Handling Poverty (Not) by poor economics: A book review
Key arguments in the book:
Battle against global poverty is one of the most pressing issues of our times, and consequently, many grandees ranging from politicians, star economists to Hollywood stars have fought it. Yet, the problem persists.
The authors start by throwing up a paradox that even for Africa, excluding Nigeria and South Africa, receives just 5% of government’s spending as an aid while much of talk in development economics is about foreign aids. Similarly, subsidies have used considerable space in development economics. Upon them, various camps or schools have developed which support one and oppose others. Here poor economics aims to look via the perspectives of the poor themselves without being from any camp. To this effect, the authors argue that the investigation of specific aspects of poverty is required. Consequently, they divided poverty into themes of health, nutrition, education, institutions and entrepreneurship.
The authors employed S-shaped, and inverted L-shaped curve to explain why some people below certain income are trapped in poverty while others are not. Additionally, they corroborated this by randomised control trials bringing a high degree of objectivity and rigour into findings.
Hunger based poverty takes the limelight, which assumes that the poor have little to eat, become less productive and are cemented in the poverty trap. However, the cost of minimum calorie intake is far less than poverty income and marginal spending on food is low. The L-shaped curve is observed here, with most gains in income in initial consumption explains why there is no hunger based poverty trap and questions our world view of poverty.
However, S-based poverty traps for health reasons are predominant due to high rate borrowings in the face of illness and meagre amounts spent on the cure. Notwithstanding high awareness about treatments like chlorine for water, use is inadequate. RCTs showed they are highly price-sensitive but not much income-sensitive. A nudge is needed here to push people towards the virtuous part of S-based cycle.
Interestingly, poor have been described as hedge fund managers for massive risk in life and livelihood. However, liability here is 100%! Mild disruptions may slip them to the poverty trap side of S-based curve. Even with such risks, they don’t avail insurance due to high costs relative to the sum insured. For instance, cattle loss may cause enormous trauma and push people into the poverty trap. Consequently, a cattle insurance scheme was launched, and soon 100% of cows insured were lost. And to think that people ridiculed aadhaar scheme for the cows!
A similar analysis for delivery mechanisms like institutions, innovations like microfinance and microinsurance was presented. A cushion of savings in handling shocks is absent, pushing people into poverty traps primarily due to high rate lending. Development effect of institutions is recognised profoundly, but corrupted institutions again push people towards the wrong side of S-curve. RCTs conducted towards the microfinance, microinsurance shows that they deliver results but are not a panacea for poverty.
Who should read the book?
Someone who views poverty as an economic challenge and wants to divulge into the microeconomics of ‘the rational poor’ and explore possibilities of handling poverty by breaking it down into stand-alone deliverables should give it a thorough read. Additionally, the book gives insights into evidence-based practices like RCTs diverting from omnipresent models incorporated by authors and makes one an informed and engaged citizen.
Pandemic ensued disruption never seen hitherto, which will push many people into the poverty traps. Sectors like hunger with no traps may suddenly find many exposing the ineffectiveness of current programmes. Future administrators, volunteers engaged in rehabilitation works will find the book valuable to design relevant nudges to bring people out of the trap.
This article has been written by Shubham Yadav, a PGP (2020–22) Student at IIM Ahmedabad . All the views expressed are his own.
