Name: Poor Economics
Rating: 4.2 (76 reviews)
Author: Abhijit V. Banerjee and Esther Duflo

Introduction

What’s in it for me? Find out how the problem of global poverty could be solved.

The battle against global poverty has been fought by grandees from many fields – from politicians and economists to famous musicians and Hollywood actors. Yet, as we all know, the problem remains.

And Poor Economics attempts to provide several answers to why.

As the authors argue, we are currently looking at the problem in the wrong way. We spend most of our time on general theories about poverty, neglecting the perspective of the poor themselves. Instead, we should be examining the complexity of their lives to get a clearer idea of which kinds of aid are effective and which are not. To that end, we should first seek to understand how and why poor people make the often self-destructive decisions they do, and how we can get them to make better ones in the future.

By looking at the problem of poverty from this angle, Poor Economics shows how we might begin to answer such perplexing questions as: Why do poor people refuse to take medicine that will make them healthier? Why do women in poorer regions bear more children than those in richer ones? And, why do people in poverty spend what little money they have on inferior, non-nutritious food?

Key idea 1 of 10

Economists seek general solutions to global poverty, but these don’t deal with the problem effectively.

It’s a sad fact: poverty causes millions of deaths every year. Equally sad is the fact that we have yet to find an effective solution to this devastating problem.

One of the reasons might be that economists dealing with the problem tend to look at it in the wrong way, focusing too much on “big” economic questions like, “Do developing countries need more or less help from outside in order to grow?”

Such general questions tend to generate ineffective debate.

One camp argues for more development aid to get these countries on track, as they’re not able to do so on their own. Economist Jeffrey Sachs claims that if rich countries would spend $195 billion per year on development aid, in 20 years (i.e., by 2025), poverty would be eradicated.

Then there’s the other camp, which emphasizes the negative consequences and ineffectiveness of outside interventions, claiming that it’s more helpful to leave developing countries alone.

Clearly, it’s difficult to come up with a conclusive answer to such a general question. Moreover, debating it does nothing to solve the problem of poverty.

Of course, some countries appear to prove the effectiveness of development aid. For example, following the Rwandan Genocide, Rwanda received a lot of money and their economy subsequently boomed. However, the situation’s complexity renders it impossible to know for certain whether Rwanda’s success was due to the aid or to other factors.

Furthermore, a single case isn’t enough to prove a theory’s accuracy: data from over 100 countries suggests that those that had received aid didn’t grow anymore than those that didn’t.

Both of these arguments are manifestations of an economic reasoning that looks at the problem of poverty in the wrong way. And, in the end, such arguments will not help to solve it.

Rather than spending time and energy on considering these big questions, it’s more useful to look more closely at specific measures and to evaluate why they do or do not work.

Key idea 2 of 10

Looking seriously at how poor people make economic decisions is vital for eradicating poverty.

Until now, the economic complexity of poor people’s lives hasn’t received much scientific attention. Perhaps since most poor people live on less than $1 a day (13 percent of the world’s population in 2005), economists seem to believe that the poor have no complex economic decisions to make.

But that’s not true.

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Key idea 3 of 10

Non-nutritious food – not hunger – is what reinforces poverty.

Most of us would associate poverty with hunger without thinking twice. Yet the link between the two is not as obvious as it seems.

One popular view held by economists and politicians is that hunger is one of the main reasons for poverty’s persistence. Indeed, this seems reasonable since nobody can be productive if they’re hungry.

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Key idea 4 of 10

A reliable and proactive healthcare system is necessary for improving the health of the world’s poor.

Staying healthy is extremely important for poor people. Just one sick family member can have a disastrous effect on the whole family, as it can cause a drop in income and generate additional costs.

The following three things are required to help raise health levels in poor countries:

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Key idea 5 of 10

Developing countries need better school systems that focus on educating all children.

Another very important factor for overcoming poverty is education.

In recent years, many developing countries have addressed this by providing educational facilities for their children.

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Key idea 6 of 10

The key to population decrease is better social protection of the poor and the empowerment of women.

Because of the strong connection between population growth and poverty, many countries have attempted to regulate that growth. As you might imagine, however, fighting population growth is a complex issue.

For one, as long as there’s no social security system or strong incentives to save money, having many children is a rational choice for poor people.

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Key idea 7 of 10

Financial innovations, like microcredits, improve poor people’s lives, but they’re not a long-term solution to poverty.

One popular, though controversial, instrument for helping the poor is microcredits.

Microcredits are useful in supporting poor people and their businesses in developing countries. Without them, poor people would have to approach banks, which have little interest in giving affordable credits to poor people (because of the small amounts involved and the risk of not being paid back), or loan sharks, to whom they’d have to pay very high interests.

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Key idea 8 of 10

Insurance against misfortune protects against poverty, so governments should incentivize the poor’s coverage.

In contrast to most poor people around the world, those in rich countries are lucky, as they’re insured against many risks (e.g., losing their job or sickness).

So if there were more affordable opportunities to get insurance in developing countries, many poor people’s fears could be reduced.

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Key idea 9 of 10

A successful fight against poverty will require small, local actions alongside big institutional reforms.

By now it should be clear that there is no easy solution to the question of how to end poverty. And yet, many experts recognize that we must begin by focusing on major institutional changes.

One popular view held by economists and political scientists is that we will not be able to fight poverty effectively as long as there are unstable political regimes. For those experts, corruption is a huge problem as it means, e.g., that corrupt officials often steal money allocated to projects dedicated to fighting poverty.

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Key idea 10 of 10

Final Summary

The key message in this book:

The fight against poverty is very complex and there is no easy solution. But we must not give up: a better understanding of the lives of poor people, and a close examination of the measures we take against poverty, will help us to see what’s essential to winning the fight against poverty.

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Poor Economics summary