Self Help

Poor Economics - Abhijit Banerjee

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Matheus Puppe

· 56 min read

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Here is a summary of the Table of Contents:

The book consists of two main parts divided into several chapters.

Part I focuses on the private lives of the poor, examining topics like hunger, health choices, education, family size and structure.

Chapter 1 sets up the theme of challenging preconceptions about poverty.

Chapter 2 questions assumptions about the scale of world hunger and whether the poor eat well.

Chapter 3 analyzes health choices and technologies not widely used.

Chapter 4 looks at education supply/demand issues and why schools fail.

Chapter 5 profiles a large family in Indonesia.

Part II shifts to institutions and how markets/governments work for the poor.

Chapter 6 discusses risk, insurance and their hazards of being poor.

Chapter 7 analyzes microcredit and its impacts.

Chapter 8 covers saving habits and challenges.

Chapter 9 profiles entrepreneurship among the poor.

Chapter 10 examines political economy factors and policy impacts.

The book aims to understand poverty in more complex, realistic ways through lessons learned directly from the poor themselves over many years of field work and data analysis.

  • The book addresses some fundamental questions about poverty - are there ways for the poor to improve their lives, and what prevents them from doing so? Is it more about the upfront costs or ongoing challenges?

  • It explores what exactly makes initiatives costly for the poor and if they understand the potential benefits. If not, what makes it difficult for them to learn about the benefits?

  • It aims to understand lives and choices of the poor to provide insights into fighting global poverty effectively. For example, why microfinance works to some extent but not as a magic solution, why health services often do more harm than good, why education doesn’t always lead to learning.

  • It reveals why many previous “magic bullets” ended up as failed ideas, but also where hope lies - like small subsidies having outsized impacts, better insurance marketing, less can be more in education, and good jobs matter for growth.

  • Overall the book makes the point that poverty is a set of solvable problems, not an overwhelming global issue, and that progress can be made by understanding specific challenges rather than bigger philosophical questions alone. Knowledge and continued effort are needed.

  • Many poor countries fund social programs for their poor out of domestic resources, not foreign aid. For example, India spends $31 billion on primary education programs annually. Even in Africa, foreign aid makes up a small portion (5.7-12%) of government budgets.

  • Debates about foreign aid often overlook what really matters - where the money is spent, not where it comes from. The key is choosing effective projects like food assistance, pensions, or health clinics and implementing them well.

  • There is general agreement that we should help the poor when possible. Philosophers argue we have a moral duty to save lives in need, regardless of location. Poverty also wastes human potential.

  • Disagreements arise around what effective ways exist to help the poor. Concrete, evidence-based solutions are needed, not just identifying problems.

  • For issues like malaria prevention, randomized experiments can help answer practical questions like whether bed nets are best provided freely or sold at a subsidy. This helps identify barriers to solutions like bed net adoption.

  • Answering narrow, evidence-based questions not only helps policies but expands understanding of decision-making by the poor and roots of poverty. Differences in perspectives, like Sachs vs. Easterly, stem partly from divergent worldviews.

So in summary, the key is focusing on specific, testable ways to help the poor through effective projects and implementations, informed by empirical research, rather than broad debates about foreign aid.

This passage summarizes the differing views of economists Jeffrey Sachs and William Easterly on foreign aid and poverty traps:

  • Sachs believes some countries are trapped in poverty through no fault of their own due to geographic or other disadvantages. He supports large-scale foreign aid programs to give these countries a “big push” out of poverty.

  • Easterly argues many formerly poor countries became rich and vice versa, so poverty is not a permanent condition. Therefore, the idea of poverty traps that inexorably ensnare countries is invalid. He and others oppose aid because it can corrupt governments and should respect people’s freedom not to accept it.

  • Their differing views stem from differing answers to an economic question - can people be trapped in poverty? Sachs says yes due to insufficient means to invest in improving their situation, while Easterly argues opportunities for growth exist even among the poor.

  • This relates to whether the relationship between current/future income is best modeled by an S-shaped curve indicative of poverty traps, or an inverted L-shape with no traps. Real world evidence is needed to determine which model applies.

  • Randomized controlled trials have helped provide such evidence and test theories about poverty at local levels, improving understanding compared to previous generations lacking such data.

  • Poverty is often associated with hunger, as seen in the focus on food aid and subsidies. The idea is that the poor cannot afford enough food, making them less productive and trapping them in poverty.

  • J-PAL was created by Abhijit Banerjee and Esther Duflo to encourage evidence-based policymaking using randomized controlled trials. Their approach has been very successful, with over 240 experiments conducted in 40 countries by 2010.

  • The book will present evidence from these experiments and other rigorous studies to counter lazy or ideologically-driven thinking and identify effective ways to address poverty. Getting policy details right is important to avoid poverty traps that are imagined but not real or ignore real existing traps.

  • Pak Solhin’s story illustrates the common view of a nutrition-based poverty trap, where lack of food makes people too weak to work and earn enough for more food, trapping them. The book will examine where this type of trap actually exists and where the problem may be incorrectly diagnosed.

  • Food provides nourishment that builds strength, allowing people to be more productive than is needed just to survive. This creates a poverty trap where the very poor cannot work much and earn enough to eat better to be stronger and more productive.

  • However, in many places today there seems to be enough available food, so being trapped in starvation due to lack of food is not entirely logical. The poor do not seem to spend all their money on food even when they could.

  • When the poor have more money, they do not proportionally increase their spending on food or calories. They still spend on other things like alcohol and festivals. They also buy more expensive foods rather than maximizing calories.

  • Studies in China and India found that when staple foods became cheaper, people did not increase calorie intake but bought other foods like meat and shrimp. This suggests calories were not the priority.

  • Despite economic growth in India, calorie consumption has decreased at all income levels. People eat less while incomes rise. This contradicts the idea that more income leads to more eating and productivity.

  • In many places today, food production is sufficient to provide adequate calories globally. Starvation exists due to issues with food distribution, not absolute scarcity. For most poor people, an adequate diet is affordable through cheap calories. This suggests the poverty trap logic may not fully apply in many current contexts.

  • The cost of a diet providing 2,400 calories (10% protein, 15% fat) using just bananas and eggs would be only 21 cents, affordable even for someone living on 99 cents a day.

  • Indian survey data shows the percentage of people reporting not having enough to eat has dropped dramatically from 17% in 1983 to 2% in 2004.

  • This could be because people need fewer calories due to less physical labor and improved sanitation/fewer illnesses. One study found productivity increased modestly (4% for a 10% calorie increase) with more calories for self-employed farmers in Sierra Leone.

  • However, many Indian adults and children remain undernourished by international standards. Nearly half of Indian children under 5 are stunted due to long-term malnutrition. This suggests nutrition may still be holding back health and productivity for many poor Indians.

  • In summary, while calorie intake has risen, widespread undernutrition persists especially in children, implying many poor Indians likely still benefit from improved nutrition and food security.

  • South Asian countries like India, Pakistan, Bangladesh have not performed well at the Olympics relative to their large populations. Countries with more than 10 times fewer people have more medals per capita.

  • Bangladesh in particular, with over 100 million people, has never won an Olympic medal. This is attributed partly to a focus on cricket over other sports.

