Tuesday, September 4, 2012

Book Review - "Poor Economics" by A. Banerjee and E. Duflo

What is the root cause of poverty? Is foreign aid beneficial to countries? Often, we get stuck on these 'big' questions instead of looking more closely at particular situations and learning from them. The main argument of this book is that we can not generalize solutions to problems connected with poverty. In fact, solutions that might work in some situations might not work in others. Thus, the reader is presented with a multi-perspective, highly contextualized framework through which to analyse the challenges that developing countries are faced with in tackling poverty.

The concept of a 'poverty trap' is debated in the beginning of the book. Believers in such a trap represent it economically through an S-shaped curve, while those who see it as a temporary phenomenon represent poverty through an L-shaped curve. There is no correct approach, but a certain methodology is described, which entails two features: One, there is now high quality data available from poor countries that was not previously available that is used to better understand reality. Two, studies can be done through Randomized Control Trials (RCTs)  in which researchers collaborate with local partners to conduct large scale experiments in which different versions of the same program are assigned to individuals/communities. The results analyse the effects of the treatment. Through RCTs, theories can be tested in multiple regions, over multiple trials. The authors founded the Poverty Action Lab in 2003 to use this methodology ; In 2010, 240 experiments were conducted over 40 countries using RCTs. The arguments propagated by the authors in this book are based on this methodology.

Nutrition is one of the key areas highlighted in the beginning of the book. Through RCTs it has been found that the poor are eating less even though incomes are generally higher than they used to be. The poor are also eating less nutritious and more expensive food. The epistemic premise of this trend is that as an individual constrained by limited resources, one would prefer small pleasures like taste over calorie-based fulfilment. Another influencing factor is that some events are more important than eating nutritious food, such as weddings in India and funerals in South Africa (p. 37).

Health for the poor is discussed as being central to their physical, emotional, and economical development. The poor seemingly neglect their health due to a phenomenon termed “time inconsistency”, which claims that the present is viewed differently from the future, where the former is driven by impulse and desire for comfort, and in which small costs (for example, standing in line for vaccines) are postponed.

The issue of education is also brought to the forefront and problematized as psychologically discriminating for socio-economically disadvantaged students who are treated as less deserving or less capable in school. RCTs show that the quality of education can lead to a change in this mindset. In order for the quality to improve, education should focus on strengthening the basics and supplementing teaching with technology as part of the pedagogical process. The public charter school system of the Knowledge is Power Programme (KIPP) in America and India's non-profit Pratham are cited as examples of this model's success.

The second half of the book is dedicated to understanding macro issues. Historically, the poor have developed their own methods of saving money because banks do not loan them small amounts of money. One reason for this is that credit information about the borrowers is difficult to obtain in rural areas. In light of this obstacle to credit, microfinance institutions (MFIs) have provided a way out. Through the system of loaning small amounts of money, MFIs depend on networks of its borrowers to obtain credit information about other borrowers. Microfinance is often touted as a “miracle drug” to the ailment of poverty. Since they are financially sustainable and the borrowers keep coming back, these institutions are perceived as indicators of success. However, the results of RCTs show that MFIs do not result in social empowerment for the communities in question. For example, the role of females in household decision-making did not increase due to their participation in Self-Help Groups.

The good news regarding MFIs is that they have contributed to financial empowerment of communities. However, this monetary gain is limited for the poor. When a poor individual becomes an entrepreneur, he/she does so not because of a particular entrepreneurial spirit, but because employment options are greatly limited. A small business owner, say a shopkeeper, can suffer from “hollow shelf” syndrome where the business is not profitable due to lack of inventory. In the case that inventory is present, the business grows only up to a certain upper limit, after which a greater capital investment is needed. However, banks are not willing to loan large amounts to small business owners, because of the high administrative costs involved. MFIs have filled the gap in providing a channel towards financial independence for small business owners, but the challenge remains to provide a sound support system for medium-sized business owners. Their capital requirements are greater than the provisions of MFIs but too small for banks to assist them. This is proposed as the next challenge in the field of microfinance.

The political economy of poverty finds space in the later chapters of the book, by propagating the primacy of political institutions in an economy. Daron Acemoglu, author of Why Nations Fail, is of the view that political institutions need to be fixed in order for development of any country to become a reality. Institutions can be conceptualized as economic (tax systems) or political (autocracy, democracy). Acemoglu claims that good economic institutions are mechanisms that prevent the leaders of countries from using the economy in their vested interest. The “iron law of oligarchy” exemplifies a scenario when private use of economic institutions takes place via an authoritarian political institution. Colonial systems that used nations for their private economic interests are being carried forward in post-colonial times through politico-economic policies. The “long shadow of political institutions in India” is indicated by the ineffective land reforms that have maintained the status quo between the landlords and the landless. Furthermore, the Police Act of 1861 remains an unchanged law in its colonial entirety. Reducing the deeply embedded practice of corruption is another challenging social issue that is addressed, not only as important in India, but in all developing countries. Electoral reforms are proposed as a possible solution, which have been implemented with some success in Indonesia, Brazil, Mexico, Vietnam, Saudi Arabia, and Yemen. While imperfect, these reforms have the potential to change local governance for the better.

