An economist with a human face wins the Nobel

This year's winner of Nobel Prize in Economic Sciences Angus Deaton has been awarded the honour for his analysis and pioneering work on the determinants of poverty, consumption and welfare. He has enhanced our understanding of individual consumption choices that helps in designing economic policy for promoting welfare and reducing poverty. As the Nobel Committee said in his description, "By linking detailed individual choices and aggregate outcomes, his research has helped transform the fields of microeconomics, macroeconomics and development economics". Deaton's work complements studies by Piketty and Atkinson on wealth and income inequality, by examining consumer spending patterns to illustrate growing inequality in health and wellbeing. He is well-known for his research on consumption theory, welfare and inequality as well as the Deaton Paradox, which states that sharp shocks to income do not appear to cause equally large shocks to consumption. People, for example, do not change their consumption wildly when their pay is hiked or cut, which is also known as 'consumption smoothing'.
Deaton's works on development economics are practical in nature, as they show how to measure poverty and living standards in poorer countries, and how foreign aid should be directed there. His research shed light on how policy measures feed through the households, for example what impact would a change in value-added tax have on consumption of food and other goods. As the Nobel Committee said, "Deaton helped transform development economics from a largely theoretical-field based on crude macro data, to a field dominated by empirical research based on high-quality micro data". During the 1980s, Deaton developed the 'Almost Ideal Demand System' - a flexible, yet simple way of estimating how the demand for each good depends on the prices of all goods and individual incomes. This approach and later modifications are now standard tools for practical policy evaluation by governments.
Some commentators also interpret this year's Nobel Prize for economics as a victory for the sceptics of foreign aid, about which Deaton has been critical throughout his career. In his famous book The Great Escape: Health, Wealth and the Origins of Inequality (2013) as well as in his regular write-ups, Deaton argues that foreign aid cannot solve the big problem that is keeping poorer countries poor, because it is the weak governments that make growth impossible. He wrote, "If poverty is not a result of lack or resources or opportunities, but of poor institutions, poor government and toxic politics, giving money to poor countries - particularly giving money to the governments of poor countries - is likely to perpetuate and prolong poverty, not eliminate it". In this book, Deaton argues that the main barrier to progress in fighting poverty in the world's poorest countries is bad government rather than lack of resources, and criticised international aid by claiming it could do more harm than good. He concludes that international aid has little to do with progress in the developing world, and suggests that free trade and incentives for drug companies can make a larger contribution to their growth in the future.
In the words of Deaton, "Unfortunately, the world's rich countries are making things worse. Foreign aid - transfers from rich countries to poor countries - has much to its credit, particularly in terms of healthcare, with many people alive today who would otherwise be dead. But foreign aid also undermines the development of local state capacity. This is most obvious in countries - mostly in Africa - where the government receives aid directly and aid flows are large relative to fiscal expenditure (often more than half the total). Such governments need no contact with their citizens, no parliament, and no tax collection system. If they are accountable to anyone, it is to the donors; but even this fails in practice, because the donors, under pressure from their own citizens (who rightly want to help the poor), need to disburse money just as much as poor-country governments need to receive it, if not more so".
"Poor people need government to lead better lives; taking government out of the loop might improve things in the short run, but it would leave unresolved the underlying problem. Poor countries cannot forever have their health services run from abroad. Aid undermines what poor people need most: an effective government that works with them for today and tomorrow".
Deaton adds, "One thing that we can do is to agitate for our own governments to stop doing these things that make it harder for poor countries to stop being poor. Reducing aid is one, but so is limiting the arms trade, improving rich-country trade and subsidy policies, providing technical advice that is not tied to aid, and developing better drugs for diseases that do not affect rich people. We cannot help the poor by making their already-weak governments even weaker".
Deaton also made a compelling and clear case in The Great Escape for why income inequality in society as a whole threatens democracy: "The political equality that is required by democracy is always under threat from economic inequality, and the more extreme the economic inequality, the greater the threat to democracy. If democracy is compromised, there is a direct loss of well-being because people have good reason to value their ability to participate in political life, and the loss of that ability is instrumental in threatening other harm". He documented in the book why the world is a better place than it used to be with substantial increases in wealth, health and longevity, but expressed concern over vast inequalities within and between nations. He has focused more attention in recent years on measuring and reducing global poverty and inequality, while putting a particular emphasis on India and Africa. His writings cover themes like the dark side of extreme income inequality that corrodes basic state institutions like the courts, and the failure of foreign aid to improve outcomes for the poor.

Dr. Helal Uddin Ahmed is a senior civil servant and former editor of Bangladesh Quarterly.  [email protected]