  • Child malnutrition is prevalent in South Asia and likely contributes to poor Olympic performance. Studies show childhood nutrition impacts adult height, IQ, earnings potential.

  • Research links childhood deworming/nutrition to increased education and earnings later in life. Prenatal nutrition also impacts lifelong outcomes. Iron and iodine supplements can increase productivity.

  • Yet the poor don’t adequately invest in their own and children’s nutrition. Reasons include lack of information on benefits, preference for familiar foods, inability to link current nutrition to distant outcomes, lack of incentives if earnings aren’t tied to productivity. Additional effort is needed to promote good nutrition behaviors.

  • The self-employed man may not have noticed earning an extra $40 per year due to the ups and downs of his weekly income.

  • The poor often choose foods based on taste rather than just price and nutrition. Orwell observed poor British workers relied on an “appalling” diet of white bread, margarine, processed meats, tea, and potatoes. While healthier options might be better, no one wants to live on just brown bread and raw carrots.

  • Traditional celebrations like weddings and funerals require substantial spending that families feel compelled to do, even if it means less money for food. Funeral costs in particular have been shown to depress household incomes and cause children to drop out of school.

  • The poor prioritize things that make life less boring, like TVs, over strictly necessities like food. Entertainment helps pass the time in villages with little work or opportunities.

  • Small indulgences and treats are carefully budgeted for and provide psychological benefits, even during difficult times. Cutting them out may not result in as much savings as thought.

  • While calorie needs are usually met, micronutrient deficiencies still impact health and productivity. But the issue is complex with social and psychological factors also influencing budgets, priorities and well-being.

  • Nutrition during early childhood and in utero has a major impact on lifetime health and earnings potential. Small differences in programs that improve nutrition, like deworming or fortified foods, can lead to large economic gains over a lifetime.

  • Governments and organizations need to rethink food policy and prioritize improving nutrient quality, not just quantity. Giving people more subsidized grains does little to improve nutrition. Direct investments in children and mothers’ nutrition through supplemental foods, deworming, meals, or incentives see high social returns.

  • Many regions have “low-hanging fruit” health technologies like oral rehydration solution (ORS), chlorine for water purification, and vaccines that could save millions of lives each year very cheaply. However, these are underutilized for various reasons.

  • Poor health can trap families and communities in long-term poverty through missed work, lower educational attainment, and sickly future generations. Diseases like malaria may keep entire countries much poorer through this cycle. Public health interventions aimed at controlling diseases could have high economic returns by breaking these traps.

The evidence supports the activists’ view more than the skeptics’ view. Studies that have examined the effects of successful malaria eradication campaigns in various countries find that after the campaigns, life outcomes like education and earnings of children born in the previously high-malaria areas catch up to those in low-malaria areas. This suggests eradicating malaria does lead to reductions in long-term poverty. While the effects may not be as large as Sachs claimed, multiple studies still found significant benefits. For example, one study found children who grew up malaria-free earn 50% more per year than those who had malaria, over their whole adult lives. Similar results have been found in other countries studying other health interventions like clean water and sanitation. So the data shows improving health, such as through malaria prevention, can have substantial economic returns by increasing productivity and incomes. This supports the activists’ view that health issues like malaria play a role in ongoing poverty traps. The skeptics’ argument that weak governance may be a confounding factor is not supported by the evidence from studies directly comparing health outcomes before and after successful intervention campaigns.

  • Chlorine bleach (Chlorin) for water purification costs 800 kwachas ($0.18) per bottle in Zambia and lasts a month for a family. This can reduce diarrhea in children by up to 48%.

  • However, only 10% of the population uses Chlorin, even though it is relatively cheap compared to other expenses. Demand increases when the price is reduced to 300 kwachas but even then 1/4 of people did not buy it.

  • Demand for mosquito nets is also low unless they are distributed for free. Even a 50% subsidy did not increase usage much. Reducing malaria risk could increase income by 15% on average but this does not reliably translate to net usage.

  • The poor report worrying about health often and spend significant portions of their budgets on healthcare. However, this money usually goes to expensive private providers and cures rather than cheaper prevention.

  • Public primary healthcare is underutilized despite being free or low-cost. Private providers are often untrained but still preferred over public options. Potentially life-saving prevention and treatment options are not being adequately adopted.

  • Doctors in India were given clinical vignettes (case studies) and their responses were compared to expert recommendations. On average, competency was quite low, with even the best doctors asking less than half the recommended questions.

  • Doctors tended to underdiagnose and overmedicate. Private doctors frequently prescribed antibiotics, steroids, or IV drips that were unnecessary and potentially dangerous. This can increase antibiotic resistance.

  • Government health centers are often closed when they should be open. Absenteeism rates of government health workers are high at around 35%. This makes it hard for people to rely on government services.

  • Even when open, government providers spend little time with patients (around 2 minutes on average) and do minimal examination. Service is often poor.

  • While improved government services might help somewhat, increasing access alone does not dramatically increase utilization of services like immunizations. Even when made easily available, many people do not take advantage of preventive healthcare measures.

  • People’s health seeking behavior does not seem fully explained by faults in the government system. There may be other behavioral or cultural factors influencing why cheap prevention is under-utilized compared to spending on often unnecessary treatments.

  • Economic theory suggests that once something is paid for, the sunk cost shouldn’t affect future usage. However, people often feel motivated to use something more if they paid a lot for it (psychological sunk cost effect).

  • People may also judge quality based on price - cheap things seem less valuable. This matters for health subsidies aiming to increase access.

  • Studies show subsidies do increase usage of things like bed nets and don’t decrease usage. Anecdotes of misuse are overblown.

  • However, health choices are also guided by beliefs and theories since people lack direct evidence from randomized trials. Faith and trust play a big role.

  • The poor have even less access to information and reasons to trust the system, so their choices are more based on plausible theories than evidence. This can lead to overmedication or misunderstandings about issues like immunization.

  • Learning about health is inherently difficult. Improvements may seem linked to treatments even if they aren’t. This reinforces beliefs.

  • For the poor, holding onto beliefs provides hope when more definitive treatment is too costly. It keeps them engaged in their health even if problems can’t truly be addressed.

  • Traditional healers and preachers offered services to treat HIV/AIDS when allopathic doctors had few effective treatments. Their services gave patients a sense of doing something even if the treatments were not truly effective.

  • This grasping at straws is not unique to poor countries. Americans also seek out alternative treatments like spiritual healing, chiropractic, yoga for poorly understood conditions like depression and back pain.

  • Beliefs held for convenience rather than true conviction may be more flexible. People in Udaipur, India access both traditional healers and allopathic doctors, not insisting on distinguishing their inconsistent belief systems.

  • Seva Mandir found offering incentives like food significantly increased childhood immunization rates in their program from 6% to 38%. Doctors were initially reluctant thinking incentives would be too weak or bribery was wrong, but it proved successful and cost-effective.

  • Resistance to incentives comes from a view that people should be convinced, not bribed, to do what is best. But beliefs are not always strongly held, and intention does not always lead to action due to issues like time inconsistency in decision making. Incentives help overcome small costs that discourage preventive actions.

