Poor Economics

Author:: Abhijit Banerjee Esther Duflo Tags: economics capitalism foreign aid nonprofits#media/book

• themes:: *
• Summary::
  • “It is not easy to escape from poverty, but a sense of possibility and a little bit of well-targeted help… can sometimes have surprisingly large effects. On the other hand, misplaced expectations, the lack of faith where it is needed, and seemingly minor hurdles can be devastating. A push on the right lever can have a huge difference, but it is often difficult to know where that lever is.” x ^I-7DVc-cH
  • Book covers the questions of “Are there ways for the poor to improve their lives, and what is preventing them from being able to do these things? Is it more the cost of getting started, or is it easy to get started but harder to continue? What makes it costly? Do people sense the nature of the benefits? If not, what makes it hard for them to learn them?” x ^_1jsVDR23
• notes::
  • Foreword
    • “The urge to reduce the poor to a set of cliches has been with us for as long as there has been poverty… These ideas all have important elements of truth, but they rarely have much space for average poor women or men, with their hopes and doubts, limitations and aspirations, beliefs and confusion. If the poor appear at all, it is usually as the dramatis personae of some uplifting anecdote or tragic episode, to be admired or pitied, but not as a source of knowledge, not as people to be consulted about what they think or want to do.” viii
    • combining data and anecdotal evidence and identifying the story of the poor
    • so many normal assumptions for how our systems work go out the window when you consider the very poor (people who live on <99 cents a day)
    • “It is not easy to escape from poverty, but a sense of possibility and a little bit of well-targeted help… can sometimes have surprisingly large effects. On the other hand, misplaced expectations, the lack of faith where it is needed, and seemingly minor hurdles can be devastating. A push on the right lever can have a huge difference, but it is often difficult to know where that lever is.” x ^I-7DVc-cH
      • Switch
    • Book covers the questions of “Are there ways for the poor to improve their lives, and what is preventing them from being able to do these things? Is it more the cost of getting started, or is it easy to get started but harder to continue? What makes it costly? Do people sense the nature of the benefits? If not, what makes it hard for them to learn them?” x ^_1jsVDR23
  • I - Private Lives
    • 1 - Think Again, Again
      • everything is speculation when you look at broad answers: “There is never a shortage of compelling anecdotes, and it is always possible to find at least one to support any position.” 5
        • black swan
        • you can make data fit any conclusion
      • “As Amartya Sen] puts it, poverty is not just a lack of money; it is not having the capability to realize one’s full potential as a human being” 6
      • two sides of debate are imposing behavior vs. complete freedom (supply vs. demand side)
      • general principle: “There will be a poverty trap whenever the scope for growing income or wealth at a very fast rate is limited for those who have too little to invest, but expands dramatically for those who can invest a bit more.”
        • winners take all
      • “The lack of a grand universal answer might sound vaguely disappointing, but in fact it is exactly what a policy maker should want to know—not that there are a million ways that the poor are trapped but that there are a few key factors htat create the trap…” 13
        • can visualize world as 2 diff curves
        • focus on the concrete solution not ideals
    • 2 - A Billion Hungry People
      • assumption that “poor cannot afford to eat enough; this makes them less productive and keeps them poor.” 20
      • misinformed assumption that poor don’t have willpower: “We are often inclined to sere the world of the poor as a land of missed opportunities… The poor on the other hand, may well be more skeptical about supposed opportunities and the possibility of 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…” 38
      • “the solution is not to simply supply more food grains… The poor like subsidized grains, but… giving them more does little to persuade them to eat better, esp. since the main problem is not calories but other nutrients. It also is probably not enough just to provide the poor with more money, and even rising incomes will probably not lead to better nutrition in the short run… [because] there are too many other pressures and desires competing with food” 39
        • what about ubi? what if income goes up significantly
      • Conclusion:
        • no nutrition-based poverty trap
        • easy to assume; hard to do research for specific case
    • 3 - Low-Hanging Fruit for Better (Global) Health
      • “There was also a clear pattern in the errors: Doctors tended to underdiagnose and overmedicate.” 53
      • Systematic Q&A — one question to the next
