Poor Economics by Banerjee
Ref: Abhijit Banerjee (2011). Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. PublicAffairs.
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Summary
In general, poor people suffer from several compounding problems; wage instability, job insecurity, poor or even non-existent education, long term caloric deficit leading to physical and mental stunting, higher interest rates, lesser access to loans, higher insurance premiums, when available, lesser resiliency to disaster, sanitation problems, chronic medical issues, and corrupt political and economic institutions, to name only a few.
Microcredit, Primary (and Secondary) Education, Secure jobs, Insurance against health or weather disasters, a social safety net (minimum income support), physical and economic security through effective political institutions, and so on. The sense of security that any of these would provide would create a sense that the future holds promise while lowering stress levels, which directly impedes decision-making ability.
The poor seem to be trapped by the same kinds of problems that afflict the rest of us—lack of information, weak beliefs, and procrastination.
If children born into large families are less likely to receive proper education, nutrition, and health care (investment in human capital), and if poor families are more likely to be large, this creates a mechanism for the intergenerational transmission of poverty, in which poor parents beget (many) poor children.
The poor bear responsibility for too many aspects of their lives. The richer you are, the more the “right” decisions are made for you. Their lives 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.
Most political rules were probably put on paper by a well-meaning bureaucrat, who had his own views of what the system should do and did not pay too much attention to what that demanded on the ground. This is what we call, for short, the “three I’s” problem: Ideology, ignorance, and inertia on the part of the expert, the aid worker, or the local policy maker, often explain why policies fail and why aid does not have the effect it should.
The average poverty line in the 50 countries where most of the poor live is the equivalent of 16 Indian rupees ($.36) per person per day.
Poverty leads to an intolerable waste of talent. Poverty is not just a lack of money; it is not having the capability to realize one’s full potential as a human being. Generally, it is clear that things that make life less boring are a priority for the poor.
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Population
The number of children born to each family goes down sharply with income.
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.
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Global Statistics
~13% of the world’s population lacked access to improved water sources (typically meaning a tap or a well) and about one-fourth did not have access to water that is safe to drink (2008 WHO & UNICEF Estimates).
42% of the world’s population lives without a toilet at home.
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Nutrition
Nutrition Based Poverty Trap: The human body needs a certain number of calories just to survive. So, when someone is very poor, all the food he or she can afford is barely enough to allow for going through the motions of living and perhaps earning the meager income that the individual used to buy that food (Pak Solhin, 1958).
As people get richer, they can buy more food. Once the basic metabolic needs of the body are taken care of, all that extra food goes into building strength, allowing people to produce much more than they need to eat merely to stay alive.
Even among the very poor, food expenditures increase much less than 1:1 with the budget. Equally remarkable, even the money that people spend on food is not spent to maximize the intake of calories or micronutrients. When very poor people get a chance to spend a little bit more on food, they don’t put everything into getting more calories. Instead, they buy better-tasting, more expensive calories. The puzzle is that people do not seem to want more food, and yet more food and especially more judiciously purchased food would probably make them, and certainly their children, significantly more successful in life.
On average, adults who have been well nourished as children are both taller and smarter.
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.
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Agriculture
The average annual return to using fertilizer exceeds 70%: For $1 paid in fertilizer, the average farmer would get $1.70 worth of extra maize.
On average in our 18-country data set, 44% of the extremely poor in urban areas (those who live on <$.99 a day) operate a nonagricultural business. Even among the rural extremely poor, many—from 3% in Brazil to up to 44% in Ecuador (and 24% on average)—operate a nonagricultural business.
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Economics
Economic Institutions: Institutions that shape economic incentives, the incentives to become educated, to save and invest, to innovate and adopt new technology, and so on. Good economic institutions will encourage citizens to invest, accumulate, and develop new technologies, as a result of which society will prosper. Bad economic institutions will have the opposite effects (Acemoglu and Robinson).
Microfinance: Developed by Muhammad Yunus; places economic power in the hands of people by giving them a way to map out the future in a way that was not possible before. Whether buying machines, utensils, or a TV, the distinction is that microfinance enables people to work towards a vision of a life that they want, by saving and scrounging and working extra hard when needed, rather than simply drifting along.
Microfinance is not well designed to put large sums of money in the hands of people who might fail.
Microfinance gives its clients every incentive to play it safe, so it is not well suited to discover who has an appetite for risk taking.
In Chennai, India, when the typical fruit seller reimburses the wholesaler at night for the 1,000 rupees’ ($51 USD PPP) worth of vegetables she got in the morning, she gives him 1,046.9 rupees on average. This interest payment is 4.69% per day. To see what this means, try the following calculation: If you borrowed 100 rupees ($5.10 USD PPP) today and kept it until tomorrow, you would need to repay 104.69 rupees. If you kept this amount a further 24h and repaid it the following day, you would need to repay 109.6 rupees. After 30d, you would owe almost 400 rupees, and after a year, 1,842,459,409 rupees ($93.5M USD PPP). So, the equivalent of a $5 loan, if it goes unrepaid for a year, leaves a debt of nearly $100M. These very high interest rates were the call to action for the founders of microfinance.
