Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty – BOOK REVIEW

Background

All economies face different types of socio-economic challenges. The problems include inefficient education and healthcare, poor sanitation, and so on. Most prominent and despicable among all is poverty because it can be attributed as a reason for all other evils. According to a report released by the World Bank in 2010, there is a remarkable decline in the poverty rates in the last decade. The number of people living in extreme poverty has been declined to more than 700 million. However, the total number of people still entrenched in destitution nearly equals the total population of India, i.e. 1.2 billion. The reduction in poverty is more than half for the middle and high-income countries since 1981. For less income countries the extreme poverty fell by less than a third. The subsistence earnings allow the poor as much to keep their body and soul intact. Most of the world’s poor lives in Third World nations. Abolition of poverty and the protection of marginalized has always grabbed the attention of governments, policymakers, development workers, international agencies, etc.

The primary agenda for almost all governments in developing countries has always been poverty elimination. Various international agencies, local organizations, and governments have made individual and collective actions to end poverty. However, poverty has always been able to triumph over all measures. Poverty eradication is definitely the biggest humanitarian challenge. The “invisible hand” has largely failed to serve everyone in society. The reasons of failure are mostly attributed to institutional and market failures. However, the role of beneficiaries in the success and failure of a particular measure mostly remained ambiguous and probably hard to answer. A comprehensive understanding of the lives of the poor is absolutely necessary to devise effective and efficient solutions to deal with the problem of poverty.

Poor economics tries to find out how best to realize the goals of eliminating poverty; what works and what doesn’t? Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty provides fascinating details of the lives and thought process of the poor. The authors claim that the anti-poverty approaches followed by the governments as well as by the local, national, and international development and aid agencies primarily propagate their ideologies by imposing quixotic policies; apathy and unawareness further worsen the situation. This explains why even good-intentioned policies fail. Through various Randomized Controlled Trials (RCTs) in 18 countries, data set Professor Banerjee and Professor Duflo explain the causes of poverty and solutions to combat it. Whether people live in poverty traps and need help and aid to get out, or if they are not in poverty traps, why they remain poor. The book covers eight major development-related issues including food, health, education, family planning, microfinance, saving, and entrepreneurship. Each of these issues is contextualized with anecdotes of the realities of the lives of the poor, with the evidence presented to support or dismiss a particular policy proposal.

Think Again, Again

Poor Economics: A Radical Rethinking of the Way to Fight Global Povertyopens up by illuminating the debate over development aid. At one end of the debate is aid “optimist” ProfessorJeffrey Sachs who believes in the existence of a poverty trap and favors the governmental intervention to fight poverty by infusing large amounts of money into the existing system. At another end, Professor William Easterly criticizes the idea of aid arguing that it does more bad than good and promotes dependency culture. The aid pessimists believe that people can find a way through free markets provided that the incentives are right. The authors express doubt over which idea should be believed? They say that debate about the rights and wrongs of aid often obscure what really matters. However, no one in the debate overlooks the moral imperative to save lives of those who are not known to anyone. The authors give three I’s,viz., ideology, ignorance, and inertia as the reason why policies fail and why aid does not impact as it should and favors a step-by-step approach to fight poverty.

Hunger

Flight to Quality!

The authors revoke the common notion that poor people go to bed hungry every night. They also dismiss that people in destitution put every available penny into buying more food. It is quite surprising that neither of the two assumptions is true. The poor do not spend extra money on buying extra calories instead they spend it on purchasing better-tasting and expensive food. Like in China when the price of basic staple was largely subsidized the poor started spending their savings on buying shrimp and meat. This suggests that poor people also make rational decisions to allocate their income. Instead of raging against their destiny poor people have made things bearable by reducing their standards but not necessarily by cutting out luxuries. This indulgence is not because of impulsive purchase but is well thought out, and reflects strong compulsion.

