Poor Economics: Rethinking Poverty & the Ways to End it

by Abhijit V. Banerjee

Starvation exists in today’s world, but only as a result of the way the food gets shared among us. There is no absolute scarcity.

As Amartya Sen has shown, however, most recent famines have been caused not by lack of food availability but by institutional failures that led to poor distribution of the available food, or even hoarding and storage in the face of starvation elsewhere.

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. So although genetic makeup is certainly important at the individual level, the genetic differences in height between populations are believed to be minimal. If the children of first-generation mothers are still small, it is partly because women who were themselves malnourished in childhood tend to have smaller children.

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.

The poor often resist the wonderful plans we think up for them because they do not share our faith that those plans work, or work as well as we claim.

We asked Oucha Mbarbk, a man we met in a remote village in Morocco, what he would do if he had more money. He said he would buy more food. Then we asked him what he would do if he had even more money. He said he would buy better-tasting food. 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!”

After spending some time in that Moroccan village, it was easy to see why he thought that. Life can be quite boring in a village. There is no movie theater, no concert hall, no place to sit and watch interesting strangers go by. And not a lot of work, either. Oucha and two of his neighbors, who were with him during the interview, had worked about seventy days in agriculture and about thirty days in construction that year. For the rest of the year, they took care of their cattle and waited for jobs to materialize. This left plenty of time to watch television. These three men all lived in small houses without water or sanitation. They struggled to find work, and to give their children a good education. But they all had a television, a parabolic antenna, a DVD player, and a cell phone. Generally, it is clear that things that make life less boring are a priority for the poor.

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. In Udaipur, India, where almost no one has a television, the extremely poor spend 14 percent of their budget on festivals (which includes both lay and religious occasions). By contrast, in Nicaragua, where 56 percent of rural poor households have a radio and 21 percent own a television, very few households report spending anything on festivals.

Instead of raging against their destiny, they have made things tolerable by reducing their standards. But they don’t necessarily reduce their standards by cutting out luxuries and concentrating on necessities; more often it is the other way around—the more natural way, if you come to think of it—hence the fact that in a decade of unparalleled depression, the consumption of all cheap luxuries has increased.

These “indulgences” are not the impulsive purchases of people who are not thinking hard about what they are doing. They are carefully thought out, and reflect strong compulsions, whether internally driven or externally imposed. 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.

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 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.

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.

Decent sanitation facilities are even rarer among the poor—42 percent of the world’s population live without a toilet at home.

When faced with a serious health issue, poor households cut spending, sell assets, or borrow, like Ibu Emptat, often at very high rates: In Udaipur, every third household we interviewed was currently repaying a loan taken out to pay for health care. A substantial proportion of those loans are from moneylenders, at rates that can be very high:The standard interest rate is 3 percent per month (42 percent per year).

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.

What is going on here? Why do the poor sometimes reject inexpensive effective sanitation—the cheap and easy way to dramatically improve people’s health—in favor of spending a lot of money on things that don’t help and might actually hurt?

In fact, there is a “psychological sunk cost” effect—people are more likely to make use of something they have paid a lot for. In addition, people may judge quality by price: Things may be judged to be valueless precisely because they are cheap.

Because most diseases that prompt visits to the doctor are self-limiting (i.e., they will disappear no matter what), there is a good chance that patients will feel better after a single shot of antibiotics. This naturally encourages spurious causal associations: Even if the antibiotics did nothing to cure the ailment, it is normal to attribute any improvement to them. By contrast, it is not natural to attribute causal force to inaction: If a person with the flu goes to the doctor, and the doctor does nothing, and the patient then feels better, the patient will correctly infer that it was not the doctor who was responsible for the cure. And rather than thanking the doctor for his forbearance, the patient will be tempted to think that it was lucky that everything worked out this time but that a different doctor should be seen for future problems. This creates a natural tendency to overmedicate in a private, unregulated market.

So when the child gets sick despite being immunized, the parents feel cheated and probably resolve not to go through with it again.

When there is little else they can do, hope becomes essential. One of the Bengali doctors we spoke to explained the role he plays in the lives of the poor as follows: “The poor cannot really afford to get treated for anything major, because that involves expensive things like tests and hospitalization, which is why they come to me with their minor ailments, and I give them some little medicines which make them feel better.” In other words, it is important to keep doing something about your health, even if you know that you are not doing anything about the big problem.

This kind of grasping at straws is not specific to poor countries. This is also what the privileged few in poor countries and the citizens of the First World do when they face a problem that they do not know how to remedy. In the United States, depression and back pains are two conditions that are both poorly understood and debilitating. This is why Americans are constantly going between psychiatrists and spiritual healers, or yoga classes and chiropractors. Since both conditions come and go, sufferers go through cycles of hope and disappointment, each time wanting to believe for a moment at least that the new cure must be working.

