Book Review: Poor Economics – Part II

June 22nd, 2011 by Dave Leave a reply »

Poor Economics: A radical rethinking of the way to fight global poverty

By: Abhijit Banerjee and Esther Duflo

This is a continuation of my book review. See Part I of book review >

Here are a few highlights I took away for the book:

  • Most poor aren’t hungry. Despite what the experts say. Generally, the poor don’t eat more even if you give them food. There is though an age-old issue of micronutrient deficiencies in poor people’s diet. So, it’s a “quality” issue, not a quantity issue with lots of complicated behaviorial challenges to overcome.
  • Demand is low for many beneficial things. Many poor could afford water purification products and bed nets but don’t make them a budget priority. Much of this is based on focusing resources on the short-term.
  • Paying people to take vaccines can be cheaper. One of the biggest issues for global health is how few children complete a full series of vaccines leaving them unprotected and increasing drug-resistance for diseases. They have found in a trial that it is actually cheaper to provide gifts to mothers who get their children vaccinated and they get more compliance. Read for the details.
  • Making public good things free and the default. The authors argue that governments should make things like preventative care free, required and of consistent quality. Sounds paternalistic? Yep. They argue that those in the rich world are constant beneficiaries of paternalism that we hardly notice it!
  • Unconditional cash transfers to poor families work. We’ve heard about popular (and statistically effective to help people out of poverty) programs in South/Latin America like Mexico’s Oportuniadades which provide grants to poor families on the condition that they do things like ensure their kids are in school. Two studies have found that without these conditions that the poor still send their kids to school, etc.
  • Most poor people want a job, not a micro business loan. Despite what many microfinance advocates say, most self-employed do so out of necessity, not out of choice. Jobs bring more security which enables poor families to plan and invest for a brighter future.
  • Microcredit has high marginal ROI, but low overall ROI. Since most poor who take microcredit loans are underemployed, any capital can often quickly improve their income (think: having inventory on their store shelves). But most micro-businesses stay micro as they have insufficient capital to get to the next level. And micro businesses equal micro incomes. Better than no income, but not the jackpot.
  • Many poor parents don’t treat their children equally. They look for early signs of who might be “smarter” and often focus their resources on a single child’s education. They do this because they undervalue a smaller amount of education and overvalue a larger amount of education. Lots of parental expectations need reseting.
  • Micro insurance for the poor is a hard sell. Despite all the interest by promoters in the space. The poor don’t value insurance services enough to be willing to pay premiums, which results in the insurance pool being skewed to the higher risk people raising premiums further … a downward cycle. And then there’s fraud. Their conclusion: micro insurance will only work with government subsidy. Sounds like farm insurance in USA and EU?
  • Most poor need structure to save. If money sits around, it gets spent on other things, so the best savers amongst the poor are those who immediately invest their profits. Lots of good examples in book of structured savings. We know in USA that having opt-out approaches to things like auto-deduct-from-paycheck 401(k) savings programs result in much more saving than opt-in programs. We’re all human and subject to temptation.
  • Building small businesses into bigger businesses is very rare. There are always publicized examples of a poor entrepreneur who defied all odds to build a big business from scratch. But these are extremely rare — especially in developing markets. Most poor don’t even have the ambition for this.
  • Most small/micro business owners don’t benefit from training. Yep, that’s right. Mostly because they don’t care that much about growing their business because growing a business is very hard and not likely to succeed. This is unwelcome news to the many NGOs who believe that this is an important intervention.
  • Non-agriculture growth is more beneficial than agriculture growth. When a factory locates near a village, it most often results in faster wage growth than agricultural productivity growth resulting from innovations like the famed Green Revolution. Why? Because higher-paid employment becomes available even to those with low skills.

Summary of authors’ learnings

  1. The poor often lack critical pieces of information and believe things that are not true.
  2. The poor bear responsibility for too many aspects of their lives.
  3. There are good reasons that some markets are missing for the poor, or that the poor face unfavorable prices in them.
  4. Poor countries are not doomed to failure because they are poor, or because they have had an unfortunate history.
  5. Expectations about what people are able or unable to do all too often end up turning into self-fulfilling prophecies.

I’ve only covered a small portion of the book’s content. I recommend that you read it for full benefit.

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5 comments

  1. Tara K. says:

    I have not read this book, but from this review it sounds very interesting and I would like to read it at some point.
    As an intern with Opportunity International (opportunity.org), a global microfinance organization, I have gained insight into how microfinance works. I think that this is a very interesting topic and it is something that I am interested in. Formal savings accounts, as described above, are important. Therefore, I am starting to understand the importance of microfinance as providing financial services as opposed to just a tool for loans.
    I would be interested to learn more about what the authors thought of insurance programs. Like they said, there is a downward spiral since only the most sick think it is worth getting insurance, so the premiums are very high which just dissuades others from purchasing insurance policies more. Opportunity works a little bit with insurance, but it is not the focus. I am curious to find out what the best way to motivate people to get insurance is. I strongly believe that people need incentives, so how would incentives be structured for reasonably healthy people to purchase insurance?

  2. Dave says:

    The authors describe the importance/value of insurance for the poor but believe that unless premiums subsidized by government that it will not be viable. Outside of the ubiqitous “loan insurance” bundled with most microcredit loans (which is really to benefit the lender not the borrower), there are very few examples of non-government subsidized insurance for BOP poor which have gone beyond pilots due to multiple factors many of which are unique to poor demographic.

  3. neeraye says:

    Thanks for this review!

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