Poor Economics Final

Chapter 1: Think Again, AgainPoverty and development can sometimes feel like overwhelming issues – the scale is daunting, the problems grand. 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.

If we look at the big picture it seems overwhelmingly impossible to resolve. A study gave 5$ to students and three stories to sponsor: global story (50 million dying, etc..), a story about Rokia, and the same Rokia story but with psychological explanation (people give more money to specific victims rather than global and daunting poverty problems). Amount of money given: global< Rokia + psychological explanation < RokiaThe solution would be it seems to tackle concrete problems taken separately instead of asking ourselves the “big questions” such as should poor countries have a democracy, why are poor poor?, ...Jeffrey Sachs: poor countries are poor because they are hot, infertile and infested with

malaria. They are trapped in poverty traps where only a large investment via foreign aid can kick start a virtuous cycle. Foreign aid can increase productivity which will boost incomes and in turn increase investment. William Easterly, Dambisa Moyo: Poverty traps don’t exist. Foreign aid corrupts, undermines local institutions and creates a self-perpetuating lobby of aid agencies. Their solutions: when markets are free and incentives right, people can find ways to solve their problems. Who is right? we don’t know. There will always be evidence to support one theory or the other

(e.g.: Rwanda to support Sachs theory). Let’s have a multi-country approach. The results of this study suggest that countries that received aid did not grow faster than the one’s who didn’t. Evidence to support which theory? I’d say Easterly’s at first. But then again would it be possible that these countries could have been worse off without the aid ? We don’t know.

This is what the book intends to answer. There will not be a definitive answer but we’ll assess if particular instances of aid, democracy implementation and free market did some good or not. The truth is (e.g. India: no aid) most of the

Hugo Pratt Dos Santos Resumé: poor economics 1

countries receive little aid and fund these aid projects themselves. Peter singer (researcher) found that most people would sacrifice a $1,000 suit to save a child seen drowning. This shouldn’t be any different from the 9 million children who die every year. He also said that talking about a problem

without bringing any solution is the best way to paralyze rather than progress. Thus he launched a website that lists concrete examples of things that they should support everyday in order to tackle poverty. Amartya Sen (economist): poverty leads to a waste of talent. And even if it doesn’t would it justify not giving them a chance?Concrete case: Sleeping under a bed net reduces halves the probability a malaria infection in Mali, Kenya,.. What should be the price of this bed

net? Sachs thinks we should hand it for free since 10$ is a far too high price for them. Moyo and Easterly think people will not value them and refuse to pay for it in the future if subsidize are reduced (become used to hand-outs). Three questions need to be answered: If Kenyans need to pay (significant fraction) for them, will they prefer to go without?If production is subsidized or given for free will people use them or will they be wasted?If they get it at a subsidized price will they be more or less willing to pay for the next one if the subsidy is reduced?Let’s take comparable groups of people by taking randomized trials (RCTs). Any other way is too difficult to assess the groups “comparability”. The answer to these 3 questions is in chap3. But what does comparable mean and how do we implement it? People who buy bed-nets and those who receive them for free are not usually part of a comparable group. People who buy are more likely to be educated and richer than the other group. But the opposite problem is possible, well connected people get them for free and poor people need to pay full price. This would bias question 1. Can people be trapped in poverty traps. Sachs: yes Easterly: no because the condition of poverty is not permanent. Kennedy, the farmer received via Sachs Millennium villages fertilizers, he can now support himself forever. Before Millennium he couldn’t afford fertilizers. But skeptics argue that Kennedy could have saved up to buy a bit of fertilizer , used it on it’s most profitable part of land and increased gradually it’s profit, etc.. But can fertilizers be bought in small quantities? We will postpone the answer to chap8“There will be a poverty trap whenever the scope for growing income at a very fast rate is limited for those who have too little to invest, but expands dramatically for those who can invest a bit more”

Graph 1: poverty trap: income today is higher than income tomorrow (below the diagonal). A normal situation for a poor family would be from A1 to A3 for a family in the poverty trap and from B1 to B3 for the othersGraph 2: there is no poverty trap, poor get richer overtime. There is little sense in sending aid since it doesn’t change the course of poverty, where it’s headed, it just makes the process a little faster. There is little we can do to help themWhich graph represents best Kennedy’s situation? Theory is not enough, these graphs should incorporate what the fertilizer market facts and constraints. If it is about savings (the graph) it should incorporate how poor save money. There is no general answer for each of these cases but there are a few factors that create traps and that alleviating these problems could point the poor to the right direction. It requires stepping out of the office and looking more carefully at what’s happening. It is very important, some development economists say, to collect the right data. We had two advantages compared to previous generations. There is now high quality about poor countries that didn’t exist before. Second, we developed a powerful tool: randomized Hugo Pratt Dos Santos Resumé: poor economics 2

controlled trials. (cf econo: treatments). The objective of these trials is to effectively test practical measures and policies so that we can progress, step by step, by tackling specific small scale problems, resolve bigger problemsChapter 2: A Billion Hungry People?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. So what stands in the way of better nutrition for the poor? And what policies can eradicate the “hidden hunger” of a population who may feel sated but whose diet lacks essential micronutrients?