Notwithstanding these strong views, when Seva Mandir set up immunization camps in Udaipur, we managed to convince Neelima Khetan, Seva Mandir’s CEO, to try something on a pilot basis: offer 2 pounds of dal (dried beans, a staple in the area) for each immunization and a set of stainless steel plates for completing the course. The doctor in charge of Seva Mandir’s health program was initially quite reluctant to try this out. On the one hand, it seemed wrong to bribe people to do the right thing. They should learn on their own what is good for their health. On the other hand, the incentive we proposed seemed much too weak: If people do not immunize their children, given the huge benefits of doing so, they must have some strong reason behind it. If they believed, for example, that taking their children out would cause harm, 2 pounds of dal (worth only 40 rupees, or $1.83 USD PPP, less than half the daily wage earned by working in a public works site) was not going to persuade them. We had known people at Seva Mandir for long enough that we could persuade them that this was still an idea worth trying on a small scale, and thirty camps with incentives were established. They were a roaring success. The immunization rate in the village where the camps were set up increased sevenfold, to 38 percent. In all neighboring villages, within about 6 miles, it was also much higher. Seva Mandir discovered that offering the dal, paradoxically, actually lowered the cost per immunization by in...

In the end, the mistrust of incentives for immunization comes down to an article of faith for both those on the right and the left of the mainstream political spectrum: Don’t try to bribe people to do things that you think they ought to do. For the right, this is because it will be wasted; for the conventional left, which includes much of the public health community and the good doctor from Seva Mandir, this is because it degrades both what is given and the person who gets it. Instead, we should focus on trying to convince the poor of the benefits of immunization.

We think that both of these views are somewhat wrongheaded ways to think about this and other similar problems, for two reasons. First, what the 2-pounds-of-dal experiments demonstrate is that in Udaipur at least, the poor might appear to believe in all kinds of things, but there is not much conviction behind many of those beliefs. They do not fear the evil eye so much that they would pass up the dal. This must mean that they actually know they are in no position to have a strong basis to evaluate the costs and benefits of vaccines. When they actually know what they want—marrying their daughter to someone from the right caste or religion, to take an unfortunate but important example—they are not at all easy to bribe. So, although some beliefs the poor have are undoubtedly strongly held, it is a mistake to consider that it is always the case. There is a second reason this is wrong. Both the right wing and the left wing seem to assume that action follows intention: that if people were convinced of the value of immunization, children would be immunized. This is not always true, and the implications are far-reaching.

Research in psychology has now been applied to a range of economic phenomena to show that we think about the present very differently from the way we think about the future (a notion referred to as “time inconsistency”).37 In the present, we are impulsive, governed in large part by emotions and immediate desire: Small losses of time (standing in line to get the child immunized) or petty discomforts (glutes that need to be woken up) that have to be endured right now feel much more unpleasant in the moment than when we think about them without a sense of immediacy (say, after a Christmas meal that was heavy enough to rule out all thoughts of immediate exercise). The reverse, of course, goes for small “rewards” (candy, a cigarette) that we really crave in the present; when we plan for the future, the pleasure from these treats seems less important. Our natural inclination is to postpone small costs, so that they are borne not by our today self but by our tomorrow self instead.

Poor parents may even be fully convinced of the benefits of immunization—but these benefits will accrue sometime in the future, while the cost is incurred today. It makes sense, from today’s perspective, to wait for tomorrow. Unfortunately, when tomorrow becomes today, the same logic applies. Likewise, we may want to postpone the purchase of a bed net or a bottle of Chlorin until later, because we have better use for the money right now (there is someone frying delicious conch fritters across the street, say). It is easy to see how this could explain why a small cost discourages the use of a life-saving device, or why small incentives encourage it. The 2 pounds of dal works because it is something that the mother receives today, which compensates her for the cost she bears for getting her child immunized (the couple of hours spent bringing her child to the camp or the low fever that the shot sometimes causes).

Moreover, the evidence from India suggests that even when teachers are in school and are supposed to be in class, they are often found drinking tea, reading the newspaper, or talking to a colleague. Overall, 50 percent of teachers in Indian public schools are not in front of a class at a time they should be.5 How are the children supposed to learn?

In Pakistan, 80 percent of children in third grade could not read a first-grade-level paragraph.

They found that, on average, teachers gave significantly lower grades to lower-caste students when they could see their caste than when they could not. But interestingly, it was not the higher-caste teachers who were doing this. The lower-caste teachers were actually more likely to assign worse grades to lower-caste students. They must have been convinced these children could not do well.

They found that the low-caste children compete well against the high-caste children as long as caste is not salient, but once low-caste children are reminded that they are low castes competing with high-caste children (by the simple contrivance of asking them their full names before the game starts), they do much worse.

The children of the rich go to schools that not only teach more and teach better, but where they are treated with compassion and helped to reach their true potential. The poor end up in schools that make it very clear quite early that they are not wanted unless they show some exceptional gifts, and they are in effect expected to suffer in silence until they drop out.

The problem is that there are no straightforward ways to identify talent, unless one is willing to spend a lot of time doing what the education system should have been doing: giving people enough chances to show what they are good at.

