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Book Review on Poor Economics

BOOK REVIEW POOR ECONOMICS: A RADICAL RETHINKING OF THE WAY TO FIGHT GLOBAL POVERTY By: Abhijit V Banerjee & Esther Duflo POOR ECONOMICS argues that so much of anti-poverty policy has failed over the years because of an inadequate understanding of poverty.The battle against poverty can be won, but it will take patience, careful thinking and a willingness to learn from evidence.Banerjee and Duflo are practical visionaries whose meticulous workoffers transformative potential for poor people anywhere, and is a vital guide to policy makers, philanthropists, activists and anyone else who cares about building a world without poverty.

CHAPTER 1: THINK AGAIN, AGAIN Poverty and development can sometimes feel like overwhelming issues – the scale is daunting, the problems grand.

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Ideology drives a lot of policies, and even the most well-intentioned ideas can get bogged down by ignorance of ground-level realities and inertia at the level of the implementer. In fact, we call these the “three I’s” – ideology, ignorance, inertia – the three main reasons policies may not work and aid is not always effective.

But there’s no reason to lose hope. Incremental, real change can be made. Sometimes the change seems small, but by identifying real world success stories, facing up to real world failures, and understanding why the poor make the choices they make, we can find the right levers to push to free the poor of the hidden traps that keep them behind. CHAPTER 2: A BILLION HUNGRY PEOPLE? Jeffrey Sachs, an advisor to the United Nations and director of Columbia University’s Earth Institute, is one such expert.

In books and countless speeches and television appearances, he has argued that poor countries are poor because they are hot, infertile, malaria-infested, and often landlocked; these factors, however, make it hard for them to be productive without an initial large investment to help them deal with such endemic problems. But they cannot pay for the investments precisely because they are poor — they are in what economists call a “poverty trap. ” Until something is done about these problems, neither free markets nor democracy will do very much for them.

The basic idea of a nutrition-based poverty trap is that there exists a critical level of nutrition, above or below which dynamic forces push people either further down into poverty and hunger or further up into better-paying jobs and higher-calorie diets. These virtuous or vicious cycles can also last over generations: early childhood under-nutrition can have long-term effects on adult success. Maternal health impacts in utero development. And it’s not just quantity of food – quality counts, too. Micronutrients like iodine and iron can have direct impacts on health and economic outcomes.

But if nutrition is so important, why don’t people spend every available extra cent on more calories? From the look of our eighteen-country dataset, people spent their money on food… and festivals, funerals, weddings, televisions, DVD players, medical emergencies, alcohol, tobacco and, well, better-tasting food. CHAPTER 3: Low-Hanging Fruit for Better (Global) Health? Every year, nine million children under five die from preventable diseases such as diarrhea and malaria. Often, the treatments for these diseases are cheap, safe, and readily available.

So why don’t people pick these ‘low-hanging fruit’? Why don’t mothers vaccinate their children? Why don’t families use bednets, or buy chlorinated water? And why do they spend such large amounts of money on ineffective cure instead? There are a number of possible explanations. These can include unreliable health service delivery, price sensitivity, a lack of information or trust, time-inconsistent behavior and the simple fact that the poor may not be able to tackle big, chronic illnesses. None of these reasons explains everything in isolation.

But understanding what stops the immediate spread of our ‘low-hanging fruit’ – bednets, de-worming medication, vaccines, chlorinated water – is an important step in improving global health, and may finally help to eliminate health-based poverty traps. CHAPTER 4: TOP OF THE CLASS Over the past few decades, children have flocked into the schools, but schools seem to have delivered very little: teachers and students are often absent, and learning levels are very low. Why is this happening? Is it a supply issue, where the government needs to provide children with better schools, better textbooks, better teachers and better facilities?

Or is it demand, where parents would lobby for quality education if and only if there were real benefits? There seems to be a problem with both. For example, parents expect both too much and too little from the schools: government jobs for those who graduate from secondary school, and nothing for the rest. Teachers seem focused on teaching small elite, and undervalue the regular students. These expectations affect behavior and generate real world waste. But the good news is that these expectations and these real world outcomes can be changed CHAPTER 5: Pak Sudarno’s Big Family

Most policy makers consider population policy to be a central part of any development program. And yet, unexpectedly, it seems that access to contraception may not be the determining factor in the poor’s fertility decisions. So how can policy makers influence population? Instead of contraception, other aspects like social norms, family dynamics, and above all, economic considerations, seem to play a key role, not only in how many children people choose to have, but how they will treat them. Discrimination against women and girls remain a central fact of the life for many poor families.

Going inside the “black box” of familial decision-making – that is, understanding how and why decisions are made the way they are – is essential to predicting the real impact of any social policy aimed at influencing population. CHAPTER 6: BAREFOOT HEDGEFUND MANAGERS The poor face a huge amount of risk – a friend of ours from the world of high finance once noted that they’re like hedge fund managers. These risks can come from health shocks – like an accident – or agricultural shocks – like a drought – or any other number of unexpected crises.

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Often, the poor just don’t have the means to weather these shocks, and so they get pushed into poverty traps. The steps they take to protect themselves form these risks are insufficient and often costly: they choose less profitable and less risky crop, they spread themselves too thin across a great number of activities; they exchange favors with neighbors. Yet all this doesn’t always even cover large shocks. CHAPTER 7: MICROFINANCE The fact that banks are often unwilling to lend to the poor, coupled with the extremely high interest rates moneylenders charge, was a call to action for the founders of microfinance.