Consider microfinance for the fruit seller: Imagine they can get a 1,000-rupee ($51 USD PPP) loan, even at a relatively hefty rate of, say, 10% monthly. They can now buy the vegetables in cash, rather than on credit. In one month, they would each already have saved 4,000 rupees ($203 USD PPP) in interest paid to the wholesaler, more than enough to repay the microfinance agency.
Innovations that better the lives of the poor have to be the low-hanging fruit, and who better than the poor themselves to think of what they could be?
India has a “priority sector” regulation, which constrains banks to lending 40% of their portfolios to the priority sector, consisting of agriculture, microfinance, and small and medium enterprises, which can include quite large firms (the largest eligible firms are larger than 95% of Indians’ firms).
Wage Variability: In Bangladesh, in any normal year, agricultural wages could be up to 18% above or below their average levels. And the poorer the country, the greater this variability.
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Healthcare
Family Planning and Maternal and Child Health Program (FPMCH): An intensive family planning outreach program implemented in 1977. Every two weeks, a trained nurse brings family-planning services to the homes of all married women of childbearing age who were willing to receive her. She also offered help with prenatal care and immunizations. The program led to a sharp reduction in the number of children. By 1996, women in the program areas between the ages of 30-55 had about 1.2 fewer children than those in the areas without the program. This change was accompanied by a drop in child mortality by 25% (but since the program also directly intervened to improve child health, there is no reason to attribute the increase in child survival to the change in fertility).
Contraception: The availability of contraception gives women more control over their reproductive lives—they can decide not just how many babies to have but also when to have them.
‘Miracle’ drugs that could save most of children: Cl bleach, purified water, salt/sugar (ORS).
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Education
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.
A combination of unrealistic goals, unnecessarily pessimistic expectations, and the wrong incentives for teachers contributes to ensure that education systems in developing countries fail their two main tasks: giving everyone a sound basic set of skills, and identifying talent.
In most countries, schools are available and schools are free, at least at the primary level. Most children are enrolled. And yet in the various surveys that we have conducted around the world, child absentee rates vary between 14-50%.
Demand Wallahs: Educational critics who believe there is no point in supplying education unless there is a clear demand for it. In their view, the quality of education is low because parents do not care enough about it, and they don’t because they know that the actual benefits (what economists call the “returns” to education) are low. For Wallahs, the best education policy is no education policy. Make it attractive to invest in business requiring educated labor and there will be a need for an educated labor force, and therefore a pressure to supply it.
India Caste Prejudice: In one study in India, teachers were asked to grade a set of exams. The teachers did not know the students, but half of the teachers, randomly chosen, were told the child’s full name (which includes the caste name). The rest were fully anonymous. The study found that, on average, teachers gave significantly lower grades to lower-caste students when they could see their caste than when they could not. But interestingly, it was not the higher-caste teachers who were doing this. The lower-caste teachers were actually more likely to assign worse grades to lower-caste students. They must have been convinced these children could not do well.
African Americans do worse on tests if they have to start by indicating their race on the cover sheet.
One study concluded that every extra year of primary school raised wages by about 8%.
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Politics
Political Institutions: Institutions that work to determine the ability of citizens to control politicians. Political institutions exist to prevent leaders from organizing the economy for their private benefit. When they work well, political institutions put enough constraints on rulers to ensure that they cannot deviate too far from the public interest (Acemoglu and Robinson).
The long shadow of bad political institutions is the main reason many countries in the developing world have failed to grow. Those countries inherited from the colonial period a set of institutions that were put in place by colonial rulers not for the development of the country but to maximize the extraction of resources for the benefit of the colonial powers. After decolonization, the new rulers found it convenient to hold on to the same extractive institutions and use them for their own benefit, thereby setting off a vicious cycle (Acemoglu and Robinson).
Until political institutions are fixed, countries cannot really develop, but institutions are hard to fix.
Iron Law of Oligarchy: Bad institutions tend to perpetuate bad institutions, creating a vicious circle.
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.
If the rules make such a difference, then it becomes very important who gets to make them. If the village is left to its own devices, it seems likely that rule making would be captured by the elite. It might therefore be better for the decentralization to be designed by a centralized authority, with the interest of the less advantaged or less powerful in mind. Power to the people, but not all the power.
Brazil provides voters with useful information about their politicians. Since 2003 in Brazil, every month, 60 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.
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Corruption
Corruption: Dereliction of political duty; creates massive inefficiencies in all aspects of society.
In a study, the threat of audits reduced the theft of wages and materials by one-third, compared to the villages where audits were not conducted (Olken).
A few people within the system who believe in fighting corruption may be enough.
Over time, women appear to be doing more than men with the same limited budget and are reported to be less inclined to take bribes.
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Foreign Aid
In Africa, foreign aid represents 5.7% of total government budgets in 2003 (12% if we exclude Nigeria and South Africa, two big countries that receive very little aid).
“Poor countries are poor because they are hot, infertile, malaria infested, often landlocked; this makes it hard for them to be productive without an initial large investment to help them deal with these endemic problems. But they cannot pay for the investments precisely because they are poor. Foreign Aid is key because it can kick-start a virtuous cycle by helping poor countries invest in these critical areas and make them more productive. The resulting higher incomes will generate further investments; the beneficial spiral will continue.”-Jeffrey Sachs.
