Why should you read Esther Duflo and Abhijit Banerjee’s “Poor Economics”?
My interest in economics piqued in 2008 when I was in college and the world had crashed in recession. A lot of jobs were at stake for my immediate seniors and for my batch which would be graduating in the year 2010. As I started understanding economics better I was both fascinated by its logical simplicity and multidisciplinary approach yet confounded by its ambiguity. Keynes once said,“The master-economist must possess a rare combination of gifts …. He must be mathematician, historian, statesman, philosopher — in some degree. He must understand symbols and speak in words. He must contemplate the particular, in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. He must be purposeful and disinterested in a simultaneous mood, as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician.” I scraped the surface by reading articles written by Krugman, Rajan, Sen, Stiglitz, Dreze and ended up going to IIM-C which has a brilliant department of economics. What the study gifted me,was a lens with which I look at every situation in terms of trade-offs and optimization. India and world economics has always been of interest and when I knew that the Nobel Laureate was going to be present at Jaipur Literature Festival in January 2020, I made sure I was there. The stimulating lecture was followed by me purchasing this book and getting it signed from Dr. Banerjee himself. (Unfortunately, Dr. Duflo wasn’t been able to make it to the event)
This book is meant for all professionals especially working in developing nations. It is relevant for billionaires running philanthropic trusts and for volunteers in not-for- profits.It is for people in rural or retail banking, MSME segment, FMCG sales and marketing professionals, doctors and policy makers, administrative officials and ultimately every tax payer . The authors have put the research done by their team at J-PAL in a very lucid and comprehensive format, making it easy for a layperson to understand. Out of the many ideas and insights discussed in the book, here are some that struck me. These are facts that really made me think about the bottom of the pyramid.
While many countries are given aid by development banks and rich countries, there are economists like William Easterly, who are against it.Does financial aid bring in complacency and corruption? Can these countries not operate on free markets and incentives?On the other hand there are economists like Jeffrey Sachs who believe that the poor are stuck in a poverty trap and aid becomes necessary to kick them out of this. It is required to start a virtuous cycle where people become more productive and thus grow beyond poverty line ploughing their money back to grow. To find out answers to these questions the team at J-PAL used a method called randomized control trials(RCTs) where they conduct a series of experiments with groups differing in location and chosen randomly.
Education and basic awareness is one of the biggest problems in this strata of society. Poor kids are either sent to government schools or sent to jobs at a young age. The condition of government schools is bad as many teachers don’t pay attention to teaching. While schemes like mid-day meals incentivize parents to send their kids to schools, it is teachers in govt. schools who are not coming to the classes and have no incentive to teach. The teachers receive no bonus on their performance. Very few states in India have monitoring mechanism today.
Subsidies or direct cash transfer schemes may not be the best solution to remove poverty as there are a lot behavioural nuances that come into picture. When poor have to deal with existential issues like meal fulfillment and medicines for illness on a daily basis, the stress inducing hormones like cortisol make them despondent, indecisive and vexed. By the same logic the spending and savings pattern of the poor is also driven by impulse and lack of self control. Government needs to think about food policies. Giving them direct cash in hand does little to persuade them to eat healthy. Because there are so many issues they have to deal with,cash is used for an imminent issue demanding attention in the next few days. Education about food and nutrients is also poor. When you are poor you don’t want to eat wholesome food. You want to eat tasty food.For eg. these households spend a lot on tea, sugar,rice and tobacco.They spend on expensive cure rather than cheap prevention. Poor face boredom.They even take loans to ensure houses have mobile phones and TV. The households may spend on instant gratification to release stress.They spend more on dowries,wedding and festivals.
