Poor Economics – Some Thoughts

“Poor economics – A radical rethinking of the way to fight global poverty” by Esther Duflo and Banerjee Abhijit is an attempt to understand and fight poverty by examining poverty from the point of view of the poor and offering solutions that are down to earth and simple rather than grand and revolutionary after careful study and analysis. The idea is that these simple things when done consistently add up and can eventually make a huge difference.

Some important insights from the book are discussed below:

1. Can individuals or countries be trapped in poverty such that to get out of it they would require some push (aid)? There is no easy answer but a poverty trap exists wherever the possibility of growing income or wealth at a fast rate is constrained for those with little to invest but expands dramatically for those who can invest a bit more. However, if the potential for fast growth is high among the poor and then declines, as one gets richer, then there is no poverty trap.

2. When it comes to hunger and food, what matters most is good nutrition in early childhood as on average, adults who have been well nourished as children, are both taller and smarter. Therefore, the social returns from improving pregnant women and children nutrition could be huge. This can be through free fortified foods to poor pregnant women and school meals to children in primary schools.

3. Surprisingly other things are more important in the lives of the poor than food. Generally, things that make life less boring such as television, cell phones, social events like weddings are a priority for the poor. This partially explains the huge number of people you see at weddings even when not invited and the ubiquity of cell phones.

4. On health matters, it pays to invest in public education and subsidy or incentives to nudge people towards behaviors that impact others such as immunization. Parents could be rewarded for immunizing their children, chlorine dispensers could be placed near public water sources and public investments can be made in sanitation and water in densely populated areas.

5. In reality there should be no education based poverty trap because education is valuable at every level. However, parents believe there is one and it becomes a self-fulfilling prophecy. In large families there is therefore a tendency to send only the brightest to school while the rest drop out and start work at an early age. Teachers, who also believe in this trap, tend to ignore children who have fallen behind condemning them to life without basic literacy skills and the time spent in school is thus wasted. Indeed, in northern Nigerian this problem is acute as majority of children that pass through government primary schools graduate without basic writing and reading skills.

6. How can we address this waste of talent in public primary schools? A first step is to design a curriculum that focuses on basic writing and reading skills and commitment to the idea that every child can learn the basics. The second is training of teachers and provision of remedial classes by volunteers. The third is the use of technology to complement teachers. I can see some gains in public schools in Nigeria if we can focus on redesigning the curriculum to emphasize key competencies and in massive training of teachers.

7. For the poor, every year feels like being in the middle of a huge financial crisis and one bad break could have huge consequences since there is a positive relationship between income today and income tomorrow (S shaped).

8. Why is that private-banks find it difficult to lend to the small entrepreneurs? One reason is that enforcing credit contracts is very costly and difficult. If the borrower misspends the loan proceeds or the business fails, there will be nothing to collect since the poor generally have no collateral to pledge. The borrower can also take advantage of this and claim to have no money to repay the loan. Therefore the main constraint on lending to the poor is the cost of gathering information about them to ascertain their credit worthiness etc. This is why local Micro finance banks can actually succeed where big private banks cannot; they can know their customers well and can keep operating costs down and make profit in the process.

9. Although the poor are entrepreneurial, they largely engage in micro businesses that are undifferentiated with potential for only subsistence level profits. This partially explains why basic business training for owners of micro businesses had little impact in sales and profits in studies done in Peru and India. This is food for thought for our Foundation Founders program.

10. Poor countries are not doomed to failure and being poor is not a permanent condition. While it might take some time for a full-scale improvement in political and economic institutions, doing small things to improve governance can make a difference. For example, publishing the revenues allocated to each local government, monitoring politicians at local level and holding them accountable by the press or other non- governmental organizations and the electorate matters.

11. Finally, a social policy that keeps the poor from striking out because they feel they have nothing to loose, may be a crucial strategy that prevents the country from descending into chaos before the other forces of an educated manpower, good infrastructure and inclusive political and economic institutions converge to get the economy to finally take off and lift the masses of the people from penury.

In all, this is an interesting and easy read full of practical things that can be immediately implemented which can hopefully reduce poverty. I recommend it to anyone interested in making life a little easier for the masses.

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