BOOK REVIEW

POOR ECONOMICS: A RADICAL RETHINKING OF THE WAY TO

FIGHT GLOBAL POVERTY

By: Abhijit V Banerjee & Esther Duflo

POOR ECONOMICS argues that so much of anti-poverty policy has

failed over the years because of an inadequate understanding of

poverty. The battle against poverty can be won, but it will take

patience, careful thinking and a willingness to learn from evidence.

Banerjee and Duflo are practical visionaries whose meticulous

workoffers transformative potential for poor people anywhere, and

is a vital guide to policy makers, philanthropists, activists and anyone

else who cares about building a world without poverty.

CHAPTER 1: THINK AGAIN, AGAIN

Poverty and development can sometimes feel like overwhelming issues – the

scale is daunting, the problems grand. Ideology drives a lot of policies, and

even the most well-intentioned ideas can get bogged down by ignorance of

ground-level realities and inertia at the level of the implementer.

In fact, we call these the “three I’s” – ideology, ignorance, inertia – the three

main reasons policies may not work and aid is not always effective.

But there’s no reason to lose hope. Incremental, real change can be made.

Sometimes the change seems small, but by identifying real world success

stories, facing up to real world failures, and understanding why the poor make

the choices they make, we can find the right levers to push to free the poor of

the hidden traps that keep them behind.

CHAPTER 2: A BILLION HUNGRY PEOPLE?

Jeffrey Sachs, an advisor to the United Nations and director of Columbia

University's Earth Institute, is one such expert. In books and countless

speeches and television appearances, he has argued that poor countries are

poor because they are hot, infertile, malaria-infested, and often landlocked;

these factors, however, make it hard for them to be productive without an

initial large investment to help them deal with such endemic problems. But

they cannot pay for the investments precisely because they are poor -- they

are in what economists call a "poverty trap." Until something is done about

these problems, neither free markets nor democracy will do very much for

them.

The basic idea of a nutrition-based poverty trap is that there exists a critical

level of nutrition, above or below which dynamic forces push people either

further down into poverty and hunger or further up into better-paying jobs

and higher-calorie diets.

These virtuous or vicious cycles can also last over generations: early childhood

under-nutrition can have long-term effects on adult success. Maternal health

impacts in utero development. And it’s not just quantity of food – quality

counts, too. Micronutrients like iodine and iron can have direct impacts on

health and economic outcomes.

But if nutrition is so important, why don’t people spend every available extra

cent on more calories? From the look of our eighteen-country dataset, people

spent their money on food… and festivals, funerals, weddings, televisions, DVD

players, medical emergencies, alcohol, tobacco and, well, better-tasting food.

CHAPTER 3: Low-Hanging Fruit for Better (Global) Health?

Every year, nine million children under five die from preventable diseases such

as diarrhea and malaria. Often, the treatments for these diseases are cheap,

safe, and readily available. So why don't people pick these 'low-hanging fruit'?

Why don’t mothers vaccinate their children? Why don’t families use bednets,

or buy chlorinated water? And why do they spend such large amounts of

money on ineffective cure instead?

There are a number of possible explanations. These can include unreliable

health service delivery, price sensitivity, a lack of information or trust, time-

inconsistent behavior and the simple fact that the poor may not be able to

tackle big, chronic illnesses.

None of these reasons explains everything in isolation. But understanding what

stops the immediate spread of our ‘low-hanging fruit’ – bednets, de-worming

medication, vaccines, chlorinated water – is an important step in improving

global health, and may finally help to eliminate health-based poverty traps.

CHAPTER 4: TOP OF THE CLASS

Over the past few decades, children have flocked into the schools, but schools

seem to have delivered very little: teachers and students are often absent, and

learning levels are very low. Why is this happening? Is it a supply issue, where

the government needs to provide children with better schools, better

textbooks, better teachers and better facilities? Or is it demand, where parents

would lobby for quality education if and only if there were real benefits?

