Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty

by Abhijit V. Banerjee

They have to be sophisticated economists just to survive. Yet our lives are as different as liquor and liquorice.

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?

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.

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.

Using price data from the Philippines, we calculated the cost of the cheapest diet sufficient to give 2,400 calories, including 10 percent calories from protein and 15 percent calories from fat. 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.

It would then be understandable if people chose to do something else with their money, or move away from eggs and bananas toward a more exciting diet.

The Work and Iron Status Evaluation (WISE) study in Indonesia provided randomly chosen men and women in rural Indonesia with regular iron supplementation for several months, while the comparison group received a placebo.28 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 decision to spend money on things other than food may not be due entirely to social pressure. 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!”

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.

Children who go to private school also perform better. In India in 2008, according to ASER, 47 percent of government-school students in fifth grade could not read at the second-grade level, compared to 32 percent of private-school students.

Women do better on math tests when they are explicitly told that the stereotype that women are worse in math does not apply to this particular test; African Americans do worse on tests if they have to start by indicating their race on the cover sheet.

Malthus believed that the resources countries have are more or less fixed (his favorite example was land), and he therefore thought that population growth was bound to make them poorer.5 By this logic, the Black Death, believed to have killed half of Britain’s population between 1348 and 1377, should get credit for the high-wage years that followed. Alwyn Young, an economist at the London School of Economics, recently reinstated this argument in the context of the current HIV/AIDS epidemic in Africa. In an article entitled “The Gift of the Dying,” he argued that the epidemic would make future generations of Africans better off by reducing fertility.6 This reduction of fertility occurs both directly, through the reluctance to engage in unprotected sex, and indirectly, because the resulting labor scarcity makes it more attractive for women to work rather than have babies. Young calculated that in South Africa in the coming decades, the “boon” of a reduced population would be large enough to outweigh the fact that many of the AIDS orphans would not get a proper education; South Africa could be 5.6 percent richer in perpetuity as a direct consequence of HIV. He concluded by observing, no doubt for the benefit of his more squeamish readers, “One cannot endlessly lament the scourge of high population growth in the developing world and then conclude that a reversal of such processes is an equal economic disaster.”

Another piece of evidence comes from Matlab, Bangladesh. This area was the setting for one of the most impressive experiments in voluntary family planning in the world.

Thus, what makes the family special is not that its members are effective in negotiating with each other: Quite the contrary—they operate by observing simple, socially enforceable rules such as “Thou shalt not sell thy child’s yam to buy new Nikes” that safeguard their basic interests, without having to negotiate all the time.

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.

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.

The poor should save because, like everybody else, they have a present and a future. They have little money today, but unless they expect to stumble on a pile of cash during the night, they presumably also expect to have little money tomorrow. Indeed, they should have more reason to save than the rich, if there is at least some possibility that, in the future, a little bit of buffer could shield them from a disaster. Such a financial cushion would, for example, allow the poor families in India’s Udaipur District to avoid cutting meals when money runs out, something that they claim makes them extremely unhappy.

The bigger point is that a little bit of hope and some reassurance and comfort can be a powerful incentive. It is easy for those of us who have enough, living a secure life, structured by goals that we can reasonably confidently aspire to achieve (that new sofa, the 50-inch flat screen, that second car) and institutions designed to help us get there (savings accounts, pension programs, home-equity loans) to assume, like the Victorians, that motivation and discipline are intrinsic. As a result, there are always worries about being overindulgent to the slothful poor. Our contention is that for the most part, the problem is the opposite: It is too hard to stay motivated when everything you want looks impossibly far away. Moving the goalposts closer may be just what the poor need to start running toward them.

One of his sons worked in the army; another tended to the animals; the third was mostly idle (his main activity was harvesting snails when they were in season).

Starting a small business was the only option they had. Her first venture was to cook snacks and sell them in the city, but she wanted something she could do from home, so she could mind the children. So they started a shop with a loan Pak Awan got from a cooperative he belonged to, even though there were already two other shops within 50 yards. Pak Awan and his wife did not enjoy running the business. They were eligible for a second loan from the cooperative, which would have allowed them to expand their shop, but had decided that they didn’t want it. Unfortunately for them, a fourth shop opened in the neighborhood and threatened their livelihood by offering a more diverse array of goods, and when we met them, they were in the process of taking out a new loan to buy more stock. Their hope for their children was that they would each grow up to get a salaried job, preferably in a government office.