Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty [Tapa dura]

Although I am an economist by training and have studied economics for many years, I admit that in reading this book I have learned a great deal about the complexities of both the theory and the practice of anti-poverty policies in developing nations.

Why are people so interested in the issue of global poverty? Well, to list a few of the many aspects about poverty addressed in this book, every year about 9 million children die before they reach their fifth birthday, usually in the poorest countries. In the developed world, a woman has a one-in-5,000 chance of dying while giving birth, but in many sub-Saharan Africa countries the odds are one-in-30. There are at least 25 countries in the world with life expectancies of 55 years or less. If these sorts of situations capture your mind and lead it to ask what can be done, one of the first things you might consider doing is learning more about the conditions and circumstances that lead to these revealing statistics. That's where this book comes in.

So, is this book one you should buy? Presumably that's why you are reading this. Here are a few observations that may help you decide whether to buy this fine book: In the authors' own words, the book "is ultimately about what the lives and choices of the poor tell us about how to fight global poverty." That may not sound too sexy or exciting, but if you have an interest in facts, theories and observations about global poverty, then this is your book. On the other hand, if what you seek are simple theories and, especially, strong advocacy of a few preferred solutions, then you are probably barking up the wrong tree. Don't get me wrong; I like the book just as it is. There is so much information to consider and so many approaches to fighting poverty to contemplate. Just don't expect the authors to take a lot of your time championing pet solutions. Because the problem of poverty is itself rather complex, so are some of its solutions. Jack Webb (the "just the facts, ma'am" star of the "Dragnet" series) might have loved this fact-filled book. At least, he'd love it if he was an economist or someone interested in learning (a lot) about global poverty. Yet there's much more to the book that mere facts. Primarily, there is a pursuit of understanding the circumstances associated with poverty and the efforts to overcome it. That's where this book excels.

It's certainly early to judge, but this book could prove to be a classic in its field. It successfully challenges and encourages the reader to think in new ways about anti-poverty initiatives. Although its authors are probably unknown to the general public, they are well regarded in economics. They both have received a number of prestigious awards, including the John Bates Clark Medal (to Esther Duflo) for the best American economist under age 40. Previous winners of this award include a Who's Who of economists, such as Paul Samuelson, Milton Friedman, James Tobin, Kenneth Arrow, Gary Becker, Martin Feldstein, Lawrence Summers and Steven Levitt.

In short, this is a substantial book with a great deal of important content. There are some graphs, but less than you might expect from two economists. Importantly, it is readable and understandable by the interested lay reader. Frankly, I think it's a book you won't forget. If the issues of global poverty and economic development interest you, this is a book well worth your careful consideration.

The authors identify three major approaches to dealing with world poverty, suggest that whatever their virtues and faults, there is a very piecemeal and pragmatic approach through which significant gains can be made without addressing the systemic obstacles identified by the three approaches. Their analysis is brilliant, focused, rooted in first-rate data sets, yet rich in social detail and anecdotal vignettes. I believe there are probably right, and their approach deserves to be widely studied an evaluated by policy makers in the advanced and developing countries.

The dominant school of thought is probably the supply-side theory, most visibly represented by Jeffrey Sachs (the authors call him a "supply wallah"). According to this theory, the poor are poor because they lack money and resources, and there is a "poverty trap" such that investment in productive technologies must be very large in order to have a positive and sustainable effect. Because poor individuals, and even poor countries, lack the capacity to finance such investments, they are trapped in a low-level economic equilibrium. For this reason, Sachs and the supply theorists advise that the rich countries transfer a large lump-sum amount of money to a poor country, so it can get over the poverty-trap hump.

A second salient school of thought is the demand-side theory, represented by William Easterly and many others. Demand-siders (the authors call them "demand wallahs") believes that the poor are poor because they do not want to undertake what would be necessary to move out of poverty and there is no poverty trap. Thus, if you throw money and resources to the poor, they consume it immediately rather than using it for long-term betterment.

