Poor Economics: Rethinking Poverty & the Ways to End it

by Abhijit V. Banerjee

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 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

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.

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.

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.

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.

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.

Yet, though Indians are richer, they eat so much less at each level of income that they eat less on average today than they used to.

World Food Summit in 1996, the FAO estimated that world food production in that year was enough to provide at least 2,700 calories per person per day.

One study finds that potatoes may have been responsible for 12 percent of the global increase in population between 1700 and 1900.11

It would cost only 21 cents at PPP, very affordable even for someone living on 99 cents a day. The catch is, it would involve eating only bananas and eggs.… But it seems that so long as people are prepared to eat bananas and eggs when they need to, we should find very few people stuck on the left part of the S-shaped curve, where they cannot earn enough to be functional.

Many years ago, John Strauss was looking for a clear case to demonstrate the role of calories in productivity. He settled on self-employed farmers in Sierra Leone, because they really have to work hard.13 He found that the productivity of a worker on a farm increased at most by 4 percent when his calorie intake increased by 10 percent. Thus, even if people doubled their food consumption, their income would only increase by 40 percent. Furthermore, the shape of the relationship between calories and productivity was not an S-shape, but an inverted L-shape, as in Figure 2 in the previous chapter: The largest gains are obtained at low levels of food consumption. There is no steep jump in income once people start eating enough. This suggests that the very poor benefit more from eating extra calories than the less poor. This is precisely the type of situation where we would not see a poverty trap. So it is not because they don’t eat enough that most people stay poor.

During droughts in India in the 1960s, little girls in landless households were much more likely to die than boys, but boys’ and girls’ death rates were not very different when there was normal rainfall.

Reminiscent of the witch hunt of the little ice age, Tanzania experiences a rash of “witch” killings whenever there is a drought—a convenient way to get rid of an unproductive mouth to feed at times where resources are very tight.17 Families, it seems, suddenly discover that an older woman living with them (usually a grandmother) is a witch, after which she gets chased away or killed by others in the village.

Indeed, why are all South Asians so scrawny? The standard way to measure nourishment status is by the Body Mass Index (BMI), which is essentially a way to scale weight by height (i.e., adjusting for the fact that taller people are going to be heavier). The international cutoff for being malnourished is a BMI of 18.5, with 18.5 to 25 being the normal range, and people beyond 25 considered obese. By this measure, 33 percent of men and 36 percent of women in India were undernourished in 2004–2005, down from 49 percent for both in 1989. Among the eighty-three countries that have demographic and health survey data, only Eritrea has more undernourished adult women.20 Indian women, along with Nepalese and Bangladeshi women, are also among the shortest in the world.

It turns out, however, that two generations of living in the West without intermarriage with other communities is enough to make the grandchildren of South Asian immigrants more or less the same height as other ethnicities.

Therefore, if South Asians are small, it is probably because they, and their parents, did not get as much nourishment as their counterparts in other countries. And indeed, everything suggests that children are very badly nourished in India. The usual measure of how well a child has been fed through the childhood years is height, compared to the international average height for that age. By this measure, the numbers for India from the National Family Health Survey (NFHS 3) are devastating. Roughly half the children under five are stunted, which means that they are far below the norm. One-fourth of them are severely stunted, representing extreme nutritional deprivation. The children are also extraordinarily underweight given their height: About one in five children under three is wasted, which means they fall below the international definition of severe malnourishment. What makes these facts more striking is that the stunting and wasting rates in sub-Saharan Africa, undoubtedly the poorest area of the world, are only about half those in India.

India, a country with a billion inhabitants, has won an average of 0.92 medals per Olympics, over the course of twenty-two Olympic Games, putting it just below Trinidad and Tobago, at 0.93.

In poor countries and rich countries alike, taller people do earn more. It has long been debated whether this is because height really matters for productivity—it could be discrimination against shorter people, for example. But a recent paper by Anne Case and Chris Paxson made some progress in nailing down what explains this relationship. They show that in the United Kingdom and the United States, the effect of height is entirely accounted for by differences in IQ:

In Kenya, children who were given deworming pills in school for two years went to school longer and earned, as young adults, 20 percent more than children in comparable schools who received deworming for just one year: Worms contribute to anemia and general malnutrition, essentially because they compete with the child for nutrients.

Undernourished children are more likely to become short adults, to have lower educational achievement, and to give birth to smaller infants. Undernutrition is also associated with lower economic status in adulthood.”

there are some ways to improve nutrition even for adults that will much more than pay for themselves. The one that we know most about is iron to treat anemia. In many Asian countries, including India and Indonesia, anemia is a major health problem. Six percent of men and 38 percent of women in Indonesia are anemic. The corresponding numbers in India are 24 percent and 56 percent. Anemia is associated with low aerobic capacity, general weakness and lethargy, and in some cases (especially for pregnant women) it can be life-threatening.