For us poverty = hunger. It is also often used as a cause for poverty traps: hunger makes poor people week and less productive thus keeps them poor (myth résolu page suivante).It is no surprise that when local governments try to reduce hunger they focus quantities.The indian government wants to implement the right to food act which would basically allow citizens to sue the government if they are hungry.

Let’s have a concrete example of a poverty trap. Narrator for the story: Pak “Pak is a 40 year old farmer, earns 2$ a day. One day fuel prices spike and his boss decides to fire people instead of cutting wages. He’ s out of work and no one would hire him because he’s old, weak and is unskilled for any other job. His wife moves with his two younger children to Jakarta where she found a job as a maid. His oldest son drops out of school. Pak now lives from 2 meals/day from the government’s subsidized rice and barely has enough strength to fish anymore. Pak thinks he’s been put out of work because his boss preferred to ensure that other workers had enough to eat rather than cutting their wages and risking that they become unfit for agricultural work.”But Pak lives in a prosperous area of India, where plenty of food is available. Why is he so hungry?

An underlying assumption here is that poor people eat as much as they can. Well, it’s not the case. When they have the chance to spend a little more in food they will buy better tasting, more expensive food. Robert Jensen and Nolan Miller call this the “flight to quality”. These two found another example in China this time where rice is subsidized. The price of rice went down and people actually bought less of it. They bought shrimps and meat instead. An explanation to this is that because staples made such a large part of the budget the subsidy made the chinese feel richer.

In India, the story is a bit different. Obesity is plummeting, there has been a steady decline in per capita calorie consumption despite a real increase in wages and a steady decrease in food prices. Why is calorie consumption declining? Studies suggest that when asked if they were starving only 4% of the indian population said yes


This can be explained by:1. The fact that people are less hungry. why?

- Machines and automatization has appeared. Almost every flour mill is motorized- Decline of heavy physical work- Transportation: people don’t need to walk as much

2. A second reason derived from the first one is that productivity gains from consuming more calories are quite modest.

John Strauss confirmed the myth (hunger based poverty trap) by assessing the productivity gains for hard physical workers in the Philippines. The results are clear, the productivity increase is minimal. Furthermore, the relationship between calorie intake and productivity is L-shaped. Another conclusion to this finding is that it is not because they don’t eat enough that most people stay poor. So the hunger based poverty trap doesn’t exist but this doesn’t mean that nutrition is not a problem for the poor.

--We found a relationship between height and productivity instead in both rich and poor countries. Taller people earn more than short ones. This is because tall people tend to be better nourished as kids thus making them taller but also smarter. There are lots of examples showing that malnutrition directly affects the ability to function in the world. In Kenya, children given deworming pills went to school longer and earned a salary 20% higher than their counterparts

The impact of undernutrition on future life chances starts before birth. Women who took iodine pills during pregnancy had babies who completed 0.5 extra years of schooling. Which is enormous knowing that the average schooling. But most women didn’t take them. The reason for this could be that the value of feeding themselves and their children better is not fully understood, micronutrient knowledge is recent even in our standards. Moreover, people tend to be suspicious of outsiders help.

The WISE study in India (56% of women and 24% of men are anemic)proved via RCTs that iron supplements given to self employed indians substantially increased their incomes.

In other countries like south africa families have to spend huge amounts of money for the burial. When the HIV disease appeared there was a huge problem. Children were dropping out of schools and adults got severely indebted Regulation came to change norms p36

But the reason for spending less money on food might not come only from social pressure but boredomness as we see here in the moroccan village where jobs are scarce. In countries where cheap luxury, tv’s etc is available, poor people will sacrifice food to buy those (e.g.: Morocco vs New guinea). These are not impulsive purchases but carefully planned purchases. Poor people want to live the “here and now”.

But how do we solve this problem? How do we enrich the poor’s diet? Cutting prices, increasing wages (see India) or telling them to change is not going to work (see indian case). Parmentier had the same issue with the potato, and what he did was to create recipes (hachis parmentier). The solution is to mix it with tasty 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 bed-nets, 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’ – bed-nets, de-worming medication, vaccines, chlorinated water – is an important step in improving global health, and may finally help to eliminate health-based poverty traps.

