Table of Contents
Title Page
Dedication
Foreword
Chapter 1 - Think Again, Again
TRAPPED IN POVERTY?
PART I - Private Lives
Chapter 2 - A Billion Hungry People?
ARE THERE REALLY A BILLION HUNGRY PEOPLE?
ARE THE POOR REALLY EATING WELL, AND EATING ENOUGH?
WHY DO THE POOR EAT SO LITTLE?
SO IS THERE REALLY A NUTRITION-BASED POVERTY TRAP?
Chapter 3 - Low-Hanging Fruit for Better (Global) Health?
THE HEALTH TRAP
WHY AREN’T THESE TECHNOLOGIES USED MORE?
UNDERSTANDING HEALTH-SEEKING BEHAVIOR
THE VIEW FROM OUR COUCH
Chapter 4 - Top of the Class
SUPPLY-DEMAND WARS
THE CURSE OF EXPECTATIONS
WHY SCHOOLS FAIL
REENGINEERING EDUCATION
Chapter 5 - Pak Sudarno’s Big Family
WHAT IS WRONG WITH LARGE FAMILIES?
DO THE POOR CONTROL THEIR FERTILITY DECISIONS?
CHILDREN AS FINANCIAL INSTRUMENTS
THE FAMILY
PART II - Institutions
Chapter 6 - Barefoot Hedge-Fund Managers
THE HAZARDS OF BEING POOR
THE HEDGE
WHERE ARE THE INSURANCE COMPANIES FOR THE POOR?
Chapter 7 - The Men from Kabul and the Eunuchs of India: The (Not So) Simple ...
LENDING TO THE POOR
MICRO INSIGHTS FOR A MACRO PROGRAM
DOES MICROCREDIT WORK?
THE LIMITS OF MICROCREDIT
HOW CAN LARGER FIRMS BE FINANCED?
Chapter 8 - Saving Brick by Brick
WHY THE POOR DON’T SAVE MORE
THE PSYCHOLOGY OF SAVINGS
POVERTY AND THE LOGIC OF SELF-CONTROL
Chapter 9 - Reluctant Entrepreneurs
CAPITALISTS WITHOUT CAPITAL
THE BUSINESSES OF THE POOR
GOOD JOBS
Chapter 10 - Policies, Politics
POLITICAL ECONOMY
CHANGES AT THE MARGIN
DECENTRALIZATION AND DEMOCRACY IN PRACTICE
AGAINST POLITICAL ECONOMY
In Place of a Sweeping Conclusion
Acknowledgements
Notes
Index
Copyright Page
For our mothers,
Nirmala Banerjee and
Violaine Duflo
Foreword
Esther was six when she read in a comic book on Mother Teresa that the city then called Calcutta was so crowded that each person had only 10 square feet to live in. She had a vision of a vast checkerboard of a city, with 3 feet by 3 feet marked out on the ground, each with a human pawn, as it were, huddled into it. She wondered what she could do about it.
When she finally visited Calcutta, she was twenty-four and a graduate student at MIT. Looking out of the taxi on her way to the city, she felt vaguely disappointed; everywhere she looked, there was empty space—trees, patches of grass, empty sidewalks. Where was all the misery so vividly depicted in the comic book? Where had all the people gone?
At six, Abhijit knew where the poor lived. They lived in little ramshackle houses behind his home in Calcutta. Their children always seemed to have lots of time to play, and they could beat him at any sport: When he went down to play marbles with them, the marbles would always end up in the pockets of their ragged shorts. He was jealous.
This urge to reduce the poor to a set of clichés has been with us for as long as there has been poverty: The poor appear, in social theory as much as in literature, by turns lazy or enterprising, noble or thievish, angry or passive, helpless or self-sufficient. It is no surprise that the policy stances that correspond to these views of the poor also tend to be captured in simple formulas: “Free markets for the poor,” “Make human rights substantial,” “Deal with conflict first,” “Give more money to the poorest,” “Foreign aid kills development,” and the like. These ideas all have important elements of truth, but they rarely have much space for average poor women or men, with their hopes and doubts, limitations and aspirations, beliefs and confusion. If the poor appear at all, it is usually as the dramatis personae of some uplifting anecdote or tragic episode, to be admired or pitied, but not as a source of knowledge, not as people to be consulted about what they think or want or do.
All too often, the economics of poverty gets mistaken for poor economics: Because the poor possess very little, it is assumed that there is nothing interesting about their economic existence. Unfortunately, this misunderstanding severely undermines the fight against global poverty: Simple problems beget simple solutions. The field of anti-poverty policy is littered with the detritus of instant miracles that proved less than miraculous. To progress, we have to abandon the habit of reducing the poor to cartoon characters and take the time to really understand their lives, in all their complexity and richness. For the past fifteen years, we have tried to do just that.
