Poor Economics

🚀 The Book in 3 Sentences

This book covers topics such as nutrition, health care, finance and opportunity for poor people. It is a through analysis of the difficulties of the poor and how the overcome those difficulties in different and sometimes quite imaginative ways.

🎨 Impressions

Poor people are not stupid; poor people are not apathetic, and poor people are not more entrepreneurial than rich people. Poor people are PEOPLE. They are the same as you, only with less resources.

One of the most fucking annoying things is when poor people are reduced to fucking poverty pornography with no agency. It is humiliating and destructive. They are not there for your handouts.

✍️ My Top Quotes

Food subsidies are ubiquitous in the Middle East: Egypt spent $3.8 billion in food subsidies in 2008–2009 (2 percent of the GDP). Indonesia has the Rakshin Program, which distributes subsidized rice. Many states in India have a similar program: In Orissa, for example, the poor are entitled to 55 pounds of rice a month at about 4 rupees per pound, less than 20 percent of the market price.
The inability of the poor to feed themselves properly is also one of the most frequently cited root causes of a poverty trap. The intuition is powerful: The poor cannot afford to eat enough; this makes them less productive and keeps them poor.
The human body needs a certain number of calories just to survive. So when someone is very poor, all the food he or she can afford is barely enough to allow for going through the motions of living and perhaps earning the meager income that the individual originally used to buy that food. This is the situation Pak Solhin saw himself in when we met him: The food he got was barely enough for him to have the strength to catch some fish from the bank. As people get richer, they can buy more food. Once the basic metabolic needs of the body are taken care of, all that extra food goes into building strength, allowing people to produce much more than they need to eat merely to stay alive.
Most people living with less than 99 cents a day do not seem to act as if they are starving. If they were, surely they would put every available penny into buying more calories. But they do not. In our eighteen-country data set on the lives of the poor, food represents from 36 to 79 percent of consumption among the rural extremely poor, and 53 to 74 percent among their urban counterparts.
It is not because all the rest is spent on other necessities: In Udaipur, for example, we find that the typical poor household could spend up to 30 percent more on food than it actually does if it completely cut expenditures on alcohol, tobacco, and festivals.
When very poor people get a chance to spend a little bit more on food, they don’t put everything into getting more calories. Instead, they buy better-tasting, more expensive calories.
The real story of nutrition in India over the last quarter century is not that Indians are becoming fatter: It is that they are in fact eating less and less. Despite rapid economic growth, there has been a sustained decline in per capita calorie consumption; moreover, the consumption of all other nutrients except fat also appears to have declined among all groups, even the poorest.
One reason the poverty trap might not exist is that most people have enough to eat. At least in terms of food availability, today we live in a world that is capable of feeding every person that lives on the planet.
Starvation exists in today’s world, but only as a result of the way the food gets shared among us. There is no absolute scarcity. It is true that if I eat a lot more than I need or, more plausibly, turn more of the corn into biofuels so that I can heat my pool, then there will be less for everybody else.
He found that the productivity of a worker on a farm increased at most by 4 percent when his calorie intake increased by 10 percent. Thus, even if people doubled their food consumption, their income would only increase by 40 percent.
The Nobel Prize Laureate and economic historian Robert Fogel calculated that in Europe during the Renaissance and the Middle Ages, food production did not provide enough calories to sustain a full working population. This could explain why there were large numbers of beggars—they were literally incapable of any work.
In Kenya, children who were given deworming pills in school for two years went to school longer and earned, as young adults, 20 percent more than children in comparable schools who received deworming for just one year: Worms contribute to anemia and general malnutrition, essentially because they compete with the child for nutrients.
A review study by some of the best experts on nutrition leaves little doubt that proper nutrition in childhood has far-reaching implications. They conclude: “Undernourished children are more likely to become short adults, to have lower educational achievement, and to give birth to smaller infants. Undernutrition is also associated with lower economic status in adulthood.”
The poor often resist the wonderful plans we think up for them because they do not share our faith that those plans work, or work as well as we claim.
The decision to spend money on things other than food may not be due entirely to social pressure. We asked Oucha Mbarbk, a man we met in a remote village in Morocco, what he would do if he had more money. He said he would buy more food. Then we asked him what he would do if he had even more money. He said he would buy better tasting food. We were starting to feel very bad for him and his family, when we noticed a television, a parabolic antenna, and a DVD player in the room where we were sitting. We asked him why he had bought all these things if he felt the family did not have enough to eat. He laughed, and said, “Oh, but television is more important than food!”