  • Nudges or subtle interventions can help push people to take actions they know are good for them but tend to procrastinate on, like vaccinations. Default options and small incentives are examples of nudges.

  • In developing countries, the challenge is designing effective nudges that account for the local environment and barriers. One example is a chlorine dispenser installed by village wells that makes chlorinating water easy.

  • However, for some actions like vaccinations, time inconsistency alone may not fully explain delays - people may also underestimate benefits. Nudges can help with both convincing and overcoming procrastination.

  • The poor face many of the same cognitive and behavioral challenges as others, but have less support systems. Public health policies should make preventive care as accessible and easy as possible through free or subsidized services and infrastructure investments.

  • Treatment access also needs to be regulated to control drug resistance while ensuring affordability. Overall, some level of paternalism is justified given people’s limitations and the environment in developing countries.

  • The passage discusses the debate around education policy and interventions in developing countries. It outlines two main perspectives: supply-side advocates (“supply wallahs”) who emphasize increasing access to schools, teachers, etc. versus those who favor a more laissez-faire approach.

  • International goals like the MDGs focused on increasing enrollment rates, which many countries have achieved considerable success in. However, merely getting children into schools is not sufficient if real learning is not occurring.

  • Studies indicate significant teacher absenteeism in some countries, calling into question whether effective teaching is actually happening. An NGO survey in India found half of teachers were not actively teaching when they should be.

  • While access to primary education has expanded greatly, secondary school attendance rates have also risen but costs are much higher at that level.

  • The key debate centers on whether top-down government interventions to expand supply can truly improve educational outcomes, or if a demand-driven approach might work better. The evidence suggests merely enrolling children is not enough if learning levels remain low.

  • An organization called ASER conducted assessments of learning levels for children aged 7-14 across India and found that close to 35% could not read a simple paragraph and 60% could not read a simple story. Only 30% could do basic division in math.

  • These poor results were also found in other countries like Pakistan and Kenya.

  • Critics called “demand wallahs” argue that education quality is low because parents don’t value or demand education enough. They believe increased returns to education are needed to increase enrollment.

  • Programs like conditional cash transfers were introduced to nudge families into sending kids to school by making it costly not to. Mexico’s PROGRESA program pioneered this approach by giving cash only if kids regularly attended school and got health care.

  • The goal was to override what families thought about education and make it in their financial interest to send kids to school through these conditional incentives. Pilot projects were set up to evaluate the programs’ impacts rigorously.

  • The study evaluated Mexico’s PROGRESA conditional cash transfer program, which provided cash transfers to poor families conditional on children attending school.

  • The program was demonstrated to substantially increase school enrollment, particularly at the secondary level. Girls’ secondary enrollment increased from 67% to 75% and boys’ from 73% to 77%.

  • This was one of the first successful randomized experiments, establishing conditional cash transfers (CCTs) and randomized evaluations as policy tools. CCT programs then spread widely in Latin America and elsewhere.

  • Subsequent studies found that conditioning the cash transfers on school enrollment may not actually be necessary - unconditional cash transfers in places like Malawi had similar positive effects on enrollment. Simply providing financial assistance to poor families helped overcome barriers to education.

  • While top-down education policies are sometimes criticized, evidence from programs in Indonesia, Taiwan, and elsewhere show that even supply-side interventions like building new schools can be successful at increasing education levels when lack of access is a constraint.

  • Private schools, including informal low-cost private schools, also often achieve better educational outcomes than public schools, suggesting demand-side approaches have merit as well and privatization may help fill gaps in education systems.

  • Private schools in India and other developing countries often have better educational outcomes than public schools, with private school students performing higher on tests. However, simple and low-cost interventions by NGOs like Pratham have achieved learning gains comparable to or even greater than private schooling.

  • Pratham programs that use semi-trained local volunteers or work with government teachers have improved literacy and numeracy dramatically. Yet private schools have still not adopted such practices to achieve even better results.

  • Parents and children’s expectations of education are often unrealistic. Parents see it primarily as a path to obtaining wealth or government jobs, but few children actually achieve those outcomes. However, parents still overestimate the returns and underestimate the risks of education failure.

  • These unrealistic expectations distort what parents demand from schools, how public and private schools teach, and what children are able to achieve, leading to significant waste. Education is often seen as a “lottery ticket” rather than a steady investment by parents.

  • Parents perceive that each additional year of primary education increases girls’ earnings by only 0.4%, but each year of secondary education increases earnings by 17%.

  • In reality, studies show that each additional year of education increases earnings more proportionally for both boys and girls. Education also provides non-financial benefits.

  • However, the perceived S-shaped returns to education leads parents to invest more in the child they think is most promising, rather than spreading resources evenly.

  • A study found families in Colombia were more likely to concentrate resources on a child who won a school cash lottery, and less likely to enroll a sibling who lost.

  • This misperception can create an inadvertent poverty trap, as parents give up on children’s education if they don’t think they can get past the hump in the S-curve.

  • The education system also focuses on preparing an elite for exams, with a curriculum that is not accessible to many children. Teachers have lower expectations for students from poorer or lower caste backgrounds.

  • This combination of high ambitions and low expectations is damaging, as teachers ignore students who fall behind and parents stop supporting their education, thus creating a poverty trap where none truly exists.

Parents, especially more elite families, tend to deny or avoid accepting if their child is behind in school and will remain uneducated. They send their child to higher grades even if they are not ready, hoping their performance will improve. Had Abhijit been from a working class family rather than academics, he likely would have been placed in remedial classes or asked to leave school for falling behind.

Research shows stereotype threat affects student performance - when certain groups are reminded of negative stereotypes about their abilities, they do worse on tests. For example, low caste Indian children did worse on mazes when reminded of their caste before competing against high caste children. This internalization of stereotypes can lead children to blame themselves rather than the system when struggling in school.

Providing new inputs like textbooks to schools often fails to improve outcomes, as curriculum and teaching are designed for elite students, not regular students. Private schools also focus on preparing top performers for exams rather than educating average students. Government schools push low performers out by graduation to claim high pass rates.

This system wastes talent - many who drop out likely had potential but faced misjudgments, low expectations, or lack of support. Great scientists and successful entrepreneurs demonstrate how those outside the system can still succeed with opportunity and support. Reform is needed to implement teaching practices that help all students learn.

  • Raman Boards is an education firm in India that did a lot of R&D to discover students’ capabilities through constant encouragement and patience. Their model is difficult to replicate directly.

  • Infosys, an IT giant, set up testing centers to identify talent among those without formal qualifications. Successful candidates became trainees and could get jobs, providing hope for those failed by the education system.

  • The problems facing education systems in developing countries include unrealistic goals, low expectations of students, and incentives that don’t encourage good teaching. Finding talented teachers is also getting harder.

  • However, evidence shows giving every child a solid foundation in basics is possible and not that difficult with the right focus and efforts. An example is Ethiopian immigrants in Israel who nearly closed achievement gaps.

  • Successful programs focus on basic skills mastery, minimal teacher training, tracking students by ability, setting proximate goals, and using technology for self-paced learning. With the right changes, education systems could see large gains.

