Poor Economics - a book review and a few thoughts

It's Sunday, and I am here all alone at the AKF Center.  Elena was here a bit this morning to talk with David at Rotary about the upcoming Rotary delegation, and visit to the communities.  I got my laundry done, and warmed up some left overs for lunch. Dinner?  I'll have to think about that later!  But I have some time to read.

Poor Economics
I just finished reading Poor Economics by Abhijit Banerjee and Esther Duflo.  When I started on this book I was not wonderfully impressed, because they seem to have missed the whole "culture and development" idea.  But it turns out to be a great book - well worth the time.  It is a collection of research studies and experiments, with respect to how poor people make economic decisions. Much of the work comes from parts of India, but they have many other countries in their survey field.  It appears that economics is moving from the theoretical to the scientific in this important arena.  If nothing else, it is an amazing collection of stories of people who are struggling against great odds to provide a life for their family and a future for their children.

Culture is Important - but There Are Other Ways
The authors do not seem to be aware of the studies which relate cultural differences to development, but that does not seem to be a problem with their ideas and recommendations.  They base their work on field studies of poor people who are making economic decisions in a variety of experiments.  Any cultural differences are clearly present in the results.  I think that having a more express understanding of the implicit impact of the culture of the place being studied, would have helped them to understand the reasons for the behavior observed - but it clearly would not change the behavior observed.

As it turns out, poor people are making the best decisions they can, with the information they have, and the options open to them.  They do tend to do things a bit more short term, and are prone to a bit less risk taking - but that makes perfect sense in their environment.  Some of the decisions which they find to be difficult are difficult for everyone, but are somewhat managed for those of us who live in wealthier circumstances.  I, for example, never had to worry about creating an ingenious way to save for my retirement.  Between Social Security and the tax breaks provided my employer for a retirement plan and 401K, that decision was relatively painless.  I also have very little difficulty getting a bank account, or a line of credit - but I have more than enough assets to ensure that the bank is taking virtually no risk in these events.  For the poor, it is another matter entirely.

I am also not an entrepreneur - the risks involved in that scare me.  Most of the poor are entrepreneurs, running their own businesses, simply because that is the only option open to them.

Micro Lending - Finance
The book is full of solid information about how poor people make economic decisions, and why some things work and others fail.  For example, after an exhaustive evaluation of financing and micro-lending options, they conclude that micro-lending does in fact help, but it is no silver bullet - it is not THE solution to poverty.  But it should be one of the tools because it does help improve the lives of the poor.  The authors describe some of the many creative ways that micro-lending associations have invented to make the loan process work better in the economics of poverty.

Just Do It
But the biggest insight for me does relate to the culture thing.  I am persuaded that the fundamental, underlying culture of a people is the root cause of their inability to use their own talents and energy to create wealth.  Their view of the world, their view of wealth does not support the behavior and decisions that are required for economic development.  The authors of the book point to a solution to that problem.  We all recognize that changing a culture, a world view, requires a considerable effort, over a long period of time.  But there is another alternative - we can adapt the economic systems we have created to better fit the world view of the people with the need.  Economics is not a universal law handed down by nature - we have created the beast, and we can adapt it to changing needs.  The book recommends using an experimental approach to find a technique that works in the given circumstances.

One example in the book is the problem of agricultural production and the use of fertilizer.  Farmers who use fertilizer gain much higher yields, such that it is worth the added expense.  They can be taught how to use the fertilizer, they can be shown the economic benefits - but it is still difficult for them to put aside the money required to purchase the fertilizer until it is time to plant again and use the fertilizer.  They may try to save the money, but other priorities appear, and the money rarely makes it to the next planting season.  You can find this on page 207 of the paper back edition - which I have as a Google Book.

The simple solution was the creation of a voucher system.  When the grain is brought for sale, the farmers are offered a voucher which guarantees them the delivery of the fertilizer whenever they want it.  That simple process increased the use of fertilizer significantly.  People are still faced with unexpected expenses, but they somehow survive, and the fertilizer is available when needed.  They can do the same thing for the seed, and other essential parts of the cycle.