Once a village agrees to work with Gram Vikas, the building work starts and continues for one to two years. Only after every single house has received its tap and toilet is the system turned on. In the meantime, Gram Vikas collects data every month on who has gone to the health center to get treated for malaria or diarrhea. We can thus directly observe what happens in a village as soon as the water starts flowing. The effects are remarkable: Almost overnight, and for years into the future, the number of severe diarrhea cases falls by one-half, and the number of malaria cases falls by one-third. The monthly cost of the system for each household, including maintenance, is 190 rupees, or $4 per household (in current USD), only 20 percent of what is conventionally assumed to be the cost of such a system.
In many of the countries in our eighteen-country data set, the poor spend a considerable amount of their own money on health care. The average extremely poor household spends up to 5 percent of its monthly budget on health in rural India, and 3 percent to 4 percent in Pakistan, Panama, and Nicaragua. In most countries, more than one-fourth of the households had made at least one visit to a health practitioner in the previous month. The poor also spend large amounts of money on single health events: Among the poor families in Udaipur, 8 percent of the households recorded total expenditures on health of more than 5,000 rupees ($228 USD PPP) in the previous month, ten times the monthly budget per capita for the average family, and some households (the top 1 percent spenders) spent up to twenty-six times the average monthly budget per capita.
The issue is therefore not how much the poor spend on health, but what the money is spent on, which is often expensive cures rather than cheap prevention.
In India, the local health posts are supposed to be open six days a week, six hours a day. But in Udaipur, we visited over 100 facilities once a week at some random time during working hours for a year. We found them closed 56 percent of the time. And in only 12 percent of the cases was this because the nurse was on duty somewhere else near the center. The rest of the time, she was simply absent. This rate of absence is similar elsewhere.
The overall sense we get from their study about health care in India, both public and private, is frightening. Das and Hammer describe it as the 3-3-3 rule: The median interaction lasts three minutes; the provider asks three questions and occasionally performs some examinations. The patient is then provided with three medicines (providers usually dispense medicine directly rather than writing prescriptions). Referrals are rare (fewer than 7 percent of the time); patients are given instructions only about half the time and only about one-third of doctors offer any guidance regarding follow-up. As if this is not bad enough, things are much worse in the public sector than in the private sector. Public providers spend about two minutes per patient on average. They ask fewer questions, and in most cases don’t touch the patient at all. Mostly, they just ask the patient for a diagnosis and then treat the patient’s self-diagnosis.
Given the very broad consensus that immunization saves lives (2 to 3 million people are estimated to die from vaccine-preventable diseases every year) and the low cost (for the villagers, it is free), this seems like something that would be a priority for every parent. The low immunization rates, it was widely held, must have been the result of the delinquency of the nurses. Mothers would just get tired of walking all the way there with a young child and not finding the nurse.
Michael Kremer and his colleagues came up with one method: a (free) chlorine dispenser, called “one turn,” installed next to the village well, where everybody goes to get water, which delivers the right quantity of chlorine at one turn of a knob. This makes the chlorination of water as easy as possible, and because that leads many people to add chlorine every time they collect water, this is the cheapest way to prevent diarrhea among all the interventions for which there is evidence from randomized trials.
Schools are available. In most countries, they are free, at least at the primary level. Most children are enrolled. And yet in the various surveys that we have conducted around the world, child absentee rates vary between 14 percent and 50 percent.
The Millennium Development Goals do not specify that children should learn anything in school, just that they should complete a basic cycle of education.
In Kenya, the Uwezo Survey, modeled on ASER, found that 27 percent of children in fifth grade could not read a simple paragraph in English, and 23 percent could not read in Kiswahili (the two languages of instruction in primary school). Thirty percent could not do basic division. In Pakistan, 80 percent of children in third grade could not read a first-grade-level paragraph.8
Despite their sometimes dubious credentials, private schools often work better than public schools. The World Absenteeism Survey found that in India, private schools were more likely to be found in villages where the public schools were particularly bad. Furthermore, on average, the private-school teachers were 8 percentage points more likely to be in school on a given day than public-school teachers in the same village. Children who go to private school also perform better. In India in 2008, according to ASER, 47 percent of government-school students in fifth grade could not read at the second-grade level, compared to 32 percent of private-school students.
