5 key insights from Poor Economics

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Abhijit V. Banerjee and Esther Duflo’s Poor Economics is a bible of sorts- to understand poverty, the psyche, and motivations of the extremely poor, and the power of Randomized Control Trials (RCTs) to assess anti-poverty programs. Their overall approach is Bottom of the Pyramid meets Freakonomics – ‘leave the large questions aside and focus on the lives and choices of poor people’ While traditional debates around poverty focus on big questions, their book breaks down and offers solutions to problems, one at a time. 

They believe that to be able to understand the ground-reality of the poor “[W]e have to abandon the habit of reducing the poor to cartoon characters and take the time to really understand their lives, in all their complexity and richness.” Drawing on a very rich body of evidence that includes hundreds of randomized controlled trials (RCTs) pioneered at the Abdul Latif Jameel Poverty Action Lab (J-PAL), Banerjee and Duflo explain to us why the poor need to borrow in order to save, why their children go to school but often don’t learn, why they miss out on free life-saving immunizations but pay for drugs that they do not need and why they start many businesses but do not grow any of them. Here are 5 key insights from their book:

  1. The poor often lack critical pieces of information and believe things that are not true. They are unsure about the benefits of immunizing children; they think there is little value in what is learned during the first few years of education; they don’t know how much fertilizer they need to use; they don’t know which is the easiest way to get infected with HIV; they don’t know what their politicians do when in office. When their firmly held beliefs turn out to be incorrect, they end up making the wrong decision, sometimes with drastic consequences.
  2. The poor bear responsibility for too many aspects of their lives. The richer you are, the more the “right” decisions are made for you. For example, the poor have no piped water, and therefore do not benefit from the chlorine that the city government puts into the water supply. If they want clean drinking water, they have to purify it themselves.
  3. There are good reasons that some markets are missing for the poor, or that the poor face unfavourable prices in them. 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 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. In some cases, technological or institutional innovation may allow a market to develop where it was missing, but in others, governments should step in.
  4. Poor countries are not doomed to failure because they are poor, or because they have had an unfortunate history. It is true that things often do not work in these countries, but failures have 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 Is: ignorance, ideology, and inertia. It is possible to improve governance and policy without changing the existing social and political structures.
  5. Expectations about what people are able or unable to do all too often end up turning into self-fulfilling prophecies. Changing expectations is not easy, but it is not impossible. For example, 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. Most importantly, the role of expectations means that success often feeds on itself. When a situation starts to improve, the improvement itself affects beliefs and behavior.

Banerjee and Duflo’s message is that even if it takes time, careful thinking, and persistence, the battle against poverty can be won. 

Read Insights from Poor Economics here

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