Author: Abhijit Banerjee, Esther Duflo
Poor Economics; A Radical Rethinking of the Way to Fight Global Poverty Abhijit Banerjee, Esther Duflo 2012
Hunger(Economics of poverty)
A poor person is always hungry… In many countries, the poverty line is not without reason characterized by the relation to the income necessary to buy a basic minimum of food. Governments are developing special programs aimed at combating malnutrition: in 2008-2009 alone, Egypt spent $ 3.8 billion on food subsidies – 2% of GDP. Hunger and poverty have a mutual guarantee: malnutrition makes a person weaker, he loses productivity or even falls ill, loses his job, and the lack of income does not allow him to eat properly.
In fact, everything is more complicated. According to the logic described, people living on 99 cents a day should spend all available funds on more calories. However, the experience of the 18 poorest countries shows that many poor families could spend 30% more on food if they cut tobacco and alcohol completely. And when they have extra money, they buy not more nutritious, but tastier, more expensive, and sometimes harmful products.
We live in a world that is able to provide the necessary amount of calories for every inhabitant of the planet. All thanks to agricultural innovations of recent centuries, including the introduction of new crops (Europe owes 12% of population growth in 1700-1900 to potatoes alone). Add to this factors such as improved sanitation, improved transport systems even in the most remote corners of the world, and reduced physical work – all this makes humanity feel less hungry, even consuming fewer calories. Scientists note a decline in calorie intake on a global scale over the past 25 years.
If we want to address the problem systematically and prevent the long-term consequences of malnutrition, we must first pay attention to young children and those who have not yet been born.
Girls in India are a less desirable addition to the family than boys, so they are weaned from breastfeeding earlier, this directly affects children’s health. In Tanzania, children born to mothers who received the required amount of iodine during pregnancy later showed much better success in school than their peers who did not get iodine. Scientists have found that if every African mother took an iodine capsule, the overall level of education on the continent would increase by 7.5%. Concern for the child to get certain trace elements at the right time (and for the mother to understand this) is no less relevant than multi-ton grain deliveries to the poorest countries.Poor Economics
The poor are often unhealthy people, and ailments obviously affect the number of earnings. Not only people are affected, but also entire countries – including those that are prone to malaria: per capita income in Côte d’Ivoire or Zambia, half of whose population suffers from this disease, is only a third of the income of the inhabitants of countries, malaria does not expose. Meanwhile, these gigantic expenses can be avoided with the help of meager costs: an insecticide-treated bed net will cost no more than $ 14, and last for many years.
Kenyan children who took anthelmintic drugs for a long time, studied longer and more successfully, and subsequently earned 20% more than children who received short-term treatment. In turn, children who did not receive such treatment had a lower economic and social status, subsequently giving birth to weaker children.Poor Economics
It is difficult to maintain health in the absence of clean water and basic hygiene measures. Two and a half billion people still lack improved sanitation, and less than half of the world’s population has access to sanitation. In India, according to the latest census, there are 5161 cities – of which only 6% have at least a partial sewer network built. Lack of proper sewerage reduces the GDP of African countries by 2%, in India – by more than 6%.
Even the biggest problems are sometimes solved with the least expensive means. The poorest Zambian family can afford enough chlorine bleach to purify drinking water for as long as it takes. A bottle of chlorine for a month will cost them $0.18 (assuming the family spends $1.10 a week on vegetable oil alone), which will reduce the risk of diarrhea in children by 50%. Residents of Zambia, however, are aware of this effect, but only 10% use chlorine – and even a discount on a useful chemical announced in one experiment prompted only 50% of residents to buy.
This is not to say that the poor do not care about their health. In India, even a very poor family spends up to 5% of the monthly budget on medical needs (up to 4% in Pakistan, Panama, and Nicaragua). The poor spend as much on treating minor ailments as the rich, but unlike the rich, they tend to ignore the symptoms of chronic illnesses. In addition, they believe inexpensive treatment is much more than cheap prevention. (Meanwhile, the availability of inexpensive medical procedures is also ensured in the poorest countries – residents of even remote areas of India need to walk no more than two miles to find a first-aid post with a qualified nurse). The average Indian poor visits a doctor once every two months, less than a quarter of these visits are in free public institutions, and more than half are in private clinics. Such a choice might make sense if private medicine in India were more qualified, but it is not: a third of private doctors do not have higher education at all.