We are academics, and like most academics we formulate theories and stare at data. But the nature of the work we do has meant that we have also spent months, spread over many years, on the ground working with NGO (nongovernmental organization) activists and government bureaucrats, health workers and microlenders. This has taken us to the back alleys and villages where the poor live, asking questions, looking for data. This book would not have been written but for the kindness of the people we met there. We were always treated as guests even though, more often than not, we had just walked in. Our questions were answered with patience, even when they made little sense; many stories were shared with us.1
Back in our offices, remembering these stories and analyzing the data, we were both fascinated and confused, struggling to fit what we were hearing and seeing into the simple models that (often Western or Western-trained) professional development economists and policy makers have traditionally used to think about the lives of the poor. More often than not, the weight of the evidence forced us to reassess or even abandon the theories that we brought with us. But we tried not to do so before we understood exactly why they were failing and how to adapt them to better describe the world. This book comes out of that interchange; it represents our attempt to knit together a coherent story of how poor people live their lives.
Our focus is on the world’s poorest. The average poverty line in the fifty countries where most of the poor live is 16 Indian rupees per person per day.2 People who live on less than that are considered to be poor by the government of their own countries. At the current exchange rate, 16 rupees corresponds to 36 U.S. cents. But because prices are lower in most developing countries, if the poor actually bought the things they do at U.S. prices, they would need to spend more—99 cents. So to imagine the lives of the poor, you have to imagine having to live in Miami or Modesto with 99 cents per day for almost all your everyday needs (excluding housing). It is not easy—in India, for example, the equivalent amount would buy you fifteen smallish bananas, or about 3 pounds of low-quality rice. Can one live on that? And yet, around the world, in 2005, 865 million people (13 percent of the world’s population) did.
What is striking is that even people who are that poor are just like the rest of us in almost every way. We have the same desires and weaknesses; the poor are no less rational than anyone else—quite the contrary. Precisely because they have so little, we often find them putting much careful thought into their choices: They have to be sophisticated economists just to survive. Yet our lives are as different as liquor and liquorice. And this has a lot to do with aspects of our own lives that we take for granted and hardly think about.
Living on 99 cents a day means you have limited access to information—newspapers, te
levision, and books all cost money—and so you often just don’t know certain facts that the rest of the world takes as given, like, for example, that vaccines can stop your child from getting measles. It means living in a world whose institutions are not built for someone like you. Most of the poor do not have a salary, let alone a retirement plan that deducts automatically from it. It means making decisions about things that come with a lot of small print when you cannot even properly read the large print. What does someone who cannot read make of a health insurance product that doesn’t cover a lot of unpronounceable diseases? It means going to vote when your entire experience of the political system is a lot of promises, not delivered; and not having anywhere safe to keep your money, because what the bank manager can make from your little savings won’t cover his cost of handling it. And so on.
All this implies that making the most of their talent and securing their family’s future take that much more skill, willpower, and commitment for the poor. And conversely, the small costs, the small barriers, and the small mistakes that most of us do not think twice about loom large in their lives.
It is not easy to escape from poverty, but a sense of possibility and a little bit of well-targeted help (a piece of information, a little nudge) can sometimes have surprisingly large effects. On the other hand, misplaced expectations, the lack of faith where it is needed, and seemingly minor hurdles can be devastating. A push on the right lever can make a huge difference, but it is often difficult to know where that lever is. Above all, it is clear that no single lever will solve every problem.
Poor Economics is a book about the very rich economics that emerges from understanding the economic lives of the poor. It is a book about the kinds of theories that help us make sense of both what the poor are able to achieve, and where and for what reason they need a push. Each chapter in this book describes a search to discover what these sticking points are, and how they can be overcome. We open with the essential aspects of people’s family lives: what they buy; what they do about their children’s schooling, their own health, or that of their children or parents; how many children they choose to have; and so on. Then we go on to describe how markets and institutions work for the poor: Can they borrow, save, insure themselves against the risks they face? What do governments do for them, and when do they fail them? Throughout, the book returns to the same basic questions. Are there ways for the poor to improve their lives, and what is preventing them from being able to do these things? Is it more the cost of getting started, or is it easy to get started but harder to continue? What makes it costly? Do people sense the nature of the benefits? If not, what makes it hard for them to learn them?
Poor Economics is ultimately about what the lives and choices of the poor tell us about how to fight global poverty. It helps us understand, for example, why microfinance is useful without being the miracle some hoped it would be; why the poor often end up with health care that does them more harm than good; why children of the poor can go to school year after year and not learn anything; why the poor don’t want health insurance. And it reveals why so many magic bullets of yesterday have ended up as today’s failed ideas. The book also tells a lot about where hope lies: why token subsidies might have more than token effects; how to better market insurance; why less may be more in education; why good jobs matter for growth. Above all, it makes clear why hope is vital and knowledge critical, why we have to keep on trying even when the challenge looks overwhelming. Success isn’t always as far away as it looks.
