22 Mar 2015

My Review of The Book; Poor Economics

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Today, I come up a little late with the book review I promised to write. Poor Economics has been an eye-opener on how the poor think and why they act the way they do; what guides their decision-making on food, health, education, savings and loans. Please read along.

Poor Economics, published 2011
The authors are MIT Economics professors- Abhijit Banerjee; a Ford Foundation professor of international Economics, and Esther Duflo, Abdul Latif Jameel professor of Poverty alleviation and development Economics. They are the founders of the Abdul Latif Jameel Poverty Action Lab (J-PAL) where they have been working together since 2003, to study and reduce poverty by ensuring that policy is based on scientific evidence.

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Foreword
I shared with you an excerpt from the foreword in the other article.


Think Again, Again
·         Every year 9 million children die before their 5th birthday
·         A woman in sub-Saharan Africa has a ‘one in 30’ chance of dying while giving birth (in the developed world, it is ‘one in 5,600’)
·         There are at least 25 countries, most of them in Sub-Saharan Africa, where the average life expectancy is about 55 years. (It is actually 52 years in Nigeria as at the latest statistics.)
·         In India alone, more than 50 million school-going children cannot read a very simple text.

The authors start by giving these damning global facts about poverty and then stating that their goal with the book is to persuade you that though the problem of world poverty seem too big and seemingly intractable, we shouldn’t forget about or give in to it.

They illustrate that with a University of Pennsylvannia experiment for donation (which incidentally was also mentioned by Blake Mycoskie, the founder and chief shoe giver of TOMS, in his book "Start Something That Matters." Great book to read), in which students donated more money to support a charity cause where the situation/problem is personalised with a young girl’s picture and name-Rokia, as against a situation where a global statistics about world poverty is given as a call to action.

They say, “The students, it seems, were more willing to take responsibility for helping Rokia, but when faced with the scale of the global problem, they felt discouraged.

So they want us to think again, again: to turn from the feeling that the fight against poverty is too overwhelming, and to start to think of the challenge as a set of concrete that, once identified and understood, can be solved one at a time.

They also mention what economists like Jeffrey Sachs call, A Poverty Trap- a state where poor people/countries are so poor (because of factors beyond their control such as malaria, landlockedness, corruption, etc) that they cannot afford the investments that will liberate them from poverty,without foreign aid or ‘outside help.’ 
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PART I: Private lives
Chapter 2: A billion hungry people?
A poor person is defined as someone without enough to eat. In Chapter two, they talk about and challenge the notion of a Nutrition-based poverty trap. Why don’t the poor have enough to eat in spite of the fact that present FAO statistics in the world today show that there is enough food to eradicate hunger?

When the poor don’t feed well, it has far-reaching effects, confers disadvantages such as their children have stunted growth (the average American child looks healthier and bigger than a Nigerian or Indian of the same age), their children earn less than their well-fed colleagues later in life, and of course, they are more susceptible to diseases and death. Yet, the poor don’t necessarily spend more on nutritious food when their income increases. Instead, they organise bigger parties/funerals, buy a big TV/entertainment, and generally get cheaper luxuries. Is poverty a mindset?

Chapter 3: Low-hanging fruit for better (global) health?
How do the poor spend on health? Are they in a health trap?
Jeffrey Sachs believes the poor are stuck in a health-based poverty trap. Using Malaria, he quotes statistics that prove that countries where a large percentage of the population are exposed to malaria are poorer. Therefore, if malaria is eradicated, there will be a reduction in long term poverty. By giving items such as Insecticide-Treated Nets (ITNs) for free or at subsidized prices poverty will reduce as a result of the increased income (hitherto lost due to sick leave, absence from school, and in buying drugs or visiting hospital to treat malaria).

Evidence shows that the poor prefer to treat diseases with more money when it is far cheaper and easier to simply prevent it, and as such, they need to be ‘helped’- convinced or even nudged with incentives like food and money hand-outs, to do the right thing such as immunising their children, visiting a government health centre, and so on. The world shouldn’t just expect that giving them evidence-based health information is enough to encourage them to do the right thing.

Chapter 4: Top of the class
Does education liberate from poverty? Yes. So why is there a failure of schools in developing countries to attract children? Why does it seem that many poor children abhor schooling even with the demand for graduates, even when they are not sick, and with parents no longer resisting to educate their children unlike before? The authors say it is because there is a lack of emphasis on learning- not just education, but quality education. And this is evidenced by poor national results.
Teachers don’t go to school or teach classes (even when they are in school).

The authors talk about supply and demand wallahs - meaning some people (supply wallahs) believe the more you supply education, the more people will be educated, while others (demand wallahs) believe that the demand for education should drive its supply.

