’re giving out some new technology for clean water, we have to sell it. And, just because it’s in the realm of aid, doesn’t mean we can throw the marketing out the door, in fact there is a lot we can work on. So we took this lender in South Africa, which was doing these loans, which turned out to have a huge positive benefit. We wanted to find out, how important is the interest rate, and we wanted to test out how important that is compared to more Madison Avenue-style marketing. 

So, we tried sex basically. We put pictures of pretty women on the letters that were sent out to individuals to solicit loans to them and we found, that, to men, getting a photo of a pretty woman on the letter was just as effective in getting them to borrow as dropping the interest rate by 30%, so a huge effect. Now, some people are not surprised at this outcome, this is why we know sex sells. But, being able to see the relative magnitudes of price is a very shocking thing. We expected it to work, but I did not expect it to work that well compared to price, and it just reinforces the idea that we need to understand more about the human psyche and the individual decision making process when we’re working on economic development aid. And that doesn’t always mean sell things based on the way we designed them to have their positive impact. That’s not always the way you have to think, you have to think in some situations like a Madison Avenue expert and ask yourself ‘what are the factors that influence whether someone buys it and uses it or accepts it and uses it?’ And lets review that and make sure we’re employing those kinds of best practices. And in a lot of the situations we don’t necessarily know the right answer and that’s where we also set up careful randomized tests that help understand, ‘What is the right way of marketing a product? What is the right way of marketing a service?’ Even if it’s for free, this still applies to the non-profit sector the same way it applies to the for-profit sector.

Trade-offs

FAI: A lot of the solutions discussed in your book are about how small changes can make big differences. But others argue that you need big changes (i.e. better regulation) to really make an impact. Is there a fear that focusing on what you can measure could take a focus off of big things you can’t measure easily?
DK: So, great question, the way I think about this is as follows. Suppose that we wanted to increase savings, or increase school attendance. Let’s go with the increase in school attendance. Innovations for Poverty Action tested about seven or eight different methods and plus we’ve collected information from other groups that have done randomized trials on how to improve school attendance. And, when you think about it as a cost effectiveness mechanism:  for the next million dollars, how many years of extra education will you generate? The single most cost effective method was de-worming school children. Children in sub-Saharan Africa are tested for worms. You give them a pill, the worms go out, it makes them healthier, they grow more, they were able to pay attention, cognitive as well as physical well-being goes up. And, with that they go to school. In a long-term study, they followed the children for ten years, they also found that their income was higher. 

Now, let’s suppose for a second that school attendance is 70% and doing this intervention which is really cheap, only $.20 per kid, was the single smartest way to spend the next 20 cents. So let’s say that got the 70% school attendance, and I don’t know the exact number, so let’s just assume it gets it to 75%, that’s great, that’s the single best way to get from 70 to 75. If your goal is to get to 90, you’ve got 15% to go, so that doesn’t mean just do deworming three more times, right, the worms are gone, you have to go to the next best alternative and that’s part of the challenge, right? We think on the margins, but you also have to add it up. So we want to know what the best next thing to do. But once that’s done, what’s the next after that, and what’s the next after that. And we do care about the total and it’s important to not lose sight of that ultimate goal. There will come a point where we start trading off, though, school attendance for health clinics, for roads, and other things and we do ultimately have to make those types of tradeoffs too. We might find that getting school attendance to 90% is not tenable and we have to give up too many hospitals in order to do that.  We have to give up too many roads to do that. Life is full of trade-offs and the dollar cannot go to two things at once.

Microfinance and Measuring Impact

FAI: You spend some time in this book is looking at microfinance or microcredit programs, yet you acknowledge that your results haven’t shown us the kind of impacts we expected. What do you take away from that, what does it mean?
DK: I have two main take-aways from it. One is that the results are not as high as the strongest advocates put forward, but there are still some positives, there were some benefits that people received from getting access to the credit. I think the main thing to realize is that the reason it’s been oversold is partly because it has been telling the story of entrepreneurial credit, and the reality is that not everybody is an entrepreneur, not everybody needs access to credit for entrepreneurial purposes.  By focusing strictly on entrepreneurial credit, we’ve been missing out not only on some of the other uses that could be beneficial but we’ve also been missing out on some of the outcome measures that we should care about. 

The second lesson I think that I’ve seen from this is to think harder about the way we design credit products. We maybe need to think more about flexible credit products or products that are targeted at different groups of people in order to expand the way the credit can be used.

Looking Forward

FAI: What areas of research are currently exciting you? Where do you think the most interesting work is happening?
DK: So, I think some of the most interesting work as I see it has to do with how we want to think about the portfolio. Rather than just thinking about credit products, and savings products, how we want to think about helping individuals, giving them a healthy portfolio of credit and savings, ideally not at the same time, you know, not where you’re borrowing at 20% and saving at 2% and doing this at exactly the same time. I want to work with financial institutions that are thinking about the whole picture for individuals and understand how best to guide them to the right decision at the right point in their life.