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December 2019

How randomized trials became important in development economics

By Development economics No Comments

The 2019 Nobel Prize in Economics was awarded to three researchers for “their experimental approach to reducing global poverty”, an approach that “transformed development economics”.

What are randomized experiments? And why have they become so influential in development economics?

Improving the quality of life, especially for the poor, is considered one of the main goals of modern societies. It requires a certain level of wealth. For centuries, economists have been concerned with understanding why some nations have “developed” economically and others not.

But a more immediate question is: what can be done in the present? Specifically, what policies should less developed countries adopt to improve the lives of their citizens?

Development economics as a sub-discipline originated in the 1940s and 1950s. For pioneers such as Paul Rosenstein-Rodan, W. Arthur Lewis, and Albert Hirschman, development economics meant studying the means by which poor countries could achieve large-scale societal transformation. They used a variety of analytical approaches, which indicated that industrialization was the engine of development.

Arthur Lewis, originally from Saint Lucia, received the 1979 Nobel Prize in Economics. It was in recognition of his study of the means by which countries with an unlimited supply of labor – as is the case for many developing countries – could achieve economic development.

One view of the development challenge is that it is fundamentally about answering causal questions. If a country adopts a particular policy, will it lead to increased economic growth, reduced poverty, or other improved well-being of citizens?

In recent decades, economists have worried about the reliability of methods previously used to identify causal relationships. In addition to these methodological concerns, some have argued that “big theories of development” are either incorrect or at least have failed to deliver significant improvements in many developing countries.

Two notable examples are the idea that developing countries can be caught in a poverty trap that requires a “big push” to get out of it and the idea that institutions are essential for growth and development.

These concerns about methods and policies have provided fertile ground for haphazard experiments in development economics. The revival of interest in experimental approaches in economics began in the early 1990s. Researchers began to use “natural experiments”, where, for example, random variation was part of a policy rather than decided by one. researcher, to examine causality.

But it really gained momentum in the 2000s, with researchers such as Nobel Laureates designing and implementing experiments to study a wide range of microeconomic questions.

Randomized trials

Proponents of these methods argued that a focus on “small” problems was more likely to be successful. They also argued that randomized experiments would lend credibility to economic analysis by providing a simple solution to causal questions.

These experiments randomly assign treatment to certain members of a group and compare the results with other members who did not receive treatment. For example, to test whether providing credit helps grow small businesses or increases their chances of success, a researcher might partner with a financial institution and randomly allocate credit to applicants who meet certain basic requirements. . Then, a year later, the researcher would compare changes in sales or employment in small businesses that received the credit with those that did not.

Randomized trials are not a new method of research. They are best known for their use in the testing of new drugs. The first medical experiment using controlled randomization took place in the aftermath of World War II. The British government used it to assess the effectiveness of a drug for the treatment of tuberculosis.

In the early 20th century and mid-20th century, American researchers used experiments like this to examine the effects of various social policies. Examples included income protection and social housing.

The introduction of these methods in development economics has also followed an increase in their use in other areas of the economy. The study of labor markets is one example.

Randomized controlled trials in economics are now mainly used to assess the impact of social policy interventions in poor and middle-income countries. The work of 2019 Nobel Laureates – Michael Kremer, Abhijit Banerjee and Esther Duflo – includes experiences in Kenya and India on teacher attendance, textbook provision, nurse attendance tracking, and granting of microcredits.

The popularity of the approach among academics and policy makers is not only due to its apparent ability to resolve methodological and policy issues. It is also due to the very deliberate and well-funded advocacy of its supporters.

Major funders

A key player is the Abdul Latif Jameel Poverty Action Lab (J-PAL), which was founded by Duflo and Banerjee. Since its creation in 2003, J-PAL has carried out 876 political experiments in 80 countries. One estimate suggests he received around $ 300 million between 2003 and 2018, from various institutions. These include the World Bank, the UK Department for International Development and the Bill and Melinda Gates Foundation.

J-PAL appears to have played a role in the World Bank’s decision in 2005 to establish a dedicated impact evaluation unit made up of former J-PAL associates to conduct randomized trials. The number of such experiences used in World Bank evaluations rose from zero in 2000 to just over two-thirds of all evaluations in 2010.

These changes have taken place in a broader international context where the emphasis is increasingly on “evidence-based policy”. The idea is that political decisions should be based on “objective”, “rigorous” and “rational” information and analysis. While it may seem obvious, there is a lot of debate about what this actually means in practice.

Against this background, proponents of randomized trials have sought to position their preferred methods as the most reliable form of evidence.

But there is strong opposition to the approach. This argues that the experiments are not as reliable or useful as they are claimed. Some even say that many such experiments do not meet ethical principles and may in fact undermine development efforts.

This is the first article in a two-part series on randomized trials. The next one will argue that the usefulness and relevance of randomized trials for development issues have been seriously overestimated.

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