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Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty Audio CD – Audiobook, CD, Unabridged
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The dominant school of thought is probably the supply-side theory, most visibly represented by Jeffrey Sachs (the authors call him a "supply wallah"). According to this theory, the poor are poor because they lack money and resources, and there is a "poverty trap" such that investment in productive technologies must be very large in order to have a positive and sustainable effect. Because poor individuals, and even poor countries, lack the capacity to finance such investments, they are trapped in a low-level economic equilibrium. For this reason, Sachs and the supply theorists advise that the rich countries transfer a large lump-sum amount of money to a poor country, so it can get over the poverty-trap hump.
A second salient school of thought is the demand-side theory, represented by William Easterly and many others. Demand-siders (the authors call them "demand wallahs") believes that the poor are poor because they do not want to undertake what would be necessary to move out of poverty and there is no poverty trap. Thus, if you throw money and resources to the poor, they consume it immediately rather than using it for long-term betterment.
The third school of thought is the corruption school, represented by Acemoglu and Robinson, as expounded in the book Why Nations Fail. According to this theory, countries remain poor because their governments are predatory, exploiting the citizenry by refusing to make investments in productive infrastructure, by direction all profits to cronies, and by permitting rampant corruption that renders creative entrepreneurship unprofitable. According to this school, to which I admit to being very favorable, the supply wallahs are wrong because the resources throw into the system will be appropriate by the rich and powerful, and the demand wallahs are wrong because the poor are actively maintained by the oligarchy in their position of servitude.
The authors are very insightful and balanced in presenting the views of these three schools and the evidence that supports these various positions. They also clearly explain their mutual critiques. For instance, the supply wallahs claim that states are predatory and corruption is rampant only because the country is so poor, and the demand wallahs claim that when the people want to move out of poverty, they will reform their governments. I find these defenses of supply and demand wallahs rather tendentious, leaving the corruptions school as the overall most plausible school.
I think it is fair to say that Banerjee and Duflo have little sympathy for demand and supply wallahs, but considerable respect for the corruption theory. Their own position is that there are virtually always ways to productively intervene to pull a significant fraction of people out of poverty. The authors, who have collected huge amounts of data and interviewed many poor people from around the world, make the following argument.
Most important, the poor in a poor country have about the same array of preferences and capacities as that of the human population as a whole, and humans are substantively rational in making decisions that affect their lives. However, the poor have a lot fewer resources than the well-off, they lack information and skills provided to the well-off, and lack access to such public goods as clean water and consumables subject to food and drug regulations.
The poor are therefore extremely heterogeneous. Microfinance organizations like the Grameen Bank therefore provide a general path to affluences, simply because only a fraction of the population has the will and ability to be successful entrepreneurs. On the other hand, entrepreneurs often fail several times before finally becoming successful, so the authors advise an expanded microfinance industry that is more tolerant of the sorts of behaviors that may involve short-term losses, but lead to long-run successes. The authors conclude that we must consider microfinance policies as extremely successful and worthy of following, even though it is not panacea for the abolition of poverty.
Because the poor lack access to social services freely available to the non-poor, the authors advocate such measures as providing clean water to poor villages and adding nutrients, such as iron, to staple foods. This, they argue, is not charity but simply the extension to poor of services already supplied to the rest of society.
Concerning education, the authors believe that poor parents are usually very eager to have their children educated, although they may lack the means of enrolling their children in schools or providing for their transportation to and from school. However, too often the content of schooling is determined by what is good for the more affluent classes, so poor children are led voluntarily to quit school. The authors advise that the content of education take into account the preferences and culture of the target population.
I cannot do justice to the beauty and intricacy of the argument developed in this book. The authors' main point is that we must look closely at the details of the lives of the poor in order to develop policies to help people to pull themselves out of poverty. This is neither demand or supply wallah-ism, and as they repeatedly stress, real progress can be made even in a society whose government provides a poor environment for economic development.
Prior to this book, I held a number of beliefs that I simply assumed were common sense. For example, I had assumed that if you offered free food to someone who is consuming barely enough calories to survive that the overall amount of calories they consume would increase. Apparently this is not the case-- if you give them free rice, they will take the money they used to spend on rice and instead spend it on more expensive, unhealthier food (or worse yet, something like tobacco). Thus, even if everyone in developed countries purchased food and gave it to the people in poorer nations this would not solve world hunger.