The passage discusses population control policies in India under Sanjay Gandhi during the Emergency period in the mid-1970s. It focuses on one particular policy involving aggressive sterilization quotas imposed on states. Strict targets were set and local officials faced penalties for not meeting them. Coercive tactics were used to meet quotas, like threatening to deny school enrollment for children of parents who refused sterilization. Over 8 million sterilizations were reported in 1976-77, far exceeding original targets.

However, civil liberties were violated in the process and the policy was widely resented. When elections resumed, opposition to the policy helped defeat Indira Gandhi. The new government reversed it. Some argue the policy backfired long-term by increasing population suspicion of government programs and reducing willingness to engage with family planning voluntarily. The passage also briefly discusses population policies more broadly in developing countries and some arguments around large families, like the Malthusian theory linking population growth to poverty.

  • The article discusses debates around how population growth and declines in fertility impact economic growth and development. While lower fertility is often associated with economic growth, the relationship is complex and ambiguous.

  • Simply applying Malthus’ theory that population growth will outpace food production is an oversimplification, as technological progress has increased resources over time.

  • The quality-quantity tradeoff theory proposed by Gary Becker that larger families have less resources per child is examined, but studies looking at exogenous increases in family size found no impact on children’s education outcomes.

  • The article questions whether family planning programs are truly aimed at protecting children’s well-being, as the evidence does not clearly show larger families harm children. Instead, lack of access to contraception may impact mothers’ health, education and employment opportunities.

  • In examining fertility decisions, the central question becomes how much agency and control women have over these decisions within their families and societies. Overall, the relationships between population, development and individual well-being are complex with no clear theoretical or empirical conclusions.

  • Access to contraception may not effectively reduce fertility on its own. Studies in Indonesia and Colombia found little impact of increased contraceptive access on overall fertility rates. This supports the “demand wallah” view that availability follows demand, rather than creating new demand.

  • However, contraceptive access can help postpone teen pregnancies. The Colombian Profamilia program showed it helped teen girls get better jobs later by delaying pregnancies.

  • Teen pregnancy rates are very high in many developing countries, over 10% in some African and Latin American nations.

  • Kenya’s official strategy focuses on abstinence-only education, teaching “Abstain, Be Faithful, use a Condom…or you Die.” Experiments found this had no impact on reported behavior or pregnancy rates.

  • Informing girls that older men are more at HIV risk sharply reduced sex with “sugar daddies” but promoted protected sex with boys their age, cutting pregnancies involving older men by 2/3.

  • Providing school uniforms to reduce dropout rates also reduced pregnancy rates, showing keeping girls in school impacted behavior. This effect was undone when combined with the abstinence curriculum.

So in summary, simply increasing contraceptive access may not reduce overall fertility, but can help postpone teen pregnancy, while informing girls of risks and keeping them in school had clear impacts on sexual behavior in Kenya.

  • For poor girls in developing countries, getting pregnant early may seem like a relatively good option compared to staying at home without an education or means of support. It gives them a family and purpose.

  • However, whose choice is it really? Fertility decisions are made by couples, but women bear most of the physical costs. Women often have less say than their husbands due to power imbalances.

  • Access to contraception alone may not reduce fertility much if women cannot use it privately without their husband’s knowledge. Changing social norms is also important.

  • In traditional societies, shifting social norms around family planning can be complex. Women may learn about options indirectly from unlikely sources like soap operas rather than by directly asking questions.

  • Children are an economic investment for many poor parents, providing insurance, savings and potential support in old age. However, having more children also increases the risks that something could go wrong for one of them.

  • Affecting true choice would require more than just access to contraception - it would mean empowering women economically and changing social norms, which is difficult but important for reducing fertility rates.

  • In many countries, children are expected to care for elderly parents, as there is little other social support. In China, over half of elders lived with children in 2008, and families with more children (7-8) received more financial help from sons.

  • When fertility drops due to policies like China’s one-child policy, household savings rates go up significantly. One study found up to one-third of China’s rise in household savings rates was due to reduced fertility from family planning policies.

  • Parents who expect less financial support from children in old age need to save more themselves. This leaves less available to invest in the children they do have. As a result, families may end up poorer overall with fewer children.

  • Parents tend to invest less in daughters if they expect sons to provide more support later or if daughters require dowries. This can lead to discrimination against girls in things like breastfeeding and healthcare.

  • In many parts of the world, there are far fewer girls than expected due to factors like neglect, sex-selective abortion, or stopping childbearing only after having sons. This “missing women” phenomenon is largely due to a preference for sons over daughters.

So in summary, the reliance on children for support can strongly influence fertility rates, investment in children, and even discrimination by gender when returns differ for sons versus daughters.

  • The simplest model of the family views it as having a single decision-maker (usually the male head) who omnipotently decides things like consumption, education, bequests. But families don’t really work like this - there are complex dynamics.

  • In the 1980s-90s, the model shifted to seeing family decision-making as a bargaining process between members (usually husband and wife). They negotiate to find solutions that serve both their interests as much as possible.

  • Evidence from Burkina Faso and Côte d’Ivoire shows families don’t always allocate resources efficiently, suggesting individual control over certain assets/crops.

  • What really binds families is an “incomplete contract” defined by social norms, like ensuring basic sustenance. This relies on social enforcement as family members can’t always fully negotiate.

  • Norms change slowly, so the contract may get out of sync with reality, disadvantaging some. An example from Indonesia showed married daughters no longer supporting parents due to norm changes.

  • Policy should complement, not replace, families by directing support in ways that norms/contract allow it to be used for children, like cash transfers to women.

So in summary, the passage critiques early simplistic family models and argues families are really governed by social norms and incomplete contracts, which policy must understand to effectively support families.

  • Pak Sudarno wanted 9 children in order to ensure that at least one would support him in old age, since there was no social safety net. However, having so many children contributed to his poverty.

  • Effective social safety nets like pensions could reduce the need for large families by allowing the elderly to support themselves. This would lead to lower fertility rates and less pressure to have male children.

  • Ibu Tina’s small business failed due to unlucky circumstances like a fraudulent business partner and unsellable inventory. Small businesses and farms run by the poor face huge risks with no safety net.

  • The poor live with as much risk as hedge fund managers but without the same income levels or ability to raise capital. Both small businesses and casual labor offer unreliable incomes subject to market forces.

  • Agricultural incomes in particular vary greatly from year to year due to weather and prices. Effective institutions are needed to reduce risks faced by the poor from shocks outside their control.

  • City dwellers were struggling with high and uncertain food prices during this time. Farmers in particular faced high fertilizer prices but uncertainty around future produce prices at harvest.

  • For the poor, life involves significant risks beyond just income/food, like health issues, political violence, crime, and corruption. Their lives involve so much daily risk that events seen as crises in rich countries barely register for them.

  • The 2008 global financial crisis threatened to severely impact developing countries as demand and jobs declined. However, when journalists visited rural India to see the impact, locals were upbeat about job opportunities in cities and said cutbacks were not being reported. Many young men still planned to migrate for construction work.

  • The poor deal with problems on a daily basis that feel like an ongoing financial crisis. Large negative events add little to their already high level of daily risk. During past crises, the impacts on the poor were often temporary as their situation is always relatively bad.

