10 Things to Learn from Poor Economics (by Abhijit V. Banerjee and Esther Duflo)

imagePoor Economics: A Radical Rethinking of the Way to Fight Global Poverty from Abhijit V. Banerjee and Esther Duflo, has a very simple theme: every thing you thought about fighting poverty and people in poverty is wrong. They do not actually state this in that way, but over the course of the book, I realized that every blanket and lazy assumption I had ever thought (the poor are poor because they are lazy, the poor cannot be given things for free, the poor are too poor to pay for things) was wrong.

What is important, however, is that Banerjee and Duflo discuss in detail, when these certain assumptions or theories can work, and with whom, and why they do not work. From the book, you get a detailed understanding of their endless cycles of “why?” something happens, and then why the following something happens, using statistical examples all over the world. There’s no time wasted on endless armchair-at-home theory, it’s just real world testing providing proof.

My recommended takeaway from the book is never accept a blanket theory or simplified solution from a politician (or other economists) regarding poverty again. There are many things that can help, but none is a genius solution. Every single thing you can think of can probably help, but instead of choosing the cool one of the day (microfinance! government subsidies! education! first world aid!), we must realize that these are all required to slowly help people from their poverty traps. Beyond this, embrace a more empathic understanding of the poor all over the world.

Here are 10 things to learn from Poor Economics (these are quotes with my comments in []):

1) Economists (and other experts) seem to have very little useful to say about way some countries grow and others do not … But the truth is, we are largely incapable of predicting where growth will happen, and we don’t understand very well why things suddenly fire up.

2) … although we have no magic bullets to eradicate poverty, no one-shot cure-all, we do know a number of things about how to improve the lives of the poor. In particular, five key lessons emerge.

First, the poor often lack critical pieces of information and believe things are not true [examples: benefits of immunizing children; value of education, even just a few years; what politicians actually do; how HIV is contracted] … Citizens who vote in the dark are more likely to vote for someone of their ethnic group [reasoning that at least someone of the same group may provide a little help], at the cost of increasing bigotry and corruption … an information campaign must have several features: It must say something that people don’t already know … must do so in an attractive and simple way … must come from a credible source.

3) Second, the poor bear responsibility for too many aspects of their lives. The richer you are, the more the “right” decisions are made for you. The poor have no piped water, and therefore do no benefit from the chlorine that the city government puts into the water supply. [think of this as, in the United States, you are in forced to live a certain way and pay taxes for it. You have clean, running water, fluoride to protect your teeth, mandatory immunizations, taxes to cover Medicare and Social Security retirement. You have to participate in these programs, and in some ways, these protect you from being completely screwed. The poor do not have these programs and suffer in productivity because of extra disease and risk when something bad happens]

4) [Third] The poor get a negative interest rate from their savings accounts (if they are lucky enough to have an account) and pay exorbitant rates on their loans (if they can get one) because handling even a small quantity of money entails a fixed cost. [The people who need financial help the most are most unable to get it. 20% interest loans would be considered fantastic to the poor, but theft to the non-poor; credit card rates are 20%. Despite this, it is difficult for financial institutions to support these institutions because of the risk, admin work, and relatively low returns involved] The market for health insurance for the poor has not developed, despite the devastating effects of serious health problems in their lives, because the limited insurance options that can be sustained in the market (catastrophic health insurance, formulaic weather insurance) are not what the poor want.

5) The mistrust of free distribution of goods and services among various experts has probably gone too far, even from a pure cost-benefit point of view. It often ends up being cheaper, per person served, to distribute a service for free than to try to extract a nominal fee. In some cases, it may involve ensuring that the price of a product sold by the market is attractive enough to allow the market to develop. For example, governments could … distribute vouchers that parents can take to any school … It is important to keep in mind that these subsidized markets need to be carefully regulated to ensure they function well. For example, school vouchers work well when all parents have a way of figuring out the right school for their child; otherwise, they can turn into a way of giving even more of an advantage to savvy parents.

6) [Four] Many of these failures are less to do with some grand conspiracy of the elites to maintain their hold on the economy and more to do with some avoidable flaw in the detailed design of policies and the ubiquitous three I’s: ignorance, ideology, and inertia. … The fad of the moment (be it damns, barefoot doctors, microcredit, or whatever) it turned into a policy with any attention to the reality within which it is supposed to function.

7) A small revolution can be achieved by making sure that everyone is invited [explicitly] to village meetings; by monitoring government works and holding them accountable for failures in performing their duties by monitoring government politicians at all levels and share this information with voters … [the book mentions that just by having political voting, even if it is considered pre-determined, can improve things by creating an early level of accountability]

8) [Five] Finally, expectations about what people are able or unable to do all too often end up turning into self-fulfilling prophecies. Children give up on school when their teachers (and sometimes their parents) signal to them that they are not smart enough to master the curriculum; fruit sellers don’t make the effort to repay their debt because they expect that they will fall back into debt very quickly; nurses stop coming to work because nobody expects them to be there …

9) Small changes can have big effects. … Kids in Kenya who were treated for their worms at school for two years, rather than one (at the cost of $1.36 USD PPP per child and per year, all included), earned 20 percent more as adults every day, meaning $3,269 USD PPP over a lifetime.

10) Poverty has been with us for many thousands of years. If we have to wait another fifty or hundred years for the end of poverty, so be it. At least we can stop pretending there is some solution at hand…

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