The study found that the iron supplements made the men able to work harder, and the resulting increase in their income was many times the cost of a yearly supply of iron-fortified fish sauce. A year’s supply of the fish sauce cost $7 USD PPP, and for a self-employed male, the yearly gain in earnings was $46 USD PPP—an excellent investment.

The importance of micronutrients was not fully understood, even by scientists, until relatively recently. Although micronutrients are cheap and can sometimes lead to a large increase in lifetime income, it is necessary to know exactly what to eat (or what pills to take). Not everyone has the information, even in the United States.

George Orwell, in his masterful description of the life of poor British workers in The Road to Wigan Pier, observes: The basis of their diet, therefore, is white bread and Margarine, corned beef, sugared tea, and potato—an appalling diet. Would it not be better if they spent more money on wholesome things like oranges and wholemeal bread, or if they even, like the reader of the New Statesman, saved on fuel and ate their carrots raw? Yes it would, but the point is, no human being would ever do such a thing. The ordinary human being would sooner starve than live on brown bread and raw carrots. And the peculiar evil is this, that the less money you have the less you are inclined to spend it on wholesome food. A millionaire may enjoy breakfasting off orange juice and Ryvita biscuits; an unemployed man does not…. When you are unemployed, you don’t want to eat dull wholesome food. You want to eat something a little tasty. There is always some cheap pleasant thing to tempt you.30

It has been widely documented that poor people in the developing world spend large amounts on weddings, dowries, and christenings, probably in part as a result of the compulsion not to lose face. The cost of weddings in India is well-known, but there are also less cheerful occasions when the family is compelled to throw a lavish party.

In South Africa, social norms on how much to spend on funerals were set at a time when most deaths occurred in old age or in infancy.31 Tradition called for infants to be buried very simply but for elders to have elaborate funerals, paid for with money the deceased had accumulated over a lifetime. As a result of the HIV/AIDS epidemic, many prime-age adults started dying without having accumulated burial savings, but their families felt compelled to honor the norm for adults. A family that had just lost one of its main potential earners might have to spend something like 3,400 rand (around $825 USD PPP), or 40 percent of the household annual per capita income, for the funeral party. After such a funeral, the family clearly has less to spend, and more family members tend to complain about “lack of food,” even when the deceased was not earning before he died, which suggests that funeral costs are responsible. The more expensive the funeral, the more depressed the adults are one year later, and the more likely it is that children have dropped out of school.

We were starting to feel very bad for him and his family, when we noticed a television, a parabolic antenna, and a DVD player in the room where we were sitting. We asked him why he had bought all these things if he felt the family did not have enough to eat. He laughed, and said, “Oh, but television is more important than food!”

Generally, it is clear that things that make life less boring are a priority for the poor. This may be a television, or a little bit of something special to eat—or just a cup of sugary tea.

In our eighteen-country data set, it is clear that the poor spend more on festivals when they are less likely to have a radio or a television.

The basic human need for a pleasant life might explain why food spending has been declining in India. Today, television signals reach into remote areas, and there are more things to buy, even in remote villages. Cell phones work almost everywhere, and talk time is extremely cheap by global standards. This would also explain why countries with a large domestic economy, where a lot of consumer goods are available cheaply, like India and Mexico, tend to be the countries where food spending is the lowest.

Oucha Mbarbk did not buy his TV on credit—he saved up over many months to scrape enough money together, just as the mother in India starts saving for her eight-year-old daughter’s wedding some ten years or more into the future, by buying a small piece of jewelry here and a stainless steel bucket there.

The poor, on the other hand, may well be more skeptical about supposed opportunities and the possibility of any radical change in their lives. They often behave as if they think that any change that is significant enough to be worth sacrificing for will simply take too long. This could explain why they focus on the here and now, on living their lives as pleasantly as possible, celebrating when occasion demands it.

the problem may be less the quantity of food than its quality, and in particular the shortage of micronutrients. The benefits of good nutrition may be particularly strong for two sets of people who do not decide what they eat: unborn babies and young children. In fact, there may well be an S-shaped relationship between their parent’s income and the eventual income of these children, caused by childhood nutrition. That is because a child who got the proper nutrients in utero or during early childhood will earn more money every year of his or her life: This adds up to large benefits over a lifetime.

This suggests that governments and international institutions need to completely rethink food policy. Although this may be bad news for American farmers, the solution is not to simply supply more food grains, which is what most food security programs are currently designed to do. The poor like subsidized grains, but as we discussed earlier, giving them more does little to persuade them to eat better, especially since the main problem is not calories, but other nutrients. It also is probably not enough just to provide the poor with more money, and even rising incomes will probably not lead to better nutrition in the short run. As we saw in India, the poor do not eat any more or any better when their income goes up; there are too many other pressures and desires competing with food.