  • Bad events hurt the poor more due to consuming very little already and reliance on essential spending. Even temporary income/consumption declines can be devastating. Shocks can also trap the poor in long-term poverty due to S-shaped relationships between current/future income.

  • Poverty involves high stress levels that impair cognitive function and recovery, making it harder for the poor to regain stability after negative events. Their lives involve navigating a huge amount of daily risk even outside of major crises.

  • Poor communities use various strategies to cope with economic risks like drops in income or crop failures. These include diversifying activities and occupations within the family, holding multiple small land plots rather than one large plot, and temporary migration of some family members.

  • These strategies help spread risks across different locations, industries, and family members. However, they are also economically inefficient as they prevent specialization and acquiring of skills.

  • Informal support networks within villages and communities also help people cope by providing interest-free loans and gifts during hard times. However, research shows this informal insurance is imperfect and consumption still drops when families face shocks.

  • Health shocks, in particular, are very poorly insured within communities. While families receive help for issues like crop failures or job losses, research finds little support is provided for non-fatal illnesses. This leaves affected families to deal with health costs on their own.

  • The risks borne by the poor through inadequate insurance and coping strategies are not only costly during shocks but have ongoing effects by limiting opportunities for skill development and specialization.

  • One of Ibu Emptat’s daughters gave her an old but still nice TV, instead of cash to help pay off her debt from medical expenses. This surprised the interviewers as cash would seem more helpful.

  • Ibu Emptat implied it was not her place to question the gift and seemed to think it was normal that family would not directly help with health costs.

  • There are good reasons people may be hesitant to unconditionally help others, like moral hazard or claims of need when there is none. But health crises are usually unchosen, so this doesn’t fully explain the lack of help.

  • People may help neighbors in true hardship due to moral obligation rather than expected reciprocity. But large health costs require more resources than basic sharing of food.

  • Insurance could help the poor manage risk, but there are challenges like moral hazard, adverse selection, and fraud that are amplified in developing areas with weak regulations.

  • Providing health insurance for outpatient care poses high risks of overtreatment and fake claims. Insurance works better for catastrophic events than routine care.

  • Microfinance institutions (MFIs) thought offering health insurance to their borrowers could help both clients and the MFI itself by insuring against issues like defaults due to health costs.

  • SKS Microfinance, India’s largest MFI, launched a pilot health insurance program in 2007 covering maternity, hospitalization, and accidents. It was made mandatory to prevent adverse selection. Claims were capped and clients encouraged to use designated hospitals to reduce fraud.

  • When mandatory, clients rebelled. Renewal rates fell as clients left SKS to avoid insurance. Some prepaid loans to avoid mandatory insurance at renewal.

  • Faced with resistance, SKS made it voluntary, but then adverse selection became an issue as only sick clients signed up. Costs rose and the insurer asked SKS to stop.

  • Other MFI health insurance schemes faced similar problems with mandatory enrollment. Simple weather insurance in India also had very low voluntary signup rates.

  • The key issue is insurance can only practically cover catastrophic risks, but this reduces credibility and trust in insurers as smaller claims are often denied. This limits demand even when Insurance concepts are understood.

  • Many poor individuals in developing countries take out small, daily loans from wholesalers to buy goods like vegetables to sell, paying back high daily interest rates, such as 4.69% per day in India. These interest rates can compound to astronomical levels over time.

  • Founders of microfinance saw an opportunity to offer alternative loans at lower rates to help the poor grow their businesses and escape poverty. However, questions remain as to why existing lenders like wholesalers did not lower rates to capture more business.

  • In surveys across 18 countries, less than 5% of rural poor and 10% of urban poor have bank loans. Most borrow from relatives, money lenders, shops - paying much higher monthly interest rates like 3.84% from informal sources.

  • Banks are largely unwilling to lend to the poor. Microfinance aims to fill this gap by charging rates low enough to be sustainable but not exploitative. However, it remains to be seen if microloans can truly lift many out of poverty in a short time as claimed. Government may need to subsidize premiums to help the microinsurance market develop.

  • Interest rates in developing countries for the poor are often in the 40-200% range, much higher than what wealthy individuals pay. Government programs in the past tried to increase credit access for the poor through subsidized lending, but these often failed due to high default rates and loans going to political elites rather than the intended recipients.

  • Private lenders are also reluctant to lend to the poor despite high interest rates, because the transaction costs of vetting small borrowers and enforcing repayment are disproportionately high compared to the loan size. Information gathering and monitoring activities are necessary to prevent willful default but are costly.

  • The high costs mean interest rates need to be very high for lenders to break even, and this deters lenders from making small loans to the poor. It also incentivizes borrowers to default, further increasing costs. Informal local lenders can lend at lower rates as they have existing information on and relationships with borrowers.

  • Threat of punishment, such as through threatening visits by imposing figures, can also enforce repayment and lower rates. However, competition does not necessarily lower rates as switching costs for borrowers are high once vetted by a lender.

  • Traditional moneylenders have an advantage over banks in collecting loan repayments from poor borrowers because they operate locally and can put social pressure on borrowers through threats or damaging their reputation in the community.

  • Banks face challenges in lending to the poor due to lack of local knowledge, high turnover of bank officers, inability to use threats or pressure, and long legal processes for recovering assets from defaulting borrowers.

  • Microfinance institutions (MFIs) reinvented lending to the poor by forming self-help groups that mutually guarantee loans and put social pressure on one another to repay. They also standardized repayment procedures.

  • These innovations reduced administrative costs and allowed MFIs to charge lower interest rates than moneylenders, making microcredit accessible to more poor communities. However, rates are still higher than what banks charge wealthier clients.

  • While microcredit has reached over 150 million borrowers globally and enjoys high repayment rates, there was limited evidence on its impact in reducing poverty until more rigorous studies were conducted recently. Early claims about its transformational impact were based mostly on anecdotes and case studies from MFIs themselves.

  • In 2010, the Andhra Pradesh government in India blamed microfinance lender SKS for the suicide of 57 farmers, claiming coercive debt collection practices drove them to suicide. SKS denied this.

  • The government passed laws making microloan repayments more difficult, effectively telling borrowers they didn’t need to repay. This caused losses for major MFIs like SKS, Spandana, and Share.

  • MFIs had been reluctant to conduct impact evaluations to prove their benefits, assuming customer return rates proved impact. But critics argued microcredit could trap borrowers in unmanageable debt.

  • An evaluation of Spandana’s program found it modestly increased business startups, durable good purchases, and savings, but didn’t drastically transform lives or empower women. However, MFI representatives downplayed these results.

  • The study showed microcredit’s benefits but not miracles claimed by some. Further research was needed on long-term impacts and exploring what else could be done to help the poor. However, some major MFIs denied and criticized impact study findings.

  • While microcredit provides useful access to credit, it appears to have limits in dramatically reducing poverty levels or driving widespread business growth for all borrowers. Further work is needed to understand its limitations.

The standard microcredit model has rigid rules like weekly repayments starting a week after the loan is given and joint liability among group members. This means it is not ideal for situations requiring flexibility, like emergencies or projects with delayed returns. A study found letting some clients delay repayments by 2 months increased risk-taking and profits. However, default rates were also higher, so the MFI opted to keep the original model.

