Wednesday, October 14, 2015

Angus Deaton’s nuanced approach to poverty and the poor

With the world economy in a bad shape, an economist who talks of looking at the material and psychological state of the people gets the Nobel prize this year.

Angus Deaton, the winner of the 2015 Nobel Prize for Economics, awarded by the Swedish Central Bank, is quite an unusual economist who uses mathematical economics or econometrics to probe the subjective aspects like well-being and the experience of the poor in the measurements of poverty. The title of his 2011 John Hicks Lecture at Oxford University is “The financial crisis and the well-being of Americans”. There is another paper published in March this year with the title, “Creative Destruction and Subjective Well-Being” where the question is posed in simple language: “Does higher (per capita) GDP or GDP growth increase happiness? The existing empirical literature on happiness and income looks at how various measures of subjective well-being relate to income or income growth, but without going into further details into what drives the growth process.” This is not exactly the language that hard-nosed economists like to use. But Deaton has focused on these qualitative parameters throughout his academic work over the last four decades.

The Nobel Committee was careful to pinpoint that the award was for his work on poverty, health and welfare without mentioning as to what his approach to these issues were. The committee’s silence on the arguments, which can be seen as pro-poor, put forward by the economist is partly justified because Deaton takes care to keep closely to empirical data, and he maintains a value-neutral tone. He is not arguing for the poor but his theses make it clear that there is need to look closely at the preferences of the poor in assessing their economic status.

Economists are accepting more than ever that aggregate figures like Gross Domestic Product (GDP), Consumer Price Index (CPI) do not reflect accurately the actual state of the economy or of the people living in that economy. Deaton emphasises the need to tally evidence from household consumption patterns with that of the national price indexes. In doing so, he shows that the poor do not become a mere statistic but emerge as a distinct group who make informed decisions. It is the general assumption that the poor have no choice and they have to accept whatever comes their way. One of the interesting findings of Deaton is that the poor do exercise choice.

He has done quite a bit of work on Indian economy relating poverty and health, and he has kept his argument quite close to the available data. He argues that poverty measurements have to factor more parameters than is being done. He critiques existing data but he does not hold them invalid. As a matter of fact, he says that the data collected the National Sample Survey Office (NSSO) and others is generally valid but these need to be qualified. He agrees that in the 1990s, post-reforms there has been a reduction in poverty levels, but he points out the discrepancies in the different indexes. It is this calibrated and nuanced approach, which does not lend itself to political arguments, that marks Deaton out from the loud debates about the poor among representatives from the opposed ends of the political spectrum.

It is indeed quite appropriate that the Nobel Committee had sensed the shift in the global economic climate from that of market exuberance to that of market uncertainty since the 2008 financial meltdown in the United States. Growth rates are not an end in themselves and economists have to address intangible issues like that of happiness and well-being. Deaton has been doing this work with much energy, enthusiasm and wit.

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