Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty by
Abhijit V. Banerjee
My rating:
4 of 5 stars
I really enjoyed Banerjee and Duflo's book! They have interacted with most of the major current opinions on the big issues in development thinking: Sachs, Easterly, Collier, etc. But their focus is less on the "right" way to set up and improve the big institutions, and more on what is actually, provably working and not working in the field and why.
In their own words, "The positions that most rich-country experts take on issues related to development aid or poverty tend to be colored by their specific worldviews even when there seem to be, as with the price of the bed nets,
concrete questions that should have precise answers. To caricature ever so slightly, on the left of the political spectrum, Jeff Sachs (along with the UN, the World Health Organization, and a good part of the aid establishment) wants to spend more on aid, and generally believes that things (fertilizer, bed nets, computers in school, and so on) should be given away and that poor people should be enticed to do what we (or Sachs, or the UN) think is good for them: For example, children should be given meals at school to encourage their parents to send them to school regularly. On the right, Easterly, along with Moyo, the American Enterprise Institute, and many others, oppose aid, not only because it corrupts governments but also because at a more basic level, they believe that we should respect people’s freedom—if they don’t want something, there is no point in forcing it upon them: If children do not want to go to school it must be because there is no point in getting educated."
There are a few very important concepts presented in this book. One is their clarification of the concept of a
poverty trap.
"There will be a poverty trap whenever the scope for growing income or wealth at a very fast rate is limited for those who have too little to invest, but expands dramatically for those who can invest a bit more. On the other hand, if the potential for fast growth is high among the poor, and then tapers off as one gets richer, there is no poverty trap."
In other words, a poverty trap is a situation where a little bit of input gets people "over the hump" or "out of the trap" they they could never get over without help from the outside. That one-time input solves the problem. This is completely different from a situation where people with little money have the potential for fast (percentage-wise) growth that gets less as they get richer. They could still be in deep poverty or they could be very rich. But this is not a trap, it is merely "low-hanging fruit".
The other key concept is the randomized, controlled trial. Long a staple of medical research, Banerjee and Duflo are advocating taking this painstaking method as a way of actually verifying the results of our development work. This empirical verification is notoriously difficult to do, but the RCT methodology seems to be sound. It is producing answers that are surprising, obvious, depressing, and encouraging, all at the same time. They have stepped into the lives of the poor, and asked them why they do things. These is a major break from deciding what SHOULD happen and what poor people SHOULD do philosophically.
Unsurprisingly, Banerjee and Duflo find that a mixture of the different philosophies (top-down and bottom-up) tends to work best. Because poor people are people. They are good at the same things rich people are good at, and they are bad at the same things rich people are bad at. That's why rich people and poor people both eat too much junk food. The difference is that in richer countries, our wealth and institutions protect us from many of the consequences of our human failings. Great read.
Let's cover some of the material.
On Food
The data shows that even folks living on less than a dollar a day spend only half of that money on food. Further, when they receive extra money, they increase their expenditures on tasty foods rather than nutritious foods. (Side note: Banerjee and Duflo's understanding of nutrition is quite flawed)
"The poor often resist the wonderful plans we think up for them because they do not share our faith that those plans work, or work as well as we claim. This is one of the running themes in this book. Another explanation for their eating habits is that other things are more important in the lives of the poor than food."
"Generally, it is clear that things that make life less boring are a priority for the poor. This may be a television, or a little bit of something special to eat—or just a cup of sugary tea."
"As we saw in India, the poor do not eat any more or any better when their income goes up; there are too many other pressures and desires competing with food. In contrast, the social returns of directly investing in children and pregnant mother nutrition are tremendous. This can be done by giving away fortified foods to pregnant mothers and parents of small children, by treating children for worms in preschool or at school, by providing them with meals rich in micronutrients, or even by giving parents incentives to consume nutritional supplements.
...
Developing ways to pack foods that people like to eat with additional nutrients, and coming up with new strains of nutritious and tasty crops that can be grown in a wider range of environments, need to become priorities for food technology, on an equal footing with raising productivity.
"
Their conclusion: Food is NOT a poverty trap, but there are some great returns to be had by simple low-cost solutions like providing free salt fortified with iodine, iron supplements, and other micronutrients.
On Health
The primary problem is not the adequacy or expense of the solutions, it is the poor who are unwilling or unable to use them. Some common examples of underutilized though affordable healthcare are chlorine to purify water, bed nets, etc. In addition, the poor people like all people, tend to spend their money on expensive cures rather than cheap prevention.