The lucky boy’s mother explained to us that he was the only intelligent child in the family. The willingness to use words like “stupid” and “intelligent” to refer to one’s own children, often in their presence, is entirely consistent with a worldview that puts a large premium on picking a winner (and in getting everyone else in the family to back the winner).
In Burkina Faso, a study found that adolescents were more likely to be enrolled in school when they scored high on a test of intelligence, but they were less likely to be enrolled in school when their siblings had scored high.
The problem is that there are no straightforward ways to identify talent, unless one is willing to spend a lot of time doing what the education system should have been doing: giving people enough chances to show what they are good at.
Not surprisingly, the pressure occasionally went much further. In Uttawar, a Muslim village near the capital city of Delhi, all male villagers were rounded up one night by the police, sent to the police stations on bogus charges, and sent from there to be sterilized.
“Indira hatao, indiri bachao (Get rid of Indira and save your penis).”
In one of those ironic twists in which historians delight, it is not inconceivable that in the longer term, Sanjay Gandhi actually contributed to the faster growth of India’s population. Tainted by the emergency, family-planning policies in India retreated into the shadows and in the shadows they have remained—some states, such as Rajasthan, do continue to promote sterilization on a voluntary basis, but no one except the health bureaucracy seems to have any interest in it.
The standard message spells out a clear hierarchy of strategies: Abstain, Be faithful, use a Condom . . . or you Die (or in other words, ABCD). In schools, children are taught to avoid sex until marriage, and condoms are not discussed. For many years, this trend was encouraged by the U.S. government, which focused its AIDS prevention money on abstinence-only programs.
A striking feature of HIV is that women from the ages of fifteen to nineteen are five times more likely to be infected than young men in the same cohort. This seems to be because young women have sex with older men, who have comparably high infection rates. The “sugar daddies” program simply informed students about what kind of people are more likely to be infected. Its effect was to sharply cut down sex with older men (the “sugar daddies”) but, also interestingly, to promote protected sex with boys their own age.
One reason the fertility transition takes time is that people other than the wife and husband have a say about it. Fertility is in part a social and a religious norm, and deviations from it do get punished (by ostracism, ridicule, or religious sanctions). Therefore, it matters what the community deems to be appropriate behavior.
For many parents, children are their economic futures: an insurance policy, a savings product, and some lottery tickets, all rolled into a convenient pint-size package.
For the sake of their models, economists often ignore the inconvenient fact that the family is not the same as just one person. We treat the family as one “unit,” assuming that the family makes decisions as if it were just one individual.
In Côte d’Ivoire, women and men traditionally grow different crops. Men grow coffee and cocoa, whereas women grow bananas, vegetables, and other staples. Different crops are affected differently by the weather: A particular rainfall pattern may result in a good year for the male crops and a bad year for the female crops. In a study with Udry, Esther found that in good “male” years, more is spent on alcohol, tobacco, and personal luxury items for men (such as traditional items of clothing). In good “female” years, more resources are spent on little indulgences for women but also on food purchases for the household. What is particularly odd about these results is that spouses do not seem to be “insuring” each other. Knowing that they will be together for a long time, the husband could gift his wives some extra goodies in a good male year in return for some extras when the weather goes the other way.
Although many elderly people in the United States would prefer to spend more time with their children and grandchildren (at least if sitcoms are to be believed), the fact that they have the option of surviving on their own—thanks in part to Social Security and Medicare—may be very important for their dignity and their sense of self. It also means that they do not need to have lots of children in order to ensure that there will be someone to take care of them.
The most effective population policy might therefore be to make it unnecessary to have so many children (in particular, so many male children). Effective social safety nets (such as health insurance or old age pensions) or even the kind of financial development that enables people to profitably save for retirement could lead to a substantial reduction in fertility and perhaps also less discrimination against girls.
Risk is a central fact of life for the poor, who often run small businesses or farms or work as casual laborers, with no assurance of regular employment.
Their problems started when a business acquaintance they trusted gave them a bad check worth 20 million rupiah ($3,750 USD PPP). They went to the police. Policemen demanded 2.5 million rupiah in bribes even to agree to start investigating; after they were paid, they did manage to arrest the defaulter. He ended up spending a week in prison before he was released, after promising to repay what he owed. After reimbursing 4 million rupiah to Ibu Tina (of which the police claimed another 2 million) and promising to repay the rest over time, he disappeared and has not been heard from since. Ibu Tina and her husband had paid 4.5 million rupiah in bribes to recoup 4 million.