Additionally, local systems can be worked upon with considerable success without targeting the larger political and economic institutions. Benjamin Olken found that “the threat of audits reduced the theft of wages and materials by one-third, compared to the villages where audits were not conducted.” (p 245) Enhancing the functioning of local institutions is also emphasized as a tool for empowerment. India’s Gram Panchayats, for example, consist of reservations for women and other minority leaders. The common assumption is that due to high levels of patriarchy the husbands control the women’s decisions. These behind-the-scenes males are referred to as pradhanpatis. A survey done in West Bengal assessed this quota system and found that women Sarpanches invested more of the fixed budget on infrastructure desired by women themselves. A similar result was found in Rajasthan, which is considered more of a patriarchal state than West Bengal. This runs contrary to the thinking that women are more shy and have lower literacy rates, therefore they have less control as Sarpanch. However, this research suggests otherwise, that a quiet revolution is taking place.

Discussing the relationship between policies and politics, the authors question what is the lesser of the two ‘evils’: good policies in poor political environments or bad policies in healthy political environments. The former was seen in Suharto’s dictatorial regime, where the goal of education expansion led to the training of 1 million village volunteers. This may have contributed to the halving of malnutrition between 1973-1993. The point is that politics does not necessarily have to supersede policies, and that the latter can exist and create positive change irrespective of the form of governance. Further probing into the issue raises the question: is there a hierarchy between policy and politics? At the very least, good politics can act as precursors to good policies, functioning as change agents in transforming people’s expectations of the government. The authors suggest improving the broad category of institutions, and in order for this to happen the needs and obstacles facing all the stakeholders need to be deeply studied and understood.

The book ends with the same question it asks in the beginning – knowing what we now know, what can be done to improve the condition of the poor? Five big ideas emerge:
  1. Small pieces of information can make a large impact. Hence, information campaigns can be effective but only if they communicate a message people do not already know, and if they come from a source that is seen as credible.
  2. The poor, unlike the rich, have to assume more responsibility for the decisions they make. “The richer you are, the more ‘right’ decisions are made for you” (p 269). The focus of development organizations and policy makers should be to make it easier for the poor to do the ‘right’ thing.
  3.  The poor have a difficult time managing their meagre earnings due to lack of access to banks, negative interest rates, and undeveloped insurance markets. The latter can be made more accessible to the poor through technological innovations such as electronic money transfers, microcredit, and the Unique Identification system developed by Nandan Nilekani.
  4. Policy creation and implementation can be done effectively without depending on drastic changes in political and social structures. Through strategies of monitoring and holding the respective authorities accountable, etc “small revolutions” are possible. While slow-acting, these changes have the potential to be long-lasting.
  5. Changing expectations is critical to realizing one’s full potential. This is true for not only the poor, but for all those who work with the poor, from educators to policy makers to social workers. As the authors articulate “success feeds on itself” (p 272).

While fairly thorough in its addressal of social issues in the developing world, the book can be looked at critically on a few counts. Firstly, it fails to provide a persuasive alternative to the current developmental paradigm. Without an alternative, the increasing inequality, particularly in the Indian context, is not going to change. Secondly, pockets of solutions are provided and examples are given of successes in numerous countries. On the one hand, the authors state that there is no one-size-fits-all solution, while on the other hand, international examples are cited as lessons to apply in the Indian scenario. This seeming contradiction leaves the reader somewhat unclear about the larger objective of the book. Thirdly, the middle class is hardly discussed in relation to the poor, while the rich are referred to on a regular basis throughout the book. Considering that the rich constitute a much smaller proportion of India’s population than the growing middle class, it could be a fruitful exercise to analyse the middle-class’ relationship with the poor and how that can be ameliorated.

Nevertheless, the authors are to be commended for delving into the social, political, economic, and historic contexts of each case discussed. Each example appears to be fully researched, complete with references and accompanied by the views of a diverse group of scholars. Additionally, the book is supplemented by a resource-filled website, complete with all the studies done by the researchers through RCTs. All the case studies referred to in the book are available on the website along with the contact information of each researcher, allowing for a much richer interaction between the reader and the content of the book. While it leaves many questions unanswered, Poor Economics leaves one with a sense of hope and optimism regarding the future of the poor in the developing world.

- Pragya Bhagat