The key thing I got from this chapter is on page 89 under ‘Elitist school systems’; it explains how the leadership disconnect in developing countries has resulted in and perpetuated poverty.
“The curriculum and organisation of schools often date back to a colonial past, when schools were meant to train local elite to be the effective allies of the colonial state, and the goal was to maximise the distance between them and the rest of the populace.” Today, we still see the rich trying in every way to keep that distance sacrosanct, including embezzling funds meant for public good. And even schools/universities built by churches in Nigeria will admit children of the rich and famous and not bother if their own members can afford the schools their monies built.

Factors that make education ineffective among the poor include racial/income-class discrimination, not adapting the educational system/curriculum to accommodate (-run at the pace of even) the weakest students. Schools should serve the children they have rather than looking for the ‘ideal students’, and would help make the education system better for the poor.

Chapter 5: Pak Sudarnos big family
Does a large family necessarily confer poverty? It is true that richer countries have lower population growth, and some experts argue that the higher the population of a country, the more demand on fixed or limited resources, hence the poorer. But current scientific evidence says to the contrary.

If a large family size does not always affect the children, then who suffers for it? Many times, it is the mother. She saves, compromises, and denies herself many pleasures including a better education, in order to help her children survive.

The demand and supply wallahs have their family planning theories too as regards fertility/population explosion control. Supply wallahs, such as Jeffrey Sachs, argue that there should be easy access to and supply of contraception. The demand wallahs say that those who truly want to plan their families will find their way to family planning clinics regardless of supply, and those who don’t want it won’t take it, in spite of. Evidence supports the demand wallahs as they win 2:0. [I can also confirm this as true because I observed this as a medical doctor serving in a rural area in Kano state, last year. The family planning services were readily available yet villagers refused them, and even the Northern healthcare workers didn’t encourage them enough because they didn’t really believe it was needed even though the average mother was para 6 (has 6 children.)]

Family size decisions today have a lot to do with the societal prevailing norm, how much influence the wife has in the marriage, religious inclination and economic/financial wherewithal of the couple, including their access to evidence-based information, and their formal education. The authors conclude with, “The more effective social safety nets (such as health insurance or old age pensions) or even the kind of financial development that enables people to profitably save for retirement could lead to a substantial reduction in fertility and perhaps also less discrimination against girls.”

PART II: Institutions
Chapter 6: Barefoot Hedge-fund managers
“Risk is a central fact of life for the poor, who often run small businesses or farms or work as casual labourers, with no assurance of regular employment.”

The authors highlight some of the risks the poor face daily including food, income, political violence, crime and health. They then try to hedge against these risks like a hedge-fund manager would do by ‘building a diversified portfolio’. They do this by diversifying their activities thereby working more.

The authors also list other ways the poor hedge including engaging in many occupations, holding multiple plots of land in different parts of the village, temporary migration, conservatively managing their businesses, using marriage, giving birth to many children or becoming a share tenant (giving the landlord a share of the crops in exchange for capital investment).

However, the poor reject insurance in spite of the fact that they need it more. The authors give reasons why this is so but opine that micro-insurance is still a viable opportunity to be looked into by entrepreneurs (insurance companies), or by the government using public funds.

Chapter 7: The men from Kabul and the Eunuchs of India: The not (not so) simple economics of lending to the poor
The rich take loans. The poor take loans. But the poor pay back so much in interest rates that even credit card rates pale in comparison. The power of compound interest works against the poor when they take loans, mostly from money lenders, and don’t/can’t pay back on time. They pay as much as 4.69% per day. “So the equivalent of a $5 loan (about N1000) if it goes unpaid for a year, leaves a debt of nearly $100 million (about N20 billion naira)”!

But by that same power of compound interest, a small decrease in the interest rates (by the sellers saving a little more everyday) could have transform the clients lives, yet they had to wait for Muhammad Yunus and Padjama Reddy.

While there are opportunities for individuals in developed nations to invest in these poor countries (by investing in their loans), it is not so simple to lend to the poor because, among other things, they can default on loans and it is difficult to gather information on them. All these drive up the interest rates.

But the authors make a case for microcredit finance, though highlighting the limitations. I like this quote from the book, “But we are far from seeing the equivalent of the microfinance revolution for small and medium firms; nobody has yet figured out how to do it profitably on a large scale.” [My idea Credicoins seeks to do it on a large African scale though.]

Chapter 8: Saving brick by brick
Some of the poor in Morocco sometimes save by putting their money into a building project and laying the bricks as money come in, instead of saving up for a lump sum. [I also see this in Nigeria].

