Last updated on July 19, 2015
Simple regression analysis, the method of randomization, and the analysis of big data have been transforming development economics (Banerjee and Duflo 2009; Deaton 2010; Ray 2014; Varian 2014). This is truly welcome and has the potential to leave its mark on human well-being, growth, and development.
There is a risk, however, that this euphoria will once again have us carried away. We are seeing, especially in policy circles, these new empirical findings being quickly waved in front of our noses and treated as ground for doing whatever the policy maker wants to do. What is important to realize is that when we say that policy should be evidence-based, both words are important—“evidence” and “based.”We must not fall into the trap of evidence-waved policy. To see this mistake, consider the commonly heard policy refrain: “Recent data show 90% of jobs were created by the private sector. Therefore, we have to rely on the private sector for creating jobs.” The “therefore” is wrong. If it were not wrong, we would also have to go along with the Soviet economist who having studied Russian data in the 1980 s wrote: “Recent data show 90% of all jobs were created by the state. Therefore, we have to rely on the state for creating jobs.”
This is why we need the discipline of deductive reasoning, economic theory, and also common sense.
That is from Kaushik Basu and Andrew Foster–respectively, chief economist at the World Bank and editor of the World Bank Economic Review (WBER)–in an article titled “Development Economics and Method,” which serves as an introduction of sorts to a special issue of the WBER summarizing this year’s Annual Bank Conference on Development Economics.
I have been saying for a few years now that the pendulum will swing back, that theory will make a comeback in development economics in order to help understand the mechanisms whereby the effects observed in randomized controlled trials occur. It looks like the pendulum is on its way back.