Poor Economics

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by Abhijit Banerjee


  Figure 2: The Inverted L-Shape: No Poverty Trap

  This radical shift in perspective, away from the universal answers, required us to step out of the office and look more carefully at the world. In doing so, we were following a long tradition of development economists who have emphasized the importance of collecting the right data to be able to say anything useful about the world. However, we had two advantages over the previous generations: First, there are now high-quality data from a number of poor countries that were not available before. Second, we have a new, powerful tool: randomized control trials (RCTs), which give researchers, working with a local partner, a chance to implement large-scale experiments designed to test their theories. In an RCT, as in the studies on bed nets, individuals or communities are randomly assigned to different “treatments”—different programs or different versions of the same program. Since the individuals assigned to different treatments are exactly comparable (because they were chosen at random), any difference between them is the effect of the treatment.

  A single experiment does not provide a final answer on whether a program would universally “work.” But we can conduct a series of experiments, differing in either the kind of location in which they are conducted or the exact intervention being tested (or both). Together, this allows us to both verify the robustness of our conclusions (Does what works in Kenya also work in Madagascar?) and narrow the set of possible theories that can explain the data (What is stopping Kennedy? Is it the price of fertilizer or the difficulty of saving money?). The new theory can help us design interventions and new experiments, and help us make sense of previous results that may have been puzzling before. Progressively, we obtain a fuller picture of how the poor really live their lives, where they need help, and where they don’t.

  In 2003, we founded the Poverty Action Lab (which later became the Abdul Latif Jameel Poverty Action Lab, or J—PAL) to encourage and support other researchers, governments, and nongovernmental organizations to work together on this new way of doing economics, and to help diffuse what they have learned among policy makers. The response has been overwhelming. By 2010, J—PAL researchers had completed or were engaged in over 240 experiments in forty countries around the world, and very large numbers of organizations, researchers, and policy makers have embraced the idea of randomized trials.

  The response to J—PAL’s work suggests that there are many who share our basic premise—that it is possible to make very significant progress against the biggest problem in the world through the accumulation of a set of small steps, each well thought out, carefully tested, and judiciously implemented. This might seem self-evident, but as we will argue throughout the book, it is not how policy usually gets made. The practice of development policy, as well as the accompanying debates, seems to be premised on the impossibility of relying on evidence: Verifiable evidence is a chimera, at best a distant fantasy, at worst a distraction. “We have to get on with the work, while you indulge yourselves in the pursuit of evidence,” is what hardheaded policy makers and their even harder-headed advisers often told us when we started down this path. Even today, there are many who hold this view. But there are also many people who have always felt disempowered by this unreasoned urgency. They feel, as we do, that the best anyone can do is to understand deeply the specific problems that afflict the poor and to try to identify the most effective ways to intervene. In some instances, no doubt, the best option will be to do nothing, but there is no general rule here, just as there is no general principle that spending money always works. It is the body of knowledge that grows out of each specific answer and the understanding that goes into those answers that give us the best shot at, one day, ending poverty.

  This book builds on that body of knowledge. A lot of the material that we will talk about comes from RCTs conducted by us and others, but we also make use of many other types of evidence: qualitative and quantitative descriptions of how the poor live, investigations of how specific institutions function, and a variety of evidence on which policies have worked and which have not. In the companion Web site for the book, www.pooreconomics.com, we provide links to all the studies we cite, photographic essays that illustrate each chapter, and extracts and charts from a data set on key aspects of the lives of those who live on less than 99 cents per person per day in eighteen countries, which we will refer to many times in the book.

  The studies we use have in common a high level of scientific rigor, openness to accepting the verdict of the data, and a focus on specific, concrete questions of relevance to the lives of the poor. One of the questions that we will use these data to answer is when and where we should worry about poverty traps; we will find them in some areas, but not in others. In order to design effective policy, it is crucial that we get answers to such questions right. We will see many instances in the chapters that follow where the wrong policy was chosen, not out of bad intentions or corruption, but simply because the policy makers had the wrong model of the world in mind: They thought there was a poverty trap somewhere and there was none, or they were ignoring another one that was right in front of them.

  The message of this book, however, goes well beyond poverty traps. As we will see, ideology, ignorance, and inertia—the three Is—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. It is possible to make the world a better place—probably not tomorrow, but in some future that is within our reach—but we cannot get there with lazy thinking. We hope to persuade you that our patient, step-by-step approach is not only a more effective way to fight poverty, but also one that makes the world a more interesting place.

  PART I

  Private Lives

  2

  A Billion Hungry People?

