The Lean Startup and Poor Economics may seem like very different boks. While the first is a business book for startups, the second one is about development economics. Yet after reading them back to back, I realized they are not only about the same thing (learning), but that together they suggest a very slick method to think about economic development. 

In Poor Economics, Esther Duflo and Abhijit Banerjee (D&B) argue that “so much of anti-poverty policy has failed over the years because of an inadequate understanding of poverty.” They then go on to share how hundreds of rigorous randomized controlled trials have helped us learn about poverty, and explain how using that knowledge is key in the fight against it.

In The Lean Startup, Eric Ries tells us that startups fail because they have an inadequate understanding of who their customers are, or even of what their product should be. He then goes on to argue that in that uncertain environment startups exist to learn, and that the learning process holds the key to a startup’s success.

Both books are excellent reads alone, but together they were a real source of inspiration. Combining rigorous testing methods to learn about poverty with practical startup management methods could help development practitioners reach some transformational outcomes. Imagine how much great stuff could come out of a crossover between the World Bank and Dropbox!

But how would that actually work? One way would be to apply “lean methods” to development projects such as the build-measure-learn loop as described by Ries:

BACK in 2008 I wrote a piece where I suggest a framework for thinking about development called freedom diagnostics. The idea is that policy-makers can focus their efforts on those policies which give the greatest bang for the buck in terms of human capabilities (or as Amartya Sen calls them, freedoms). The way to do it is to focus on the interactions amongst these freedoms. At the time I was taking classes with Rodrik, Hausmann and Sen, so it was just natural for me to merge the idea of growth diagnostics with a more broader-based idea of what constitutes development. For the first post in this blog I will post that piece. Look forward to your comments.

ON THE NEED FOR FREEDOM DIAGNOSTICS

 A Tailored Approach to Economic Policy

Even before the global financial crisis, the failure of the one-size-fits-all approach to economic growth was already clear. The standard laundry-list policy prescriptions with neo-classical flavor (so called Washington consensus) had been discredited amongst development economists and growth diagnostics was slowly taking its place. The new approach not only promised to be more effective, but also came with a significant jump in modesty – it was full of humbling words such as ‘contingent’, ‘constraints’ and ‘priorities’. Today, growth diagnostics has gone mainstream and the crisis has forced even developed countries to accept ‘unconventional’ policies – the mantra now is a tailored approach.  

However, while recognizing the importance of a tailored approach, the growth diagnostics framework also rejected a nihilist attitude where ‘anything goes’. Although the right thing to do may change from country to country and from time to time, there is such a thing as ‘the right thing to do’: one must find and relax the binding constraint to growth. The implication of growth diagnostics is that a small concentrated effort can have a huge impact on the economy, allowing politically and administratively constrained policy-makers to focus their limited resources where they matter the most.