The focus on zero default is too stringent and creates tension with entrepreneurship, which involves risk and potential failure. However, MFIs prioritize repayment discipline to maintain trust in the model. Crises in specific districts show how beliefs can quickly unravel, with politicians or rumors causing mass defaults. Even clients near repayment were less likely to pay if others in their group stopped. These episodes demonstrate that opening the door to defaults could undermine the social contract enabling high repayment rates and low interest. Therefore microfinance may not be best for financing ambitious entrepreneurs beyond micro-enterprises.

  • Microfinance has been successful in lending small amounts to the poor, but it is not well-suited to lend large sums that could allow people to fail or find risky entrepreneurs. This is by design, as the models aims to lend sustainably at low interest rates.

  • Microcredit also does not effectively discover entrepreneurs who will start large businesses, as it incentivizes people to play it safe. While some examples exist, most loans remain very small even after years.

  • Established small and medium businesses also face credit constraints, as they are too large for microfinance but too small for banks. Regulations requiring banks to lend to small businesses have helped but are not a perfect solution.

  • A key challenge is finding ways to finance medium-scale enterprises, as microfinance is limited in its ability to provide stepping stones to larger businesses. New approaches are needed to profitably lend to smaller firms at a large scale.

  • People often save by incrementally building houses over time through adding rooms or finishing upgrades when extra cash is available, as a way of saving without formal banking.

  • The passage discusses why the poor save money in unconventional ways, like slowly building a house brick by brick over many years, instead of using more typical savings methods.

  • Saving brick by brick for a house seems inefficient, as an unfinished house provides no utility and may be worth less if sold incomplete. However, it must be the poor’s only option for saving.

  • The poor are often assumed to be impatient and unable to delay gratification, but they face the same uncertainty about the future as others. They try various creative ways to save, like savings clubs and rotating credit associations.

  • Examples from African market vendors show the poor have sophisticated financial portfolios using multiple savings instruments tailored for different purposes, despite living on under $2 per day.

  • While ingenious, these informal methods may exist because traditional banks don’t find it profitable to manage the small accounts of the poor due to administrative costs. The poor thus lack access to simpler saving alternatives.

  • The study looked at whether poor people in rural Kenya would save more if they had access to affordable bank accounts. A bank offered free savings accounts with withdrawal fees to a random sample of small business owners.

  • Few men used the accounts, but about two-thirds of women deposited money at least once. Women who used the accounts saved more, invested more in their businesses, and were less affected by illness compared to similar women without accounts.

  • However, the regular fees to open and use accounts - about 10% of total deposits - meant the accounts were not economically viable for the poor or the bank unless costs reduced. Alternative saving methods like self-help groups and mobile money could help lower costs.

  • While access to savings accounts helps some save more, lack of access is not the only barrier. Many people offered free accounts still did not use them much or stopped using them. Psychology factors like impatience may also influence saving behavior among the poor.

  • Farmers in western Kenya said they did not use fertilizer because they did not have enough money on hand to purchase it when it was time to plant. Fertilizer can be bought in small quantities, so this seemed like an accessible investment opportunity.

  • However, farmers found it difficult to save even small amounts of money between harvest and planting season due to other demands on their money like medical expenses or feeding guests.

  • One farmer, Wycliffe Otieno, overcame this by immediately selling most of his harvest and using the money to buy seeds and fertilizer in advance, before the money could be spent on other things. He stored the inputs until planting.

  • Others were not able to buy fertilizer in advance because the supply was unpredictable - fertilizer was not available right after harvest but only later near planting time.

  • A program called SAFI made fertilizer more accessible by selling vouchers for fertilizer right after harvest, then delivering the fertilizer later just before planting time. This greatly increased fertilizer usage among farmers.

  • The experience suggests barriers to savings stem partly from human psychology and difficulty resisting immediate temptations over longer-term needs like productivity investments. Farmers recognized these challenges themselves.

  • Some microfinance clients borrow money in order to save, as the obligation to repay the loan acts as discipline to prevent them from spending the money on temptations. A woman in India took out a loan and deposited it into a savings account to save for her daughter’s dowry.

  • Self-control issues can be addressed by committing savings to concrete goals like building a house brick by brick. However, committing to not withdraw savings requires initial self-control.

  • Research with vendors in Kenya found that offering locked savings boxes for health expenses did not increase savings, as people did not want their money tied up out of fear they may need it for other purposes.

  • Temptations are harder for the poor to resist as aspirations like refrigerators seem far off. Rich people are more likely to have satisfied visceral needs, so extra money faces less temptation. Frequent self-control struggles also drain poor people’s willpower.

  • Automatic savings through payroll deductions make it easier for the rich to save, while the poor must exercise self-control repeatedly. This likely contributes to an S-shaped curve between wealth today and in the future.

  • The relationship between current wealth and future wealth tends to be fairly flat at very low levels of wealth but rises sharply at a certain point, forming an S-shape curve.

  • This S-curve generates a “poverty trap” - those just below the point where the curve touches the 45-degree line won’t accumulate more wealth and remain trapped in poverty. Those just above it save more than needed and get richer over time.

  • Getting out of the poverty trap depends on optimism and hopes for the future. Providing opportunities, security, and reassurance can encourage saving behavior and goal-setting among the poor.

  • Dean Karlan found that giving fruit vendors debt relief temporarily allowed some to stay debt-free, but most fell back into debt due to emergencies. This shows the role of discouragement in maintaining poverty.

  • Padmaja Reddy of Spandana observed that their microcredit clients cut spending on “wasteful” items like tea and snacks, freeing up funds for loan repayments. This supported the idea that hope incentivizes changed spending behaviors.

  • While microcredit aims to fuel entrepreneurship, some MFI programs have found less interest than expected among eligible poor communities, challenging assumptions of the poor as naturally entrepreneurial. Understanding this reluctance could provide insights.

  • The passage describes two cases in the Moroccan village of Hafret Ben Tayeb where no one had previously borrowed money. In the first case, a man named Allal Ben Sedan and his family are interviewed. Ben Sedan has four cows, a donkey, and 80 olive trees. One son works in the army, another tends the animals, and the third harvests snails.

  • Researchers propose Ben Sedan take a loan to buy more cows for his idle son to care for. But Ben Sedan says his field is too small, and the cows would have no place to graze. He insists his family has enough and does not need anything else.

  • The founder of Al Amana microfinance, Fouad Abdelmoumni, believes Ben Sedan just needs the right business plan presented to him. He draws up a plan where Ben Sedan could build a stable, buy 4 young cows, feed them in the stable, and sell them for profit within 8 months.

  • The passage contrasts Fouad’s enthusiasm with Ben Sedan’s insistence that he has no need for a loan. It questions whether Fouad is right that Ben Sedan just needs the right plan presented, or if Ben Sedan knows his situation and needs better.

  • The passage then discusses theories that the poor are natural entrepreneurs, and provides some examples of microfinance clients who succeeded through unusual business opportunities after obtaining loans. However, it also notes that many entrepreneurs succeed without access to microfinance.

  • Even though the poor pay very high interest rates (e.g. 50% annually) for microloans, they are still able to repay the loans, indicating their businesses must be earning an even higher rate of return to make the loans worthwhile. This return is remarkably high compared to traditional investments.