Another acute problem is vaccination. It is often difficult for the poor to fully appreciate its benefits: if a child is vaccinated against measles, then he does not get measles, but neither do many of those who are not vaccinated. The habit of parents postponing vaccinations for later, even if they understand their benefits, also affects.
In India’s poorest regions, immunization rates were only 2% of all children under two years of age. This indicator could not be explained either by the lack of money, or the lack of a vaccine (it was available for free), or the fact that parents neglected the health of their children (if the children fell ill, parents spent huge amounts of money on their treatment). Duflo and colleagues decided to study the problem experimentally: they selected one and a half hundred villages and divided them into three groups. The inhabitants of the villages from the first group themselves had to go to the nearest medical center. In the second group, a mobile vaccination station was organized – in such villages, the level of vaccination was three times higher than in the villages of the first group. Finally, the third group of villages was covered by the work of the same mobile vaccination station, but at the same time, those who had been vaccinated were given a small gift – a bag of lentils. The cost of the gift was not so great, but it served as an incentive not to postpone the vaccination of your child for later, moreover, the conditions for vaccination were organized in the most convenient way for the villagers. Result? The number of people vaccinated has doubled – an average of 39%. Also, the gift idea halved the unit cost of immunization per person due to the reduction in overhead costs for medical staff, in whose work there was now no downtime.Poor Economics
The experiment with lentils showed that even the superstitions of the poor (like anti-vaccine fear) are not so strong if a more weighty argument is in store for them (a kilogram of lentils) or if most of the obstacles in their path are removed in advance (a convenient mobile first-aid post). Making it easier to take the right action by creating the right incentives is a surefire remedy for both procrastination in particular and poverty in general. It is only important that these incentives be optimally adapted to the conditions of developing countries.
Becoming a literate resident of a developing country is not difficult – in most of these countries, schools are available, moreover, they are free, at least at the primary level. 95% of Indian children have a school within a half-mile radius of their home. In Africa, primary education is available at 70%. And yet, half of the children who have access to education do not attend school. Someone’s health does not allow (let us recall the example of Kenyan children), someone was simply not let go by their parents, who believe that only one of ten brothers and sisters can be literate. Even if the child has reached school, his knowledge is not yet guaranteed: teachers in Bangladesh, Ecuador, and Peru miss one working day out of five, in India and Uganda even more often.
What will have a better impact on school performance: free lunches? additional textbooks? The researchers conducted several experiments, and hiring teachers under the contract turned out to be the most effective. Kenyan schools have been hiring additional teachers from the local population to reduce class sizes. They entered into a temporary contract, which was extended if the students showed success. Result? It was the children assigned to contract soldiers who did much better in many subjects. Their peers, who studied with teachers on a full-time basis, did not receive any benefit from the reduction in classes.Poor Economics
It should be profitable not only for teachers but also for parents to send their children to study. To do this, Mexico introduced a money transfer program: it is provided to the family only if the children regularly attend school, and the whole family seeks preventive medical care. The family received more money if the children moved from primary to secondary school and if a girl went to school instead of a boy. The payments were presented as compensation to the family for the loss of wages that their child did not receive by going to school instead of work.
However, even understanding the connection between education and future well-being, parents in developing countries are subject to some misconceptions. 70% of parents of students from 640 Madagascar schools believe that a high school graduate will enter the public service (in fact, only 33% get a job). The same parents tend to believe that the initial years of education pay off much less than subsequent ones: in their opinion, each year of primary education will increase the child’s income by 6%, and each year of secondary education by 12% (in fact, each year of education increases earnings more or less proportional).
Another major problem hindering school performance is the experience of one’s own social status. African-American students do worse on tests if they have to list their race on the title page. Indian teachers underestimated the grades of students from the lower castes and were more fair if they had no idea about the social status of the child. Maybe teachers from the higher castes are inclined to this? No, the worst grades are given by teachers from the same lower caste.Poor Economics
Poor families are large families. The issue of large families is so acute that the governments of the poorest countries pass strict birth control laws. This is what the Indian government did in 1976, promising large financial subsidies for families who would agree to sterilization: 8.25 million people were sterilized in two years. China followed a similar path with its One Family, One Child policy. At the same time, forced birth control does not always affect the well-being of an only child. There is no evidence that children from small families are more educated.
