Poor Economics

by Abhijit Banerjee

  We now return to the question of whether the poor really want such large families. Pak Sudarno wanted nine children. His large family was not the product of lack of self-control, lack of access to contraception, or even a norm imposed by society (although the fact that he got to make this decision may have been; his wife did not tell us what she would have wanted herself). At the same time, he believed that having nine children made him poor. So he did not really “want” so many children. He only needed nine children because there was no other way for him to be sure that at least one of them would support him later in his life. In an ideal world, he would have had fewer and tried to raise them as well as he could, but he would not have had to depend on them later.

  Although many elderly people in the United States would prefer to spend more time with their children and grandchildren (at least if sitcoms are to be believed), the fact that they have the option of surviving on their own—thanks in part to Social Security and Medicare—may be very important for their dignity and their sense of self. It also means that they do not need to have lots of children in order to ensure that there will be someone to take care of them. They can have the number of children they really want, and if it turns out that none of them are willing or able to take care of them, there is always the public fallback.

  The most effective population policy might therefore be to make it unnecessary to have so many children (in particular, so many male children). 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. In the second part of the book, we turn to how this can be done.

  PART II

  Institutions

  6

  Barefoot Hedge-Fund Managers

  Risk is a central fact of life for the poor, who often run small businesses or farms or work as casual laborers, with no assurance of regular employment. In such lives a bad break can have disastrous consequences.

  In summer 2008, Ibu Tina lived with her disabled mother, her two brothers, and her four children ages three to nineteen in a tiny house in Cica Das, the vast urban slum in Bandung, Indonesia. The three younger children were at least nominally in school, but the oldest had dropped out. Her two unmarried brothers, a daily wage-earning construction worker and a taxi driver, kept the family from entirely going under, but there never seemed to be enough money for school fees, food, clothes for her children, and care for her aging mother.

  Yet this had not always been Ibu Tina’s life. When she was young, she worked in a garment factory. After she got married, she joined her husband’s garment business. They had four employees, and the business was doing well. Their problems started when a business acquaintance they trusted gave them a bad check worth 20 million rupiah ($3,750 USD PPP). They went to the police. Policemen demanded 2.5 million rupiah in bribes even to agree to start investigating; after they were paid, they did manage to arrest the defaulter. He ended up spending a week in prison before he was released, after promising to repay what he owed. After reimbursing 4 million rupiah to Ibu Tina (of which the police claimed another 2 million) and promising to repay the rest over time, he disappeared and has not been heard from since. Ibu Tina and her husband had paid 4.5 million rupiah in bribes to recoup 4 million.

  For the next three or four years, they tried very hard to bounce back and eventually managed to get a loan of 15 million rupiah ($2,800 USD PPP) from PUKK, a government lending program. They used the loan to start a garment-trading business. One of their first large orders was for shorts. They purchased the shorts from the garment makers and had them ironed and packaged for sale, but then the retailers backed off, leaving them with thousands of shorts that no one wanted.

  The sequence of disasters put enormous stress on their marriage, and shortly after the second mishap, they got divorced. Ibu Tina moved in with her mother, bringing with her the four children and the stacks of shorts. When we met her she was still trying to recover from that trauma and said that she did not really have the energy to start again. She thought that when she felt better, she would open a small grocery shop in part of her mother’s house, and maybe sell some of the shorts for Idur Fitri, the Muslim holiday.

  To make matters worse, her eldest daughter needed a lot of attention. Four years earlier, when she was about fifteen, she had been abducted by a homeless person who lived next to their house. He released her after a few days, but the girl was traumatized by that episode and had stayed home since, unable either to work or go to school.

  Was Ibu Tina particularly unlucky? To some extent, certainly. She thought that the abduction of her daughter was a freak accident (though even that situation had something to do with the fact that their house was near the railway line, where many homeless people lived), but she also firmly believed that her business misfortunes were symptomatic of the lives of small business owners.

  THE HAZARDS OF BEING POOR

  A friend of ours from the world of high finance always says that the poor are like hedge-fund managers—they live with huge amounts of risk. The only difference is in their levels of income. In fact, he grossly understates the case: No hedge-fund manager is liable for 100 percent of his losses, unlike almost every small business owner and small farmer. Moreover, the poor often have to raise all of the capital for their businesses, either out of the accumulated “wealth” of their families or by borrowing from somewhere, a circumstance most hedge-fund managers never have to face.

  A high fraction of the poor run small businesses or farms. In our eighteen-country data set, an average of 50 percent of the urban poor have a non-agricultural business, whereas the fraction of the rural poor who report running a farm business ranges between 25 percent and 98 percent (the one exception is South Africa, where the black population was historically excluded from farming). In addition, a substantial fraction of these households also operate a non-agricultural business. Moreover, most of the land farmed by the poor is not irrigated. This makes farm earnings highly dependent on the weather: A drought, or even a delay in the rains, can cause a crop failure on non-irrigated land, and half the year’s income might vanish.