  For many of us in the West, poverty is almost synonymous with hunger. Other than major natural catastrophes such as the Boxing Day tsunami in 2004 or the Haiti earthquake in 2010, no single event affecting the world’s poor has captured the public imagination and prompted collective generosity as much as the Ethiopian famine of the early 1980s and the resulting “We Are the World” concert in March 1985. More recently, the announcement by the UN Food and Agriculture Organization (FAO) in June 2009 that more than a billion people are suffering from hunger1 grabbed the headlines, in a way that the World Bank’s estimates of the number of people living under a dollar a day never did.

  This association of poverty and hunger is institutionalized in the UN’s first Millennium Development Goal (MDG), which is “to reduce poverty and hunger.” Indeed, poverty lines in many countries were originally set to capture the notion of poverty based on hunger—the budget needed to buy a certain number of calories, plus some other indispensable purchases (such as housing). A “poor” person was essentially defined as someone without enough to eat.

  It is no surprise, therefore, that a large part of governments’ effort to help the poor is posited on the idea that the poor desperately need food, and that quantity is what matters. Food subsidies are ubiquitous in the Middle East: Egypt spent $3.8 billion in food subsidies in 2008–2009 (2 percent of the GDP).2 Indonesia has the Rakshin Program, which distributes subsidized rice. Many states in India have a similar program: In Orissa, for example, the poor are entitled to 55 pounds of rice a month at about 4 rupees per pound, less than 20 percent of the market price. Currently, the Indian parliament is debating instituting a Right to Food Act, which would allow people to sue the government if they are starving.

  The delivery of food aid on a massive scale is a logistical nightmare. In India, it is estimated that more than one-half of the wheat and over one-third of the rice get “lost” along the way, including a good fraction that gets eaten by rats.3 If governments insist on such policy despite the waste, it is not only because hunger and poverty are assumed to go hand in hand: The inability of the poor to feed themselves properly is also one of the most frequently cited root causes of a poverty trap. The intuition is powerful: The poor
cannot afford to eat enough; this makes them less productive and keeps them poor.

  Pak Solhin, who lives in a small village in the province of Bandung, Indonesia, once explained to us exactly how such a poverty trap worked.

  His parents used to have a bit of land, but they also had thirteen children and had to build so many houses for each of them and their families that there was no land left for cultivation. Pak Solhin had been working as a casual agricultural worker, which paid up to 10,000 rupiah per day ($2 USD PPP) for work in the fields. However, a recent hike in fertilizer and fuel prices had forced farmers to economize. According to Pak Solhin, the local farmers decided not to cut wages but to stop hiring workers instead. Pak Solhin became unemployed most of the time: In the two months before we met him in 2008, he had not found a single day of agricultural labor. Younger people in this situation could normally find work as construction workers. But, as he explained, he was too weak for the most physical work, too inexperienced for more skilled labor, and at forty, too old to be an apprentice: No one would hire him.

  As a result, Pak Solhin’s family—he and his wife, and their three children—were forced to take some drastic steps to survive. His wife left for Jakarta, approximately 80 miles away, where, through a friend, she found a job as a maid. But she did not earn enough to feed the children. The oldest son, a good student, dropped out of school at twelve and started as an apprentice on a construction site. The two younger children were sent to live with their grandparents. Pak Solhin himself survived on about 9 pounds of subsidized rice he got every week from the government and on fish that he caught from the edge of a lake (he could not swim). His brother fed him once in a while. In the week before we last spoke with him, he had had two meals a day for four days, and just one for the other three.

  Pak Solhin appeared to be out of options, and he clearly attributed his problem to food (or, more precisely, the lack of it). It was his opinion that the landowning peasants had decided to fire their workers instead of cutting wages because they thought that with the recent rapid increases in food prices, a cut in wages would push workers into starvation, which would make them useless in the field. This is how Pak Solhin explained to himself the fact that he was unemployed. Although he was evidently willing to work, lack of food made him weak and listless, and depression was sapping his will to do something to solve his problem.

  The idea of a nutrition-based poverty trap, which Pak Solhin explained to us, is very old. Its first formal statement in economics dates from 1958.4

  The idea is simple. 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 originally used to buy that food. This is the situation Pak Solhin saw himself in when we met him: The food he got was barely enough for him to have the strength to catch some fish from the bank.

  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.

  This simple biological mechanism creates an S—shaped relationship between income today and income tomorrow, very much as in Figure 1 in the previous chapter: The very poor earn less than they need to be able to do significant work, but those who have enough to eat can do serious agricultural work. This creates a poverty trap: The poor get poorer, and the rich get richer and eat even better, and get stronger and even richer, and the gap keeps increasing.

