Wednesday, 13 February 2013

Poor Economics

Poor Economics (Abhijit V. Banerjee and Esther Duflo)
East Cipinang, Jakarta Indonesia Picture taken by Jonathan McIntosh, 2004.
I enjoyed this book on development economics. Any book that has a glowing reference from Amartya Sen is worth a read, and this didn’t disappoint; the authors themselves are two highly respected economists. This book was full of surprising insight into how the poor live their lives. Its two main themes were the (relatively) recent trend of randomised controlled trials in development economics and also the importance of micro-scale reactions - talking to the people affected by poverty reduction policies and finding out what really motivates their behaviour. 

I accepted quite a lot of their arguments, which often could be summed up as ‘actually, things are a bit more complicated than that’. Memorable for me in the book was the disavowal of nutrition based poverty traps, and other traditional and simplistic traps, but the introduction of more complicated, behaviour based traps. Also the idea that the poor people live in a world that makes it very hard to make the right choices. Often people could be unambiguously better off by saving more, but they don’t have access to the right kind of finance and suffer much the same self-discipline problems that everyone in the west does. These problems are more acute though - for someone living on a dollar a day, a cup of tea might be something they could forgo to save, but a life of no tea would make life pretty dreary indeed.

The idea that poor people are ‘entrepreneurs’ out of necessity not some special pluck rang true as well. The idea behind a lot of micro finance initiatives is that poor people just need the right finance to unleash a wave of business potential across the developing world. Lending support to this theory is that  MF does get good returns on their loans. However, actually, that’s because whilst the marginal return on a small capital increase in the business can be quite high, the overall returns are still often very low or negative. Poor people often dream of stable income, and the business they run are small, non-scalable, badly run and ‘utterly undifferentiated’ from those around them. In one of these businesses, a ten pound investment which is used to buy more stock might yield twenty pounds of extra income. But the business may still make a loss overall - and a hundred pounds investment would be unabsorbable, ineffective or completely useless.

Poor economics is full of interesting micro explanations leading to RCT-tested ways to make things better for the world's poor. This is it’s biggest strength, but also a weakness. We should tinker at the edges to make things better. And yes, we so far know almost nothing about how to fire up the ‘spark’ of growth for the poorest countries. But this books lacks any sense of urgency - it says in the conclusion something like ‘poverty has been around for a thousand years, we can take a hundred to get rid of it’. That’s true - but it shouldn’t take us a hundred years to make life livable for the very poor. I think - but it’s true I don’t know for sure - that a lot of the world still lacks the most basic of infrastructure. Perhaps poor economics takes it as a given that NGOs should continue to deliver water pumps to remote villages. It doesn’t say - but for me that kind of action is the most urgent, and the most critical. Yes, let’s design good policy, and certainly lets enfranchise the poorest people with the same kind of framework and positive nudges that we in the West enjoy, but most urgently - lets relieve the suffering of those in the most need. Now.

I’m not sure there’s a policy prescription in this sentiment: NGO’s and Governments are already enacting this kind of change, but it would have been nice if Poor Economics had touched on how important this is. 


Poor Economics is available on Amazon.

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