      • “This [the fact that most diseases that prompt doctor visits are self-limiting (disappear no matter what)]naturally encourage spurious causal associations. Even if the antibiotics did nothing to cure the ailment, it is normal to attribute any improvement to them. By contrast, it is not natural to attribute causal force to inaction.” pg 60
        • false positives and true negatives
        • inaction and prevention is thankless
      • “Beliefs that are held for convenience and comfort may well be more flexible than beliefs that are held out of true conviction. We saw signs of this in Udaipur. Most people who go to the bhopa also go to the Bengali Doctor and the government hospital and do not seem to stop to think about the fact that these represent two entirely different and mutually inconsistent belief systems.” 62
        • can hold two opposing beliefs in mind
      • “Both the right and left seem to assume that action follows intention: that if people were convinced of the value of immunization, children would be immunized. This is not always true…” 64
        • not enough to be educated/aware
        • education isn’t enough to change behavior
      • Conclusion
        • Incentives are necessary not just info
        • We take so much nudging and things for granted, expect way more of poor people of things we don’t have to worry about (houses with clean water piped in and dont have to add Chlorin manually, sewage goes away on its own, trust doctors to the best)
    • 4 - Top of the Class
      • Supply wallahs’ view of problem of education: “We have to find a way to get the children into a classroom, ideally taught by a well-trained teacher,a nd the rest will take care of itself.” 73
        • but evidence says that almost everyone is going to school
        • learning is the issue
      • “Only 30 percent [of the 7-14 age group] could do second-grade mathematics. The math results are particularly stunning—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?” 75
        • wrong incentive duration not quality
      • demand wallahs’ view: “no point in supplying education unless clear demand for it”
        • “Education quality is low because parents do not care enough about it, and they don’t because they know that the actual benefits (returns to education) are low.” 76
      • PROGRESA transfer program with strings attached founded from philosophy that “linking the receipt of welfare payments to investment in human capital (health and education), could ensure that the money spent today could contribute to eradicating poverty in long as well as short term” 79
        • like employment benefits but diff condition -> school and healthcare
      • “started to ask whether an unconditional program could have same effect as a conditional transfer. A World Bank study found provocatively, that conditionality does not seem to matter at all.” 80
        • ubi
        • conditionality doesn’t matter for incentives
      • teachers had confirmation bias about poor children: “Another common reason is alienation from the local residents, who are sometimes said to be squandering their money on liquor, to have no potential for education, or simply to “behave like monkeys"" 91
        • self-fulfilling prophecy
        • “The lower-cast teachers were actually more likely to assign worse grades to lower-caste students. They must have been convinced these children could not do well.”
          • entry rites
          • overindex to prove that you are above them
          • poor preying off the poor
        • “found that low-cast children compete well against the high-caste children as long as caste is not salient” 93
          • internalization of stereotype
          • same thing with highlighting gender for math + science
        • “curriculum and teaching are designed for the elite class rather than for the regualr children who attend school…” 93
      • “At the broader, societal level, this pattern of beliefs and behavior means that most school systems are both unfair and wasteful. The children of the rich go to schools that not only teach more and teach better, but where they are treated with compassion and helped to reach their true potential. 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.” 95
        • huge waste in talent, need to instill hope in all, need to give opportunity and the hope in success
        • wasted potential
      • “The problem is that there are no straightforward ways to identify talent, unless one is willing to spend a lot of time doign what the educations system should have been doing: giving people enough chances to show what they are good at” 96
        • unconventional ways of finding hidden talent not relying on traditional education systems
        • what the hell is going on?
        • education systems are just for accreditation not about education or talent ^no3rFuUEG
      • Conclusion:
        • Differentiation as good
          • diff students need diff experiences -> let them learn at their own pace
            • this is the core idea of Montessori Education
        • demand vs. supply
        • misaligned expectations (one person can make it, no one else) becomes a self-fulfilling prophecy
        • designed only for rich leads to inefficiency and waste
    • 5 - Pak Sudarno’s Big Family