Infosys, one of India’s IT giants, has set up testing centers where people, including those without much formal qualification, can walk in and take a test that focuses on intelligence and analytical skills rather than textbook learning. Those who do well get to become trainees, and successful trainees get a job. This alternative route is a source of hope for those who fell through the gaping holes in the education system. When Infosys closed its testing centers during the global recession, it was front-page news in India.

A program in Madagascar that simply told parents about the average income gains from spending one more year in school for children from backgrounds similar to theirs had a sizable positive effect on test scores, and, in the case of parents who found out that they had underestimated the benefits of education, the gains were twice as large.

If children born into large families are less likely to receive proper education, nutrition, and health care (what economists call investment in human capital), and if poor families are more likely to be large (say, because they cannot afford contraception), this creates a mechanism for the intergenerational transmission of poverty, in which poor parents beget (many) poor children.

However, even where it is true, there is no presumption that it is because the children have many siblings that they are poor and less educated. It could just be that poor families who choose to have many children also do not value education as much.

And there is clear evidence that getting pregnant too early in life is very bad for the health of the mother.

Yet, low usage is not necessarily a sign of lack of access.

However, they also found that the decline in fertility over time was unrelated to the increase in the number of clinics. They concluded that family-planning facilities were provided where people wanted them, but that they had no direct effect on fertility. Demand wallahs, 1; supply wallahs, 0.

As we saw, women age thirty to fifty-five in 1996 had on average 1.2 fewer children in treatment areas than those in control areas. But the program in Matlab was doing much more than just making contraceptives available. One of its key components was the biweekly visit by a female health worker to households where women were in purdah and therefore limited in their mobility, bringing the discussion of contraception to places where it used to be taboo. (This also made the program expensive—Lant Pritchett, then a World Bank economist, estimated that the Matlab program cost thirty-five times more per fertile woman and per year than the typical family-planning program in Asia.)

Households that had their first child after 1972 have one less child on average than those who had that child before 1972, and their savings rates are approximately 10 percentage points higher. These results imply that up to one-third of the phenomenal increase in savings rates in China in the past three decades (the household savings ratio increased from 5 percent in 1978 to 34 percent in 1994) can potentially be explained by the reduction in fertility induced by family-planning policies; the effect was particularly strong for households that had a daughter rather than a son at first birth, consistent with the view that sons are supposed to be the ones who take care of parents.

To avoid adverse selection, the trick is to start from a large pool of people who came together for some other reason than health—employees of a large firm, microcredit clients, card-carrying Communists … and try to insure all of them.

This is why many microfinance institutions (MFIs) thought of offering health-insurance. They have a large pool of borrowers who could be offered insurance products. And because catastrophic health problems sometimes drive the otherwise highly compliant microcredit clients into default, health insurance for them would be a little bit of insurance for the MFI as well. Moreover, it would be easy to collect premiums from the clients, since loan officers already meet with them every week—in effect, they could just fold the premium into the loan.

They were, however, swayed in their decision by relatively small things. A simple home visit, without any particular effort at marketing, raises the fraction of people who buy weather insurance by a factor of four. In the Philippines, households that were randomly selected to complete a baseline survey containing many questions on health were more likely to eventually subscribe to health insurance than comparable households that had not completed the baseline survey. Presumably, answering all these questions about the possibility of health problems had reminded them of what could happen.21

Credibility is always a problem with insurance products: Because the insurance contract requires the household to pay in advance, to be repaid in the future at the discretion of the insurer, the household must trust the insurer completely. In the weather insurance case, the team marketing the product sometimes went with someone from Basix, an organization that the farmers know well, and sometimes they went on their own. They found that the presence of a member of Basix had a fairly large effect on sign-up rates, suggesting that trust is an issue.

The second issue is the problem of time inconsistency, which we already encountered in our chapter on health. When deciding whether or not to buy the insurance, we need to do the thinking now (and pay the premium), but the payout, if any, would take place in the future. We have already seen that this is a type of reasoning human beings are particularly bad at doing. The problem is made even harder when the insurance is against a catastrophic event:The payout would take place not only in the future, but in a particularly unpleasant future that no one really wants to think about. Not spending too much time anticipating these events may be a natural protective reaction, and this may explain why people were more likely to buy insurance after they were forced to think about it by answering a survey.

In the survey we conducted in Udaipur, in rural India, about two-thirds of the poor had a loan. Of these, 23 percent were from a relative, 18 percent from a moneylender, 37 percent from a shopkeeper, and only 6.4 percent from a formal source.

A study of rural moneylenders in Pakistan found that the median rate of default across moneylenders is just 2 percent, even though the average interest they charge is 78 percent.

And thus we have the familiar (at least before the go-go days of no-down-payment mortgages) rule that ties the size of the loan to the amount of money the borrower already has. As the French put it, “On ne prête qu’aux riches” (“One lends only to the rich”).