Chickens are to Cash as Poverty is to Development

Chickens and cash have a lot in common: both — if given to an individual — represent a transfer of valuable assets, chickens — if sold –generate the liquidity of cash, cash — if invested — generates an economic return like that of eggs and meat. Chicken and cash are also different — one has feathers, the other folds. “Poverty” and “development” are also similar and distinct, but just as we have chicken for dinner and cash in our wallets, direct poverty alleviation through redistribution has a place alongside the search for sustained economic development.

Drawing on a recent exchanged focused on the cash or chicken question (part one and two), and returning to basic economics, here is a proposed definition of poverty and development.

Economics suggests people are made better off — increased utility — by appreciating some resource — perhaps wealth or consumption. These are related by a utility function U(x) that turns x into utility. Typically, these functions are concave, as the image shows. We can think of development as progression along the utility curve — it is a continuous process of increased wealth, consumption and utility. Indeed “developed” countries do not reach a fixed point, but go right on developing. Poverty might be defined as the portion of the utility curve near the origin where very small changes in wealth or consumption either help hugely or hurt tremendously — the arbitrary threshold of $1, $2 or $3.10 a day is just a convenient shortcut to get us in the ballpark.

As with chickens and cash, poverty alleviation and economic development are similar and different. Economic development — if equally distributed — causes poverty alleviation. That is tautological. Poverty alleviation through redistribution — if it acts as a stimulus or engine for human capital — can further economic development. That is plausible if unproven.

A critical difference between poverty alleviation through redistribution and economic development is the time scale. Even with political will and resources to work with, economic development takes years. With political will and resources, poverty alleviation through redistribution can be quick. Which is better for people living without much depends on the metric of success.

Perhaps the most common measure of success in the aid and development industry is the number of people living in poverty (however defined) in a given year. From that perspective, if poverty is low in 2050, it doesn’t matter if it’s because the economy grew or the poor received transfers. This ignores the fact that many poor people in 2017 will be dead by 2050 and many of the living will have spent years in poverty by 2050.

A rough estimate suggests that at the same time as the number of poor people in low and middle income countries fell from ~2.6 billion in 2005 to about 1.6 billion in 2016, the cumulative number of person-years spent in poverty reached 24 billion. Economic growth likely caused the former drop, while the lack of poverty alleviation caused the latter increase. If a year spent in poverty has some cost, immediate action has a benefit.

The argument for economic development over poverty alleviation through redistribution takes resources as given, and seeks high returns on those limited resources. But can we have our cake and eat it too? Estimates of what it would take to get everyone out of that dismally steep portion of the utility curve are controversial but there is surely the potential for impact without an unbearable cost to donors. Perhaps slowing the steadily increasing integral of years in poverty is worth that cost, while economic growth is pursued in tandem.

As it turns out, the Gates Foundation has funded a study on chickens and cash. Perhaps this tells us something about that question. Unfortunately, the RCT comparing the poverty alleviation or development approach to improving lives is not feasible. Perhaps those in the industry can hedge their bets and go for both.

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