Nutrition Based Poverty Trap

The childhood malnutrition affects the ability of adults to function successfully in the world. Nutrition experts conclude that “Undernutrition is associated with lower income status in adulthood.”The social returns of directly investing in children and pregnant women’s nutrition are therefore tremendous. The food policies, therefore, need to be reformed especially considering the rights and welfare of vulnerable.

Health: Low Hanging Fruits for Marginalized Mango Man

There are a large number of cheap remedies that can be adopted by the poor to improve their work efficiency and living, for example, chlorinated water, deworming pills, bed nets, and so on. Even though these preventable and treatable remedies are easily available most of the poor don’t use them. There are three reasons why these low hanging fruits are mostly left unused.

• Poor public healthcare provided by the medical professionals;
• Money is spent on curative healthcare rather than cheaper preventive alternatives; and
• People perceive free or cheap services as worthless

The belief system also plays a crucial role in healthcare. When there is not much conviction behind a belief and is only held for convenience and comfort it is easy to bribe people to do the right thing. In such cases, rewards or incentives frequently work. It is evident from the successful immunization camp organized by Seva Mandir to provide reliable immunization services to rural children in Udaipurbetween January 2002 and August 2003.

The government should improve quality of both the preventive and curative healthcare. Stricter regulations should be enforced to maintain discipline in the public healthcare system. The preventive healthcare should be readily available and affordable. The government can further set some rewards for participation in immunization projects.

Education: Top of the Class

The world over, education systems are under stress. Enrolment has gone up faster, however, the impact created in child learning is negligible. Pratham, one of the largest non-government organizations (NGOs) in the world committed towards providing quality education to the underprivileged children in India conducts an annual survey known as the Annual Status of Education Report (ASER). The objective of this survey is to know the education standard in the schools of India. The survey suggests that more than 41% of students of grade fifth are unable to read text of grade second and fail to solve simple arithmetic like division. Based on these facts the authors rightly argue that if the children are not learning anything and the education system is unable to bring any change in their lives there is no point in sending children to school. Through various randomized controlled trials(RCTs) they try to explain the reasons why schools fail? Why the education system in developing countries does not fulfil its objective? Why there is a high level of absenteeism of teachers in school? And what can be done to improve the education system?

Professors Banerjee and Duflo reason that 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 of giving everyone a sound basic set of skills, and identifying talent. Other reasons of failure includes the curriculum and the teaching which are designed for the elite, growth in the high-tech sectors is a reason for shortage of teachers; parents perceive education primarily as a way for their children to acquire considerable wealth, the constraints imposed by the official pedagogy, and the particular focus on covering the syllabus are attributed as barrier.

Education is a form of investment. People invest in education to make money in the form of increased earnings in the future. But the problem with investing in education is that parents invest and children reap the benefits. Many factors matter in educating a child, hopes about the future, expectations, and generosity. Building schools and hiring teachers is the first step to lower the cost of sending a child to school, but it may not be enough. Compulsory education cannot be enforced due to the limited capacity of the state. One way to encourage parents to send their children to school is financial incentives like conditional cash transfer programs like PROGRESA (Programa de Educacion, Salud, y Alimenacién), an integrated approach implemented by the government of Mexico in 1997 to alleviate poverty through the development of human capital.

The authors suggest many solutions to improve the education system. These include a focus on basic skills, commitment to the idea that every child can learn and master, no excuse attitude, the curriculum should be simplified, and children should be allowed to learn at their own pace, by repeating if necessary.

However, lack of motivation in most of the cases is not because of low remuneration but because of weak external enforcement. The lack of motivation and accountability among school teachers has degraded the education system. High absenteeism and poor performance of students is proof of teachers’ irresponsible attitude. The simple solution to this problem is the privatization of public schools, contractual agreements, continuous evaluation, and performance-based benefits, rewards, and contract renewal. This will make the teachers accountable and the fear of being laid off in case of poor performance will motivate them to put real efforts.