So, for my simple minded solution, while it helps to understand how a world view operates, there is little point in spending a lot of time and energy trying to change it, when a simple process can achieve the desired result within that world view.  The hard part of this is the effort required to study the details and do the experiments to determine what works and what does not. But it appears to be an effective technique.

The bottom line recommendations are simple:

• attend to the details, 
• understand how people make decisions and 
• be willing to experiment.  

It is clearly a lot of work to study just how people operate, and adapt the system to their needs, but it does work.

Larger Factors at Work
Sometimes when I am in the midst of all of this, I feel overwhelmed by the scale of the problem.  For example, here in Nicaragua, there are so many factors working against the poor and against development, that  it sometimes seems hopeless.  How to reform the democratic system, eliminate corruption and favoritism, clean up the trash, fix the roads, improve the education, etc., etc.  Nicaragua ranks 127th out of 187 countries studied by Transparency International with respect to corruption.
See: http://www.guardian.co.uk/news/datablog/2010/oct/26/corruption-index-2010-transparency-international

The authors make the case that you do not need to completely change the system all at once.  If you work within it and take advantage of every opportunity to move it forward, a great deal of progress can be made - which will eventually amount to a great deal of change.

For example, when elections of public figures were put in place in Chinese villages, those elected tended to be more concerned for the issues of the people, even though the party slate was presented by the authorities.  In another example, schools in Uganda were receiving less than 30% of the financial aid that was sent to them.  A study by a team of economists discovered this, it was published in the paper, and school administrators began demanding their money.  The middle level administrators had been pocketing it, until that was no longer seen as an acceptable outcome.  Raising the information level, and the sense of civic awareness can help.

In another example, local meetings of the populace to make decisions with regard to funds sent their way are normally dominated by the elite in the community.  They make it their business to learn the details, and they show up at the meetings.  The simple strategy of sending a mailing inviting everyone to the meeting tends to diffuse the power of the elite and broaden the base of support for the decisions made.  I don't know what you do in a community where letters are more problematic than not - but I note that virtually everyone here has a cell phone with text capability.  A simple text message setting out the time and place and agenda would likely have a similar effect.

Other Positive Steps
There are other bits of wisdom in the book that do relate to this Nicaraguan "initiative".  People with little hope have little energy for making change.  When people are given a little bit of hope and some positive reassurance that they can make a change, they tend to respond more positively (p. 217).  What we are about with these two small communities is exactly that - raise their sense of empowerment, and ask them to step up to the challenges they are facing with some help to get started, some training and information to open up the options available to them.

Experimental Validation
Warning - what follows is pretty extraneous to this discussion.  You can stop now and not lose anything.
As I was finishing this up, I wanted to see if any others had connected the work of Culture Matters and Poor Economics - and there are a few interesting things out there.

• A gaming experiment in Peru and in Los Angeles seems to indicate that economic decision making is influenced by the cultural differences.  See:   Study on Peru and LA Bargaining Game.  The authors conclude that humans everywhere do NOT use the same kind of economic reasoning. One of the more amazing things from this paper is that this type of experimental economics study has been replicated in many parts of the  industrialized world with very similar results.  Those results tended to make researches believe that all humans have an innate sense of fairness.  The game has high stakes - $160 - and the goal is to make an offer that the other side will accept.  If the offer is accepted, then both parties get to keep the money.  If the offer is declined, then neither side gets any funds.  In industrialized countries the offers tend to be around 40 to 45%, more or less.  For the Peruvian tribe, the offers were distinctly lower - 15 to 26%!  In industrialized societies, offers below 20% are rare, and they are always rejected.  In the case of the tribe from Peru, they are low and are accepted.  Interviews with the tribe members indicated that they would accept ANY offer of money, always.  Participants from industrialized countries had a higher sense of "fairness" so that they would refuse shares that were considered unfair.
• Here is a paper from 2007 that argues just the opposite - culture has NO impact on economics.
  Walton - Culture Matters.  IMHO the author does not grasp the concept of "culture" as world view, but rather sees it as a collection of relationships.  He is thinking primarily of caste differences in India - not about mental view of how things work.

Another Book?
Until next time, I need another one in the genre - anyone have a recommendation?