On poverty

When you grow up in India, you are bound to see extreme deprivation all around. Impoverished people, children without clothes, mud houses with thatched roofs and missing sanitation are some frequently sighted visuals that have always made me ponder about poverty.

‘Why are people poor?’, ‘Why do they remain poor?’ and ‘What can be done to bring them out of poverty?’ are questions that I was seeking answers to when I decided to pick up Abhijit Banerjee and Esther Duflo’s pioneering work—’Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty‘. The recent Nobel laureates in Economics have done a great job at demystifying the core reasons for poverty and poverty traps.

Randomized Controlled Trials

Their work is based on results from Randomized Controlled Trials (RCTs) done across developing economies such as India, Indonesia, Kenya and Bangladesh. RCTs have been around for quite some time now and were primarily used in medicine for testing the efficiency and side-effect of drugs, however, there has been a gradual increase in their usage in developmental economics over the last couple of decades.

How it works is that two groups are formed at random from a population where one group called the control group is let to continue doing whatever they have been doing while the other group called the intervention group is subjected to an intervention. An intervention is a change that is implemented to test a hypothesis. For eg. introducing mid-day meals should reduce drop-out rates of school children in rural India. Here the control group will not receive mid-day meals whereas the intervention group will receive the same. The dropout rates will then be compared after sufficient time has passed to understand the effect of the intervention on the population.

Trying to understand this research method has left me unconvinced with regards to how practically reliable and scalable the findings are. That is not to say that the insights are not ingenuous—they most definitely are. But when it comes to making generalisations based on them and transforming them into policy making, the task is not as easy. The researchers understand the limitations and explicitly state their assumptions, but policymakers might not read the fine print and that can have consequences.

The following reasons state why RCTs can be unreliable:

• Selection bias – In socio-economic studies, it is very difficult to form identical control and intervention groups because there are a lot of factors at play that have the potential to affect the results of RCTs. For instance, in the mid-day meal example described above, the parental income of the students or their nutrition and health conditions can have substantial impact on the decision of them continuing schooling or not. Thus, even though the selection of the groups is random, accounting for all the associated factors is difficult and consequently their impact on the outcome being measured in the trial is difficult to isolate. There are ways to remove this bias to a certain extent by techniques such as stratified randomisation but it still remains a major point of contention in these studies.

  This further presents other challenges with regards to replicating the groups with similar characteristics in different parts of a country or the world and the results of the study holding there.

• Contamination – Another related caveat is the possibility of contamination. This means that there might be some change in the lives of the control group that adversely/favourably affects the outcome of the study. Like supposing the control group in the mid-day meal study comes across government sensitisation and counselling programs on education that alters their views. This might affect the final dropout metric and contaminate the result of the RCT.
• Attrition – Finding individuals who remain committed to the cause of the RCT is also difficult in highly impoverished regions where the priorities of the people are entirely different. This often leads to attrition from the groups and affects the results of the study.

Further reading – The value and limitations of Randomised Control Trials in economics – Alok Ray, Unicef on RCTs

Understanding the reasons for poverty

While their RCT based findings might not be entirely accurate, Banerjee and Duflo have been able to highlight some very intuitive reasons that perpetuate the poverty trap through their extensive experience of conducting studies by visiting poverty ridden areas and interacting with people. Some ideas that resonated with me are as follows:

