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Rethinking the Economics of Poverty

Why would a man in Morocco who does not have enough to eat buy a television? Why would poor households in China consume less rice and wheat when they become cheaper? Questions like these puzzle policy-makers and economists alike but need to be answered in order to formulate effective remedies for feeding the hungry. Anti-poverty policies are far too often inadequate simply because the central protagonists of these issues are overlooked: the poor.

Most of us would agree with Amartya Sen, the economic-philosopher and Nobel Laureate, that poverty is not just a lack of money – it is not having the capability to realize one’s full potential as a human being. Between 1990 and 2005 the number of people living on less than $1 a day in developing countries (at 2005 purchasing-power parity) fell by a third to 879 million people. This is a notable achievement but suggests that absolute poverty still shackles just under 20 percent of the world’s population.

The first UN Millennium Development Goal aspires to “eradicate extreme poverty and hunger” by 2015. Yet correcting global hunger is not as straightforward as growing more crops and shipping them to those areas in need. Aside from being a logistical nightmare (e.g. in India it is estimated that more than one-half of the wheat gets ‘lost’ along the way), food aid focuses too great an attention on just getting people fed. This is not to say that food aid to crises regions is bad – not at all. It is simply revealing that even where there is enough food, people do not seem healthier.

On top of the one billion people on earth who do not consume enough calories, another one billion are malnourished in the sense that they lack micro-nutrients: a phenomenon called ‘hidden hunger’. Malnutrition is associated with over a third of children’s deaths. Another one third of all children in the world are underweight or stunted (too short for their age). These are the classic symptoms of malnourishment.

Flight to Quality

The work of Abhijit V. Banerjee and Esther Duflo, presented in their book Poor Economics, provides a refreshingly new look on the economics of the poor. Central to their approach is in understanding how the poor make decisions. In their book they provide dozens of personal anecdotes illuminating the lives of those individuals towards which much of development policy is directed.

The two economists have championed randomised controlled trials (RCTs). RCTs test anti-poverty remedies much as pharmaceutical firms test drugs. A ‘treatment group’ gets a certain remedy and the ‘control group’ does not, e.g. subsidized bed nets versus bed nets at market prices. The two groups are chosen at random, such that the remedy should be the only systematic difference between the two. The comparison in outcomes between the groups sheds much light on the effectiveness of the remedy tested.

Outcomes are not as straight forward as they seem. In two regions in China randomly selected poor households were given a large subsidy on the price of the basic staples (wheat noodles in one region and rice in the other). One would expect that if the price of something goes down, people buy more of it. The opposite happened. Households that received the subsidy for wheat and rice consumed less of the staples and ate more shrimp and meat, even though their staples now cost less. Remarkably, the caloric and nutritional intake of those who received the subsidy did not increase (and may even have decreased) despite the fact that their purchasing power had increased. This is a striking example of the ‘flight to quality’ in food consumption.

Now consider the Olympic Games. India, a country with a billion inhabitants, has won an average of 0.92 medals per Olympics over the course of twenty-two games, putting it just below Trinidad and Tobago. Nutrition is central to understanding this predicament. Yet, the percentage of people in India who consider that they do not have enough food has dropped dramatically over time: from 17 percent in 1983 to 2 percent in 2004. Still, people in India eat less today than they did in the 1980s. Stunting rates in sub-Saharan Africa, undoubtedly the poorest area of the world, are only about half of those in India.

The basic human need for a pleasant life might explain why spending on food has been declining in India. It may also explain the case of the man in Morocco – one of the many anecdotes in Poor Economics. When asked what he would do if he had more money, he said he would buy more food. When asked what he would do if he had even more money, he said he would buy better food. Banerjee and Duflo began to feel bad for the man when they noticed a television and DVD player sitting on the side of the room. They asked why he had bought these things if he felt the family did not have enough to eat. He laughed and said, “Oh, but television is more important than food!”

The poor are not stupid. They simply try to find comfort in lives that are not blessed by abundance. But often misinformed and overwhelmed by circumstance, it is difficult for them to do what even they recognise is in their best interests. The good news is that nothing else in development policy has as high returns on investment as does nutrition. Every dollar spent promoting breastfeeding in hospitals yields returns of between $5-$67. And every dollar spent giving pregnant women extra iron generates between $6-$14.

Quiet Revolution

Having presciently recognized the potential for nutrition-based aid policy in 2008, eight prize-winning economists of the Copenhagen consensus included nutrition in half of their suggested projects. As stated by Banerjee and Duflo: “Developing ways to pack foods that people like to eat with additional nutrients, and coming up with new strains of nutritious and tasty crops that can be grown in a wider range of environments, need to become priorities for food technology, on an equal footing with raising productivity.” Already a variety of orange sweet potatoes suitable for Africa (richer in beta carotene than the native yam) were recently introduced in Uganda and Mozambique.

Much of anti-poverty policy has failed over the years because of an inadequate understanding of the poor and their needs. Instead of working from the bottom up, the most vocal experts on development tend to be fixated on the ‘big questions’: What role do free markets play? Will democracy bring prosperity? Is foreign aid good or bad? William Easterly, a prominent economist in the aid debate, stated that “embracing RCTs has led development researchers to lower their ambitions.” Far from it: it is the body of knowledge that grows out of each specific answer, and the understanding that goes into those answers, that give the best shot at one day ending poverty. Small changes can have big effects, and the problem of ‘hidden hunger’ is in need of a quiet revolution.

 

– Elias Kühn von Burgsdorff

 

Featured image and third image by Elias

(Second image: No Derivative WorksPaternité by BBCworldservice, Flickr, Creative Commons)

About Elias Kühn von Burgsdorff

Student of History and Economics at McGill University. Elias has a passion for journalism and travel. Although he is German, Elias was born in South Africa and has lived in several countries including Mozambique, Slovakia, Belgium, Cuba, and now Canada.

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3 comments

  1. Interesting view of events and recent situation from the inside. A perfect way to make people understand that everything does not change as soon as the policies are legally removed.

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