A friend of ours from the world of high finance always says that the poor are like hedge-fund managers—they live with huge amounts of risk. The only difference is in their levels of income. In fact, he grossly understates the case: No hedge-fund manager is liable for 100 percent of his losses, unlike almost every small business owner and small farmer. Moreover, the poor often have to raise all of the capital for their businesses, either out of the accumulated “wealth” of their families or by borrowing from somewhere, a circumstance most hedge-fund managers never have to face.
Big agricultural disasters, such as the Bangladesh drought of 1974 (when wages fell by 50 percent in terms of purchasing power and, according to some estimates, up to 1 million people died) or food crises in Africa (such as the Niger 2005–2006 drought), naturally attract particular attention from the media, but even in “normal” years, agricultural incomes vary tremendously from year to year. In Bangladesh, in any normal year, agricultural wages could be up to 18 percent above or below their average levels. And the poorer the country, the greater this variability. For instance, agricultural wages in India are twenty-one times more variable than in the United States. This is no surprise: American farmers are insured, receive subsidies, and benefit from the standard social insurance programs; they don’t need to fire their workers or cut wages when they have a bad harvest.
For the poor, every year feels like being in the middle of a colossal financial crisis.
Harder to focus, which in turn may make us less productive. In particular, there is a strong association between poverty and the level of cortisol produced by the body, an indicator of stress. And conversely, the cortisol levels go down when households receive some help. The children of the beneficiaries of PROGRESA, the Mexican cash transfer program, have, for example, been found to have significantly lower levels of cortisol than comparable children whose mothers did not benefit from the program.
All of these ways in which the poor cope with risk tend to be very costly. This has been well documented for agriculture: In India, poor farmers use farm inputs in a more conservative but less efficient way when they live in areas where rainfall is more erratic. Poor farmers’ profit rates go up by as much as 35 percent when they live in areas where the yearly rainfall pattern is very predictable. Furthermore, risk affects only the poor in this way: In the case of the richer farmers, there is no relationship between farm profit rates and variability in rainfall, presumably because they can afford a loss of harvest and therefore are willing to take risks.
Another strategy that poor farmers often adopt is to become someone’s share tenant, meaning that the landlord pays a part of the cost of farming and claims a part of the output. This limits the farmer’s risk exposure at the cost of incentives: Knowing that the landlord will take half (for example) of whatever comes out of the ground, the farmer has less reason to work very hard. A study in India showed that farmers put in 20 percent less of their own effort on land that they sharecrop compared to land where they are entitled to the entire crop.13 As a result, these plots are farmed less intensively and less efficiently.
A study by Christopher Udry shows both the power and the limits of such informal insurance. Over an entire year that he spent in rural Nigeria, Udry got his fellow villagers to record every gift or informal loan that they gave to each other, as well as the terms under which they repaid those loans. He also asked them every month if something bad had happened to them. He found that at any point in time, the average family owed or was owed money by 2.5 other families. Furthermore, the terms of the loans were adjusted to reflect the situations of both the lender and the borrower. When the borrower suffered a shock, he would reimburse less (often less than the original loan amount), but when it was the lender who had hit a rough patch, the borrower would actually repay more than he owed. The dense network of mutual borrowing and lending did a lot to reduce the risk that any individual was facing. Nevertheless, there was some limit to what this informal solidarity could achieve. Families still suffered a drop in consumption when they experienced a shock, even when the total income of everyone in their network put together had not changed.
Health shocks, in particular, are very badly insured. In Indonesia, consumption drops 20 percent when a household member falls severely
In Chennai, India, when the typical fruit seller reimburses the wholesaler at night for the 1,000 rupees’ ($51 USD PPP) worth of vegetables she got in the morning, she gives him 1,046.9 rupees on average. This interest payment is 4.69 percent per day.
These very high interest rates were the call to action for the founders of microfinance. For instance, Padmaja Reddy, the CEO of Spandana, one of the largest microfinance institutions (MFI) in India, told us that she got the inspiration for starting Spandana after striking up a conversation with a ragpicker in the city of Guntur, in Andhra Pradesh. She realized that if only the ragpicker could come up with the funds to buy one cart, she could be in a position to buy “scores of carts” in just a few weeks with the money saved from not having to pay the daily rental fee. But the ragpicker did not have enough money to buy a cart. Why, Padmaja asked herself, is no one lending her the money to buy one cart? According to Padmaja, the ragpicker explained that the bank would not lend to someone like her.
