Poor Economics and ‘Just Giving Money to the Poor’
Abhijit Banerjee and Esther Duflo's book, Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, is making waves in development circles. Beyond the strong focus on randomised control trials, the book distinguishes itself by wading into issues on which the development community has often ignored or made uninformed guesses. These include the rationale behind the decisions made by the poor, whether they make the "best" decisions available, and how policymakers should respond.
As someone who is in favour of policies that transfer money directly to the poor, I just had to have a look. After all, cash transfers and other forms of welfare are often opposed on the basis of claims that the poor make "irrational" or uninformed decisions and therefore shouldn't be trusted with public resources. And the kneejerk response to this argument risks moving to the other extreme: assuming that the poor live up to a straight-jacketed vision of generally well-informed, "rational" individuals.
Actually, Banerjee and Duflo's book doesn't really support either view. To their credit, the authors certainly don't shy away from cases where the poor don't make perfect decisions from a development perspective. For example, the poor often believe that it's only worth sending children to school if there's a chance they can go all the way and complete secondary education. And that belief can lead to brutal trade-offs: selecting the "cleverest" child to go to school while making the others work.
In other cases, they might spend money on alcohol, tobacco and festivals even though they don't have enough to eat. And when they do buy food, they might opt for food that is tasty, rather than nutritious. The poor often struggle to control their temptations and make impulsive purchases, thereby failing to save for the future. Indeed, even when they do save up to make calculated purchases, their decisions can confound even the most well-meaning of development practitioners: In one village in Morocco, for example, Banerjee and Duflo talked to a man who didn't have enough money to feed his family, but had a TV and a DVD player.
So surely it's case closed? If the poor don't fully understand the benefits of education, don't eat enough of the right food, have limited self-control and use scarce resources to buy things such as TVs, who would want to place state resources in their hands through cash transfers? Surely it's best to make sure that money gets used by educated people in governments and NGOs who, let's face it, know what's best?
Well, not necessarily. A careful reading of Poor Economics, and a look at broader research, suggest that many of the examples above are not strong arguments against cash transfers, and could even be used to advocate for them. On the issue of education, it may be the case that the poor undervalue the importance of even a small amount of education, but that does not change the fact that the root problem is a basic lack of money and livelihood security. So when the World Bank looked at a cash transfer pilot programme in Malawi (pdf), school attendance rose significantly even though it was not a condition of the transfers.
On the issue of nutrition, I feel there is a danger of reading too much into Banerjee and Duflo's findings: we might discuss why the poor don't always spend as much on nutritional food as one might expect, but that shouldn't detract from the overwhelming evidence that bolstering the incomes of the poor with cash transfers really does improve nutrition (see DfID's review of the evidence). There may still be a case for Duflo and Banerjee's suggestion of packing nutrition into the food children eat in schools, but given that most of the food the poor eat comes from the unregulated informal economy, this approach might have its limits.
Perhaps the most important finding in Poor Economics is the impact of insecurity, stress and hopelessness on the decisions of the poor. Why worry about the future if that future only promises misery, or if any attempts at self-improvement are likely to fail? As Banerjee and Duflo make clear, when poor people gain a degree of genuine security and opportunity for self-improvement, their attitudes and decision-making can change dramatically, and social protection is one way of bringing this about.
And as for poor people spending money on TVs and DVD players, something that is frequently judged and used as evidence for "irrationality", it might be worth seeing things from their perspective. Poor Economics reminds us that for many of the poor, particularly those in rural areas, life is often just a bit boring, and getting a modern gadget can have a major impact on people's happiness or wellbeing. This might not contribute much towards the Millennium Development Goals, but if development is supposed to be about improving the wellbeing of the poor, seeing wellbeing from their point of view has to be central to that vision.
This blogpost also appears on the Guardian´s website, globaldevelopment.