Enforcing credit contracts involves collecting extensive information about the borrower to ensure repayment. The high cost of gathering this information makes neighborhood moneylenders the easiest source of credit. Microfinance institutions rely on their ability to keep a close check on the customer, in part by involving other borrowers who happen to know the customer: This was a recipe for enormous success, there are more than 200 million microfinance borrowers today. Many MFIs were unwilling to evaluate whether their lending programs were helping the poor.

The MFIs were financially sustainable and borrowers kept coming back, which the MFIs saw as proof enough. When an Indian MFI, Spandana, was rigorously evaluated, there was clear evidence that microfinance was working. People in Spandana neighborhoods were more likely to have started a business and made large purchases. However, there were no detectable impacts on women’s empowerment, spending on education or health, or in the probability that kids would be enrolled in private schools. One of the limits of microfinance is its inflexible structure and focus on “zero default. It may not be an effective borrowing channel for entrepreneurs who are willing to take risks and will go on to set up a large business. More established businesses do not find it that much easier to get credit. In particular, they run the risk of being too large for the traditional moneylenders and microfinance agencies, but too small for the banks. We need to see the equivalent of the microfinance revolution for small and medium firms; figured out how to do it profitably on a large scale is the next big challenge for finance in developing countries. CHAPTER 8: SAVING BRICK BY BRICK

Just as with lending, banks have not found a good way to adapt their services to the poor. The administrative costs associated with managing small accounts are too high. Instead, the poor find unusual and ingenious ways to save. They buying durable goods like jewelry or new bricks for their house. Many form savings “clubs” such as the popular rotating savings and credit associations (ROSCAs) in Africa. However, the fact that the poor have to adopt complicated and costly alternative strategies to save means that saving is harder than if they had a bank account: access to a saving accounts increases profits and consumption.

With new technology and innovations like M-PESA in Kenya which allows cell phone users to send money with their phone, microsavings might become the next microfinance revolution. However, not all barriers to savings are externally imposed. The poor, like anyone else, easily give in to the temptation to spend money in the present rather than save it for the future. They have difficulty, for example, saving enough over a short season to buy fertilizer; but a program to help them buy it early increased fertilizer use. The poor may be more subject to temptations than the rich because the items they dream of may be further from their reach.

Poor people who feel that they have opportunities have strong reasons to cut down on “frivolous” spending and invest in the future. Those who feel that they have nothing to lose, in contrast, save less: hope matters! CHAPTER 9: RELUCTANT ENTREPRENEURS Many expect that the poor will find successful business opportunities. They haven’t been given a chance, so their ideas are fresher: MFIs have many examples of successful clients, like a garbage collector turned recycling empress! The sheer number of business owners among the poor is impressive. When tiny grants were made to small businesses in Sri Lanka, their profits increased rapidly.

However, while many of the poor operate businesses, most of these businesses are tiny. The businesses of the poor tend to have few if any employees and very limited assets. The businesses run by the poor are also generally unprofitable, which may well explain why giving them a loan to start a new business does not lead to a drastic improvement in their welfare. Many businesses suffer from the “empty shelf” problem: a space a created for a shop, but no inventory fills the shelves. Even a small investment in more inventory will have large marginal returns, but once the shelves are full, the business has no further scope to grow.

Despite initial large returns to small investments, many small businesses hit at point at which a substantial capital investment is needed in order to continue growing. However, few people are willing to give such large loans to the poor. Because of this trap, the poor may not invest as much (both money but also emotions and intellectual energy) into their businesses because they know that their business will always remain too small to make real money. Often, the enterprises of the poor seem more a way to buy a job when more conventional employment opportunities are not available than a reflection of a particular entrepreneurial urge.

One of the most common dreams of the poor is that their children become government workers – a stable, though not always an exciting job. A sense of stability may be necessary for people to be able to take the long view. People who don’t envision substantial improvements to their future quality of life may stop trying and end up staying where they are. Creating good jobs could go a long way in increasing the stability of the lives of the poor, which will, in turn give the poor the opportunity and the urge to invest in their children and save more.

There are more than a billion people who survive off of the earnings of their own farm or business. We must be impressed by their resilience. But these small businesses will probably not pave the way for a massive exit from poverty. CHAPTER 10: POLICIES, POLITICS Even the most well-intended and well-thought-out policies may not have an impact if they are not implemented properly. Corruption, or the simple dereliction of duty, creates massive inefficiencies. Many people believe that until political institutions are fixed, countries cannot really develop. There may be no natural process to completely eliminate bad institutions.

Institutional change from the outside is probably an illusion. But it is not clear that things will eventually fix themselves. However, fighting corruption appears to be possible to some extent even without fixing the larger institutions. Relatively straightforward interventions, such as threatening audits or publicizing corruption results have shown impressive success. Often, small changes make important differences. In Brazil, switching to a pictorial ballot enfranchised a large number of poor and less educated adults. The politicians they elected were more likely to target their policies to the poor.

In China, even imperfect elections led to policies that were more favorable to the poor. In India, when quotas for women on village councils in India were enacted, women leaders invested in public goods preferred by women. Policies are not completely determined by politics. Good policies (sometimes) happen in bad political environments. For example, Suharto built tens of thousands of schools in Indonesia. And bad policies happen in good environments, because what the government is trying to do is hard: generally, the government tries to convince people to do something they would not like to do, like wearing a helmet on a motorcycle!

The opportunities for corruption are rife. Bad policies are often a product of the three I’s: ideology, ignorance, inertia. For example, nurses in India, whose job description is so overwhelming that they have decided that they cannot possibly do it, and instead do nothing. Careful understanding of constraints can lead to policies and institutions that are better designed, and less likely to be perverted by corruption. Changes will be incremental, but they will sustain and build on themselves, and perhaps even improve the political process.

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