Duflo offers pathways to a better future, lessons from COVID-19 crisis

16 June 2021

Coronavirus pandemic recovery efforts should provide comprehensive social protection, fight climate change and ensure vaccines reach the poorest people quickly.

Esther Duflo
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© Bryce Vickmark

Nobel laureate Esther Duflo spelled out what an inclusive recovery from the COVID-19 crisis should entail and outlined lessons learned from the pandemic, while delivering the 17th edition of UNCTAD’s prestigious Raúl Prebisch Lecture on 15 June.

The world-renowned economist said only a concerted global vaccination campaign to contain COVID-19 worldwide, backed by sufficient resources from rich countries, would prove that developed and developing nations have joint stewardship of their shared destiny and can tackle other pressing problems together.

“We have one world, and everything is interdependent,” said Ms. Duflo, the Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics at the Massachusetts Institute of Technology.

Social protection is for all

Ms. Duflo said the pandemic has proved that social protection is for everyone, not just the poor or those in developing nations, as shown by the generous unemployment benefits in the United States and similar wage support programmes in Europe.

She said these support programmes proved the immense value of social protection systems that put human dignity at the centre of economic priorities.

Ms. Duflo pointed out that economic research over the years had debunked the argument by some policymakers that people become lazy when they get unemployment support.

“Get rid of the idea that we need to keep poverty around to ensure that people do not feel too comfortable in social welfare and refuse to work,” she said.

Fight climate change

Ms. Duflo also said the COVID-19 pandemic is an occasion for people to think more seriously about how their choices affect the future of the planet.

She said people suffer from “projection bias” and don’t like to contemplate bad situations.

“We think things will always be the way they are now, so since there is no climate catastrophe yet or it’s far away in countries, we can just ignore it,” she said.

However, Ms. Duflo added, the pandemic shows that sometimes disasters foretold by scientists actually occur, and by this logic, climate change in one part of the globe threatens people everywhere.

Make the shared destiny real

The Nobel laureate said the global pandemic response is an opportunity to forge a real shared destiny between the rich and poor world.

While well-resourced vaccination programmes have enabled rich countries to bring COVID-19 under control, she said, the pandemic is still raging in poor nations.

Ms. Duflo said even the recent pledge by the Group of Seven (G7) countries to provide 1 billion coronavirus jabs to poorer countries wouldn’t bridge the vast global divide in supplies of the life-saving vaccines.

She said the shared destiny would only be realized “if the rich countries were able to put enough commitment of resources and sway on the pharma companies to make a global vaccination policy possible.”

Ms. Duflo also said while rich countries had spent more than 20% of GDP to help their populations ride out the crisis, poor countries could afford to spend only 2% of GDP, showing the extent of the inequality.

Government legitimacy matters

Ms. Duflo said the pandemic also presents a make-or-break moment for governments in many countries and offers them a chance to rebuild their legitimacy.

“It’s easy to treat the government as a punching bag, but the COVID-19 crisis reminds us why we need governments,” she said.

She cited COVID-19 containment measures such as mask mandates, social distancing rules, economic rescue packages and vaccine development and distribution, as key examples of the critical role of governments.

However, trust in governments has dropped worldwide, she said, noting that countries without government trust performed poorly in their responses to the pandemic.

Financial incentives are overrated

According to Ms. Duflo, policymakers in the United States and elsewhere overestimate the influence of financial incentives on people’s behaviour.

For example, some economists and policymakers in the United States worried that the COVID-19 unemployment benefits were too generous and would discourage people from going back to work.

However, Ms. Duflo said there is little evidence that people prefer a financial incentive over an actual job.

“Generous unemployment benefits don’t discourage people from working,” she said, arguing that people prefer to work to have meaning in their lives and make a difference in their communities.

The economy – and place – is “stickier” than we think

Ms. Duflo also highlighted research to show that the economy is “stickier” and countered alarmist migration narratives.

While many economic models assume that once there is an economic shock, people respond by moving to other regions and sectors, she said research shows that both geographic and sector mobility has declined markedly in recent decades.

For example, in the United States, despite economic shocks, annual inter-county mobility was 7% in the 1950s and is less than 4% today, while mobility within counties has gone down from 13% in the 1950s to 7% today.

At the height of the Greek financial crisis between 2010 and 2015, less than 3% of the population left Greece, yet unemployment was at 27%.

“In normal times, even within free mobility zones, migration is very low,” Ms. Duflo said, adding that COVID-19 had led to a further collapse in migration, even within developing countries.

She cited the example of India, where millions of migrant workers who lived in their work sites in cities were stranded when the economy went into lockdown, as they tried to return to their areas of origin.

Pains from trade

Ms. Duflo also urged the world to pay more attention to the “pains from trade”, not just gains.

“Trade has been associated with inequality in poor countries,” she said, and gave the example of how blue-collar workers in Mexico lost 15% of their real wage between 1987 and 1990 due to unilateral trade liberalization, while white-collar workers gained 15%.

She said the same thing happened in Argentina, Brazil, Chile, China, Colombia and India due to unilateral trade liberalization in the late 1980s or early 1990s, followed by a steep rise in inequality.

Ms. Duflo said trade policies should be accompanied with measures to assist those affected by them, especially the poorest.

Restore human dignity

Ms. Duflo explained how human dignity had been eroded in recent years, partly due to rapid changes in jobs and falling incomes.

As a result, between 1990 and 2014, there was a steep rise in social problems such suicides, drug-related deaths and fewer marriages.

And social welfare programmes further robbed people of their dignity so as not to serve as an incentive, Ms. Duflo said.

But the COVID-19 crisis gives the world the opportunity to put dignity back at the centre of social protection for a better future, she said.

Economists as plumbers

In conclusion, Ms. Duflo said economists need to help governments design COVID-19 recovery plans and should engage more with the details of policymaking.

In doing so, they should adopt the mindset of a plumber, who has to tinker and adjust to realities, rather than rely on theories.