"By contrast, it is not natural to attribute causal force to inaction: If a person with the flu goes to the doctor, and the doctor does nothing, and the patient then feels better, the patient will correctly infer that it was not the doctor who was responsible for the cure. And rather than thanking the doctor for his forbearance, the patient will be tempted to think that it was lucky that everything worked out this time but that a different doctor should be seen for future problems.This reaction creates a natural tendency to overmedicate in a private, unregulated market. This is compounded by the fact that, in many cases, the prescriber and the provider are the same person, either because people turn to their pharmacists for medical advice, or because private doctors also stock and sell medicine."
"Our natural inclination is to postpone small costs, so that they are borne not by our today self but by our tomorrow self instead. This is an idea that we will see again in future chapters. Poor parents may even be fully convinced of the benefits of immunization—but these benefits will accrue sometime in the future, while the cost is incurred today. It makes sense, from today’s perspective, to wait for tomorrow. Unfortunately, when tomorrow becomes today, the same logic applies. Likewise, we may want to postpone the purchase of a bed net or a bottle of Chlorin until later, because we have better use for the money right now (there is someone frying delicious conch fritters across the street, say). It is easy to see how this could explain why a small cost discourages the use of a life-saving device, or why small incentives encourage it. The 2 pounds of dal works because it is something that the mother receives today, which compensates her for the cost she bears for getting her child immunized (the couple of hours spent bringing her child to the camp or the low fever that the shot sometimes causes). If this explanation is correct, it suggests a new rationale for mandating specific preventive health behaviors or for providing financial incentives that go beyond the traditional economic argument we have already suggested, which is that it makes sense for society to subsidize or enforce behaviors that have benefits for others. Fines or incentives can push individuals to take some action that they themselves consider desirable but perpetually postpone taking. More generally, time inconsistency is a strong argument for making it as easy as possible for people to do the “right” thing, while, perhaps, leaving them the freedom to opt out. In their best-selling book
Nudge: Improving Decisions About Health, Wealth, and Happiness, Richard Thaler and Cass Sunstein, an economist and a law scholar from the University of Chicago, recommend a number of interventions to do just this."
This is a solid argument for the intervention of the government into private affairs and an abrogation of perfect freedom. People are not good at doing the right thing for the future Is it patriarchal/matriarchal ... yes? But is it helpful and necessary? It seems to be, at least in countries that are experiencing incredible poverty.
And this point is key (if it is true): we have a limited amount of self-control. The less often we have to use it to make good decisions for the future, the better off the society as a whole will be.
"Our real advantage comes from the many things that we take as given. We live in houses where clean water gets piped in—we do not need to remember to add Chlorin to the water supply every morning. The sewage goes away on its own—we do not actually know how. We can (mostly) trust our doctors to do the best they can and can trust the public health system to figure out what we should and should not do. We have no choice but to get our children immunized—public schools will not take them if they aren’t—and even if we somehow manage to fail to do it, our children will probably be safe because everyone else is immunized. Our health insurers reward us for joining the gym, because they are concerned that we will not do it otherwise. And perhaps most important, most of us do not have to worry where our next meal will come from. In other words, we rarely need to draw upon our limited endowment of self-control and decisiveness, while the poor are constantly being required to do so."
On Education
Banerjee and Duflo state the problem well. Parents bear the costs now in terms of money, students bear the costs now in terms of effort, and both are rewarded far, far in the future.
"Misperception can be critical. In reality, there should not be an education-based poverty trap: Education is valuable at every level. But the fact that parents believe that the benefits of education are S-shaped leads them to behave as if there were a poverty trap, and thereby inadvertently to create one."
They are referring here to the general discounting of the benefit of low-level education and over-valuing of more advanced education. B & D find that both kinds of education are equally valuable in the long term. So there is no advantage to leaving three children uneducated in order to push one child through high school. Though there may be other social factors (such as the immense pressure to succeed that that dependence places upon the sole educated child) that B & D overlook in their analysis.
"At the broader, societal level, this pattern of beliefs and behavior means that most school systems are both unfair and wasteful. The children of the rich go to schools that not only teach more and teach better, but where they are treated with compassion and helped to reach their true potential. The poor end up in schools that make it very clear quite early that they are not wanted unless they show some exceptional gifts, and they are in effect expected to suffer in silence until they drop out. This creates a huge waste of talent. Among all those people who drop out somewhere between primary school and college and those who never start school, many, perhaps most, are the victims of some misjudgment somewhere: Parents who give up too soon, teachers who never tried to teach them, the students’ own diffidence. Some of these people almost surely had the potential to be professors of economics or captains of industry. Instead they became daily laborers or shopkeepers, or if they were lucky, they made it to some minor clerical position."
B & D set up the goals of education as twofold: give everyone a basic set of skills and identify talent. That seems fair to me. They offer a few pragmatic solutions.