  Although Pak Solhin’s logical explanation of how someone might get trapped in starvation was impeccable, there was something vaguely troubling about his narrative. We met him not in war-infested Sudan or in a flooded area of Bangladesh, but in a village in prosperous Java, where, even after the increase in food prices in 2007–2008, there was clearly plenty of food available, and a basic meal did not cost much. He was clearly not eating enough when we met him, but he was eating enough to survive; why would it not pay someone to offer him the extra bit of nutrition that would make him productive in return for a full day’s work? More generally, although a hunger-based poverty trap is certainly a logical possibility, how relevant is it in practice, for most poor people today?

  ARE THERE REALLY A BILLION HUNGRY PEOPLE?

  One hidden assumption in our description of the poverty trap is that the poor eat as much as they can. And indeed, it would be the obvious implication of an S—shaped curve based on a basic physiological mechanism: If there was any chance that by eating a bit more, the poor could start doing meaningful work and get out of the poverty trap zone, then they should eat as much as possible.

  Yet, this is not what we see. Most people living with less than 99 cents a day do not seem to act as if they are starving. If they were, surely they would put every available penny into buying more calories. But they do not. In our eighteen-country data set on the lives of the poor, food represents from 36 to 79 percent of consumption among the rural extremely poor, and 53 to 74 percent among their urban counterparts.5

  It is not because all the rest is spent on other necessities: In Udaipur, for example, we find that the typical poor household could spend up to 30 percent more on food than it actually does if it completely cut expenditures on alcohol, tobacco, and festivals. The poor seem to have many choices, and they don’t elect to spend as much as they can on food.

  This is evident from looking at how poor people spend any extra money that they happen upon. Although they clearly have some unavoidable expenses (they need clothes, medicines, and so forth) to take care of first, if their livelihoods depended on getting extra calories, one would imagine that when a little bit more spendable money is available, it would all go into food. The food budget should go up proportionally faster than total spending (since both go up by the same amount, and food is only a part of the total budget, it increases by a bigger proportion). However, this does not seem to be the case. In the Indian state of Maharashtra, in 1983 (much before India’s recent successes—a majority of households then lived on 99 cents per person per day or less), even for the very poorest group, a 1 percent increase in overall expenditure translated into about a 0.67 percent increase in the total food expenditure.6 Remarkably, the relationship was not very different for the poorest individuals in the sample (who earned about 50 cents per day per person) and the richest (who earned around $3 per day per person). The Maharashtra case is pretty typical of the relationship between income and food expenditures the world over: Even among the very poor, food expenditures increase much less than one for one 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. For the poorest group in Maharashtra in 1983, out of every additional rupee spent on food when income rose, about half went into purchasing more calories, but the rest went into more expensive calories. In terms of calories per rupee, the millets (jowar and bajra) were clearly the best buy.Yet only about two-thirds of the total spending on grains was on these grains, while another 30 percent was spent on rice and wheat, which cost on average about twice as much per calorie. In addition, the poor spent almost 5 percent of their total budget on sugar, which is both more expensive than grains as a source of calories and bereft of other nutritional value.

  Robert Jensen and Nolan Miller found a particularly striking example of the “flight to quality” in food consumption.7 In two regions of China, they offered randomly selected poor households a large subsidy on the price of the basic staple (wheat noodles in one region, rice in the other). We usually expect that when the price of something goes down, people buy more of it. The opposite happened. Households that received subsidies for rice or wheat consumed less of those two
items and ate more shrimp and meat, even though their staples now cost less. Remarkably, overall, the caloric intake of those who received the subsidy did not increase (and may even have decreased), despite the fact that their purchasing power had increased. Neither did the nutritional content improve in any other sense. The likely explanation is that because the staple formed such a large part of the household budget, the subsidies had made them richer: If the consumption of the staple is associated with being poor (say, because it is cheap but not particularly tasty), feeling richer might actually have made them consume less of it. Once again, this suggests that at least among these very poor urban households, getting more calories was not a priority: Getting better-tasting ones was.8

  What is happening to nutrition in India today is another puzzle. The standard media story about it is about the rapid rise of obesity and diabetes as the urban upper-middle classes get richer. However, Angus Deaton and Jean Dreze have shown that the real story of nutrition in India over the last quarter century is not that Indians are becoming fatter: It is that they are in fact eating less and less.9 Despite rapid economic growth, there has been a sustained decline in per capita calorie consumption; moreover, the consumption of all other nutrients except fat also appears to have declined among all groups, even the poorest. Today, more than three-fourths of the population live in households whose per capita calorie consumption is less than 2,100 calories in urban areas and 2,400 in rural areas—numbers that are often cited as “minimum requirements” in India for individuals engaged in manual labor. It is still the case that richer people eat more than poorer people. But at all levels of income, the share of the budget devoted to food has declined. Moreover, the composition of the food basket has changed, so that the same amount of money is now spent on more expensive edibles.

 

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