Economics Of Poverty: Some Ideas Help The Poor, But Do They Also Help The Poorest? 

E M Forster once wrote, “We are not concerned with the very poor. They are unthinkable, and only to be approached by the statistician or the poet.”

While I am of the opinion that capitalism works well for most of society, can it really touch the very poor and destitute? To be sure, there are books like C K Prahalad’s The Fortune at the Bottom of the Pyramid (2004), which discuss how firms and corporations can reach out to address the needs of the poor and reap profits for themselves but that didn’t seem to be the complete answer.

Here I wish to talk about a handful of people who have looked at the face of poverty unflinchingly and come up with answers to whether capitalism actually works at the lowest rungs of society.

The first is Muhammad Yunus, a PhD in economics from Vanderbilt University, who, after the formation of Bangladesh in 1971, settled down as the head of the economics department at Chittagong University. Did he really settle down? In his autobiography Banker to the Poor (1998), Yunus talks of the 1974 famine in Bangladesh in which a million people died and which changed him from an academic to a man of action.

As he says in his book: “I now focused on the task of unlearning theory, and on learning instead from the real world. It was just outside the doors of the classroom.

“It was everywhere except inside the classroom.”

Looking around, Yunus found that many of the poor were caught in a poverty trap laid by usurious moneylenders. Of course, there were poverty alleviation programmes, but Yunus observed:

“Like good old Gresham’s law, it is wise to remember that in the world of development, if one mixes the poor and the non-poor within a programme, the non-poor will always drive out the poor, and the less poor will drive out the more poor, and this may continue ad infinitum unless one takes protective measures right at the beginning.

“And what will happen is that in the name of the poor, the non-poor will reap the benefits.”

Yunus found that these poor were bonded to the moneylenders for paltry sums – something like 20 to 50 US cents per day. Hence he decided to give $27 as loans to 42 people to relieve them of their misery.

Next, he approached the local government bank hoping to persuade the branch manager to lend to the poor. The branch manager laughed him off saying he couldn’t give loans to the poor as they had no collateral.

This was the first occasion when Yunus came face to face with the “cliches and myths” about the poor: the poor cannot save or invest; the poor cannot work together; poor women have no skills; the poor are too hungry and desperate to make rational judgements; the poor enjoy serving their masters rather than taking care of themselves, and so on.

Yunus went against each and every one of these cherished beliefs in founding his for-profit Grameen Bank in 1983 to lend to the poor.

In founding his bank, Yunus sought plain old capitalistic principles in which micro-credit would enable the poor to set up small village enterprises to pull themselves out of poverty. Indeed, in his book, Yunus is all for grassroots capitalism rather than government programmes or protectionist policies.

Yunus upholds the importance of education among the poor. The poor want “to be able to keep accounts, read information about businesses, about health, about poultry-raising, about cattle-raising, about new ways of planting, storing, processing.” Moreover, education “delays marriage and children, and better-educated women are likely to use contraceptives. They also have more options open to them in life than child-rearing, in particular the ability to earn a livelihood.”

At present, the Grameen project has been replicated worldwide (the poor are the same everywhere, observes Yunus) with impressive loan recovery rates and about 200 million people have benefited from it.

Yunus and the Grameen Bank received the Nobel Peace Prize in 2006.

I was so enthralled by Yunus’s story that I wanted to learn more about microfinance and other ways of tackling poverty. I chanced upon Abhijit V Banerjee and Esther Duflo’s Poor Economics: Rethinking Poverty & the Ways to End It (2011).

Banerjee and Duflo are MIT economists who co-founded the Abdul Latif Jameel Poverty Action Lab in 2003 at MIT and their strategy is to use randomised control trials (RCTs) to answer questions critical to poverty alleviation. Poor Economics is based on their own findings and those of others in the field.

Banerjee and Duflo do not write just about microfinance but address the entire spectrum of anti-poverty ideas.