If the poor still save brick by brick, it must be that they have no better way to save. In order to save, they form savings groups/clubs, cooperative societies, and so on. And of course, many join a lot of such savings groups.

The authors see microsavings as the next microfinance revolution. They go on to give examples of how microsaving can help businessmen/women borrowers get off debt by just denying themselves a few cups of tea every other day. Self control sometimes makes people not save at all, or continue to save if they start. The poor stay poor because they do not save enough.

And if there is anything this blog teaches, it is that you must save enough, but start by saving something first, even if it isn’t enough at first.

Chapter 9: Reluctant Entrepreneurs
The poor are great entrepreneurs, and that isn’t far-fetched. Poverty will make a married man with responsibilities think up ideas because he has to, else his family will go hungry. Muhammad Yunus and the whole of the microfinance movement believe that everyone has a shot at being successful entrepreneur. But the two reasons why the poor are more likely to find amazing opportunities are that their ideas are probably fresher- less likely to have been tried, and the market has so far ignored the bottom of the pyramid.

But the poor operate tiny businesses, and even when they get financing from microcredit facilities, they rarely generate enough profit to sustain the business, or get more funds to expand operations.

If the poor have jobs, they will engage less in business. As we have seen even in Nigeria, many youths have to think up business ideas because there are too few jobs.

See the powerful way they end the chapter, “Microcredit and other ways to help tiny businesses still have an important role to play in the lives of the poor...but we are kidding ourselves if we think that they can pave the way for a mass exit from poverty.”

Chapter 10: Policies, politics
Government policies do of course affect the poor and cause poverty many times, especially when the government is a corrupt one. Jeffrey Sachs sees corruption as a poverty trap: Poverty causes corruption, and corruption causes poverty. His suggestion is to break the trap by focusing on making people in developing countries less poor: Aid should be given for specific goals (such as malaria control, food production, water, and so on) that can be easily monitored. Raising living standards, Sachs argues, would empower civil society and governments to maintain the rule of law.

The authors note, “One problem is that rulers, who have the power to shape economic institutions, do not necessarily find it in their interest to allow their citizens to thrive and prosper.” But in spite of the fact that the governments of many poor countries are corrupt, you can’t impose freedom on those countries from outside, as that won’t be freedom again. Corruption has to be curbed but by putting measures in place, and giving power to the people through true democracy based on transparency -helping the people make informed choices.

Many government policies do not favour the poor and many western scholars and policy makers are extremely pessimistic about political institutions in the developing world. They see those governments as the reason why their countries are poor. Sachs believe that poor institutions are a disease of poor countries so that even in such bad environments, poverty can still be addressed successfully, though in a limited way, by focusing on concrete, measurable programs; and making people richer and more educated can start a virtuous circle where good institutions will emerge.

The authors end by saying that careful understanding of the motivations of everyone will lead to policies and institutions that are better designed, and are less likely to be perverted by corruption or dereliction of duty. We need to find, not big solutions to the big problems but, small effective ones. These changes will be incremental, but they will sustain and build on themselves, and can start a quiet revolution.

In place of a sweeping conclusion
The authors advocate
1.       giving the poor enough critical pieces of information in order to make informed choices
2.       making it easy for the poor to make and follow the right decisions even if it means giving them incentives for it
3.       we can leverage on technology or institutional innovations to develop a market for the poor that is missing, presently.
4.       Government policy and programs should be carried out with the ubiquitous three I’s in mind: Ignorance, Ideology, and Inertia. They should encourage an all-inclusive government/institutions that carry everyone that matter along in order to have effective policies and programs.
5.       Fear feeds on fear, just as success feeds on success. What we think often happen. When a situation starts to improve, the improvement itself affects beliefs and behaviour. And little improvements or nudges can start a virtuous cycle, breaking vicious cycles.

MY OWN CONCLUSION
With Credicoins Network, the poor all over Africa will have the choice and power to make their lives better. We hope to use the knowledge from this great book to further help create an automated system and network that if anyone, willing to move out of poverty, plugs into/connects with, they can become financially free and comfortable in life, by having access to insurance, insured savings, micro-loans without overbearing interest rates, among other benefits.

We not only intend making savings easy and simple, we also intend making wealth making opportunities available for all.

 
During my research for my credicoins savings scheme idea during the week, I stumbled upon an article you might also find worth reading. It is a report of the 2011 Firstbank Impact series conference where Mohammad Yunus gave a keynote address on the seven (7) flaws of microfinance banking in Nigeria. Mohammed Yunus is the father of microfinance banking -which he calls social business- and the 2006 Nobel Peace prize winner (which he shared with Grameen bank, the microfinance bank he founded).

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Thank you for reading.

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