1
Think Again, Again
Every year, 9 million children die before their fifth birthday.1 A woman in sub-Saharan Africa has a one-in-thirty chance of dying while giving birth—in the developed world, the chance is one in 5,600. There are at least twenty-five countries, most of them in sub-Saharan Africa, where the average person is expected to live no more than fifty-five years. In India alone, more than 50 million school-going children cannot read a very simple text.2
This is the kind of paragraph that might make you want to shut this book and, ideally, forget about this whole business of world poverty: The problem seems too big, too intractable. Our goal with this book is to persuade you not to.
A recent experiment at the University of Pennsylvania illustrates well how easily we can feel overwhelmed by the magnitude of the problem.3 Researchers gave students $5 to fill out a short survey. They then showed them a flyer and asked them to make a donation to Save the Children, one of the world’s leading charities. There were two different flyers. Some (randomly selected) students were shown this:Food shortages in Malawi are affecting more than 3 million children; In Zambia, severe rainfall deficits have resulted in a 42% drop in maize production from 2000. As a result, an estimated 3 million Zambians face hunger; Four million Angolans—one third of the population—have been forced to flee their homes; More than 11 million people in Ethiopia need immediate food assistance.
Other students were shown a flyer featuring a picture of a young girl and these words:Rokia, a 7-year-old girl from Mali, Africa, is desperately poor and faces a threat of severe hunger or even starvation. Her life will be changed for the better as a result of your financial gift. With your support, and the support of other caring sponsors, Save the Children will work with Rokia’s family and other members of the community to help feed her, provide her with education, as well as basic medical care and hygiene education.
The first flyer raised an average of $1.16 from each student. The second flyer, in which the plight of millions became the plight of one, raised $2.83. The students, it seems, were willing to take some responsibility for helping Rokia, but when faced with the scale of the global problem, they felt discouraged.
Some other students, also chosen at random, were shown the same two flyers after being told that people are more likely to donate money to an identifiable victim than when presented with general information. Those shown the first flyer, for Zambia, Angola, and Mali, gave more or less what that flyer had raised without the warning—$1.26. Those shown the second flyer, for Rokia, after this warning gave only $1.36, less than half of what their colleagues had committed without it. Encouraging students to think again prompted them to be less generous to Rokia, but not more generous to everyone else in Mali.
The students’ reaction is typical of how most of us feel when we are confronted with problems like poverty. Our first instinct is to be generous, especially when facing an imperiled seven-year-old girl. But, like the Penn students, our second thought is often that there is really no point: Our contribution would be a drop in the bucket, and the bucket probably leaks. This book is an invitation to think again, again: to turn away from the feeling that the fight against poverty is too overwhelming, and to start to think of the challenge as a set of concrete problems that, once properly identified and understood, can be solved one at a time.
Unfortunately, this is not how the debates on poverty are usually framed. Instead of discussing how best to fight diarrhea or dengue, many of the most vocal experts tend to be fixated on the “big questions”: What is the ultimate cause of poverty? How much faith should we place in free markets? Is democracy good for the poor? Does foreign aid have a role to play? And so on.
Jeffrey Sachs, adviser to the United Nations, director of the Earth Institute at Columbia University in New York City, and one such expert, has an answer to all these questions: 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—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. This is why foreign aid is key: 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. In his best-selling 2005 book, The End of Poverty,4 Sachs argues that if the rich world had committed $195 billion in foreign aid per year between 2005 and 2025, poverty could have been entirely eliminated by the end of this period.
But then there are others, equally vocal, who believe that all of Sachs’s answers are wrong. William Easterly, who battles Sachs from New York University at the other end of Manhattan, has become one of the most influential anti-aid public figures, following the publication of two books, The Elusive Quest for Growth and The White Man’s Burden.5 Dambisa Moyo, an economist who previously worked at Goldman Sachs and at the World Bank, has joined her voice to Easterly’s with her recent book, Dead Aid.6 Both argue that 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. In this sense, the aid pessimists are actually quite optimistic about the way the world works. According to Easterly, there are no such things as poverty traps.
Whom should we believe? Those who tell us that aid can solve the problem? Or those who say that it makes things worse? The debate cannot be solved in the abstract: We need evidence. But unfortunately, the kind of data usually used to answer the big questions does not inspire confidence. There is never a shortage of compelling anecdotes, and it is always possible to find at least one to support any position. Rwanda, for example, received a lot of aid money in the years immediately after the genocide, and prospered. Now that the economy is thriving, President Paul Kagame has started to wean the country off aid. Should we count Rwanda as an example of the good that aid can do (as Sachs suggests), or as a poster child for self-reliance (as Moyo presents it)? Or both?
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