Saturday, March 03, 2012

Book: Poor Economics

Poor Economics - A Radical Rethinking of the Way to Fight Global Poverty, Ranerjee, A. V., Duflo, E., 2011, 303 pages.

It explains how the world looks from the eyes of the poor (i.e. < 1$ a day) and why many well intentioned programs to help them fail. It is especially eye opening for people like me, who have a secure life and are almost always totally ignorant about the poor. The chapter about education was fascinating because the problems are so relevant to my own country, Turkey. As someone who regularly donates via Kiva, the microfinance chapter showed me clearly what to expect from microfinance and what not to. I was embarrassed to see my half-baked ideas naked in front of me and from time to time I became quite emotional. Besides sadness, my disgust for lazy intellectuals who lecture the poor about what to do without bothering to listen to them increased ten fold.

In short, this is a must read book not only to Kiva lenders but to everyone because what happens to the poor affects all of us in some way or another. The privilege of having a secure life entails responsibility. To act responsibly, you must first understand what the real problem is. Detox your brain...

My underlinings:

[p.viii] To progress, we 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.

[p.ix] Living on 99 cents a day means you have limited access to information — newspapers, television, and books all cost money — and so you often just don't know certain facts that the rest of the world takes as given, like, for example, that vaccines can stop your child from getting measles.

[p.xi] ...why children of the poor can go to school year after year and not learn anything...

[p.4] ...the data on a couple of hundred countries in the world show that those that received more aid did not grow faster than the rest. This is often interpreted as evidence that aid does not work, but in fact, it could also mean the opposite. Perhaps the aid helped them avoid a major disaster, and things would have been much worse without it. We simply do not know; we are just speculating on a grand scale.

[p.6] ...poverty is not just a lack of money; it is not having the capability to realize one's full potential as a human being.

[p.8] The shift from broad general questions to much narrower ones has another advantage. When we learn about whether poor people are willing to pay money for bed nets, and whether they use them if they get them for free, we learn about much more than the best way to distribute bed nets: We start to understand how poor people make decisions. For example, what stands in the way of more widespread bed net adoption?

[p.31] When we compare people who have the same IQ, there is no relationship between height and earning.

[p.35] 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.

[p.37] Generally, it is clear that things that make life less boring are a priority for the poor. This may be a television, or a little bit of something special to eat—or just a cup of sugary tea.

[p.38] We are often inclined to see the world of the poor as a land of missed opportunities and to wonder why they don't put these purchases on hold and invest in what would really make their lives better. The poor, on the other hand, may well be more skeptical about supposed opportunities and the possibility of any radical change in their lives. They often behave as if they think that any change that is significant enough to be worth sacrificing for will simply take too long. This could explain why they focus on the here and now, on living their lives as pleasandy as possible, celebrating when occasion demands it.

[p.50] ...the poor spend a considerable amount of their own money on health care.

[p.54-55] In 2002-2003, the World Bank conducted a World Absenteeism Survey in Bangladesh, Ecuador, India, Indonesia, Peru, and Uganda and found that the average absentee rate of health workers (doctors and nurses) was 35 percent (it was 43 percent in India). In Udaipur, we found that these absences are also unpredictable, which makes it even harder for the poor to rely on these facilities. Private facilities offer the assurance that the doctor will be there. If he isn't, he won't get paid, whereas the absent government employee on a salary will.

[p.59] If people in the West, with all of the insights of the best scientists in the world at their disposal, find it hard to base their choices on hard evidence, how hard must it be for the poor, who have much less access to information? ...To make matters worse, learning about health care is inherently difficult not only for the poor, but for everyone.

[p.65] Our natural inclination is to postpone small costs, so that they are borne not by our today self but by our tomorrow self instead. ...Fines or incentives can push individuals to take some action that they themselves consider desirable but perpetually postpone taking.

[p.68] In other words, we [the non-poor] rarely need to draw upon our limited endowment of self-control and decisiveness, while the poor are constantly being required to do so

[p.70] ...information alone will not do the trick. This is just how things are, for the poor, as for us.

[p.74] The Millennium Development Goals do not specify that children should learn anything in school, just that they should complete a basic cycle of education.

[p.75] ...all over the Third World, little boys and girls who help their parents in their family stall or store do much more complicated calculations all the time, without the help of pen and paper. Are schools actually making them unlearn?

[p.93] Because in many developing countries, both the curriculum and the teaching are designed for the elite rather than for the regular children who attend school, attempts to improve the functioning of the schools by providing extra inputs have generally been disappointing.

