Poor Economics: Summary and Review, Part 1

Poor Economics, is a fantastic, insightful look into the complex economics surrounding poverty. It's central thesis can be summarized in a single sentence in the foreword: "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."

There are many grand sweeping theories out there that claim the solution to poverty, that foreign aid is the solution to the poverty trap, or the opposite, that left to the free market with the encouragement of democracy and liberty, poverty will resolve itself. However, this fundamental question can't be resolved abstractly; it requires evidence and close examination of the economics of the poor: how they lead their lives, make decisions, and deal with problems. Because of this, a lot of Duflo's and Banerjee's theories and suggestions are backed by randomized control trials (RTCs) that aim to test out predictions with experiments in a way similar to how medical trials are conducted. They also include interviews and draw from the experiences of the poor. Chapter by chapter, they aim to address the large problems the poor face and possible solutions.

A lot of the solutions to problems the poor face are also framed differently as issues that need to be studied at the micro level - looking at a case by case basis, from country to country, market to market - as opposed to one size fits all miracle cures. The book makes it very clear that economists don't really understand very well what causes growth and often can't predict where growth will happen, but we do know a few things that are likely to help the poor and using evidence, we can bring about a quiet revolution.

A central idea throughout the book is the idea of a "poverty trap." That the poor have an income too low to increase over time, and therefore as their future income will never increase beyond their income at the present, they'll be stuck at the same level -- overcoming this poverty trap means pushing their income (through aid or investments) beyond a critical point beyond which tomorrow's income will be larger than today's and income will increase over time. The book explores whether a poverty trap indeed does exist in many scenarios, and if so, how to escape it.

Chapter 1: Hunger

Is there enough food? Historically, poverty has often been associated with hunger -- justifying massive government programs that give food stamps and subsidies. The concept of a nutrition based poverty trap implies that if people don't get enough calories, they become weaker and less productive, reducing their wages.

However, people today (even living in extreme poverty at under 99 cents a day) seem to have enough money to get the recommended calorie intake. Moreover, when people get extra money, they tend to spend it not on extra calories, but a) on tastier food and b) other, less basic, expenses.

What do people spend on?

Interestingly, even when people get more money, they don’t necessarily spend it on higher quality good. Instead, they make purchases such as buying a TV or paying for a wedding. These aren’t just impulse purchases either, people have clearly saved money and planned out these purchases. I was a little bit suspicious as to if this last part was true. Are these purchases really well thought out, or purchases on tastier food or alcohol that they regret later on? It strongly seems that it’s the former. A number of studies testing this have all found the impact of unconditional cash transfers on alcohol or tobacco to be negative or statistically insignificant. I do still have questions about unconditional cash transfers though, which I hope to resolve in a future blog post.

Problems with quality Malnutrition is still a huge problem. Children frequently suffer from deficiencies such as anaemia (56% of women and 24% of men in India are anemic!) or iodine deficiencies and intestinal worms. These likely reduce their productivity and lifetime earnings by a lot, because the deficiencies decrease productivity and make it less likely for children to go to school. However, even though an iron-fortified fish sauce costs just $7 PPP and returns $46 PPP per year, and are often accessible, people don’t seem to want it. Why is this? Maybe employers pay everyone the same wage so productivity doesn’t correlate directly with higher wages. Another explanation is they just don’t realize the benefits of micronutrients and are suspicious when outsiders tell them to stop eating food they like, and the health gains are hard to see.

Another possibility is that the poor don’t think their lives can radically change quickly, and therefore prefer to make purchases that make their lives enjoyable now, through festivals and tuning in to India’s cricket matches.

Solutions to solving quality of food

It seems very important then, if deworming and fortified foods present such massive gains in productivity, to change the way food policy is enacted, shifting it away from maximizing calories and more towards providing nutrient rich food. Policy ideas that can be implemented:

1. Providing incentives for the poor to consume nutrient rich food and making it tastier
2. Deworming children at school for free (even a small cost can reduce deworming by a lot)
3. Providing nutrient rich meals to children in school and pregnant mothers

Chapter 2: Healthcare

Vaccines, bed nets, purifying drinking water— so many low hanging fruit that are very cheap to purchase but deliver outsized improvements to health exist. So why do so few people use them? Why do only 10% of families buy really cheap chlorine to purify water and avoid diarrhea?

Do the poor not care about health?