  • Experiments where very small grants were given to tiny businesses in Sri Lanka and Mexico found average returns of over 60% annually on the initial $250 grants. This shows high marginal returns for investing small additional amounts in these businesses.

  • However, the vast majority of businesses operated by the poor remain very small with no paid employees or assets. Many do not survive long-term, and the average profits are quite low once unpaid family labor is accounted for.

  • So while marginal returns on small investments can be high, overall returns for these tiny, low-profit businesses are generally not high enough to significantly improve the owners’ welfare or lift them out of poverty in the long-run. The ability to repay high-interest microloans does not necessarily mean the businesses are hugely profitable on average.

In summary, it explains the apparent paradox that while marginal returns on investments in these businesses can be high, overall most remain low-profit and inability to meaningfully reduce poverty in the long run.

  • The relationship between investment (OI) and returns (OR) in a firm can be represented by a production technology curve. The overall return is the height of the curve, while the marginal return is the change in height from one level of investment to the next.

  • For poor small businesses, the curve typically has an inverted L-shape, with high marginal returns at low levels of initial investment that taper off as more is invested.

  • This is illustrated through the example of a shopkeeper who sees high returns from her first small investment but diminishing returns as she expands further.

  • Many small businesses in developing countries remain at a very small scale, with limited inventory, despite the potential for high marginal returns from expanding.

  • Access to financing is not the only constraint - even with grants, businesses may not invest all the capital if larger-scale expansion is not viable given the nature of their production technology curve.

  • Production technology curves that increase returns steeply at first but flatten out quickly (OP curve) mean it’s easy to grow a very small business but hard to expand beyond a certain point, limiting overall returns.

  • This helps explain why small businesses remain small despite potential high returns, as viable larger-scale expansion may not be feasible given the shape of their production technology curve.

  • For most poor people, starting a small business is a way to “buy a job” when other employment options are unavailable, rather than a genuine attempt to grow a substantial enterprise. The returns are often too low and risky for real scale.

  • There is an “S-shaped” curve of returns, where small initial investments only generate low returns (OP) but a much larger investment is needed to access higher returns from more productive technologies (QR). Crossing this hump is difficult without access to capital.

  • For micro-businesses trapped in the low-return part of the curve, entrepreneurs may lack commitment to growing the business since they know returns will always be limited. Basic business training often has little impact.

  • Case studies show it can take decades of reinvesting high profits just to accumulate the capital needed to access higher-return technologies. Returns are often too low and the time horizon too long for most poor entrepreneurs.

  • Necessity rather than talent or ambition often drives people to operate micro-businesses that are essentially “buying a job” in the absence of other employment options, not genuine attempts to build large enterprises.

  • Turah wanted to start a small business from home to take care of her children, so she and her husband Pak Awan opened a neighborhood shop with a loan. However, there were already two other shops nearby.

  • They didn’t enjoy running the business. When they had the chance to expand with a second loan, they declined. However, a fourth shop opened and threatened their business.

  • To compete, they decided to take out a new loan to buy more stock for their shop. Their hope was that their children would get salaried jobs, preferably with the government.

  • Businesses run by the poor often seem to be more out of necessity than entrepreneurial spirit. They are a way to earn income when better jobs are not available. Women in particular often run businesses in addition to household work.

  • The poor strongly aspire for their children to get secure government jobs rather than be entrepreneurs. They value stability over potentially higher but riskier earnings. Access to stable employment distinguishes the middle class from the poor.

  • Factories providing stable rural jobs had transformational effects by allowing investment in education and career progression over generations. Access to reliable employment allows people to better plan for the future.

  • A “good job” refers to a steady, well-paid job that provides financial and mental stability. While expensive initially, good jobs allow children to reach their full potential.

  • Moving to cities can enable upward mobility by providing access to better schools and job opportunities. A story is told of an Indian family who moved to Hyderabad, allowing their sons to get college degrees and stable jobs.

  • However, permanent migration is still relatively uncommon among the poor due to costs, lack of social networks in cities, and lack of stable housing and jobs. Migrants often leave families behind and return home frequently.

  • Factors like existing social connections in cities, access to stable income and credit, social safety nets, and affordable housing can make permanent migration easier. But jobs also need to be created in smaller towns to provide opportunities closer to home for many.

  • While microenterprises help survival, they are unlikely to lead to mass exits from poverty on their own. “Entrepreneurship” implies talents and skills most microbusiness owners lack. Stable, larger businesses are needed to generate the jobs and wages that can truly reduce poverty.

  • Effective policies are needed to promote job creation through infrastructure development, appropriate regulations and social programs, and potentially government support for medium businesses to start virtuous cycles of growth and poverty reduction. However, proper implementation is also critical for policies to have impact.

The gap between intended policies and actual implementation can be wide due to issues of government capacity and corruption. Some argue that until problems like corruption are solved, it is difficult to design and implement good policies at scale in developing countries.

A study in Uganda found that only 13% of funds intended for schools actually reached them, with over half receiving nothing. This highlighted the problem of corruption. However, when the results were publicized, accountability improved - by 2001, 80% of funds were reaching schools after complaints were filed. This suggests that incremental solutions focusing on accountability and transparency can help make progress even in corrupt environments, without needing large-scale political or social change first.

Political economists argue that a country’s broad political and economic institutions are major drivers of development outcomes. Rulers may design extractive institutions that maximize their personal gains rather than national development. This can create vicious cycles where bad initial institutions persist over time. However, the Ugandan school funding example shows that even without wholesale institutional reform, smaller targeted interventions addressing issues like corruption can still help policies get implemented and drive meaningful change over time through an accumulation of incremental progress.

  • Acemoglu and Robinson argue that countries can get stuck in a vicious cycle of bad political and economic institutions. Changing institutions is difficult and requires the right alignment of forces and some luck, as seen in major historical events like the English and French Revolutions.

  • There are two other views that share their focus on the importance of institutions but differ in their optimism. One view advocates for outside intervention to help establish better institutions, potentially through force. The other views any top-down changes as doomed to fail and says changes must come from within.

  • Paul Romer proposed the idea of “charter cities” where countries cede empty land to foreign powers to develop new cities with good institutions from scratch. Critics argue leaders may not agree to this and maintaining control would be difficult.

  • Paul Collier argues rich Western nations should intervene in the “basket case” countries through military action if needed to help transition them to democracy and better institutions. William Easterly criticizes this as easier said than done, backing foreign takeovers will likely backfire, and reforms must be gradual and tailored locally.

  • Easterly is skeptical of foreign aid and intervention but believes in freedom and free markets as the solution, allowing “7 billion experts” to solve their own problems through collective action and entrepreneurship. However, some rules and government are still needed for markets and society to function properly.

  • The debate misses that “institutions” also include many specific local institutions that define the actual rules and how they are enforced. Significant changes can sometimes happen gradually through reforms to these smaller institutions.

  • Local elections have been introduced in recent years in Vietnam, Saudi Arabia, and Yemen, but they are often rigged and elected officials have limited powers.

  • Even imperfect local elections can make a difference by increasing accountability to locals. In China in the 1980s, village elections increased benefits for middle class farmers and spending on villagers’ needs.