We cannot expect the poor to become entrepreneurs by giving them seed capital. Entrepreneurship needs skills and risk taking ability. It needs a streak of positivity and hope. It needs culture. In his paper Gary Becker the Nobel winner talks how possession of wealth makes people patient and how its lack makes people impatient. With so many hurdles in their way, which includes lack of access to loans and credit, entrepreneurship amongst the poor is not easy to foster. Banks don’t trust them and chances of default are high. Farming is generally their main occupation in rural India, but because of land fragmentation most of the farmers have a small plot to cultivate and that is dependent on many seasonal factors. The book talks about how weather based crop insurance works well for farmers in Ghana and the fertilizer vouchers given to farmers benefits them more than any loan waivers. Loan waivers are more of a political weapon used by governments to remain popular leading to deficit and systemic losses.
If you want to understand microfinance better — this book explains it in a very simple way. Why did SKS microfinance fail? What made Muhammad Yunus’ Microfinance Institutions (MFI) succeed? What is the difference between banks giving loans to a priority sector vs MSMEs vs poor? MFIs lend to a group of borrowers. They keep a close check on customers, and group lending ensures that other borrowers know the customer. In case there are defaulters, connections are used to put pressure to repay. The power of shame, makes the borrower loathe the idea of nuisance by a credit officer at her door step.Loan officer in MFIs is generally a local who collects a definite amount from groups and is incentivized to do so,keeping the cost of transaction and operation low as compared to a bank. MFIs have seen huge success in Brazil and South Asia with effective execution. It is useful where people want to start a cottage industry or want to rear animals for milk or want to buy a cart to sell as a vendor. Women are more trustworthy when it comes to lending and paying back. Microfinance has its own limitation as well. It is suitable for small businesses and not for high risk capital businesses. What leads schemes like Rosca(rotating savings and credit associations) and M- Pesa succeed in African nations, is also well explained in the book.
Poor are also subjected to “healthtraps”. While in an organized sector employees are eligible for paid leaves, in the unorganized sector if the poor get bed ridden or fall ill they are likely to lose out on their daily wage.In normal circumstances because of malnutrition and lack of clean water poor people fall ill frequently requiring medicines and cure. This creates deficit in their income and they are forced to borrow from moneylenders in their social network who charge them interests that can be between 40% — 200%. Thus the poor get into this trap where they earn to pay their debts, but because the interest they have to pay is so high they end up borrowing again, constantly living in credit. Poor also have less access to health insurance schemes. It is only recently that govts. and trusts have started looking into health insurance schemes for the poor. There was a 4X increase in the health insurance sign-ups when door to door marketing of these schemes took off,explaining what it covers. It gets very difficult for them to come out of the debt cycle especially if they have small odd jobs. The man of the house or the son, generally migrates to a large town in search of better income. The family stays back in the village as the town life means high cost,low savings and lack of large living space and poor sanitation. The family in the village is sent remittance. This is also seen as de-risking the family to not purely depend on one occupation or livelihood. In villages family members are married off to spouses from different villages just to ensure that they can be of help to each other should there be any drought or flood in one area.
Participation of women plays a crucial role in poverty eradication. While the wish for a male child is an aspiration for the poor. It is so, because they feel the boy will work and take care of his parents. In such cases daughters and dowry are seen as a liability. Educating girls and making them earning members goes a long way in ensuring their social status and value to parents. It is also seen that in India where Gram Panchayats have had an active participation from women, infrastructure like toilets and wells have been given importance to.Schemes like Progresa of Mexico have delivered very positive results when it comes to improvement in health indicators of children; the conditional cash transfers being doled out strictly to the mother. The system believes that if the sum of money is given to the mother it will go towards uplifting the condition of the household and the health of the children.
“The bad thing about poverty is not that it deprives people from wealth and happiness but that it limits the potential of a human life and thus of humanity. This should be a good enough reason enough to alleviate this state.” These are some profound and humble thoughts from the Nobel winning duo which should make us think about this issue.With the pandemic hitting various parts of the world we cannot imagine how badly the poor have been affected,surviving on daily wages with no formal work contracts. After I had read this book, I sympathized even more closely with our helps, delivery boys and vegetable vendors. I tried to be a bit more compassionate. This book made me realize the privilege I enjoy because I was born in congenial circumstances of human existence.