The third school of thought is the corruption school, represented by Acemoglu and Robinson, as expounded in the book Why Nations Fail. According to this theory, countries remain poor because their governments are predatory, exploiting the citizenry by refusing to make investments in productive infrastructure, by direction all profits to cronies, and by permitting rampant corruption that renders creative entrepreneurship unprofitable. According to this school, to which I admit to being very favorable, the supply wallahs are wrong because the resources throw into the system will be appropriate by the rich and powerful, and the demand wallahs are wrong because the poor are actively maintained by the oligarchy in their position of servitude.

The authors are very insightful and balanced in presenting the views of these three schools and the evidence that supports these various positions. They also clearly explain their mutual critiques. For instance, the supply wallahs claim that states are predatory and corruption is rampant only because the country is so poor, and the demand wallahs claim that when the people want to move out of poverty, they will reform their governments. I find these defenses of supply and demand wallahs rather tendentious, leaving the corruptions school as the overall most plausible school.

I think it is fair to say that Banerjee and Duflo have little sympathy for demand and supply wallahs, but considerable respect for the corruption theory. Their own position is that there are virtually always ways to productively intervene to pull a significant fraction of people out of poverty. The authors, who have collected huge amounts of data and interviewed many poor people from around the world, make the following argument.

Most important, the poor in a poor country have about the same array of preferences and capacities as that of the human population as a whole, and humans are substantively rational in making decisions that affect their lives. However, the poor have a lot fewer resources than the well-off, they lack information and skills provided to the well-off, and lack access to such public goods as clean water and consumables subject to food and drug regulations.

The poor are therefore extremely heterogeneous. Microfinance organizations like the Grameen Bank therefore provide a general path to affluences, simply because only a fraction of the population has the will and ability to be successful entrepreneurs. On the other hand, entrepreneurs often fail several times before finally becoming successful, so the authors advise an expanded microfinance industry that is more tolerant of the sorts of behaviors that may involve short-term losses, but lead to long-run successes. The authors conclude that we must consider microfinance policies as extremely successful and worthy of following, even though it is not panacea for the abolition of poverty.

Because the poor lack access to social services freely available to the non-poor, the authors advocate such measures as providing clean water to poor villages and adding nutrients, such as iron, to staple foods. This, they argue, is not charity but simply the extension to poor of services already supplied to the rest of society.

Concerning education, the authors believe that poor parents are usually very eager to have their children educated, although they may lack the means of enrolling their children in schools or providing for their transportation to and from school. However, too often the content of schooling is determined by what is good for the more affluent classes, so poor children are led voluntarily to quit school. The authors advise that the content of education take into account the preferences and culture of the target population.

I cannot do justice to the beauty and intricacy of the argument developed in this book. The authors' main point is that we must look closely at the details of the lives of the poor in order to develop policies to help people to pull themselves out of poverty. This is neither demand or supply wallah-ism, and as they repeatedly stress, real progress can be made even in a society whose government provides a poor environment for economic development.

Poor Economics is an excellent survey of empirical data on the world's most impoverished areas. The amount of work put into the studies (the authors have extensive work in their own control studies) is astounding, and well worth a look for anyone interested in the data.

The general picture one hopes when reading a book like this is a "silver bullet" that will solve the problems of every kind of poor people around the world. As the authors are quite upfront in saying, this is not realistic. Economies are complex and work in strange ways. Anyone familiar with systems dynamics will recognize the traps that "silver bullet" theories get into: one quick fix leads to some improvement, but causes side effects that might make matters worse in the long run.

This book examines how the predominant theories on poverty have played out. They cite Jeffrey Sachs' The End of Poverty, in which the idea is that aid will bring an end to a "poverty trap". And then regard William Easterly's The White Man's Burden, in which the idea is that aid tends to make people dependent on it and thus makes them less capable. With these plausible arguments as a backdrop, they delve into the examples and case studies to identify instances where one or both or neither are true.

Ultimately, the argument that is made is for a comprehensive understanding of the way poverty works in order to apply proper levels and composition of aid. Though, this isn't a grand theoretical survey of the way economies and systems in general function. I would recommend something like Juggernaut: Why the System Crushes the Only People Who Can Save It for that. It is still a penetrating survey of poverty and offers the reader the tools to do something about it.