On Poverty, Risk, and Happiness
When optimising for happiness, will societies let the poor sink or swim?
During my childhood, the Asian Financial Crisis hit, and my father lost his job. He was forced to look outside the country for work. Growing up with very little financial security, I am attuned to how it is to live day-in day-out thinking about risk. Furthermore, I lived in the Philippines where it is hard not to feel and observe the life of being poor. In this article, I share some observations about poverty and curious thoughts about how we emerge out of this pandemic.
Absolute Poverty and Relative Poverty
When I started travelling, I wondered what it is like to be considered “poor” in other countries. I learned to think of poverty as either Absolute or Relative Poverty. Without using the technical definitions, I describe people in absolute poverty as those are unable to access basic living necessities. They are those who do not have food, water, rest, security and safety, or also known as the items in the lower levels of Maslow´s pyramid of needs. Relative poverty, as the name suggests, applies to those living in conditions poorer than most people in the population. They may be able to have food and shelter but perhaps sometimes they cannot pay for utilities or insurance, or must work several jobs to get by. The frequency of absolute poverty globally has been trending down (Gapminder shows this trend well) and the UN’s goal no.1 is to eliminate absolute poverty by 2030, so this post is mostly about relative poverty.
Being Poor and Managing Risk
Risk is central to life, also for the poor. It is uncommon to think of poor people as asset managers. Abhijit Banerjee and Esther Duflo, two MIT professors and Nobel Prize winners in Economics, argue that poor people in fact, are asset managers. In poorer countries, it is common to hear of the story of a single mother with seven children who can only send one child to school. All the family´s assets, earnings and debt are invested in that one child. A major risk is that when the single mother falls ill, the child drops out of education and is forced to work for the family, cutting out all future potential earnings that come with education. In the book “Poor Economics”, Banerjee and Duflo describes how, unlike in the corporate world, the poor are asset managers who are liable for 100% of their losses.
Risk management is practised - at a higher cost. Like everywhere else, the risks of being poor are managed through risk diversification. In rural areas where income is earned from tilling someone else’s farm, temporary migration to the city or to other countries to earn more can be considered a form of risk diversification. The risks typically include a fallout in family ties or poorly managed remittances.
Another way risk is managed is through an informal insurance within the community. Those who are temporarily doing well help those who are currently doing badly. Most people can, to an extent, rely on the community helping them back if the situation is reversed. But what if the whole network experiences a shock, like monsoons that wipe out most livelihoods or this pandemic when everybody is out of work? This amounts to the informal insurance scheme failing, leaving everybody exposed. “Exposed” is corporate or academic speak for “starving”.
Health risk is one of the costliest and is hardly insured for the poor as the community informal insurance only covers temporary risks. It does not cover permanent loss of health. When informal insurance fails, many of the temporary health risks become permanent. Hence, when public healthcare is not widely accessible, health shocks can throw families who are otherwise doing okay, back to poverty permanently, which is a probable and serious consequence of this global pandemic.
Value in Wealth Re-distribution
In my experience, discussions on helping the poor to get out of poverty have been dominated by a feeling that helping them will give them opportunity to slack off, also called “moral hazard”. I don’t disagree that this is part of the picture. However I also observed that people fail to highlight there is value in distributing wealth. Societies who have managed to eliminate poverty by way of redistributing wealth enjoy benefits such as less desperation, less crime, and an overall higher peace of mind compared to those who have not.
Wealth Re-distribution and the Laffer Curve
The well-known Laffer Curve posits that there is an optimum level between tax rates and government revenues. Inspired by this concept, I think eliminating poverty by way of redistributing wealth also has an optimum point so we can maximise society´s overall happiness.
This pandemic will push millions of people into poverty, which will have lasting effects for years to come. The outcomes are still undetermined but risk management strategies of the poor are likely inadequate for this massive crisis. Will societies let the poor sink or swim? Will we optimise for collective happiness? I watch with bated breath.