Poor Economics by Abhijit Banerjee and Esther Duflo (Finished: Dec 26 2015)
Rating: 4/5
Difficulty: 2.5/5
Read if: You’re interested in developmental economics at all, you’re interested in economics and economic experiments, you’re willing to challenge your perceptions of poverty.
Even though poverty is an incredibly interesting, complex situation that lends itself to a complicated and nuanced economics, the economics of poverty is often ignored when it comes to policy-making. While developed world economics is seen as incomprehensible to ordinary people, developing world economics and in particular the economics of poverty is treated as though it were incredibly simplistic. We assume without hesitation that all charitable initiatives will do some good, even though we’d never assume that all developed world policy proposals invariably create good outcomes. The greatest service Banerjee, Duflo and other writers of popular books on developmental economics do for the general public is in complicating the simple narrative of poverty that many people believe, and in doing so promoting a more empathetic and data-driven look at policies for the poor.
The second greatest service “Poor Economics” does is in establishing the place of randomized controlled trials in developmental economics. Often a field contaminated by the three is of ideology, ignorance and inertia, Banerjee and Duflo reinvigorate the study of developmental economics by breaking the field down into a series of small experiments that focus on solving specific problems faced by specific communities. In doing so, they demonstrate where and when a poverty trap exists, the importance of listening to the poor when constructing poverty-alleviation initiatives, the place for markets within development, the decisions made by people with little income, the markets that exist to serve the poor (and the markets that don’t), and many more interesting lessons.
One of the most important ideas that I took away is how profoundly similar people are, regardless of how much they earn. When explaining the actions of the poor, we often endow the poor with attributes of great nobility or heroism (especially those of us within the liberal camp), and forget that poor people are not particularly courageous or moral, but are simply human beings living within a particular economic circumstance.
For instance, an early section of the book comments on a study that found that as the extreme poor (those living under $1USD per day, PPP adjusted) become slightly richer, even if they are starving they not to consume more overall calories, but will consume better tasting ones. So for instance, if someone typically consumes coarse grains and becomes slightly richer, she tends to consume more luxury grains (like rice) than to consume a larger quantity of grains overall. While it could perhaps lift someone out of a “poverty trap” if they consumed more calories, this effect is both insignificant in situations where a persons economic welfare is not strictly tied to their physical well-being, and is often so minute on a day to day basis as to go completely unnoticed. Information asymmetry tends to be very great among the poor, who often don’t know (or don’t believe) the benefits of good nutrition and cannot perceive the economic benefits of nutrition over a short scale of time. So of course, it makes perfect sense that even starving people will sometimes choose to consume better food given additional income as opposed to more food. This data-backed realization has interesting and significant implications for policy-makers worldwide.
Another important and interesting idea the book touches upon is the subject of microfinance. The microfinance debate will be familiar with anyone that has studied developmental economics before, and is still a key issue that many developing countries contend with. When first introduced as a financial innovation, microfinance was hailed as a game changing innovation in the field of developmental economics and was even honored with a Nobel Peace Prize in 2006. In recent years, it has been both exalted and vilified by numerous voices from many different political leanings. Again through an examination of the effects of microfinance on (shocker) a micro-level, Banerjee and Duflo reach a conclusion on the benefits of microfinance that strikes a balance between extremes.
All in all, this book is extremely interesting both in the breadth of issues it covers and in the meticulous examination with which it regards all of its subjects. Definitely worth a read!
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