The problem needs to be addressed at the stage of family planning, which is most often missed. According to the UN, filling the current unmet demand for contraceptives could lead to a 27% annual reduction in maternal mortality, reducing the number of unplanned pregnancies from 75 million to 22 million per year. Developing countries have extremely high rates of teenage pregnancy, up to 9.2 births per 100 adolescent women in Mexico, Panama, and Guatemala (in the United States, which has one of the highest rates of teenage pregnancy in developed countries, at 4.5 births per 100). 100 teenagers). Teenagers not only become pregnant but also become infected with AIDS.
Many educational programs on this subject rather scare away adolescents by completely prohibiting any sexual contact, while it would be much more reasonable to inform potential victims of HIV about the likelihood and specific conditions for infection. Kenyan girls are well aware that unprotected sex is fraught with pregnancy. They also know that starting a family can be a good option if the future father is a respectable adult. But what they don’t know is that sex with older men makes it much more likely to transmit HIV. Programs that focus on these details achieve much lower pregnancy and HIV rates.Poor Economics
Having many children for the poor is also a kind of investment. It is important for most poor people to know that their children will take care of them in their old age. In 2008, more than half of the elderly in China lived with their children. True, the opposite view of the problem is no less popular: isn’t it cheaper not to have extra eaters at all? In India, gender-selective abortions are extremely accessible and very cheap: girls are not wanted. A roadside advertisement in Delhi offers an illegal sex determination service, enticing with the slogan “Spend 500 rupees now and save 50,000 rupees for future dowry.”
Elderly people in developed countries may not depend on their children at all, being able to live independently thanks to social security and health insurance. State social guarantees are a measure that solves a number of problems at once: it eliminates the need to have so many children (in particular, so many boys who are more desirable in the poorest families), allows you to save money for old age, leads to a significant decrease in the birth rate and less discrimination regarding girls.
Ways to fight poverty
Departing from the city center to the poor outskirts of almost any developing country, tourists are invariably surprised by the number of unfinished houses along the roads. Some houses have erected walls, but without a roof, others with a roof, but without windows, and others have an unfinished wall. If a tourist asks the owners of such houses about the condition of their housing, they will answer: “We build a house gradually and thereby save money.” Not the best investment, is it? Isn’t it more profitable to take the saved money to the bank, and then immediately finish building the house? But the bank is unlikely to welcome the poor kindly – managing their meager accounts requires high costs, which means that the client’s commission will be too high. Therefore, the poor do not have bank accounts, although they formally have the right to do so. The solution, however, is not only to give the poor people specific financial instruments like deposits but also to teach them how to save money wisely.
Yields will be much higher if farmers fertilize the land; fertilizers are expensive, but the harvest also brings higher income. But most often, farmers make a decision to buy fertilizers before planting seeds, when there is almost no money left for the last harvest and it is simply a pity to spend it on deferred benefits. In one charity program, African farmers were given the opportunity to buy a voucher with the right to purchase fertilizer at planting time immediately after the harvest. In addition, employees went to farmhouses, offering vouchers directly (and targeted support is of great importance here – remember the story of vaccinations and lentils). The share of farmers using fertilizers was halved, and the effect was far greater than the 50% reduction in fertilizer prices.Poor Economics
Consistently saving for the future is more convenient for those who have a clear image of this future, and people in developing countries do not always have it. It’s too hard to stay motivated if you live by the day. A sense of security is what the poor need and that feeling can only be provided by consistent government support.
The proportion of the rural poor employed in the farming business can be as high as 98%. At the same time, more than half are engaged in daily work, their earnings are subject to change. Let us add here natural disasters, which often cause enormous damage to the agriculture of developing countries. In Bangladesh, agricultural wages can be 18% above or below average in normal years.
What can the poor do to cope with these risks?
- Work more. However, in difficult times of drought or rising commodity prices, this will lead to fierce competition, which will provoke a decrease in wages.
- Invest in less risky pursuits (in a survey of 27 villages in West Bengal, even households that claimed to work the land devoted only 40% of their time to farming; the typical family in this study consisted of three working people with seven professions).
- Migrate to the city (however, cases when the whole family moves are relatively rare: the move of one father of the family or brothers ensures that the family’s fortune will not depend entirely on incorrect city earnings, allows you to maintain local ties).