      • “People traveling by train without a ticket—a widely accepted practice among the poor until then—were handed heavy fines unless they chose sterilization.” 104

        • deadly power of quotas

      • “are they unable to control their own fertility (due to lack of access to contraception, for example), or is it a choice? And what are the reasons for those choices?” 106

        • eigenquestion

      • “Indeed, for most of human history (starting in 1 million BC), regions or countries that had more people were growing faster than the rest.” 107

        • non-diminishing returns, exponential returns
        • correlation not causation

      • “As we have had to do many times already, we need to shift perspective, leave the large question aside, and focus on the lives and choices of poor people—if we want to have any hope of making progress on this issue.” 107

      • no smoking gun that “proves larger families are bad for children” 110

        • as such hard to justify top-down family planning for protecting children
        • no smoking gun but what if it still matters and to what degree?

      • men and women have different preferences for fertility (men want larger family size and women want the freedom)

        • which preference wins out depends on the social, political, and economic environments for women and how free they are

      • The conflict between husbands and wives also implies that whereas the availability of contraceptives per se may not do very much to reduce fertility, small changes in the way in which they are made available can potentially have larger effects” 116

        • ==how matters more than what==

      • “Negotiating shifts in the social norm within traditional societies can be a very complex business.” 118

        • hard to ask certain questions because act of asking itself reveals inclinations
        • humans do so much complex calculations for social ramification

      • "For many parents, children are their economic futures: an insurance policy, a savings product, and some lottery tickets, all rolled into a convenient pint-size package" 121

        • the incentives of the parents when they look at children

      • “What all of this underscores is the violence, active and passive, subsumed within the functioning of the traditional family. This was, until fairly recently, ignored by most economists… Yet most societies rely on the goodwill of the parents to make sure that children get fed, schooled, socialized, and taken care of more generally. Given that these are the same parents who contrive to let their little girls die, how much faith should we place in their ability to get this done effectively?” 123

        • difference in treatment between boys and girls
        • assumption that wasn’t examined

      • Conclusion:

        • families are big factor and hard to categorize
        • rely on social norms to dictate behavior
        • paradox of wanting children to take care of the parents but not caring for them
  • II - Institutions
    • 6 - Barefoot Hedge-Fund Managers
      • “The point is not that construction jobs were not lost during the crisis in Mumbai–some surely were–but for most of these young men, the salient fact for the time being was the opportunity. There were still jobs to be had, jobs that paid more than twice what they could make in a day in the village. Compared to what they had endured–the routine anxiety about not getting any work at all, the seemingly interminable wait for the rains to come–life as a migrant construction worker still seemed pretty attractive.” 138
        • m… matters very little
        • “Of course the global crisis increased risk for the poor, but it added little to the overall risk they have to deal with daily, even when there is no crisis for the World Bank to worry about.”
          • relatively small diff
        • what seemed like an economic crisis was not one for the poor people (at least it didn’t seem like one)
      • ”For the poor, every year feels like being in the middle of a colossal financial crisis" 138
      • Levels of cortisol, an indicator of stress, go way down when households receive some help. Cortisol directly impairs cognitive and decision-making ability. 140-141
        • I have a literal cognitive advantage compared to poor people
      • people help each other out in hard times out of a sense of moral obligation rather than expecting to be helped in the future which is why informal networks are not equipped to deal with health shocks. thus the biggest impact things are excluded from this moral obligation because it would require a much more elaboreate social contract to carry out
        • ease of social contracts crucial part in whether they work and are efficient
      • Conclusion:
        • poor live w/ lots of risks
        • some social contracts around “incoming” each other but have weaknesses and inefficiencies
        • need gov. and private intervention to deal with insurance system in safe and effective way
    • 7 - The Men from Kabul and the Eunuchs of India: Lending to the Poor
      • study on how microfinance is not miraculous but working lead to people pushing back against the study and it only being represented negatively. trapped vby decades of overpromising, many of the leading players in the microfinance world decided that they would rather rely on the power of denial than regroup and take stock
        • delusional grandeur
      • “One way to summarize all these results is to observe that, in many ways, the focus on “zero default” that characterizes most MFIs is too stringent for many potential borrowers. In particular, there is a clear tension between the spirit of microcredit and true entrepreneurship…” 174
        • metric in conflict with goal
      • ”Opening the door to defaults, even as a way to encourage necessary risk taking, may lead to an unraveling of the social contract that allows them to keep repayment rates high and interest rates relatively low” 177
        • second order effects
      • Conclusion:
        • lending to poor is hard
        • interest rates are high bc of the high costs / defaul rates and no way to enforce collection efficienly
        • microfinance successful and important tool in fight, but not magic bullet still susceptible to lots of external factors like social image and government
        • inherent inverse relationship between low default rate and supporting bigger/riskier ventures
          • microfinance not meant for entrepreneurs
    • 8 - Saving Brick by Brick
      • “As a market vendor married to a farmer, Jennifer Auma probably lived on much less than $2 a day. Yet she had an array of finely tuned financial instruments. We see this kind of financial ingenuity time and time again” 187
        • $2 a day with thousands of dollars outstanding in loans and financial instruemnts like ROSCA
      • “Yet all the ingenuity the poor employ may simply be the symptom of the fact that they don’t have access to the more conventional and simpler alternatives. Banks don't like managing small accounts, largely because of the administrative costs of running them.… managing each account requires employees to fill out some amount of paperwork, which can quickly become too burdensome, relative to any money that the bank can hope to make from these tiny accounts.” 187
        • can you remove the admin cost?
        • bc you need accountability
      • Lucrative opportunities to save with compounding interest but they don’t use them. A confusing conflict between the sophisticated financial instrumentation and not taking advantage of clearly beneficial saving programs.
        • bc psychology of saving is bad, need to remove small things in the way
      • “Indeed, if the lack of self-control is sufficiently serious, it would be worth paying someone to force us to save. For example, we might prefer to run the risk that the mortar on our freshly built walls might get washed away by the rain so that we wouldn’t have to keep cash on hand” 196
        • wow
      • paradox of choice/freedom. want flexibiilty but also dangerous
        • “lockbox with money for health emergencies” 198
      • ”Decisions about how much should be saved are difficult decisions for anyone... [because] they require thinking about a future, carefully laying out contingencies, negotiating with family. The richer we are, the more these decisions are made for us” 199
        • decision paralysis
      • “This asymmetry between managing to stay free of debt and not managing to get out of debt shows the role of discouragement in making it harder to impose self-discipline” 202
        • free but not out
      • “The bigger point is that a little bit of hope and some reassurance and comfort can be a powerful incentive.” 204
      • Conclusion:
        • hope of path forward is crucial
        • path must be relatively clear, poor people have lots of obstacles on path
        • poor don’t save in traditional ways because economics of traditional financial services don’t work for them