• Being empirical is better than being ignorant or being driven by ideologies when one wants to understand poverty. It is very much like building products where the customer is king and the only way to know what they want is through iterative experiments.
• Poverty traps exist when there is a disparity that leads to a chunk of the population being unable to grow income or wealth at a faster rate because they lack resources to invest while the other chunk of the population can do that. Fighting poverty is about reducing this gap.
• Lack of access to proper information is a major detriment in enabling people move out of poverty. It is also a lever that can create maximum impact with the least amount of effort.
  • Food and nutrition – Iodine supplementation or deworming pills can have far reaching implications on the lives of young kids and affect their future earnings in a significant way. But the poor are skeptical of what they are told to eat.
    For those who are able to get a full plate of meal on their tables at night comparatively easily, an incremental increase in income means graduating to better quality grains (eg. from millets to wheat/rice). The problem with most of these people is not the amount of calorie intake but rather the lack of essential nutrients (vitamins and minerals). Even when they can afford to add them to their diets, their lack of information and longing for better food comes in the way of them becoming healthier.
  • Health – A major reason why the poor remain poor is the health trap where diagnosis and treatment costs can be life-changing for them. There is still very less cognizance to the existence of preventive measures such as vaccination, the use of mosquito nets or the need for disinfecting water through chlorine in some areas.
  • Education – While enrolment rates are increasing across a lot of places, the major challenges in education now lie in the quality delivered and in reducing the dropout rates. A major contributor to the dropout rate is the lack of understanding among parents as to what education can mean for their children because they often don’t have role-models in their surroundings to emulate.
• Behavioural factors – Like us, the poor are also driven by a lot of instincts and face other pressures that lure them into taking unwise decisions or ends up affecting them negatively.
  • They are found to prioritize spending on luxury goods like TV, mobile phones etc. that make their life interesting or add to their social status instead of fulfilling basic needs like enriching their diets or spending on some preventive measure.
  • At schools, the child’s background and the associated perceptions of teachers, parents and peers has been found to have a strong correlation with learning outcomes. Even when the children might be talented, the stories that they keep on hearing about their abilities and place in the society because of where they come from has a negative consequence on their growth.
  • The psychological effect of the constant financial pressure that the poor live in leads to stress and poor mental health which impairs focus, reduces productivity and hampers the decision-making capabilities.
  • Savings doesn’t make sense to the poor because they live in a perpetual state of hopelessness and to them the idea of life changing is difficult to conceive. They lose motivation and spend any extra income that they might have on immediate pleasures.
• Lack of financial products for the poor owing to the high cost of setting up and maintaining the infrastructure for the low deposit amounts and their inherent unreliability has meant that the potential upliftment value of the financial system has not percolated to them.

What can be done?

I think we are making fantastic progress. Although it might not seem like that because this progress is not reinforced by the media regularly. Incremental growth doesn’t make for good clickbait headlines, overdramatic representation of how the situation is bad does. (Recommended reading for some optimism around how remarkable our growth story has been – Factfulness: Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think).

But there is still a long way to go. The good thing about Poor Economics is that the suggestions in the book are simple to implement and have the potential to have a large impact. Here are some thoughts on how can it be done:

• As described in the previous section, a major part of poverty alleviation comes down to proper sensitisation and education of the masses. The rationale behind policy decisions needs to conveyed to the poor. This dissemination of information is as important as implementing policies. The establishment of trust will play a critical role in the success or failure of these initiatives. The poor are extremely reliant on their communities for survival and hence routing the communication through them can solve for this.
• Better financial products and government intervention in ensuring that these are delivered either directly or through support of microfinance institutions can help create a powerful framework for the poor to take control of their lives. This can be done by bringing the poor population under the purview of the banking system, creating systems for savings with no cost attached to withdrawal or maintenance of the account and helping insure the poor in case of adversities through partially contributing towards insurance premiums. Incurring these costs along with increasing financial literacy will enable self-sufficiency and in my opinion will have a far more positive impact in the long term than direct cash transfers.
• Enabling entrepreneurship can create opportunities of rapid growth and also extend employment to others in and around them. The book mentions that the marginal returns (return per dollar of investment) of investments in these micro and small enterprises can exceed 50% but the overall returns are small. Reinvestment of capital is rare as most of these businesses do not last more than five years and rarely grow beyond one employee. This is changing in India at least with the government providing good credit terms for MSMEs but the 0-1 change can only come through technology. This means that entrepreneurs across the world should seriously consider building for entrepreneurs in the poor hinterlands because these people don’t lack ideas or drive—all they need is support from the government and those more privileged to cross the barriers of poverty.