Poor Economics by Abhijit V. Banerjee and Esther Duflo (Part Two)

When I last left off with Banerjee and Duflo’s book the two were finished describing the private lives of the world’s poor and were moving on to Part Two: Institutions. I stopped at this point because the semester was coming to a close and I did not want to mess up the narrative of their research that my professor wanted us to concentrate for the final exam. I immediately jumped back in this book after taking said exam last Thursday.

The second half of this book is meant almost entirely as a response to the debate between Acemoglu and Sachs. According to Acemoglu and Sachs, there are two main fundamental explanations for poverty – geography and institutions. Acemoglu argues that there is definitely a correlation between geography and prosperity but the main determinant of poverty is institutions, whose three main characteristics include enforcing property rights, constrains on the actions of elites and politicians, and a high degree of equal opportunity for the masses.

Using the European colonizing experience to support his point, Acemoglu explains how colonists imposed “bad” institutions in some places but these institutions have not changed despite the dismantlement of colonization because the elites in the country want to main the status quo. Sachs, in contrast, argues that geography does actually have a negative impact on development – malaria transmission impacts productivity, physical isolation impedes trade, and sheer size makes developing a basic infrastructure prohibitively expensive.

Banerjee and Duflo seem to buy into Acemoglu’s argument, calling for many of the institutions available to the poor to be reformed to better suit their needs. (My own bias in this debate can be quickly summed up with the fact that I am a geography major in addition to an economics major.) The majority of the second part is actually concentrated on one institution in particular – microfinance firms (MFIs). Part One details how the poor of the world are actually incredibly risk-spreading, taking on more than one job or starting their own small-scale enterprises. However, they also have the smallest accumulation of capital and therefore are spurred by traditional banks due to their lack of collateral. This is where microfinance is supposed to step in, providing small loans to those in developing countries without capital.

“So are there really a billion barefoot entrepreneurs, as the leaders of MFIs and the socially minded business gurus seem to believe? Or is this just an illusion, stemming from a confusion about what we call an “entrepreneur’”? There are more than a billion people who run their own farm or business, but most of them do this because they have no other options. Most of them manage to do this well enough to survive, but without the talent, the skills, or the appetite for risk needed to turn these small businesses into really successful enterprises.” (pg. 233)

MFIs have also been championed as the poor’s saving grace, but Banerjee and Duflo makes some interesting observations and points about these firms. The poor still borrow money for their local money lenders, who charge absorbingly high interests rates, largely for two reasons: (1) the poor cannot normally follow the repayment plan for these microfinance firms that require the loan start being repaid within a week and are therefore restricted to smaller, more risky business ventures and (2) these loans cannot be used to pay off other costly expenses such as health care. Interesting fodder for discussion, for sure.

The book concludes without a sweeping conclusion about the poor. (If anything, this book has taught me that you cannot make sweeping conclusions and generalizations about the world’s poor.) Instead, it concludes with five interesting lessons about examining the economics of poverty. The poor:

  • Often lack critical pieces of information and believe things that are not true.
  • Bear responsibility for too many aspects of their lives. The richer you are, the more the “right” decisions on everything from clean water to savings for retirement are made for you.
  • Face unfavorable prices or are missing from some markets because they do not want to be included in even those options available to them. (Not sure how convinced I am of this one.)
  • Are not doomed to failure because they are poor or because they have had an unfortunate history.
  • Expectations are about what people are able or unable to do all too often end up turning into self-fulfilling prophecies.

All around, an interesting read. It’s not the best mainstream economics book I have read but it’s also not so technical that non-economics majors could not understand it. I don’t agree with everything Banerjee and Duflo say yet I did end up learning a lot from their book and I’m learning that’s really all you can ask.

Book Mentioned:

  • Banerjee, Abhijit V. and Esther Duflo. Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: Public Affairs, 2011. Print. 303 pgs. ISBN: 9781586487980. Source: Purchased.
Book Cover © Public Affairs. Retrieved: November 22, 2011.

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