There seems to be a problem with both. For example, parents expect both too

much and too little from the schools: government jobs for those who graduate

from secondary school, and nothing for the rest. Teachers seem focused on

teaching small elite, and undervalue the regular students. These expectations

affect behavior and generate real world waste.

But the good news is that these expectations and these real world outcomes

can be changed

CHAPTER 5: Pak Sudarno's Big Family

Most policy makers consider population policy to be a central part of any

development program. And yet, unexpectedly, it seems that access to

contraception may not be the determining factor in the poor's fertility

decisions. So how can policy makers influence population?

Instead of contraception, other aspects like social norms, family dynamics, and

above all, economic considerations, seem to play a key role, not only in how

many children people choose to have, but how they will treat them.

Discrimination against women and girls remain a central fact of the life for

many poor families.

Going inside the "black box" of familial decision-making - that is, understanding

how and why decisions are made the way they are - is essential to predicting

the real impact of any social policy aimed at influencing population.

CHAPTER 6: BAREFOOT HEDGEFUND MANAGERS

The poor face a huge amount of risk - a friend of ours from the world of high

finance once noted that they're like hedge fund managers. These risks can

come from health shocks - like an accident - or agricultural shocks - like a

drought - or any other number of unexpected crises. Often, the poor just don't

have the means to weather these shocks, and so they get pushed into poverty

traps.

The steps they take to protect themselves form these risks are insufficient and

often costly: they choose less profitable and less risky crop, they spread

themselves too thin across a great number of activities; they exchange favors

with neighbors. Yet all this doesn't always even cover large shocks.

CHAPTER 7: MICROFINANCE

The fact that banks are often unwilling to lend to the poor, coupled with the

extremely high interest rates moneylenders charge, was a call to action for the

founders of microfinance.

Enforcing credit contracts involves collecting extensive information about the

borrower to ensure repayment. The high cost of gathering this information

makes neighborhood moneylenders the easiest source of credit.

Microfinance institutions rely on their ability to keep a close check on the

customer, in part by involving other borrowers who happen to know the

customer: This was a recipe for enormous success, there are more than 200

million microfinance borrowers today.

Many MFIs were unwilling to evaluate whether their lending programs were

helping the poor. The MFIs were financially sustainable and borrowers kept

coming back, which the MFIs saw as proof enough.

When an Indian MFI, Spandana, was rigorously evaluated, there was clear

evidence that microfinance was working. People in Spandana neighborhoods

were more likely to have started a business and made large purchases.

However, there were no detectable impacts on women's empowerment,

spending on education or health, or in the probability that kids would be

enrolled in private schools.

One of the limits of microfinance is its inflexible structure and focus on "zero

default." It may not be an effective borrowing channel for entrepreneurs who

are willing to take risks and will go on to set up a large business.

More established businesses do not find it that much easier to get credit. In

particular, they run the risk of being too large for the traditional moneylenders

and microfinance agencies, but too small for the banks.

We need to see the equivalent of the microfinance revolution for small and

medium firms; figured out how to do it profitably on a large scale is the next

big challenge for finance in developing countries.

CHAPTER 8: SAVING BRICK BY BRICK

Just as with lending, banks have not found a good way to adapt their services

to the poor. The administrative costs associated with managing small accounts

are too high.

Instead, the poor find unusual and ingenious ways to save. They buying

durable goods like jewelry or new bricks for their house. Many form savings

"clubs" such as the popular rotating savings and credit associations (ROSCAs) in

Africa.

However, the fact that the poor have to adopt complicated and costly

alternative strategies to save means that saving is harder than if they had a

bank account: access to a saving accounts increases profits and consumption.

With new technology and innovations like M-PESA in Kenya which allows cell

phone users to send money with their phone, microsavings might become the

next microfinance revolution.

However, not all barriers to savings are externally imposed. The poor, like

anyone else, easily give in to the temptation to spend money in the present

rather than save it for the future.