"A first factor is a focus on basic skills, and a commitment to the idea that every child can master them as long as she, and her teacher, expends enough effort on it. This is the fundamental principle behind the Pratham program, but it is also an attitude that is encapsulated by the “no excuse” charter schools in the United States.37 These schools, such as the Knowledge Is Power Program (KIPP) schools, the Harlem Children’s Zone, and others, mainly cater to students from poor families (particularly black children), with a curriculum that focuses on the solid acquisition of basic skills and continuous measurements of what children actually know."
On Family Size
There is
no evidence to show that large families are bad for their members which makes top-down family planning (aka government or NGO intervention) a poor choice (and also unlikely to work anyway)
.
"They [parents in the United States] can have the number of children they really want, and if it turns out that none of them are willing or able to take care of them, there is always the public fallback. The most effective population policy might therefore be to make it unnecessary to have so many children (in particular, so many male children).
Effective social safety nets (such as health insurance or old age pensions) or even the kind of financial development that enables people to profitably save for retirement could lead to a substantial reduction in fertility and perhaps also less
discrimination against girls"
The second part of the book is on institutions.
The poor face incredible amounts of risk, which reduces their ability to think clearly (because of the amount of stress) and their ability to cope with disaster. The poor are ingenious in their diversification to reduce their risks.
"Another way the poor limit risk is by being very conservative in the way they manage their farms or their businesses. For example, they may know that a new and more productive variety of their main crop is available but choose not to adopt it. One advantage of sticking to the traditional technology is that farmers don’t need to buy new seeds—they just save enough seed from last season’s crop to replant—whereas the new seeds often cost a significant amount of money. Even if the new seeds repay the investment many times over when things go well, there is always a small chance that the crop will fail (say, because the rains don’t arrive) and the farmer will lose the extra investment he has made in new seed. The family is also used in creative ways to spread risk. Farming households in India use marriage as a way to diversify the “risk portfolio” of their extended families. When a woman moves to her in-laws’ village after marriage, this creates a link between the household she came from and the household she married into, and the two families are able to call on each other when in trouble."
B & D see a clear role for government intervention here as well.
"For these reasons, micro insurance may not become the next billion-client market opportunity:There seem to be deep reasons that most people don’t yet feel very comfortable with the kinds of insurance products that the market is willing to offer. On the other hand, the poor clearly bear unacceptable levels of risk. There is thus a clear role for government action.This does not mean the government needs to substitute for a private insurance market, but for a real market to have a chance to emerge, the government will probably need to step in. Private companies could continue to sell exactly the kinds of insurance they are currently willing to sell (catastrophic care with a strict cap, indexed weather insurance, and so forth). But for the time being, the government should pay a part of insurance premiums for the poor. There is already evidence that this could work: In Ghana, when weather insurance was offered to farmers with a large subsidy on the premium, almost all farmers to whom it was offered took it up."
Poor people, like the rest of us, hate spending money on insurance that only pays when something goes terribly wrong. They want a regular return on investment. but the only way to give that is to make insurance too expensive for poor people. Thus: government intervention.
On Loans
The poor pay incredible interest premiums (at least triple what the worst credit cards in America can charge). This makes micro-finance seem a godsend, and it is to a certain extent. but the fact of the matter is that not all people are entrepreneurs with the skills and desire to expand a business enough to move out of poverty, just like in the developed world. Therefore, micro-finance will help people who do have t those skills, which is great. But it won't help everyone, which is okay too. Micro-finance is just one tool in the development toolkit.
An interesting conclusion is that micro-finance also works against entrepreneurship in that it is set up to make people invest as safely as possible.
"The rigidity and specificity of the standard microcredit model mean, for one thing, that since group members are responsible for each other, women who don’t enjoy poking into other people’s business don’t want to join. Group members may be reluctant to include those they don’t know well in their groups, which must discriminate against newcomers. Joint liability works against those who want to take risks: As a group member you always want all other group members to play it as safe as possible.
...
One way to summarize all these results is to observe that, in many ways, the focus on “zero default” that characterizes most MFIs is too stringent for many potential borrowers. In particular, there is a clear tension between the spirit of microcredit and true entrepreneurship, which is usually associated with taking risks and, no doubt, occasionally failing. It has been argued, for example, that the American model, where bankruptcy is (or at least was) relatively easy and does not carry much of a stigma (in contrast with the European model, in particular), has a lot to do with the vitality of its entrepreneurial culture. By contrast, the MFI rules are set up not to tolerate any failure."