This seems false. The poor take large loans to fund big healthcare expenditures and spend a good percentage of their budget on it — but perhaps on the wrong things. The poor overmedicate on things like antibiotics and cures, and spend less on cheaper preventative treatments. They often go to private hospitals compared to cheaper public ones.

Is this government failure?

The poor often shun public healthcare despite it’s ability and go to private doctors — despite them often not being better qualified (only around half have medical degrees). This happens because in public hospitals, doctors and nurses are very often absent — at least private hospitals have the guarantee that they’ll show up. But the way they treat diseases is often quite bad. They give many antibiotics and injections which can spread diseases if needles are not sterilized and lead to widespread antibiotic resistance.

So why don’t the poor spend on the preventative stuff?

Lack of knowledge

The poor often don’t have high school biology - which teaches you about stuff like how vaccines work, why sterilising needles is important. Furthermore, causality is often hard to observe - most people who don’t get a vaccine won’t develop that specific disease.

In contrast, for things like antibiotics, most diseases will disappear untreated which can paint a false picture of causality. Doctors which have medicine stocks have the incentive to overmedicate.

Also, the poor are less likely to go to doctors for conditions that are genuinely life threatening such as heart pain because costs will be high — they’re more likely to go to traditional healers. Different belief systems - spiritual healers vs doctors, often clash with each other.

Time inconsistency

Psychologically, people value short term gains over long term ones, so they are unlikely to go through short term discomfort, such as buying a bed net, even at a subsidized price, or going multiple times to complete a child's immunisation.

Solutions

To solve the above issues, it’s important to make the costs to access the treatments as low as possible.

1. It’s important to make treatments free, to reduce the costs associated with getting them as much as possible
2. Providing incentives for eg: immunisation, such as 2 pounds of daal
• Interestingly, small incentives are usually enough to override beliefs such as "children should not be brought outside or else they'll catch the evil eye" because these beliefs aren't strong enough to forego 2 pounds of daal. This suggests the beliefs aren't very deeply rooted or hard to change.

This may sound patronising towards the poor, but importantly, the rich don’t avoid these issues because they’re more logical - it’s because the healthcare system already has these nudges in built so there is no cost towards accessing something like clean water, and immunisation is mandatory to go to school. No one is wise, patient or informed enough to make fully free choices about their health and it’s important that these nudges should exist for everyone.

Chapter 3: Education

Accessibility

Ah education. Just build a school in every village, new textbooks to each child, and watch as they develop the skills to ride out of poverty! If only it were that simple. But accessibility is, largely, there. There are plenty of schools -- 95% of children in India have a school within half a mile or so. There’s plenty of demand for high skilled jobs. Parents seem to be aware of the benefits. The only issue is that children don’t seem to learn.

Governments and international organisations put heavy emphasis on ensuring that kids enter school, but little on learning things. The Millennium Development Goals don't even mention anything about learning.

Teacher absenteeism rates are very high (50% of teachers are not in front of a class when they should be) and many students cannot read simple paragraphs or basic maths - skills that are essential in daily life, for reading job postings, applying for a clerical position, or managing finances with an understanding of how money compounds. The problem seems to be with incentives and perception.

According to the "demand wallahs" (people who think education can be solved if it's demand increases) education can be seen as an investment that gives greater long run returns. Parents see education as being an all or nothing type of thing - that secondary school gives far more returns (in terms of future income)/time spent than primary school, while actually, the returns per time spent are quite linear. This is bad because it means they’re far more likely to invest a lot in a single child, rather than helping all equally.

The incentives of teachers are also often misaligned. They focus more on finishing the syllabus as it's required by the board - which is often designed for and by the elite - and focus on top students. This can discourage and bore students who aren't at the top of the class, making them demotivated to learn and increasing the chances they will drop out or be absent. Casteist perceptions by teachers (interestingly, regardless of their own caste) lead to discriminating against lower caste students.

Solutions

Offering remedial teaching in summer seems quite effective - it’s not that teachers don’t want to teach, it’s that their purpose is quite different in remedial teaching - it’s about helping the weakest students learn, not focusing on the top students getting the top grades. It's also important to set the right expectations and focus on proximate goals - of learning how to read or divide - rather than focus on only the final high school diploma.

To improve attendance, both conditional and unconditional cash transfers seem to work very (equally) well. This indicates that parents don’t necessarily need the condition, just the extra money.

Technology seems useful to help students learn at their own pace, in the absence of high quality teachers that do it for them.

I would love to hear any critical feedback or discuss anything about this!

Part 2 of the summary and review of Poor Economics coming soon!