- Provide mutual assistance – it is developed at a very high level in the villages of the poorest countries. However, this practice has its own nuances. A study in the Philippines found a rule: when a family has a bad harvest or someone loses their job, other families in the village come to the rescue, but when one family member becomes seriously ill, no one will come to the rescue. What caused this tactic: whether it was an involuntary expectation of deception or fear that mutual assistance may not always follow, is unclear.
Meanwhile, official insurance in the poorest countries is extremely poorly developed. This is partly due to the potential unreliability of the subjects of insurance and the fear of unpredictable consequences of social benefits. If even without health insurance, the poor are constantly visiting hospitals, how will they behave when visits become free? And won’t doctors be tempted to prescribe more expensive treatment – is it still paid for by the state? .. Another problem is that many poor people do not understand the concept of insurance at all: why pay money today for what will happen tomorrow, and most likely not at all happen?
In a situation where private insurance companies do not have much interest in doing business in the poorest countries, the state should take the initiative. At the same time, it must be prepared for additional spending aimed at long-term consequences. When farmers in Ghana were offered drought insurance at a heavily discounted down payment, almost all farmers accepted the offer. Moreover, those who received inexpensive insurance began to think more about the long-term consequences: they fertilized their lands more often than those who did not buy insurance, and they cared more about their health in order to have the strength to work. As the consciousness of the poor grows, government subsidies may decrease.
The poor often live in debt, and it costs them much more than the rich. In rural India, two-thirds of the poor have loans, with 23% borrowing money from relatives, 18% from moneylenders, 37% from shopkeepers, and only 6.4% receiving money from official sources. Those who live on 99 cents a day pay an average of 3.84% per month (equivalent to an annual rate of 57%) for informal loans – this costs them much more than the US credit cardholders’ interest rate of about 20% per year.
Why are the poor being given such high rates? Why is it cheaper to lend to wealthier people? Lenders protect themselves from possible default by requiring a down payment: the larger the borrower’s down payment, the less temptation he has to deceive the lender. The more a borrower can mortgage, the larger his loan can be. So, the amount of the loan is tied to the amount that the borrower already has. It turns out that only the rich can afford to borrow … And the lender must also collect the most complete information about the borrower, efforts to find it take time, and time is money that the interest rate should cover. In a word, it is easier for the poor to go for money to a familiar usurer.
The only real shift in this problem has been microfinance. Today it covers hundreds of millions of borrowers around the world. Microcredit pioneer Muhammad Yunus received the Nobel Peace Prize for his project. Yes, MFI lenders are tougher than loan sharks, who often allow borrowers to choose how and when to repay the debt—the poor who take out a microloan are required to repay a fixed amount every week (which is why more than half of Hyderabad’s slum dwellers still go to loan sharks for money, despite the accessibility of MFIs in their areas). But this is the price of a compromise: it is a tough policy that reduces administrative costs and lending risks.
Entrepreneurship and civil service
Does it seem that “poor” and “entrepreneur” are incompatible concepts? But poor people are not strangers to the enterprise; perhaps, due to circumstances, it is even better developed among them than among the inhabitants of prosperous countries. And their relationship with money is more complicated than it seems at first glance. The very fact that, even after paying very high-interest rates, moneylenders to the poor still manage to earn enough money to repay their loans (and they very rarely default), means that they earn even more money in terms of the rupee or peso invested. The problem is how to recognize this profit and put it in the right direction.
Maybe the poor just lack the initial momentum? To answer this question, the researchers developed a special charity program for Bangladesh. The poorest residents of the village were given an initial asset (a pair of cows, a sewing machine), a small cash allowance as working capital, they were given financial literacy lessons. A couple of years later, the result was obvious: the poorest villagers really learned to earn money by increasing their initial capital and giving much more time to work, and their monthly expenses increased by 10%. And most importantly, their views on life have changed: they have learned to consciously save and changed their views on health and general well-being.
Of course, we are talking more about successful households than successful business projects: the enterprises created by the poor are usually too small. An analysis of data from the 18 poorest countries showed that the majority of businesses run by the poor do not have paid staff, and these businesses also tend to have very limited assets. In Hyderabad, only 20% of businesses have their own private room. Very few have any kind of transportation.
