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Teaser on Banerjee-Duflo’s Poor Economics

I cannot recall the last time I looked forward so much to reading a book on economics. But after reading the reviews of Poor Economics (by Abhijit Banerjee and Esther Duflo) and hearing from friends who’ve read it, I find myself with a hopeful anticipation. I’m including excerpts from the book’s foreword which will hopefully pique your interest sufficiently to go buy or borrow this book and read along with me for the next few weeks. I fully expect to share some of the insights from the book periodically so do return to the Poverty Economics category on this blog. [Hat tip to commenter Chiki Sarkar who alerted us to the book’s rich companion website – http://www.pooreconomics.com/]

Our focus is on the world’s poorest. The average poverty line in the fifty countries where most of the poorest live is 16 Indian rupees per person per day. People who live on less than that are considered to be poor by the government of their own countries. At the current exchange rate, 16 Rupees corresponds to 36 U.S. cents. But because prices are lower in most developing countries, if the poor actually bought the things they do at U.S. prices, they would need to spend more – 99 cents. So to imagine the lives of the poor, you have to imagine having to live in Miami or Modesto with 99 cents per day for almost all your everyday needs (excluding housing). It is not easy – in India, for example, the equivalent amount would buy you fifteen smallish bananas, or about 3 pounds of low-quality rice. Can one live on that? And yet, around the world, in 2005, 865 million people (13 percent of the world’s population) did.

What is striking is that even people who are that poor are just like the rest of us in almost every way. We have the same desires and weaknesses; the poor are no less rational than anyone else – quite the contrary. Precisely because they have so little, we often find them putting much careful thought into their choices: They have to be sophisticated economists just to survive. Yet our lives are as different as liquor and liquorice. And this has a lot to do with aspects of our own lives that we take for granted and hardly think about.

Poor Economics is a book about the very rich economics that emerges from understanding the economic lives of the poor. It is a book about the kinds of theories that help us make sense of both what the poor are able to achieve, and where and for what reason they need a push. Each chapter in this book describes a search to discover what these sticking points are, and how they can be overcome. We open with the essential aspects of people’s family lives: what they buy; what they do about their children’s schooling, their own health, or that of their children or parents; how many children they choose to have; and so on. Then we go on to describe how markets and institutions work for the poor: Can they borrow, save, insure themselves against the risks they face? What do governments do for them, and when do they fail them? Throughout, the book returns to the same basic questions. Are there ways for the poor to improve their lives, and what is preventing them from being able to do these things? Is it more the cost of getting started, or is it easy to get started but harder to continue? What makes it costly? Do people sense the nature of the benefits? If not, what makes it hard for them to learn them?

Poor Economicsis ultimately about what the lives and choices of the poor tell us about how to fight global poverty. It helps us understand, for example, why microfinance is useful without being the miracle some hoped it would be; why the poor often end up with health care that does them more harm than good; why children of the poor can got to school year after year and not learn anything; why the poor don’t want health insurance. And it reveals why so many magic bullets of yesterday have ended up as today’s failed ideas. The book also tells a lot about where hope lies: why token subsidies might have more than token effects; how to better market insurance; why less may be more in education; why good jobs matter for growth. Above all, it makes clear why hope is vital and knowledge critical, why we have to keep on trying even when the challenge looks overwhelming. Success isn’t always as far as it looks.