  • Relatively simple anti-corruption interventions like audits and publicizing results can be effective even without fixing large institutions. In Indonesia, auditing a infrastructure program reduced theft by 1/3.

  • In India, mystery shoppers pretending to report petty crimes to police found that only 40% of cases were initially registered. But after revealing the tests, registration increased to 70% due to fear of further tests, improving policing.

  • New technologies like biometric IDs in India have potential to reduce corruption even with persistent institutional flaws by making ghost beneficiaries harder.

  • Even systems with “generally bad institutions” can work better in practice with small rule changes. In Brazil, switching to electronic voting reduced invalid votes by 11%, enfranchising poorer voters.

  • Handing control of services to beneficiaries through power like hiring/firing providers can increase accountability, but this is often done without asking the poor if they want this responsibility.

  • Community-driven development projects where communities choose and manage collective projects can help rebuild social ties after civil conflicts. However, how community participation and decentralization is implemented matters greatly.

  • Village meetings in developing countries are often dominated by local elites. Small changes to meeting rules, like inviting all villagers via letters, can increase participation and critical feedback.

  • India’s reservation system reserves some village council leadership positions for women and minorities. Studies found women leaders invested more in infrastructure priorities of women, like drinking water, compared to male leaders who invested more in roads. However, forcing political leadership on women is not an instant revolution, as they still face prejudice and oversight from husbands/relatives.

  • Testing candidates who gave different speeches found promises of local benefits based on ethnicity (“clientelist” speeches) gained more votes than calls for national unity. This ethnic voting rewards candidates more for their group identity than merit, lowering incentives to perform well and increasing corruption over time.

  • Some scholars argue that ethnic identities fundamentally shape politics in traditional societies, and ethnicity will dominate political attitudes until a society modernizes. However, evidence suggests ethnic voting is not as entrenched as believed.

  • An experiment in India found that a simple message from an NGO to “vote on development, not caste” reduced ethnic voting by 7 percentage points, showing voters’ minds can be changed.

  • One reason voters rely on ethnicity is they know little about candidates and it’s hard to assess performance or corruption. Caste gives a small chance of benefit so they see little downside.

  • Brazil tries to provide more information to voters. Audits of local governments are publicized, and voters punish corrupt incumbents or reward honest ones based on audit results. Similar effects were seen in Delhi when voters learned about incumbent performance.

  • Politics is not completely determined by political economy forces. There is some slack, and minor interventions can make a difference. Good policies sometimes occur in unfavorable political environments, and bad policies sometimes occur in favorable ones. The motivations and goals of political elites are complex.

  • Both politics and good policy design are difficult. Government must solve problems markets can’t, but faces challenges in assessing performance and risk of corruption, especially in poor countries with weak governance. Success requires attention to implementation details.

  • Absenteeism among health workers in India is a major problem that illustrates how programs can fail when they are badly conceived from the start and not revised.

  • A program in Udaipur district tried to address nurse absenteeism by tightening attendance rules and having an NGO monitor attendance. Initially it worked, but nurse attendance soon dropped back down.

  • The real problem was that the nurses’ workload was unrealistic and poorly designed - expecting them to work 6 days a week doing difficult home visits. The rules were not grounded in reality.

  • This reflects the “three Is” problem - programs are often based on ideology rather than reality, developed in ignorance of ground conditions, and then just endure through inertia without revision.

  • Similarly, an education reform program to increase parental involvement failed because parents were unaware of it due to the three Is problem - it was not adapted to the local context or maintained over time.

  • Concrete, clearly defined tasks like providing reading classes were more effective at mobilizing communities than vague responsibilities like pressuring administrators. Successful programs give communities tangible roles.

Based on the passage, the key points about what the extra teacher was doing in the schools are:

  • The extra teacher was part of a new program that was implemented in all schools.

  • The effects of the program were stronger in schools where the school committee was asked to pay close attention to how the new teacher and the program worked.

  • This suggests the school committee was monitoring and overseeing the new teacher and program to make sure the school was implementing it properly and not misusing the new teacher.

  • Having the school committee involved in oversight helped ensure the program was working as intended and the new teacher was being utilized appropriately.

So in summary, the extra teacher was part of a new education program, and the school committee played an oversight role by monitoring how the teacher and program were being implemented to prevent any potential misuse of the new teaching resources. Their involvement strengthened the impact of the program.

Economists have little ability to predict where economic growth will occur or explain why growth happens in some places but not others. While many factors are likely important, such as education, health, security, and confidence, there are no definitive answers.

Social policies that improve living conditions and reduce misery may help sustain a population until economic growth occurs. Even if social policy does not directly cause growth, improving lives is a moral imperative given that effective poverty interventions exist.

Five key lessons emerge. First, the poor often lack critical information and have misconceptions, so well-designed information campaigns can help. Second, the poor bear too much responsibility due to a lack of default options and support systems. Third, some markets are missing or unfavorable for the poor due to high transaction costs. Governments may need to intervene to support markets or provide certain services directly. Fourth, failures in poor countries are often due to avoidable flaws in policy design rather than conspiracy, so improving policies and governance is important. Overall, incremental improvements can help lift living standards while countries await economic growth.

  • There is tremendous potential for improving lives and reducing poverty even without major social or political changes. Small, targeted interventions can have meaningful impacts.

  • Simple measures like ensuring all community members are invited to village meetings, monitoring government workers’ performance, informing voters about politicians’ records, and clarifying what public services people are entitled to can make a difference.

  • Changing expectations, which often become self-fulfilling prophecies, is also important. For example, after seeing a female leader, some villages lost prejudice against women politicians and saw their daughters having that potential too.

  • Success breeds more success, so small initial improvements in a situation can trigger virtuous cycles by positively impacting beliefs and behaviors. Providing support when needed can get these cycles started.

  • Even modest interventions, if done at scale, can significantly boost outcomes. For example, deworming treatments in Kenya produced large lifetime earning increases from apparently small costs per person treated.

  • While poverty is deeply entrenched, gradual, evidence-driven changes over time can make progress toward eliminating extreme poverty, even if a complete solution takes decades.

Here is a summary of the key points from the review essay “An Aid-Institutions Paradox? A Review Essay on Aid Dependency and State Building in Sub-Saharan Africa,” Working Paper No. 74, Center for Global Development (January 2006):

  • The essay examines the relationship between foreign aid and institutional development in sub-Saharan African countries. It explores the idea that high levels of aid can undermine the development of strong domestic institutions.

  • Still, many countries receive a significant portion of their national budgets from foreign aid. Eleven countries received over 10% of their budget from aid, and eleven received over 20% of their budget from aid.

  • There is no consensus on the exact relationship between aid and institutions. Aid can help build capacity and scale-up programs in the short-run, but may reduce incentives for self-sufficiency and domestic revenue generation in the long-run.

  • Aid that bypasses government institutions may weaken them by reducing pressure for reform. But channeling aid through governments has risks as well, as some governments are ineffective partners.

  • The essay concludes there is an “aid-institutions paradox” - aid is both necessary for development but may also undermine institutional development. More research is needed to better understand this complex relationship and how to maximize the benefits of aid.

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About Matheus Puppe