In the survey we conducted in Udaipur, in rural India, about two-thirds of the poor had a loan. Of these, 23 percent were from a relative, 18 percent from a moneylender, 37 percent from a shopkeeper, and only 6.4 percent from a formal source.
As the French put it, “On ne prête qu’aux riches” (“One lends only to the rich”).
Even when the bank manages to get its money back, things can backfire: Banks do not like headlines associating them with “farmer suicides.” And to cap it all off, when elections are around the corner, governments love to write off outstanding loans.
Given all this, it is no surprise that banks find it easier to stay away from lending to the poor altogether, leaving the field to moneylenders. However, although the moneylenders have an advantage in getting their money back, they have to pay a lot more for the money they lend out than the banks.
The typical MFI contract involves loans to a group of borrowers, who are liable for each other’s loans and hence have a reason to try to make sure that the others repay.
Like the moneylender, MFIs threaten to cut off all future lending to anyone who defaults outright and do not hesitate to use their connections within village social networks to put pressure on recalcitrant borrowers. Unlike moneylenders, their official policy is never to use actual physical threats.
When we compared the households in these two sets of neighborhoods, some fifteen to eighteen months after Spandana started lending, there was clear evidence that microfinance was working. People in the Spandana neighborhoods were more likely to have started a business and more likely to have purchased large durable goods, such as bicycles, refrigerators, or televisions. Households that did not start a new business were consuming more in these neighborhoods, but those who had started a new business were actually consuming less, tightening their belts to make the most of the new opportunity.
The fraction of families that started a new business over the fifteen-month period went up from about 5 percent to just over 7 percent—not nothing, but hardly a revolution. As economists, we were quite pleased with these results: The main objective of microfinance seemed to have been achieved. It was not miraculous, but it was working. There needed to be more studies to make sure that this was not some fluke, and it would be important to see how things panned out in the long run, but so far, so good. In our minds, microcredit has earned its rightful place as one of the key instruments in the fight against poverty.
The MFIs responded to the evidence from the two studies (ours, and another by Dean Karlan and Jonathan Zinman, with even more lukewarm results) with six anecdotes on successful borrowers. This was followed by an op-ed in the Seattle Times by Brigit Helms, CEO of Unitus, that simply declared, “These studies are giving the inaccurate impression that increasing access to basic financial services has no real benefit.”14 It was somewhat surprising to read, since our evidence shows, quite to the contrary, that microfinance is a useful financial product. But that apparently is not enough. Trapped by decades of overpromising, many of the leading players in the microfinance world have apparently decided they would rather rely on the power of denial than take stock, regroup, and admit that microfinance is only one of the possible arrows in the fight against poverty.
The crisis of fall 2010 in Andhra Pradesh was almost a repeat, on a grander scale, of the 2006 crisis. Once again, farmer suicides were used as an argument for politicians to attack the MFIs, and once again, repayments entirely stopped once the government stepped in. It brought some of the biggest microfinance institutions (SKS, Spandana, and Share) to the brink of bankruptcy. Such episodes suggest that MFIs might be right to focus on managing beliefs, and therefore it might make sense for them to insist on prioritizing repayment discipline over everything else. Opening the door to defaults, even as a way to encourage necessary risk taking, may lead to an unraveling of the social contract that allows them to keep repayment rates high and interest rates relatively low.
The necessary focus on repayment discipline implies that microfinance is not the natural or best way to finance entrepreneurs who want to go beyond micro-enterprises. For each successful entrepreneur in the Silicon Valley or elsewhere, many have had to fail. The microfinance model, as we saw, is simply not well designed to put large sums of money in the hands of people who might fail. This is not an accident, nor is this due to some shortcoming in the microcredit vision. It is the necessary by-product of the rules that have allowed microcredit to lend to a large number of poor people at low interest rates.
Narayan Murthy and Nandan Nilekani, despite their degrees from the ultra-prestigious Indian Institute of Technology, could not get a loan to start the firm Infosys because the banker objected that the bank could see no inventory to lend against. Infosys today is one of the largest software firms in the world. It is hard not to assume that there are a lot more people like these three, but who just couldn’t make it because they didn’t get the right financing at the right time.
In India, the introduction of faster court action led to much faster loan recovery, larger loans, and lower interest rates. However, this is not a magic bullet, either. When the debt recovery tribunals were introduced, lending to the largest firms increased, but lending to the smaller firms actually went down.