[p.95] The constraints imposed by the official pedagogy and the particular focus on covering the syllabus seem to be too much of a barrier. We cannot just blame the teachers for this. Under India's new Right to Education Act, finishing the curriculum is required by law... The poor end up in schools that make it very clear quite early that they are not wanted unless they show some exceptional gifts, and they are in effect expected to suffer in silence until they drop out. [Şamil: This sounds so much like Türkiye]

[p.96] 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.

[p.97] A combination of unrealistic goals, unnecessarily pessimistic expec tations, and the wrong incentives for teachers contributes to ensure that education systems in developing countries fail their two basic tasks: giving everyone a sound basic set of skills, and identifying talent.

[p.100] This highlights what is particularly good about the computer as a learning tool: Each child is able to set his or her own pace through the program.

[p.101] If the curriculum were radically simplified, if the teachers mission were squarely defined as making everyone master every bit of it, and if children were allowed to learn it at their own pace, by repeating if necessary, the vast majority of children would get something from the years they spend in school... Recognizing that schools have to serve the students they do have, rather than the ones they perhaps would like to have, may be the first step to having a school system that gives a chance to every child.

[p.126] One problem with rules that rely on social norms for enforcement is that these norms change slowly, and therefore there is always the risk that the rules are entirely out of sync with reality, sometimes with tragic consequences.

[p.133] 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. In such lives a bad break can have disastrous consequences.

[p138] For the poor, every year feels like being in the middle of a colossal financial crisis.

[p.140] Loss of hope and the sense that there is no easy way out can make it that: much harder to have the self-control needed to try to climb back up the hill.

[p.143] Pak Sudarno had nine children to ensure at least one of them would take care of him.

[p.147] Health insurance, insurance against bad  weather, and insurance against the death of livestock, which are standard products in the lives of farmers in rich countries, are more or less absent in the developing world.

[p.149] They recounted to us, with self-deprecating humor, their . first disastrous attempt, many years ago, to provide cattle insurance: After the first lot of policyholders universally claimed to have lost their cattle, they decided that in order to claim that an animal had died, the owner would need to show the ear of the dead cow. The result was a robust market in cows' ears: Any cow that died, insured or not, would have its ear cut off and the ear would then be sold to those who had insured a cow... Some types of risk ought to be easier to insure than others. Consider weather, for example. A farmer should value a policy that pays him a fixed amount (based on the premium he paid) when the rainfall measured at the nearby weather station falls below a certain critical level. Because no one controls the weather and there is no judgment to be made about what should be done (unlike in medical care, where someone must decide which tests or treatment is needed), there is no scope for moral hazard or fraud.

[p.153] Because the insurance contract requires the household to pay in advance, to be repaid in the future at the discretion of the insurer, the household must trust the insurer completely.

[p.155] Because the fear of bad shocks leads the poor to costly mitigation strategies, subsidizing insurance could pay for itself in terms of higher incomes for the poor.

[p.163] ...the smaller the loan, the larger the monitoring and screening costs will be as a fraction of loan size, and because these costs have to be covered by the interest collected, the higher the interest rate will be... Because the main constraint on lending to the poor is the cost of gathering information about them, it makes sense that they would mostly borrow from people who already know them, such as their neighbors, their employers, the people they trade with, or one of the local moneylenders, and that is exactly what happens.

[p.167] Like the moneylender, MFIs [Micro Finance Institutions] 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... An MFI client, by contrast, typically has to repay a fixed amount every week, starting one week after the loan is given out, and, at least for first loans, everyone usually receives the same amount. Moreover, the borrower has to make the payment at the weekly meeting, which is always at a fixed time for each group. The advantage of this is that keeping track of repayments is very easy... since the transaction is so simple, the loan officer does not need to be particularly well educated or trained, which also keeps costs down. In addition, loan officers are paid on steep incentive contracts, based on recruiting new clients and making sure that everyone repays.

[p.170] ...access to microfinance is important because it gives the poor a way to map out the future in a way that was not possible for them before, and this is the first step toward a better life. Whether they are buying machines, utensils, or a television for their home, the important difference is that they are working toward a vision of a life that they want, by saving and scrounging and working extra hard when needed, rather than simply drifting along.

[p.177] ...farmer suicides were used as an argument for politicians to attack the MFls, and once again, repayments entirely stopped once the government stepped in... Microfinance gives its clients every incentive to play it safe, so it is not well suited to discover who has an appetite for risk taking.

[p.180] In India, the introduction of faster court action led to much faster loan recovery, larger loans, and lower interest rates.

[p.192] Saving at home is difficult, they explained, because there is always something that comes up that requires money (someone is sick, someone needs clothes, a guest has to be fed), and it is hard to say no.

[p.198] There are ways to get around self-control problems, but to make use of them usually requires an initial act of self-control... 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.