“Aid does more bad than good: It prevents people from searching for their own solutions, while corrupting and undermining local institutions and creating a self-perpetuating lobby of aid agencies. The best bet for poor countries is to rely on one simple idea: When markets are free and the incentives are right, people can find ways to solve their problems. They do not need handouts, from foreigners or from their own governments.”-William Easterly & Dambisa Moyo.
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Nudges
The key challenge for institutions is to design “nudges” tailored to the environment of developing countries.
The government (or a well-meaning NGO) should make the option that it thinks is the best for most people the default choice, so that people will need to actively move away from it if they want to. So people have the right to choose what they want, but there is a small cost of doing so, and as a result, most people end up choosing the default option (Nudge).
The poor often lack critical pieces of information and believe things that are not true.
Information Campaigns: In order to work, an information campaign must have several features: It must say something that people don’t already know; it must do so in an attractive and simple way (a film, a play, a TV show, a well-designed report card); and it must come from a credible source (interestingly, the press seems to be viewed as credible).
Ensure everyone is invited to village meetings; by monitoring government workers and holding them accountable for failures in performing their duties; by monitoring politicians at all levels and sharing this information with voters; and by making clear to users of public services what they should expect—what the exact health center hours are, how much money (or how many bags of rice) they are entitled to.
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Misc Quotes
“Expectations about what people are able or unable to do all too often end up turning into self-fulfilling prophecies.”
“Talking about the problems of the world without talking about some accessible solutions is the way to paralysis rather than progress.”
“It often ends up being cheaper, per person served, to distribute a service for free than to try to extract a nominal fee.”
“Give poor communities the opportunities, and get out of the way.”-John Hatch, FINCA CEO.
“Families face a quality-quantity tradeoff. That is, when there are more children, each of them will be of lower quality because the parents will devote fewer resources to feeding and schooling each of them properly.”-Gary Becker.
“Large-scale waste and policy failure often happen not because of any deep structural problem but because of lazy thinking at the stage of policy design.”
“The possession of wealth encourages people to invest in becoming more patient. By implication, therefore, poverty makes people (permanently) more impatient.”-Gary Becker, 1997.
“The AIDS epidemic would make future generations of Africans better off by reducing fertility. This reduction of fertility occurs both directly, through the reluctance to engage in unprotected sex, and indirectly, because the resulting labor scarcity makes it more attractive for women to work rather than have babies. One cannot endlessly lament the scourge of high population growth in the developing world and then conclude that a reversal of such processes is an equal economic disaster.”-The Gift of Dying by Alwyn Young.
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Resources
Bangladesh Rehabilitation Assistance Committee (BRAC): Provides Microcredits to Bangladeshi borrowers, mostly women (http://www.brac.net/).
PROGRESA: The first conditional cash transfer (CCT) program; offers money to poor families, but only if their children regularly attended school and the family sought preventive health care. They got more money if the children were in secondary school than in primary school and if it was a girl who went to school rather than a boy.
A study of conditional cash transfer in the city of Bogotá, Colombia, found compelling evidence of the propensity to concentrate resources on one child.
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Terminology
Moral Hazard: Worry that the guarantee of help might create a temptation to slack off.
Portfolio at Risk: Loans that may default; <4% in S. Asia, <7% in most Latin America and Africa (2009).
Purdah: A Muslim and Hindu custom which forbids a woman to leave the house without her husband.
Sunk Cost Fallacy: People are more likely to make use of something they have paid a lot for. Additionally, people may judge quality by price while conversely judging things to be valueless precisely because they are cheap.
Time Inconsistency: The difference in how we think about the future as compared to the present. In the present, we are impulsive, governed in large part by emotions and immediate desire: small losses of time (standing in line to get the child immunized) or petty discomforts (glutes that need to be woken up) that have to be endured right now feel much more unpleasant in the moment than when we think about them without a sense of immediacy (say, after a Christmas meal that was heavy enough to rule out all thoughts of immediate exercise). The reverse, of course, goes for small “rewards” (candy, a cigarette) that we really crave in the present; when we plan for the future, the pleasure from these treats seems less important. Our natural inclination is to postpone small costs, so that they are borne not by our today self but by our tomorrow self instead.
In essence, we seem to have a vision of how we should act in the future that is often inconsistent with the way we act today and will act in the future. One form that this “time inconsistency” takes is to spend now, at the same time as we plan to save in the future. In other words, we hope that our “tomorrow’s self” will be more patient than “today’s self” is prepared to be.
Thinking about long-term goals and getting used to making short-term sacrifices in order to get there are the first steps toward liberation from one of the most frustrating aspects of poverty.
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Chronology
Apr, 1976: India’s Cabinet approves a national population policy to encourage family planning, including financial incentives for those who agreed to be sterilized (such as a month’s wages or priority on a housing list), and more frighteningly, authorization for each state to develop compulsory sterilization laws.-Poor Economics by Banerjee.
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