Poor Economics by Abhijit V. Banerjee and Esther Duflo is one of those books everyone knows about in the international development community but few have read. And since I set myself the challenge to actually read these books in 2016, it was normal that I would start with the topic that puts me off the most: economics!
I devoured the book and despite the fact that it is full of economic concepts, it was never dull to read. On the contrary, the authors brilliantly manage to mix personal stories from the experiments and studies they undertook in 18 developing countries with the latest economic theories.
The idea behind the book, in a nutshell, is to dispel myths about how and why the very poor (living with less than 99 cents per day) take daily decisions on food, health, education, parenting, working and saving or investing money.
You can check out my 12-page summary of the book if you really don’t feel like reading it.
Poverty trap or not?
By taking the S-shaped poverty trap, made popular by Jeffrey Sachs in his book The End of Poverty, and applying it to other areas such as nutrition, health or investments, Banerjee and Duflo demonstrate that the poverty traps are not necessarily where we think they are. To make this demonstration, they rely heavily on the results of randomised control trials (RCTs) or experiments organised by researchers in several developing countries, as well as a comprehensive 18-country study of the lives of the poor. Here is an infographic that summarises some of the main findings of the book.
Looking at institutions, not INSTITUTIONS
To really understand the effect of institutions on the lives of the poor, what is needed is a shift in perspective from INSTITUTIONS in capital letters to institutions in lower case – the ‘view from below’. (p. 243)
Banerjee and Duflo rightly point to the fact that sometimes minor technical changes to a policy can have big consequences. They use numerous examples of this throughout the book. They also mention how the 3 I’s – ideology, ignorance, inertia – negatively impact on the delivery of numerous development and policy initiatives. According to them, the development community seems to be divided between those who talk about INSTITUTIONS and those who look at institutions.
The authors don’t take sides in this debate, but they do point to the hidden potential of focusing on improving what is and not spending too much time on what should be. A possible way to bridge this divide would be to actually make it apparent in discussion on development policies and work.
Focusing on small solutions, not on big problems
The political constraints are real and they make it difficult to find big solutions to big problems. But there is considerable slack to improve institutions and policy at the margin. (p. 264)
The influence of nudge theory and design thinking on the two authors is quite clear, but their experimental approach, however ethically questionable, offers insights of a quality and reliability rarely achieved in development studies before the publication of their book. If details matter and policy design is crucial to get it right on the ground, then government and development experts have a basic blueprint for more effective public policies. The difficulty lies of course in implementing these policies.
The book offers 5 key lessons from the authors’ research on the lives of the poor:
- The poor often lack critical pieces of information and believe things that are not true.
- The poor bear too many responsibilities for too many aspects of their lives (hence the power of default options and small nudges).
- There are good reasons that some markets are missing for the poor or that the poor are facing unfavorable prices in them (e.g. insurance, savings, borrowing money).
- Poor countries are not doomed to failure because they are poor, or because they have an unfortunate history.
- Expectations about what people are able or unable to do all too often end up turning into self-fulfilling prophecies.