We asked him what he did when he had already purchased fertilizer (but not yet used it) and someone got sick. Wasn’t he tempted to resell it at a loss? His answer was that he never found the need to resell the fertilizer. Instead, he tended to reevaluate the true urgency of any need when there was no money lying around. And if something really needed to be paid for, he would kill a chicken or work a bit harder as a bicycle taxi driver (a job he did on the side when he was not too busy with farming).
Another manifestation of time inconsistency is to buy what we want today (alcohol, sugary or fatty foods, trinkets) but to plan on spending money in more responsible ways tomorrow (school fees, bed nets, roof repairs). In other words, the things we take pride or pleasure in imagining buying in the future are not always what we end up buying today. Knowing that we will have one drink too many again tomorrow gives most of us no pleasure—indeed, it probably makes us unhappy—yet when tomorrow comes along many of us cannot resist it. Alcohol, in this sense, is a temptation good for many people, something that makes immediate claims on us without giving us anticipatory pleasure. In contrast, a television is probably not a temptation good: Many poor people plan and save for months or even years to buy one.
Awareness of our problems thus does not necessarily mean that they get solved. It may just mean that we are able to perfectly anticipate where we will fail.
Self-control may also be more difficult for the poor for another reason: Decisions about how much should be saved are difficult decisions for anyone, rich and poor alike. These decisions require thinking about the future (a future probably unpleasant to contemplate, for many of the poor), carefully laying out a number of contingencies, negotiating with a spouse or a child. The richer we are, the more these decisions are made for us.
We saw no point in reminding her that this went diametrically against the view that we heard from so many people, that the worst thing about easy credit for the poor is precisely that it makes it too easy for them to indulge their momentary whims, but it was clearly on our minds when we started to look at the data, some eighteen months after the first round of loans.
The bigger point is that a little bit of hope and some reassurance and comfort can be a powerful incentive. It is easy for those of us who have enough, living a secure life, structured by goals that we can reasonably confidently aspire to achieve (that new sofa, the 50-inch flat screen, that second car) and institutions designed to help us get there (savings accounts, pension programs, home-equity loans) to assume, like the Victorians, that motivation and discipline are intrinsic. As a result, there are always worries about being overindulgent to the slothful poor. Our contention is that for the most part, the problem is the opposite: It is too hard to stay motivated when everything you want looks impossibly far away. Moving the goalposts closer may be just what the poor need to start running toward them.
If you have very little, use your ingenuity to create something out of nothing.
“Give poor communities the opportunities, and get out of the way.”
So many have managed to be entrepreneurs in the face of so much adversity, and have made so much out of so little. There are, however, two troubling shadows in this otherwise sunny picture. First, while many of the poor operate businesses, they mainly operate tiny businesses. And second, these tiny businesses are, for the most part, making very little money.
Economists (for once, probably usefully) distinguish between the marginal return on a dollar and the overall return from a business. The marginal return on a dollar is the answer to the question “What would happen to your revenue net of all operating costs (but not interest costs) if you were to invest $1 less, or $1 more?”The marginal return is what is relevant when you ask whether you should cut your investment a little (or grow it a little): If investing $1 less allows you to borrow $1 less and therefore repay 4 cents less in principal and interest, you would want to do so if the marginal return is less than 4 percent and not otherwise. So when people borrow at a rate of interest of 4 percent a month, it must mean that their marginal return is at least 4 percent a month.
This is the paradox of the poor and their businesses: They are energetic and resourceful and manage to make a lot out of very little. But most of this energy is spent on businesses that are too small and utterly undifferentiated from the many others around them. As a result, their operators have no chance to earn a reasonable living. The creative sand-driers of Mumbai had spotted an opportunity to make a profitable use of the resources available to them: some free time and the sand on the beach. But what the businessman’s uncle had failed to point out was that, for all their ingenuity, the profits from this activity were almost surely negligible.
The average small business in the Hyderabad survey, we noted, would actually lose money if it were to pay even minimum wages.
If our diagnosis is correct, the reason that the poor do not grow their businesses is that, for most of them, it is too hard: They cannot borrow to cross the hump, and saving up to get there will take too long unless their businesses have extremely high overall returns.
It is only recently that men in the West have learned to at least pay lip service to the many things that their wife who “does not work” does for them; it would not be astonishing if their developing-country counterparts ascribed more leisure to their spouses than they actually enjoy. It
Everywhere we have asked, the most common dream of the poor is that their children become government workers.