To start off the debate, the authors point out two opposing approaches to the issue. The first is that of the economist Jeffrey Sachs who says that unless the poor are pulled out of their “poverty trap” by external aid, neither free markets nor democracy will do much for them. The other approach is that of economists William Easterly and Dambisa Moyo who argue that aid does more harm than good: it prevents people from searching on their own for solutions and corrupts and undermines local institutions.

Banerjee and Duflo concede that there are some poverty traps like corruption and usurious moneylenders that strive to keep people poor. But, oftentimes, the poor are victims of perceived poverty traps where none exist which make them lose confidence, destroy their hopes and they plain give up. This is ultimately the tragedy of the poor.

Take health, for example, especially when poor children get diarrhoea. Doctors suggest intake of oral rehydration solution (ORS). But many poor mothers believe that this does not do any good. They want injectables – medicines that directly enter the bloodstream. They are happy when antibiotic injections are given but that would lead to increased drug resistance. To understand the actions of ORS or antibiotics, the poor people need to have a knowledge of basic biology which they lack.

Another issue is education. The poor just don’t see the value of education at the lower years. As a consequence, they don’t know how much fertiliser to use; they don’t know which is the easiest way to get infected with HIV; they don’t know what their politicians do when in office. As we have seen earlier with Yunus, education can help them satisfy many needs.

Banerjee and Duflo conclude that, with health care and education, we cannot assume that improvements in these among the poor can happen without intervention.

As the authors say, “[T]his sounds paternalistic, and in a way, it certainly is. But then it is easy, too easy, to sermonise about the dangers of paternalism and the need to take responsibility for our own lives, from the comfort of our couch in our safe and sanitary home. Aren’t we, those who live in the rich world, the constant beneficiaries of paternalism now so thoroughly embedded into the system that we hardly notice it?”

What about the capitalistic microfinance advanced by Yunus? Banerjee and Duflo observe that while microfinance with its 150 to 200 million clients is an excellent approach, it is by no means a miracle solution.

For instance, they found that in the slums of Hyderabad, only about one-fourth of the families borrowed from microfinance agencies whereas more than one-half borrowed from moneylenders at much higher rates. This, they hazard, may be because of the rigid values imposed by microfinance agencies and the time costs imposed on the clients.

While microfinance agencies boast about instances where corner shops have turned into retail chains, these instances are few and far between. Moreover, the average loan given by the microfinance agencies is too small to create big businesses.

While Yunus has asserted in Banker to the Poor that the poor are naturally entrepreneurial, Banerjee and Duflo seek to differ. Using experiments they find that most of the poor are not able to grow their business beyond a certain limit and, for most of them, it is too hard. In spite of various business training programmes offered by microfinance agencies, results show no changes in profits, sales or assets.

Banerjee and Duflo contend that what the poor need is not entrepreneurial ventures but good, stable jobs. The poor aspire for salaried, secure jobs such as government jobs. Good jobs will give them the mental space to think and plan about the future, the self-confidence that a prosperous future is possible, opportunity to borrow cheaply and the chance of admission of their children to a decent school.

The authors state that intervention in health care and education is probably desirable. But are governments well poised to guide the poor? The answer is a definite No. Government primary health care centres in villages are rife with absenteeism and sloth and so are government schools. The poor often prefer private solutions to government outlets. One solution may be an NGO like Pratham which has made several strides in education. But most NGOs go the way of government agencies.

For government to function properly and deliver efficient services to the poor, there is a need for good institutions that are sorely lacking in developing countries. Banerjee and Duflo conclude by providing means by which institutions can be improved, but these are open questions.

The take home message I got from these books was that my belief in the “trickle-down” effect is not always valid. Capitalism can go a long way to remove poverty (as through microfinance agencies) but ultimately the state has to play a role in nudging or guiding the poor out of their plight.

A counter-intuitive (for me) but, perhaps, compassionate and pragmatic conclusion.