About 865 million people live on less than one dollar a day. But rather than discuss how poverty can be alleviated in specific cases, much of the debate in the western world centres on the ideological question of the effectiveness of foreign aid.
The development economists Abhijit Banerjee and Esther Duflo in their book ‘Poor Economics’ invite the readers to rethink how poverty should be tackled by moving away from the big debate and looking at what works and what does not at the micro level by speaking to the poor.
Banerjee and Duflo begin their book by fighting everybody’s typical first instinct and temptation to say that the problem of poverty in some faraway countries is too overwhelming and too difficult to resolve. The authors say their book is an invitation to think again, to identify the problems of poverty and to address them one by one.
One problem, they say, is that, instead of focusing on the individual problems, the current debate over global poverty is dominated by the big ideas such as the ultimate causes of poverty, the effects of free markets or democracy on development and the role that foreign aid should play.
In this big debate they contrast the views of Jeffrey Sachs, director of the Earth Institute at Columbia University and an adviser to the United Nations, with those of William Easterly, a professor at New York University. Sachs believes poor countries are in a poverty trap, because they are naturally disadvantaged by poor geography, climate, diseases and infertile land and also lack the funds to tackle these problems.
Free markets will not be able to change the situation unless some initial investment is made to alleviate the endemic problems, he says. Development aid is needed to establish the basic infrastructure and human capital to take advantage of free market mechanisms.
Easterly, in turn, does not believe in the poverty trap and argues that aid does more harm than good. He sees foreign aid as a perpetuation of western colonial tendencies by ignoring the effect aid has on those receiving it. Easterly favours the power of free markets to create the right incentives for people to solve the poverty problem themselves.
A third school of thought was presented in the review of ‘Why nations fail?’ in the last edition of the Journal. The authors Acemoglu and Robinson argue that countries are poor because of their system of government, corruption and small ruling elites that do not act in the interest of the general public.
Banerjee and Duflo say the issue cannot be resolved by abstract discussion because there are many anecdotes for each of the arguments, but very little evidence confirming one or the other. As a result the book does not offer any preferred solutions to tackle poverty, but looks at the effectiveness of specific measures on a case by case basis.
Rather than deliver sweeping answers to philosophical or ideological questions, ‘Poor Economics’ provides examples of how to improve the lives of the poor by looking at poverty at the micro level and the choices and incentives that are part of the lives of the poor.
To establish the effectiveness of poverty alleviating measures, the authors employ randomised control trials, statistically comparing groups that receive a specific treatment or intervention with groups that do not. The extremely well researched book analyses dozens of RCTs, experiments, case studies and surveys from around the world and finds that many programmes do not take into account the needs of the poor, how aid affects them and alters their behaviour.
The poor in poor countries are trying to make rational decisions for their lives like people in the rest of the world but they often lack critical pieces of information or believe things that are not true and thus make bad decisions, the authors say. The poor also bear too much responsibility for their lives, as the richer people are the more right decisions are made for them. Banerjee and Duflo give the example of purifying drinking water, saying the poor often don’t have access to piped water and do not benefit from the chlorine the government puts into the water supply.
The task of purifying the water is left to the poor who do not necessarily have the means or knowledge to do it.
The poor also do not have access to many markets for goods and services or, if they do, they have to pay a higher price. For instance financial services such as loans or savings accounts or health insurance are not available to them. Microloans can offer assistance in many cases but they are not a panacea, the authors say.
Education is generally not limited by the poor parents’ desire to have their children educated, but by access to schools, in terms of fees and transport. But even if access to education is guaranteed, the content of what is taught in school does not always take into account the culture and needs of the target group.
Banerjee and Duflo’s general conclusion is therefore that any programmes that target poverty should be designed on the basis of direct interaction with the beneficiaries.
The many examples in the book can sometimes make it difficult to identify overriding themes but the excellent research by the authors gives a valuable insight into the lives of the poor and a fresh look at how the problem of global poverty can be addressed. The most valuable conclusion by the economists is that the typical ideological debate over the big economic questions is in no way a reflection of reality and helps little to solve the problem of poverty.
Poor Economics A Radical Rethinking of the Way to Fight Global Poverty (2011) by Abhijit Banerjee & Esther Duflo