The poor themselves consider the civil service to be the best fate. In the poorest families of Indian Udaipur, 34% of parents would like their son to become a public teacher, and 18% would like him to be an employee in a private firm. As for girls, 31% of parents dream that their daughter becomes a teacher, 19% – of a nurse, and 31% see her in some other government job. The secret of the dream is simple: public office is stability. Ultimately, stable employment is what separates the middle class from the poor. The increase in factory employment increased the wages of Indian workers far more than the increase in agricultural productivity brought about by the famous Green Revolution 1.
Since most of the desired jobs and schools are concentrated in the city, moving there could be the first step towards changing one’s status. However, only 10% of trips to the city last longer than three months, and permanent migration is relatively rare (only 4% of those who migrated to Pakistan, 6% to Côte d’Ivoire and Nicaragua, 10% to Peru). In the city, the poor rarely become such valuable workers that the owner keeps them longer.
Once again we come to the need for external support, which should come from the state. An obvious measure is to create a streamlined urban migration process that would be supported by effective social protection (this would reduce dependence on local community ties, which are especially held on by rural residents). Finally, we have the impressive example of Deng Xiaoping, who allowed enterprising villagers to start private farms in the 1970s, thereby pushing China into rapid financial development.
Quality of political decisions
The public policy of developing countries is often a sad sight: authoritarian leaders are at the helm, governments are corrupt, and social systems do not work. In addition, the political system of developing countries has a bad anamnesis: since colonial times, it has been customary to govern the country, not for its development, but to pump out the maximum amount of resources. Decolonization did not reverse this order.
During the British Raj in India, different areas of India had different rules for collecting land revenues, established mainly for random reasons. In some areas, for some reason, the responsibility for collecting land tax was assigned to the local feudal landowner. In others, farmers were fortunate enough to be individually responsible for their taxes: in these regions, more cooperative relationships developed. And still, many years after the abolition of the tax, areas governed in a feudal manner have lower yields, fewer schools and hospitals, and are characterized by more tense social relations.Poor Economics
Maybe you need to influence the situation from the outside? Wouldn’t it be better to find an effective manager from developed countries? And since it is difficult to govern an entire country, why not start with small towns, over which patronage will be taken? But how many examples of such management do we see? No, on the other hand, we know many examples of colonial powers that could not bear their weight and, in the end, missed the runaway colonies. This is because it is much easier to seize power than to manage competently later. The American attempt to establish a market democracy in Iraq is one of the clearest examples.
Freedom is not imposed from outside, otherwise, it is not freedom. Public principles should be formed from the bottom up and formulated by the local population. The basic principles of a healthy society, such as democracy or property rights, are implemented locally through many specific small institutions and actions. The more we study life in developing countries, the more we see that it is not black and white. Even very imperfect elections and very half-hearted decisions make a difference on the ground.
Indonesian President Mohammed Suharto single-handedly ruled the country for 30 years (1968-1998), suppressed political freedoms in every possible way and embezzled $ 35 billion – a record among dictators. And at the same time he brought the country out of the deepest economic crisis, raising the standard of living of Indonesians. He made the most of the oil boom that began in the 1960s, and the oil money was used to build schools, among other things. Suharto greatly valued education for its propaganda opportunities, and literate residents began to earn more. The expansion of education was accompanied by a massive program to improve child nutrition: undernourishment in the country was halved between 1973 and 1993.Poor Economics
This does not justify the dictatorships of developing countries but convinces us that the motives of political elites are quite complex and are not always embodied to the detriment of the population. Rigid centralized power is quite capable of carrying out partial decentralization in the field, making life easier for the poor.
A successful fight against poverty is possible even in the worst conditions if we focus on concrete measures and measurable results. As for corruption, there is always a risk of it, and the main thing here is to avoid the complications that inevitably arise if the government forces the population to do things that it does not understand and does not appreciate (like forced vaccination), and if the work of the government itself is not carefully controlled.