In contrast, the social returns of directly investing in children and pregnant mother nutrition are tremendous. This can be done by giving away fortified foods to pregnant mothers and parents of small children, by treating children for worms in preschool or at school, by providing them with meals rich in micronutrients, or even by giving parents incentives to consume nutritional supplements. All of this is already being done in some countries. The government of Kenya is now systematically deworming children in school. In Colombia, micronutrient packets are sprinkled on kids’ meals in preschool. In Mexico, social welfare payments come with free nutritional supplements for the family. Developing ways to pack foods that people like to eat with additional nutrients, and coming up with new strains of nutritious and tasty crops that can be grown in a wider range of environments, need to become priorities for food technology, on an equal footing with raising productivity. We do see some instances of this across the world, pushed by organizations such as the Micronutrient Initiative and HarvestPlus: A variety of orange sweet potatoes (richer in beta carotene than the native yam) suitable for Africa was recently introduced in Uganda and Mozambique.35 A new salt, fortified both with iron and iodine, is now approved for use in several countries, including India. But there are all too many instances where food policy remains hung up on the idea that all the poor need is cheap grain.

When a child came to them with diarrhea, all they could offer the mother was a packet of oral rehydration solution (or ORS, a mixture of salt, sugar, potassium chloride, and an antacid to be mixed with water and drunk by the child). But most mothers didn’t believe that ORS could do any good. They wanted what they thought was the right treatment—an antibiotic or an intravenous drip. Once a mother was sent away from the health center with just a packet of ORS, the nurses told us, she never came back. Every year, they saw scores of children die from diarrhea, but they felt utterly powerless.

Yet neither chlorine nor ORS is used very much. In Zambia, thanks to the efforts of Population Service International (PSI), a large organization that markets it at subsidized prices worldwide, chlorine is cheap and widely available. At the cost of 800 kwachas ($0.18 USD PPP), a family of six can buy enough bleach to purify its water supply, avoiding waterborne diarrhea. But only 10 percent of families use it.2 In India, according to the United Nations Children’s Fund (UNICEF), only one-third of children under five who had diarrhea were given ORS.3 Why are some 1.5 million children dying every year of diarrhea, a disease that could often be avoided in the first place, and could often be treated with boiled water, sugar, and salt?

It is not that people don’t care about their health. They do, and they devote considerable resources to it. They just seem to spend money elsewhere: on antibiotics that are not always necessary, on surgery that comes too late to help. Why does it have to be this way?

insalubrious

the conventional wisdom is that today, at $20 per household per month, providing piped water and sanitation is too expensive for the budget of most developing countries.13 The experience of Gram Vikas, an NGO that works in Orissa, India, shows, however, that it is possible to do it much more cheaply. Its CEO, Joe Madiath, a man with a self-deprecating sense of humor who attends the annual meeting of the world’s rich and powerful at the World Economic Forum in Davos, Switzerland, in outfits made from homespun cotton, is used to doing things differently.

The monthly cost of the system for each household, including maintenance, is 190 rupees, or $4 per household (in current USD), only 20 percent of what is conventionally assumed to be the cost of such a system.

ORS, getting children immunized, deworming drugs, exclusive breast-feeding until six months, and some routine antenatal procedures such as a tetanus shot for the would-be mother. Vitamin B against night blindness, iron pills and iron-fortified flour against anemia, and so on are other examples of low-hanging fruit.

A few years ago, Joe Madiath told us he felt he had to turn down funding from the Bill & Melinda Gates Foundation when the grant officer insisted that the villagers should pay the full cost of what they were getting (fortunately, the foundation subsequently changed its view on this question). He argued that villagers simply cannot afford 190 rupees per month, even though it is true that the health benefits are potentially worth far more—Gram Vikas only asks villagers to pay enough money into a village fund to be able to keep the system in good repair and be able to add new households as the village grows. The rest the NGO raises from donors all over the world. In Sachs’s view, this is how things should be.

Breast-feeding, for example, costs nothing at all. And yet fewer than 40 percent of the world’s infants are breast-fed exclusively for six months, as the WHO recommends.

Much as in the case of Chlorin, they found that the purchase of nets was indeed very sensitive to the price. Almost everybody took a free net home. But the demand for nets fell to very close to zero at the PSI price (about $0.75 USD PPP). When Dupas replicated the experiment in different market towns but gave people the time to go home and collect cash (rather than having to buy on the spot), more people bought at the PSI price, but demand still went up by several times when the price was brought down toward zero.

far from virtually ensuring that the next generation sleeps under a net, distributing free bed nets once would only increase the number of children in the next generation sleeping under a net from 47 percent to 52 percent. That is not nearly enough to eradicate malaria.

What the lack of demand underscores is perhaps the fundamental difficulty of the problem of health: The ladders to get out of the poverty trap exist but are not always in the right place, and people do not seem to know how to step onto them or even want to do so.

The issue is therefore not how much the poor spend on health, but what the money is spent on, which is often expensive cures rather than cheap prevention.