  Business or farm owners are not the only ones exposed to income risk. The other main form of employment for the poor is casual labor, paid by the day: Over half of those who are employed among the extremely poor in rural areas are casual workers. In urban areas, it is about 40 percent. When day laborers are lucky, they find jobs that last for several weeks or even a few months on a construction site or a farm, but often a job might just be for a few days or a couple of weeks. A casual worker never knows whether there will be a job when the current spell ends. If there is a problem with the business, these jobs are the first to be eliminated: It didn’t take much time for Pak Solhin, whom we met in Chapter 2, to lose his job when fertilizer and oil prices went up and farmers cut back on labor. As a result, casual laborers tend to work fewer days in a year than regular workers, and a good portion of them work very few days in a year. A survey in Gujarat, India, found that casual workers worked on average 254 days per year (as against 354 for salaried workers, and 338 for the self-employed), and that the bottom one-third worked only 137 days.1

  Big agricultural disasters, such as the Bangladesh drought of 1974 (when wages fell by 50 percent in terms of purchasing power and, according to some estimates, up to 1 million people died)2 or food crises in Africa (such as the Niger 2005–2006 drought), naturally attract particular attention from the media, but even in “normal” years, agricultural incomes vary tremendously from year to year. In Bangladesh, in any normal year, agricultural wages could be up to 18 percent above or below their average levels.3 And the poorer the country, the greater this variability. For instance, agricultural wages in India are twenty-one times more variable than in the United States.4 This is no surprise: American farmers are insured, receive subsidies, and benefit from the standard soci
al insurance programs; they don’t need to fire their workers or cut wages when they have a bad harvest.

  As if the vagaries of the elements were not bad enough, agricultural prices fluctuate enormously. There was an unprecedented rise in food prices from 2005 to 2008. They have collapsed during the global financial crisis, only to rise to the pre-crisis level over the last two years. High food prices should in principle favor producers (the rural poor) and hurt consumers (the urban poor). In summer 2008, however, a record year for the prices of both food and fertilizer, everyone we talked to in countries such as Indonesia and India felt that they were holding the short end of the stick: Farmers thought that their costs had increased more than their prices; workers complained that they could not find work because farmers were saving money; at the same time, city dwellers were struggling to pay for food. The problem was not just the level of prices, but also the uncertainty. Farmers, for example, who were paying high prices for fertilizer were not sure whether the price of their produce would still be high when they were ready to harvest.

  For the poor, risk is not limited to income or food: Health, which we discussed in a previous chapter, is one major source of risk. There is also political violence, crime (as in the case of Ibu Tina’s daughter), and corruption.

  There is so much risk in the everyday lives of the poor that somewhat paradoxically, events that are perceived to be cataclysmic in rich countries often seem to barely register with them. In February 2009, the World Bank’s president, Robert Zoellick, warned the world’s leaders: “The global economic crisis [sparked by the collapse of Lehman Brothers in September 2008] threatens to become a human crisis in many developing countries unless they can take targeted measures to protect vulnerable people in their communities. While much of the world is focused on bank rescues and stimulus packages, we should not forget that poor people in developing countries are far more exposed if their economies falter.”5 The World Bank note on the subject added that with the drop in global demand, the poor would lose the market for their agricultural products, their casual jobs on construction sites, and their jobs in factories. Government budgets for schools, health facilities, and relief programs would be cut under the simultaneous pressure of reduced tax receipts and a collapse in international assistance.

  In January 2009, we went with Somini Sengupta, then the New York Times correspondent in India, on a trip to Maldah, a rural district in West Bengal. She wanted to write a story on how the poor were affected by the global crisis. Sengupta, who grew up in California but speaks perfect Bengali, was told that a lot of the laborers at many construction sites in Delhi were from Maldah, and she knew that construction was slowing in Delhi. So we went from village to village, asking young men about their migration experiences.

  Everyone knew someone who had migrated. Many of the migrants themselves were home for the month of Muharram, observed by many Indian Muslims. Everyone was happy to talk to us about migration experiences. Mothers told us about distant cities in southern or northern India, places like Ludhiana, Coimbatore, and Baroda, where their sons and nephews now lived and worked. There were of course some tragedies—one woman talked about her son who had died in Delhi of some mysterious disease—but the tone was overwhelmingly upbeat. “Are there jobs in the city?” Sengupta would ask. Yes, lots of jobs. “Have you heard of cutbacks?” No, no cutbacks in Mumbai, things are great. And so on. We went to the train station to see if anyone had come back after having lost his job. There we met three young men on their way to Mumbai. One of them had never been there; the others, veterans, were assuring him that finding a job was no problem. In the end, Sengupta never wrote the story about how the poor had suffered from the global downturn.

  The point is not that construction jobs were not lost during the crisis in Mumbai—some surely were—but for most of these young men, the salient fact for the time being was the opportunity. There were still jobs to be had, jobs that paid more than twice what they could make in a day in the village. Compared to what they had endured—the routine anxiety about not getting any work at all, the seemingly interminable wait for the rains to come—life as a migrant construction worker sill seemed pretty attractive.