[p.199] So if sugary tea is the archetype of a temptation good, as it seemed to be for the women in Hyderabad, then the rich are unlikely to be troubled by it—not because they are not tempted but because they can already afford so much tea (or other substitutes for tea) that they do not have to worry about their hard-earned savings being frittered away on extra cups of tea.

[p.204] 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.

[p.214] If the businesses run by the poor are generally unprofitable, this may well explain why giving them a loan to start a new business does not lead to a drastic improvement in their welfare.

[p.218] 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.

[p.221] You can start Microsoft in a garage somewhere and keep scaling up, but to do so you need to be the kind of person who is at the absolute cutting edge of some new product. For most people, that is not really an option.The alternative is to invest enough to get a production technology that allows your business to operate on a large scale.

[p.224] Given that her business is destined to remain small and never make much money, she may decide to devote her attention and her resources to other things.

[p.225] Taken together, this evidence makes us seriously doubt the idea that the average small business owner is a natural "entrepreneur," in the way we generally understand the term, meaning someone whose business has the potential to grow and who is able to take risks, work hard, and keep trying to make it happen even in the face of multiple hardships.

[p.226] The enterprises of the poor often seem more a way to buy a job when a more conventional employment opportunity is not available than a reflection of a particular entrepreneurial urge... Perhaps the many businesses of the poor are less a testimony to their entrepreneurial spirit than a symptom of the dramatic failure of the economies in which they live to provide them with something better... Everywhere we asked, the most common dream of the poor is that their children become government workers.

[p.229] Perhaps this idea that there is a future is what makes the difference between the poor and the middle class.

[p.233] Stable and higher wages would give workers the financial resources, the mental space, and the necessary optimism both to invest in their children and save more. With those savings, and the access to easier credit that a steady job brings, the most talented among them would eventually be able to start businesses large enough to, in turn, hire other people.

[p.234] 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.

[p.235-236] Only 13 percent of the funds ever reached the schools. More than half the schools got nothing at all. Inquiries suggested that a lot of the money most likely ended up in the pockets of district officials.

[p.237] It seems that the district officials had been happy to embezzle the money when no one was watching but stopped when that became more difficult. A generalized theft of government funds was possible, it seems, mainly because no one had bothered to worry about it.
The Ugandan headmasters suggest an exciting possibility: If rural school headmasters could fight corruption, perhaps it is not necessary to wait for the overthrow of the government or the profound transformation of society before better policies can be implemented. Careful thinking and rigorous evaluations can help us design systems to keep corruption and inefficiency in check... Corruption, or the simple dereliction of duty, creates massive inefficiencies. If teachers or nurses do not come to work, no education or health policy can really be implemented. If truck drivers can pay a small bribe to drive massively overloaded trucks, billions of dollars will be wasted in building roads that will be destroyed under their weight.

[p.241] Reform, if possible at all, must be gradual, and must recognize that existing institutions are most likely there for a

[p.242] ...people who don't know how to drive may nevertheless want to drive their car. But society feels that it is better if they don't, because of what it means for the rest of us. A free market in driver's licenses obviously cannot solve this problem. The problem is that if the state is weak or corrupt, the free market will tend to naturally reemerge via bribes and corruption.

[p.245] Indian police stations are evaluated on the basis of the ber of unsolved cases, that is, the more unresolved cases, the worse the evaluation. Therefore, an easy way to get better evaluations is to register as few cases as possible.

[p.253] Given that all the candidates look more or less the same to voters (and perhaps equally bad), the voters may feel that they might as well vote on caste: There is a small chance that caste loyalty will pay off and the politician will help, and in any case, what do they have to lose?

[p.255] Part of the problem is that even when governments are well intentioned, what they are trying to do is fundamentally difficult. Governments exist to a large extent to solve problems that markets cannot solve...

[p.259] The nurses' workload was based on an ideology that wants to see nurses as dedicated social workers, designed in ignorance of the conditions on the ground, that lives on, mostly just on paper, because of inertia. Altering the rules to make the jobs doable might not be sufficient to get the nurses to come to work regularly, but it has to be a necessary first step.

[p.262] If the government starts to deliver, people will start taking politics more seriously and put pressure on the government to deliver more, rather than opting out or voting unthinkingly for their co-ethnics or taking up arms against the government.

[p.267] In retrospect, it is always possible to construct a rationale for what happened in each place. But the truth is, we are largely incapable of predicting where growth will happen, and we don't understand very well why things suddenly fire up.

[p.268] ...although we have no magic bullets to eradicate poverty, no one-shot cure-all, we do know a number of things about how to improve the lives of the poor.

[p.272] When a situation starts to improve, the improvement itself affects beliefs and behavior. This is one more reason one should not necessarily be afraid of handing things out (including cash) when needed to get a virtuous cycle started.

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