          • self-awareness of vices and psychological biases like forcing themselves to save upfront by locking in decision
    • 9 - Reluctant Entrepreneurs
      • as likely to go into business as richer counterparts
      • return on investment in these businesses is very high but very low profitability at the same time
        • “What is confusing here are the two possible uses of the word return. Economists distinguish between the marginal return on a dollar and the overall return from a business. The marginal return on a dollar is the answer to the question “What would happen to your revenue net of all operating costs if you were to invest $1lessor$1 more? The overall return is the total revenue net of operating expenses (what you take home at the end of the day)” 214
          • paradox is that marginal returns can be high while overall returns ar elow
      • "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. As a result, their operators have no chance to earn a reasonable living.” 218
      • “Starting a small business was the only option they had.” 224
      • “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.” 226
        • forced entrepreneurship
      • “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.” 226
      • most common dream of poor is government worker (risk-free)
      • poor people are poor because they have lost all hope for a better future
        • ”Perhaps this idea that there is a future is what makes the difference between the poor and the middle class.” 229
        • A sense of stability may be necessary for people to be able to take the long view. It is possible that people who don’t envision substantial improvements in their future quality of life opt to stop trying and therefore end up staying where they are.” 229
        • how you feel matters a lot to actual outcomes
        • steady income opens up so many doors
          • reassurance -> the key problem here is trust
      • Conclusion:
        • lots of poor are “entrepreneurs” but not by choice
        • prefer steady jobs -> big diff to success of family bc of additional guarantees
        • empower actual people who want to be entrepreneurs to start bigger companies that provide steady jobs to others
    • 10 - Policies, Politics
      • “Economic institutions shape economic incentives, the incentives to become educated, to save and invest, to innovate and adopt new technologies and so on. Political institutions determine the ability of citizens to control politicians” 238 Acemoglu and Robinson
      • After holding elections (even if they were rigged both who was on the ballot and stuffed and not anonymous), promotes greater accountability (study on Communist party that revealed this) 244
        • process itself matters even if outcome is the same
        • process matters
      • “Power to the people but not all the power”
        • centralized authority to design a decentralized system with the interest of less advantaged people in mind
        • kind of round-about but needed for some structure?
      • problem that plagues many efforts to supposedly help the poor: “three I’s problem” ideology, ignorance, intertia 259
        • well-meaning bureaucrat who had no idea what happens on the ground
      • Concluision:
        • change starts small and can happen incrementally at the margin between sweeping change at high-level and concrete on-the-ground problems
          • small changes build up to a huge wave
        • concrete solutions are best and effective even if a lot going against it
          • process itself matters even if outcome same
        • every fix helps even if end result is overall “bad”
        • virtuous cycles can start with policies rather than big picture answer. Levels of abstraction traversal -> low level helps reveal high-level
  • In Place of a Sweeping Conclusion
    • change now -> imperfect improvement better than nothing
      • “to the extent that we know how to remedy poverty, there is no reason to tolerate the waste of lives and talent that poverty brings with it.” 268
      • 5 key lessons
        • poor often lack critical pieces of information and believe things that are not true
          • reduce burden of info/choice
        • bear responsibility for too many aspects of their lives. The richer you are, the more the “right” decisions are made for you. right decisions
          • choice overload / willpower expenditure
        • good reasons that some markets are missing for the poor or that they face unfavorable prices in them
          • economics don’t work for the poor, lots of fixed costs, money system rewards people for owning and having not for using well or any demonstrable skill
        • poor countries are not doomed to failure because they are poor or because they have had an unfortunate history
          • possible to improve governance and policy without changing the existing social and political structures
            • work with what you are given
            • lots of scope to improve in “good” institutional environments but also work to be done at the margin for bad ones
        • expectations about what people are able or unable to do all too often end up turning into self-fulfilling prophecies
          • vicious cycle biased
      • ”If we resist the kind of lazy, formulaic thinking that reduces every problem to the same set of general principles; if we listen to poor people themselves and force ourselves to understand the logic of their choices; if we accept the possibility of error and subject every idea, including the most apparently commonsensical ones, to rigorous empirical testing, then we will be able not only to construct a toolbox of effective policies but also to better understand why the poor live the way they do. Armed with this patient understanding, we can identify the poverty traps where they really are and know which tools we need to give the poor to help them get out of them.”
        • context matters, one-size-fits-all bad idea
  • “The focus on the broad INSTITUTIONS as a necessary and sufficient condition for anything good to happen is somewhat misplaced. The political constraints are real, and they make it difficult to find big solutionts to big problems. But there is considerable slack to improve institutions and policy at the margin.”
  • solutions require local context will come up