  Of course the global crisis increased risk for the poor, but it added little to the overall risk they have to deal with daily, even when there is no crisis for the World Bank to worry about. During the Indonesian crisis of 1998, the rupiah lost 75 percent of its value, food prices went up 250 percent, and GDP fell by 12 percent, but rice farmers, who tend to be among the poorest people, actually gained in terms of purchasing power.6 It was government employees and other people with relatively fixed cash incomes who ended up worse off. Even in 1997–1998, the year of the great Thai financial crisis, when the economy shrank by 10 percent, two-thirds of the nearly 1,000 people surveyed said that the main reason for the fall in their income was a drought.7 Only 26 percent named loss of employment, and the job losses were almost surely not all a result of the crisis. For the most part, it seems that, once again, things were not a lot worse for the poor than in any other year, precisely because their situation is always rather bad. They were dealing with problems that were all too familiar. For the poor, every year feels like being in the middle of a colossal financial crisis.

  Not only do the poor lead riskier lives than the less poor, but a bad break of the same magnitude is likely to hurt them more. First, a cut in consumption is more painful for someone who consumes very little to start with. When a not-so-poor household needs to cut back on consumption, members may sacrifice some cell phone minutes, buy meat less often, or send the children to a less expensive boarding school. This is clearly painful. But for the poor, a large cut in income might mean cutting into essential expenditures: Over the previous year, adults in 45 percent of the extremely poor households we surveyed in rural Udaipur District had to cut the size of their meals at some point. And cutting meals is something the poor hate: Respondents who had to cut the size of their meals reported themselves to be much unhappier than those who did not need to do it.

  Figure 1: The Effect of a Shock on Ibu Tina’s Fortunes

  Second, when the relationship between income today and future income is S—shaped, the effect on the poor of a bad break may actually be much worse than temporary unhappiness. In Figure 1, we have plotted the relationship between income today and income in the future for Ibu Tina, the Indonesian businesswoman.

  In Chapter 1, we saw that there is the possibility of a poverty trap when investments pay off relatively little for those who can invest little, and more if they can invest enough. Ibu Tina was clearly in this situation. In her case, the relationship between income tomorrow and income today had an S—shape because her business needed a minimum scale to be profitable (in Chapter 9, we will see that this is a central feature of the businesses the poor run, so her case was not unique). Before the theft, she and her husband had four employees, and they had enough money to buy raw material and use their sewing machines and employees to make garments. This was very profitable. Afterward, all they could manage was to buy ready-made shorts and package them, an activity that was much less profitable (or not profitable at all). Before the debacle of the bounced check, Ibu Tina and her husband were outside the poverty-trap zone. If we follow their path over time, we see that they were on the trajectory to eventually arrive at a decent income. But the theft wiped out all their assets. This had the effect of moving them to the poverty-trap zone. Thereafter, they made so little money that they kept getting poorer over time: When we met her, Ibu Tina was reduced to living off her brothers’ charity. One bad break in this S—shaped world can have permanent consequences. When the relationship between income today and income tomorrow is S—shaped, a family can plunge from being on a path to middle class to being permanently poor.

  This process is often reinforced by a psychological process. Loss of hope and the sense that there is no easy way out can make it that much harder to have the self-control needed to try to climb back up the hill. We
saw it with Pak Solhin, the onetime farm worker and now occasional fisherman in Chapter 2, and with Ibu Tina. They did not seem to be in the mental shape needed to pick themselves up and start over. In Udaipur we met a man who said in response to a standard survey question that he had been so “worried, tense, or anxious” that it interfered with normal activities like sleeping, working, and eating for more than a month. We asked him why. He said that his camel had died, and he had been crying and tense ever since. Somewhat naïvely perhaps, we then went on to ask whether he had done something about his depression (like talk to a friend, a health-care practitioner, or a traditional healer). He seemed irked: “I have lost the camel. Of course I should be sad. There is nothing to be done.”

  There may be other psychological forces at work as well: Facing risk (not only income risk but also the risk of death or disease) makes us worry, and worrying makes us stressed and depressed. Symptoms of depression are much more prevalent among the poor. Being stressed makes it harder to focus, which in turn may make us less productive. In particular, there is a strong association between poverty and the level of cortisol produced by the body, an indicator of stress. And conversely, the cortisol levels go down when households receive some help. The children of the beneficiaries of PROGRESA, the Mexican cash transfer program, have, for example, been found to have significantly lower levels of cortisol than comparable children whose mothers did not benefit from the program. This is important, because it turns out that cortisol directly impairs cognitive and decisionmaking ability: The stress-induced release of cortisol affects brain areas such as the prefrontal cortex, the amygdala, and the hippocampus, which are important in cognitive functioning; in particular, the prefrontal cortex is important in suppression of impulsive responses. It is therefore no surprise that when experimental subjects are artificially put under stressful conditions in the laboratory, they are less likely to make the economically rational decision when faced with choosing among different alternatives.8