They have difficulty, for example, saving enough over a short season to buy

fertilizer; but a program to help them buy it early increased fertilizer use.

The poor may be more subject to temptations than the rich because the items

they dream of may be further from their reach.

Poor people who feel that they have opportunities have strong reasons to cut

down on “frivolous” spending and invest in the future. Those who feel that

they have nothing to lose, in contrast, save less: hope matters!

CHAPTER 9: RELUCTANT ENTREPRENEURS

Many expect that the poor will find successful business opportunities. They

haven't been given a chance, so their ideas are fresher: MFIs have many

examples of successful clients, like a garbage collector turned recycling

empress!

The sheer number of business owners among the poor is impressive.

When tiny grants were made to small businesses in Sri Lanka, their profits

increased rapidly.

However, while many of the poor operate businesses, most of these

businesses are tiny.

The businesses of the poor tend to have few if any employees and very limited

assets.

The businesses run by the poor are also generally unprofitable, which may well

explain why giving them a loan to start a new business does not lead to a

drastic improvement in their welfare.

Many businesses suffer from the "empty shelf" problem: a space a created for

a shop, but no inventory fills the shelves. Even a small investment in more

inventory will have large marginal returns, but once the shelves are full, the

business has no further scope to grow.

Despite initial large returns to small investments, many small businesses hit at

point at which a substantial capital investment is needed in order to continue

growing. However, few people are willing to give such large loans to the poor.

Because of this trap, the poor may not invest as much (both money but also

emotions and intellectual energy) into their businesses because they know that

their business will always remain too small to make real money.

Often, the enterprises of the poor seem more a way to buy a job when more

conventional employment opportunities are not available than a reflection of a

particular entrepreneurial urge.

One of the most common dreams of the poor is that their children become

government workers - a stable, though not always an exciting job.

A sense of stability may be necessary for people to be able to take the long

view. People who don’t envision substantial improvements to their future

quality of life may stop trying and end up staying where they are.

Creating good jobs could go a long way in increasing the stability of the lives of

the poor, which will, in turn give the poor the opportunity and the urge to

invest in their children and save more.

There are more than a billion people who survive off of the earnings of their

own farm or business. We must be impressed by their resilience. But these

small businesses will probably not pave the way for a massive exit from

poverty.

CHAPTER 10: POLICIES, POLITICS

Even the most well-intended and well-thought-out policies may not have an

impact if they are not implemented properly.

Corruption, or the simple dereliction of duty, creates massive inefficiencies.

Many people believe that until political institutions are fixed, countries cannot

really develop.

There may be no natural process to completely eliminate bad institutions.

Institutional change from the outside is probably an illusion. But it is not clear

that things will eventually fix themselves.

However, fighting corruption appears to be possible to some extent even

without fixing the larger institutions. Relatively straightforward interventions,

such as threatening audits or publicizing corruption results have shown

impressive success.

Often, small changes make important differences. In Brazil, switching to a

pictorial ballot enfranchised a large number of poor and less educated adults.

The politicians they elected were more likely to target their policies to the

poor.

In China, even imperfect elections led to policies that were more favorable to

the poor.

In India, when quotas for women on village councils in India were enacted,

women leaders invested in public goods preferred by women.

Policies are not completely determined by politics. Good policies (sometimes)

happen in bad political environments. For example, Suharto built tens of

thousands of schools in Indonesia.

And bad policies happen in good environments, because what the government

is trying to do is hard: generally, the government tries to convince people to do

something they would not like to do, like wearing a helmet on a motorcycle!

The opportunities for corruption are rife.

Bad policies are often a product of the three I's: ideology, ignorance, inertia.

For example, nurses in India, whose job description is so overwhelming that

they have decided that they cannot possibly do it, and instead do nothing.

Careful understanding of constraints can lead to policies and institutions that

are better designed, and less likely to be perverted by corruption. Changes will

be incremental, but they will sustain and build on themselves, and perhaps

even improve the political process.