Large Families

One of the most common characteristics of poor families is their large size. Why is it so? Is the poor not aware of the benefits of a small family? Or they are unable to plan a family by controlling their fertility? The authors’ reason that the poor families are large not because they are unable to control their own fertility but for them, it is a choice. When family size increases, there is nothing left for savings and on the other side, if the family size decreases, the precautionary savings go up. But these savings are not for the children rather are provident measures for the old age or emergency such as healthcare-related issues etc. So it does not make any difference to the health and education of a child in a poor family whether the family is small or large. This is one reason why family planning programs fail because they are actually not wanted by the poor. Furthermore, HIV/AIDS or compulsory sex education is not a solution to teenage pregnancies or sexually transmitted diseases. The RCTs shows that even small rewards like distribution of school uniform for girls work and keep them off the streets. Such initiatives are more effective in preventing teenage pregnancies.

Insurance

Poor live their lives at the face of risk. Why the formal insurance is not available to the poor? The book cites numerous explanations like fear of moral hazard, adverse selection, fraud, government subsidies, why formal institutes do not provide security to poor, etc. And in many cases poor do not understand the concept of insurance or doubt the credibility of insurance products. There is so much risk in the everyday lives of poor that the event perceived to be cataclysmic in rich countries often seems to barely register with them. Poor always live circled by various livelihood risks. To bear this risk poor people diversify their livelihood options. On one hand diversification of livelihood activities strengthens them to face risk and at the other, it takes away the benefits of specialization. The diversification includes part-time work at construction sites, small plots in different parts of the village, and different crop types. The authors suggest a governmental intervention to develop the insurance market by providing subsidies.

Borrowing

Poor generate their working capital through borrowing. The money is generally borrowed from friends, relatives, money lenders, and family. Poor people repay the borrowed amount with exorbitant rates of interest. These can be as highas5% per day. Poor people borrow at such higher rates from informal sources because formal financial institutes impose stringent rules and takes time to lend money. Only about 5%are able to borrow through financial channels. According to financial institutions they are reluctant to lend money to poor because information and monitoring costs of lending to poor people are high. This was how the concept of microfinance, a small amount of finance provided to low-income individuals or groups who otherwise have no other access to financial services, came into being. Professor Muhammad Yunus who is hailed as the father of modern microfinance has done extensive work improving lives of thousands of marginalized. But there are also many case studies like of Spandana in Hyderabad which suggests that microfinance work but not remarkably.

Savings

Largest problem of saving is procrastination. It is very hard for poor people to save money because they always have a preference for present rather than future consumption. Another reason is formal banking system is less interested in dealing with small accounts. One way to overcome the problem of saving is by providing short-term fixed deposits so that after a certain period of time-poor people can save a considerable sum of money.

Natural Entrepreneurs!

The authors thus disapprove of the idea that the poor are “natural entrepreneurs.” In an RCT when 52 people were randomly provided microfinance after sometime it was observed that very few people started new ventures. Most of these businesses run by the poor were tiny. Maximum of these have no paid staff and generate very little profits. They do not sustain for long. These businesses are reluctant to invest more to achieve further growth. Even if somebody wanted to it is hard for them to save or borrow money to overcome the financial barrier. The reason why most poor pursue to start their own venture is to supplement their meager income. There is no spirit of entrepreneurship per se. Another major problem is that many poor countries are unable to provide job opportunities due to which poor people have to opt for something on their own.

Limitations of “Poor Economics”

• The RCTs are criticized by many development experts arguing that the results cannot be generalized and only sometimes replicable. It is not possible to test every permutation and combination through RCTs. Like Professor William Easterly argues that RCTs are infeasible for many of the big questions in development, like the economy-wide effects of good institutions or good macroeconomic policies.
• The ambiguity still persists because the book does not clearly explain which pro-poor policies are most effective and which should be discarded? What should be done to uplift the poor? What are the policy implications? What should be the trajectory to achieve the goal of social inclusiveness?
• Climate change is endangering development successes. Poor and marginalized are often affected the most. No effort has been made to study the adverse impact of climate change in the lives of the bottom billion.
• The book does not summarize the chapters to discuss the future perspective.

