Policy for the poor

“Poor Economics”, by Abhijit Banerjee and Esther Duflo, is a book about the economics of poverty. The tagline, at least on the paperback version, is the enticing “Barefoot Hedge-fund Managers, DIY Doctors and the Surprising Truth about Life on Less Than $1 a Day”.

I may as well tell you now that this book doesn’t actually feature barefoot hedge-fund managers in the commonly used sense of the term “hedge-fund manager”. I say this not from a malicious desire to spoil the surprise, but from a kind-hearted wish to save you from crushing disappointment. No doubt, there are some among you who were hoping for a tale of arrogant riches to rags. Even I was guiltily preparing myself for a delicious bout of Schadenfreude, washed down by a nice cup of tea. But if you want to read about financiers being taken down a few pegs, this isn’t the book for you.

“Barefoot hedge-fund managers” turn out to be a description of many of the very poor – whom the author argues live with huge amounts of risk – having to raise all the capital for their businesses, and being liable for 100% of the losses. 

And some of the businesses are fascinating – like the women in Bombay who collect wet sand from the beach, lay it out on the roads and collect it once it is dry for sale to local families for washing dishes. But the real lesson in “Poor Economics” is that all the factors that make it hard for people in rich developed countries to make good decisions are magnified for the poor: this is where behavioural and development economics meet.

For instance, the poor are more likely to be unaware of basic information about immunisation. At the same time, as the book points out, the richer you are, the more the “right” decisions are made for you: the poor don’t have retirement plans or already purified water.

Many policies fail because they are flawed in their design, such as health workers who are given job descriptions that are unachievable in practice. But this also means that relatively small changes and ideas can have a large effect, even in societies where lack of trust and corruption seem impossible to overcome. For example, one study in Uganda found that 13% of funds allocated to school by central government actually made it to those schools. The resulting uproar when the results of the study were released prompted headmasters to issue formal complaints, and by 2001 schools were getting 80% of what they were entitled to.

“Poor Economics” may be about the economics of poverty, but it is actually application of a much broader revolution in economics in the last few years. Understanding and testing different individuals’ motives, aspirations and needs is fundamental to good policy-making. You can’t achieve macro-economic outcomes without understanding what’s going on at the micro-level. It’s starting to feel like a cliche, but it really is all about policy design.

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