However this is a necessary part of micro-finance
"Opening the door to defaults, even as a way to encourage necessary risk taking, may lead to an unraveling of the social contract that allows them to keep repayment rates high and interest rates relatively low. The necessary focus on repayment discipline implies that microfinance is not the natural or best way to finance entrepreneurs who want to go beyond micro-enterprises. For each successful entrepreneur in the Silicon Valley or elsewhere, many have had to fail. The microfinance model, as we saw, is simply not well designed to put large sums of money in the hands of people who might fail. This is not an accident, nor is this due to some shortcoming in the microcredit vision. It is the necessary by-product of the rules that have allowed microcredit to lend to a large number of poor people at low interest rates.
"
On Saving
The central problem with saving is that it requires self-control. And though there are ways around these self-control problems (like social savings groups), they require an INITIAL act of self-control too.
"This effect is reinforced by the fact that a lot of the goods that the poor might really look forward to having, such as a refrigerator or bicycle or admission to a better school for their child, are relatively expensive, with the result that when they have a little bit of money in hand, the temptation goods are in an excellent position to stake their claim (You’ll never really save enough for that refrigerator, the voice in your ear insists. Have a cup of tea instead . . . ).The result is a vicious circle: Saving is less attractive for the poor, because for them the goal tends to be very far away, and they know that there will be lots of temptations along the way. But of course, if they do not save they remain poor.
"
Other Insights
"Everywhere we have asked, the most common dream of the poor is that their children become government workers ... The poor don’t see becoming an entrepreneur as something to aspire to. The emphasis on government jobs suggests a desire for stability"
On Corruption
"Top-down monitoring is not a particularly new idea. But audits and decoys seem to be effective, presumably because once the information is out there, there is some chance that it will be used to punish the offenders. A few people within the system who believe in fighting corruption may be enough."
For example,
"Brazil is one country that has tried to provide voters with useful information about candidates. Since 2003, every month, sixty municipalities are drawn at random in a televised lottery, and their accounts are audited. These audit results are made public through the Internet and the local media. Being audited hurts corrupt incumbents. In the 2004 election, they were 12 percentage points less likely to be elected if their audit was revealed before the election. Honest incumbents, on the other hand, were 13 percentage points more likely to be elected if their audit results were revealed just before an election."
Fantastic insight!
"Part of the problem is that even when governments are well intentioned, what they are trying to do is
fundamentally difficult.
Governments exist to a large extent to solve problems that markets cannot solve—we have already seen that in many instances government intervention is necessary precisely when, for some reason, the free market cannot do the job.
...
At an intersection, we would rather go than stop at the red light. And so on. As a result, the agents of the government (the bureaucrats, the pollution inspectors, the policemen, the doctors) cannot be paid directly for the value they are delivering to the rest of us—when a policeman gives us a ticket, we complain, but we don’t offer him a reward for doing his job well and keeping the roads safe for everyone. Contrast this with the grocery store owner: She delivers value by selling us eggs, and when we pay her for the eggs, we know we are paying for the social value she is delivering. This simple observation has two very important implications: First, there is no easy way of assessing the performance of most people who work for the government. This is why there are so many rules for what bureaucrats (or policemen, or judges) should and shouldn’t do. Second, the temptation to break the rules is ever present, both for the bureaucrat and for us, which is what leads to corruption and dereliction of duty. The risk of corruption and neglect is thus endemic in any government, but it is likely to be more severe in three circumstances: First, in cases when the government is trying to get people to do things whose value they don’t appreciate, such as wearing a helmet on a motorcycle, or immunizing a child. Second, when what people are getting is worth a lot more than they are paying for it; for example, a hospital bed provided free to those who need it, regardless of income, invites a bribe from richer people who want to jump the queue. Third, when bureaucrats are underpaid, overworked, and not well monitored, and have little to lose by getting fired anyway."
And finally, here are there major conclusions
1. The poor often lack critical pieces of information and believe things that are not true.
2. The lives of the poor could be significantly improved by making it as easy as possible to do the right thing—based on everything else we know—using the power of default options and small nudges:
3. There are good reasons that some markets are missing for the poor, or that the poor face unfavorable prices in them.
4. Poor countries are not doomed to failure because they are poor, or because they have had an unfortunate history. It is true that things often do not work in these countries: Programs intended to help the poor end up in the wrong hands, teachers teach desultorily or not at all, roads weakened by theft of materials collapse under the weight of overburdened trucks, and so forth. But many of these failures have less to do with some grand conspiracy of the elites to maintain their hold on the economy and more to do with some avoidable flaw in the detailed design of policies, and the ubiquitous three I’s: ignorance, ideology, and inertia.
5. Expectations about what people are able or unable to do all too often end up turning into self-fulfilling prophecies.
Links
http://gramvikas.org/ - affordable piped water in the developing world
View all my reviews
Allah: A Christian Response by Miroslav Volf