Despite a few of its limitations, Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty provides a large number of anecdotes and experiments to build mind-boggling facts, challenges key assumptions provoking thoughts.

Discussion, Conclusion, and Suggestions

It is evident that socio-cultural barriers and religious beliefs prevent radical social reforms to take place. Certain social stigma and taboo restraint people to participate in life-transforming policy initiatives. Another major problem is gender bias. Gender rights play a crucial role in the socio-economic well-being of society. Gender inequality suppresses the talents of billions of women worldwide who are capable of becoming business leaders, great politicians, researchers, and so on. There is a lot of waste of human capital. The gender bias restricts women to become economic agents in society resulting in a gender-specific poverty trap. Domestic violence and sexual harassment is a significant contributor to it. A report released by the World Health Organization (WHO)in 2014 shows that about 700 million women are a victim of sexual or domestic violence. According to this report, 35% of women are a victim of violence during their lives, mostly at the hands of their husbands or partners and at a huge personal and economic loss. The report suggests that the productivity loss due to domestic violence is in the range of 1.5% to 2% of the gross domestic product (GDP) equivalent to the total spending on primary education by most of the developing countries. Major gender reforms are needed to uplift women. One such measure is increased rights over resources so that the women can be included in the decision-making processes.

Professor Easterly maintains that countries like China and India have achieved success through market-based approaches. According to him, market-based approaches provide an efficient solution to the problems and lead countries to the path of development. To extend his view one such promising idea to address the social challenges is through social business/ social enterprise. The system is self-sustainable because of its market-led business model and continuously provides the supply of goods and services to poor at competitive price. The social business directly addresses the social problems and the investors seek Return on Investment (ROJ) in terms of positive social impact. There are many success stories like Grameen Danone, Arvind Eye Care and so on which has created a positive impact in society. Social problems can also be effectively addressed through public-private partnership (PPP) models. PPP models have achieved great success in wider areas including health, education, sanitation, clean water supply, etc. PPP is especially helpful when the public sector lacks resources and technological and professional expertise.

Corruption and lack of accountability result in the failure of political and economic institutions. In such cases marginalized suffer the most. Like Professor Banerjee and Professor Duflo maintains the formal financial institutions like banks and insurance companies have been unable to provide effective strategies and financial policies to help the poor. These institutions have largely failed to realize the goal of society. Many development economists like Professor Easterly believe that the development objectives cannot be realized unless the institutions are corruption-free and not deter from the duty. However, some like Professor Sachs favor the strengthening of civil society and poverty elimination through the bottom-up approach. However, the responsibility has to be shared between both the institutions and the civil society.

The lesson learned from the book is that it does not make any difference how well pro-poor policies are designed? How carefully aid is planned? Or how efficient markets are? If these policies and plans are based on whims and hunches they are most likely to fail. Development and anti-poverty policies should be formed on scientific evidence and the approach should be need-based. The comprehensive understanding of ethnography is necessary to find innovative solutions to tackle key social challenges and foster development. This is possible through 3Cs, i.e. co-creation, collaboration, and co-operation. Like both ProfessorSachs and Easterly agree thatthere should be a balance between motivation and constraints. Even good-intentioned, ideological policies can fail if the approach is not bottom-up. Therefore, before we devise any development or pro-poor policy we need to “Think Again, Again.”

References

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• Poor economics: A radical rethinking of the way to fight global poverty. retrieved (02/09/2017) from http://www.kent. ac.uk/economics/ documents/tt/ Poor-economics- review-article.pdf
• Tooley J.(2012). Big questions and poor economics: Banerjee and Duflo on schooling in developing countries.Economics Journal Watch 9(3), 170-185.
• Wacziarg R.(2002). Review of Easterly’s elusive quest for growth. Journal of Economic Literature, XL, 907-918.
• What does it take for you to be outraged? (2014). Voices: Perspective on development. retrieved (02/09/2017) from http:// blogs.worldbank.org/voices/1-3-what-does-it- take-you-be-outraged

 

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