In Pakistan, for example, in urban areas, 74 percent of those who are employed and who live on 99 cents or less per day work for a weekly or monthly wage, but 90 percent of those earning $6 to $10 a day do. In rural areas, 44 percent of the very poor who are employed work for a regular wage, and 64 percent of the middle class do.
Maquiladoras generally have the reputation of being exploitative and paying poor wages. However, for many women without a high school education, the establishment of the maquiladoras offers the prospect of a better job than the jobs in retail, food services, or transportation that would otherwise be their lot—the hourly wages are not much higher, but they work longer hours and with more regularity.
Several examples of the effects of risk on household behavior: Poor families take preventive actions to limit risk even at the cost of higher levels of income. Here we see another consequence, possibly even deeper: A sense of stability may be necessary for people to be able to take the long view. It is possible that people who don’t envision substantial improvements in their future quality of life opt to stop trying and therefore end up staying where they are. You
Kaivan Munshi, for example, found that Mexican villagers migrate to cities where people from their village have already migrated, even if the original round of migration was purely accidental.
Microcredit and other ways to help tiny businesses still have an important role to play in the lives of the poor, because these tiny businesses will remain, perhaps for the foreseeable future, the only way many of the poor can manage to survive. But we are kidding ourselves if we think that they can pave the way for a mass exit from poverty.
Acemoglu and Robinson define institutions as follows: “Economic institutions shape economic incentives, the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. Political institutions determine the ability of citizens to control politicians.”
The argument in Acemoglu and Robinson’s book Why Nations Fail, which reflects a widely shared view among scholars of political economy, is that these (broad) institutions are the prime drivers of the success or failure of a society. Good economic institutions will encourage citizens to invest, accumulate, and develop new technologies, as a result of which society will prosper. Bad economic institutions will have the opposite effects. One problem is that rulers, who have the power to shape economic institutions, do not necessarily find it in their interest to allow their citizens to thrive and prosper.
Our colleague Benjamin Olken hired teams of engineers to excavate a tiny bit of road in 600 or so villages to figure out how much material had actually gone into the road’s construction. The cost estimate was then compared with what was reported. Another team interviewed some of the people who were reported to have worked on the project about how much they had actually been paid. Theft was rife: 27 percent of the wages reported to have been paid had somehow vanished, and so had 20 percent of the materials. To make matters worse, the money was only one part of the waste. The roads that were built were still the same length (otherwise the theft would be too obvious) but the missing materials meant that they were built less well, and therefore more liable to be washed away by the next rains.
In an effort to fight corruption, government officials in charge of the program told the village leaders that the building programs would be audited, and the results would be made public. The government did not hire especially honest auditors—they worked within the existing system. Yet, Olken showed that the threat of audits reduced the theft of wages and materials by one-third, compared to the villages where audits were not conducted (the villages where audits were conducted were randomly selected).
“Eve-teasing” (the expression that Indians use to describe harassing women in the streets),
Brazil used to have a complex paper ballot. Voters had to choose one candidate from a long list, then write in the name (or the number) of the candidate they wanted to vote for on their ballot. In a country where roughly one-fourth of adults are not functionally literate, this led to the de facto disenfranchisement of a large number of voters. In the average election, almost 25 percent of the votes were invalid and not counted.
Further studies elsewhere in India have made it clear that women leaders almost always make a difference.
Governments exist to a large extent to solve problems that markets cannot solve—we have already seen that in many instances government intervention is necessary precisely when, for some reason, the free market cannot do the job.
After seeing a female pradhan in their village, villagers not only lost their prejudice against women politicians but even started thinking that their daughter might become one, too; teachers who are told that their job is simply to make sure that all the children can read can accomplish that task within the duration of a summer camp. Most important, the role of expectations means that success often feeds on itself. When a situation starts to improve, the improvement itself affects beliefs and behavior.
Intestinal worms might be the last subject you want to bring up on a hot date, but 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 year, meaning $3,269 USD PPP over a lifetime.
We became development economists because of our mothers, Nirmala Banerjee and Violaine Duflo. In their lives and their work they each constantly express an unwillingness to live with the injustice that they see in the world. We would have had to be deaf and blind to escape their influence.
Our fathers, Dipak Banerjee and Michel Duflo, taught us the importance of getting the argument right. We do not always measure up to the exacting standard of precision they set for themselves, but we came to understand why it is the right standard.