In chapter after chapter the authors bring up an issue faced by the world's poor, offer up the existing theories about the problem, point to research that sheds light on why the theories or current efforts fail to address the problem, and suggest solutions that we have reason to believe would work based on the findings of various research studies. The issues faced by the poor are wide-ranging and the authors do an excellent job trying to cover them all. Here are the main issues covered (a full chapter is devoted to each one):
1. Hunger (why poor people are not getting enough calories)
2. Health (why poor people don't try harder to get their kids de-wormed, vaccinated, etc.)
3. Family size (why poor people choose to have large families even though it is difficult to support more children)
4. Education (why poor people don't invest in all of their kids' education)
5. Risk/insurance (why poor people incur so much risk yet aren't insuring themselves against it)
6. Borrowing/microfinance (why microfinance isn't going to solve poverty and why borrowing is still an issue for some)
7. Saving (why poor people aren't saving)
8. Entrepreneurship (why poor people aren't all the great "entrepreneurs" that microfinance makes them out to be)
9. Politics/institutions/corruption (why poor people can see improvements in their lives even with corrupt institutions)
Each chapter begins with a difficult question which might seem to have an intuitive answer but does not; then the authors point to the results of research studies that shed light on the answer proceed to explain why the problem has not been solved if we know why it is occurring. For example, the chapter on saving begins with the following question: can poor people actually save money? Many people would immediately answer "of course not" simply based on the fact that the people we're talking about are poor. However, the authors provide convincing evidence that shows poor people are in fact capable of saving. This begs the question, if they can save, and it would be in their interest to do so (to provide a safety net for the enormous risk they face in their lives-- e.g., a family members becomes sick and can't work), then why don't they save? Are they simply lazy, short-sighted, and incompetent as we are told in the press? As you might imagine, the answer is not so simple (or condescending). Poor people don't save for a variety of reasons. First off, many of the world's poor don't have easy access to savings accounts. Banks are highly regulated and thus there is a significant cost involved in serving a client-- so why would a bank make an effort to cater to poor communities where they'll receive very little income from their customers to compensate for the costs they're incurring in offering banking services? Furthermore, it is easier for middle-class or wealthy people to save, not simply because they have more income but because the system makes it incredibly simple: for example, many people work for an employer that sets up a 401k plan for them and offers to match funds and deduct funds from your paycheck without you having to do anything. Most of the world's poor do not have such a simple option for saving-- they must exercise willpower week after week to overcome the temptation to spend (which we all have, poor or not), whereas the rest of us can just tell an employer once that we want to contribute to our 401k plan and that's the end of it. The authors even told stories of women who were taking out a loan at 24% interest and then saving the money in an account that only paid 4% interest. This seems incredibly foolish, so the authors inquired as to the women's motivations. It turns out they were doing this because this would force them to save-- having to repay the repay the loan would act as a disciplining mechanism. Essentially they were trying to force themselves to save because they didn't have a 401k account that would just automatically withdraw the money. They face the same temptations that we all do, they just don't have an easy means of overcoming them.
But the authors don't simply point out problems and throw up their hands in desperation-- they offer concrete solutions to each problem. Not all the solutions are equally convincing and the authors are the first to admit there is no "magic bullet" but they go a long way toward providing a framework for how we might think about solving global poverty in the next one hundred years. For example, in the chapter that deals with the enormous amount of risk the poor face (due to crop failures, health problems, etc.) they ask why the poor don't simply obtain insurance. The answer is complicated and has to do with moral hazard, adverse selection, and fraud, the combination of which has made it difficult for a "market" in microinsurance to develop in the same way we've had an innovation in microfinance. Thus, the authors suggest that governments step in and help create such a market by providing subsidies for insurance premiums. Before you throw up your hands and yell "that's socialism!" bear in mind that they cite previous instances of such subsidies and how they led to dramatic increases in the number of poor people who were insured.
There is no easy way to solve global poverty, as the world's poor face a number of problems that seem intractable. Yet when we examine each of these problems by looking at how the poor actually behave and how they respond to incentives, we can begin to develop a framework for how we might solve each of these problems and reach a point where poverty is a thing of the past. But before we can do anything to eradicate poverty, we need to understand why it exists, why it is self-perpetuating, and what can be done to stop it. This is the function of this book, and it excels on all fronts.