Poor Economics

Abhijit V. Banerjee & Esther Duflo

 

The book in a nutshell: 

Insight after eye-opening insight into the psyche of the poor and the entrapping infrastructures and institutions in place.

 

Miscellaneous insights:

We have to understand the poor and the problem of poverty in order to design the best policies.

The poor are often skeptical about supposed opportunities and the possibility of radical change.  They're also skeptical about medical professionals and about the benefits of education, viewing education more like a lottery ticket than a safe investment.

For the poor, potential rewards are too far off and not guaranteed.  Thus, sacrifice right now is often not considered worth it.  If there’s no hope for significant future improvements, it's easy to just stop trying.

The rich have satiated many of their everyday desires already, so there’s less temptation to give in to smaller purchases on an everyday basis, thereby making it easier for the rich to save.  

Males and females spend increases in income differently; families benefit more from increases in female income.

Microcredit doesn’t allow people to take risks because of the (understandably) strict rules.  People often don’t want to start their own businesses; it's just their only choice.


Poverty traps: 

Education: The belief that education's benefits are s-shaped (more benefit for higher education, less benefit for early education) causes families to put all eggs into one basket instead of giving some education to all children.  This creates a poverty trap where there shouldn't be one. 

 Low expectations: Various groups in various settings (e.g. the poor, women, African-Americans, etc.) aren't expected to perform well.  That expectation is engrained in them and/or affects educators'/parents' treatment of them, and a poverty trap is created when there shouldn't be one.

 Nutrition: Undernourished children become short adults, have lower educational achievement, give birth to smaller infants, and achieve lower economic status in adulthood. 

Career: The need to have several jobs to earn enough money prevents the poor from becoming specialists at anything, thus making it more difficult to move up professionally and economically.

 Bad breaks: Bad breaks hurt the poor more than they hurt the rich.  While the rich have safety nets (more on this to the right), bad breaks for the poor can lead to a loss of hope and a sense that there's no way out.  This makes it harder to have the self-control needed to climb back up.  Worry leads to stress, depression, and increased cortisol levels which impairs cognitive and decision-making ability.  (Experiments show that subjects are less likely to make the economically rational decision under stressful conditions).  

 





 

 

 

Safety nets: 

For the poor, kids are their economic futures.  The rich, on the other hand, have safety nets like Social Security, mutual funds, retirement plans, and health insurance.

Also because of social security, pension plans, etc., It's easier for the rich to save – the decision is just made once and it’s taken care of.  The poor have to have much more self-control to save.  

 

Suggested solutions: 

Help the poor to see that some of their long-term goals are indeed attainable; give hope.

Be a voice for the poor within the systems currently in place. 

Give the poor a more accurate picture of the systems and infrastructures in place - educate on what can actually help.

Carefully think through political and economic institutions to keep corruption in check, to effectively shape economic incentives, and to give the poor a legitimate voice.