The Government of Uganda regularly provided grants to schools for the maintenance of buildings, the purchase of textbooks, and additional curricula. However, only 13% of the funds reached schools, the rest ended up in the pockets of local officials. Having found this out, European volunteers contributed to the publicity of the information received. Was this followed by revenge on the part of corrupt officials? On the contrary, the Treasury Department has begun providing monthly information to the major newspapers on how much money has been directed to schools. Half of the headmasters of the underpaid schools filed formal complaints, and they were granted. After some time, the volunteers repeated their study and found that schools now receive up to 80% of subsidies. Yes, thieves in the government are happy to appropriate badly lying money – but only as long as they are not closely watched.Poor Economics
Too many attempts to help the poor fall short of the “three I problems”: ideology, ignorance, inertia. The blame for everything is either ideology, ignorance, or inertia, and often all of them combined. Major education reform in India was designed to qualitatively change the accountability of schools to parents and students. Each village was to form a village education committee, which would control the work of its educational institution and could apply for the hiring of additional teachers. Five years later, polls showed that 92% of parents had never heard of such committees. One in four adults interviewed did not know they were on a committee; of those who did, two-thirds had no idea of their right to hire teachers. Well, the “problem of three I” is obvious: here is both ideology (the declared reliance on popular self-government), and ignorance (the authorities, apparently, did not really figure out what the rural poor really need; they, in turn, have no idea had about her rights)
Three principles and five lessons
The anti-poverty philosophy of this book is based on three principles:
- down with general concepts, no matter how good they may be: pay attention to the details of the life of the poor;
- study how poor people make decisions, what they are guided by, and what delusions they are held hostage to;
- be ready to experiment with anti-poverty measures, always test your ideas with practice to understand the real causes of phenomena.
There is no magic wand that will rid the world of poverty in the blink of an eye, but there are many solutions and techniques that work wonders. Banerjee and Duflo end the book with five lessons they learned from years of work in the poorest countries:
1. Often the poor are simply not informed enough: they are afraid to vaccinate their children, they don’t know how HIV is transmitted or how much fertilizer they need to use in the fields. They need more information, but not every information campaign is effective. It’s best if you:
1) tell people in the most specific way they didn’t know before (general calls like “no sex before marriage for Kenyan girls” work poorly, the recommendation “avoid unprotected sex with older men” is much better);
2) present information in a bright and engaging way (TV shows, comics, and puppet shows are all good);
3) instill confidence in these people.
2. The poor must keep in mind too many obligations that the inhabitants of civilized countries do not think about because of long-established domestic comforts. The poor need to think about whether their children are getting enough vitamins because they do not have access to balanced healthy food. The poor are forced to count every ruble because they do not have access to pension contributions and social security. Of course, the poor do not have enough strength or knowledge for all this, and the problem is that most often there are no those who are ready to make these decisions for them.
3. The poor cannot count on the market and social institutions precisely because the market and social institutions do not count on them! The result is negative interest rates on the savings accounts of the poor, exorbitant interest rates on loans, and opaque insurance options. At the same time, the market is not barred from developing countries. Microcredit has made loans at more affordable rates available to millions of the poor. Identifying people by their appearance and a wealth of personal data can make it easier to transfer money to the poor. The point is also that it is often more convenient to promote the service that the population needs for free – private businesses will not go for it, but such measures are within the power of the state authorities. Such is the subsidization of insurance premiums, the distribution of vouchers for fertilizer, and free savings accounts. Of course, subsidized markets need careful monitoring and regulation.
4. Poverty is not destiny, and developing countries are not doomed to failure because of their history. More often than not, the multiple problems are not due to a conspiracy of thieves, but to some lack of social planning or the ubiquitous “three I problem.” Changes for the better in governance are possible without a fundamental change in existing political and social structures. There is always room for positive action: get all the villagers to come to an important meeting, pay more attention to the work of civil servants, hold the guilty more often…
5. The life of the poor is too often defined by self-fulfilling prophecies when they act under the influence of ideas imposed on them or are self-acquired about how little they can. As a result, children drop out of school because teachers convince them of mental disability, teachers themselves neglect their duties because no one expects them to go to work every day, politicians who are elected in a slipshod manner do not seek to change the life of the electorate for the better. It is not easy to change negative expectations, but it is possible: it happens when a doctor comes to a poor village and goes around the house with an offer of vaccination and a bag of lentils when volunteer teachers come to schools, whose earnings directly depend on the result of their work. Success inspires itself and triggers subsequent positive changes.
Summary prepared with the support of BI GroupPoor Economics
1. Green Revolution – the transformation of agriculture based on modern agricultural technology, which took place in the middle of the 20th century in developing countries.