There’s lots of ‘low hanging fruits’ available (preventive, low cost technology) but populations aren’t using them. Who is to blame? A mother came in one day to our hospital with diarrhea, we gave them the right treatment (ORS: little packs of salt that you put in the water to treat it from waterborne diseases) but she refused it. She thought the only way to get treated for that was with anti-biotic or intra-venous drip. Result: lots of people keep ding from diarrhea (1,5 million children die every year from it). In Zambia, although this medicine is subsidized and 98% of people know it’s benefits only 10% of the population uses it.

Dulfo portraits the life of an Indonesian wife who gets over indebted because her husband gets sick and has no more revenue. Health can be the reason for lots of poverty traps e.g.: workers living in an insalubrious environment will miss many workdays. Sachs defends this view of health based poverty traps, he gives the example of malaria. Countries where a large portion of the population is exposed to malaria have lower incomes per capita than others who are not exposed. These countries being poor makes it hard for them to take steps to prevent malaria, which in turn keeps them poor. Skeptics respond that the reason they cannot effectively eradicate malaria is because they are poorly governed.

Studies comparing figures before and after malaria campaigns in regions where malaria exists with regions poorly affected from that disease suggest that life outcomes (education and earnings) of children born in regions where malaria prevailed catch up with those of children born in malaria free regions. This suggests that eradicating malaria results in a reduction of long term poverty, this is a highly effective measure. Sachs says that “a child brought up malaria free will earn 50% more every year for his entire adult life”

Access to clean water and sanitation are other examples of highly effective health investments on both physical and cognitive development of children.


Joe Madiath, a left wing activist and founder of Gram Vikas brought sanitation and uncontaminated, chlorinated water piping to Orissa. The results appeared overnight, the number of severe cases of diarrhea fell by half, and the number of malaria cases by one third. The cost of this new system is subsidized because although the benefits are worth far greater than the price, villagers just cannot afford it. Madiath only asks the village to contribute enough so that the system can be repaired and to add new households into the system whenever new houses are built.

Why are bed-nets poorly widespread? Buying bed-nets reduces the risk of malaria and has the potential of increasing incomes by 15% on average. The together against malaria NGO (TAMTAM) did some research and provided bed-nets at different prices randomly in different clinics of the country. They found out that demand for bed-nets is highly price sensitive. Demand was almost null at full price. Is the demand for bed-nets sensitive to income? It is not sensitive at all. Their theory is: the increase of income coming from avoiding malaria should be enough to make it very likely that their children would also buy bed-nets to avoid malaria as well. But it appears that people who are 15% richer(by giving out bed-nets) are only 5% more likely to buy bed nets --> not enough, distribution of bed-nets for free is not effective.

Poor people care about their health, they would cut spending, sell assets or even borrow at high rates to pay for health care. But they do not seem to be willing to sacrifice money to get clean water, bed-nets, deworming pills or fortified flour. The issue is therefore not how much poor spend on health (often on expensive cures) but rather what the money is spent on. To make health care affordable most LEDC’s offer affordable to the poor. But the poor shun free public health care systems. They’ll go less than 1/4 of the time to free public institutions, more than half of the time to private facilities and the rest to bhopas(India) - traditional healers.


In Udaipur, india, poor people will prefer to go to expensive private doctors rather than trained nurses that the government provides for free. What makes the picture even bleaker is that these “private” doctors don’t even own college degrees, only about 50% do. But doesn’t mean they are not competent and don’t know their limits. If a tough case is presented to him he should indulge the patient to go to a hospital but that is not the case for every doctor. Two world bank’s economists did a survey to assess what their real competences where and the results were remarkably low, most of hem do more harm than good. Adding the fact that they miss use antibiotics and some of them even contaminate whole villages with hepatitis B because they’ve re-used non sterilized syringes. This miss use of antibiotics can develop a new strain of disease that are antibiotic-resistant.

Why is that, and who is to blame for this? Part of the answer is that cheap gains can be found in prevention, the traditional area where the government is the key player. The problem is that public health care lacks motivation from employees and has high levels of absenteeism

Public health care is closed when they are supposed to be open. the word bank did a survey, they went for a year at random hours to the clinics when they were supposed to be opened and found that 56% of the time they were closed. Less than 12% of the time it was because the nurse was on duty somewhere else. This is mainly due to the fact that they are paid even if they don’t come but it’s not the case for the private sector.

When government workers are around, they don’t treat patients well. A world bank research described it as the 3-3-3 rule in the private sector. An average of 3 minutes interaction with the patient, the provider asks three questions and 3 medicines are provided. Furthermore:• patients are given instructions only about half of the time• one third of the doctors offer a follow up• they perform examinations occasionally

In the public sector it’s even worse, they interact less time, ask fewer questions and most of the time they don’t even touch the patient.


But bed-nets are not exclusively distributed by the government neither is the chlorine to purify water. Seva Mandir NGO wanted to tackle vaccine preventable diseases from killing 2-3 million children every year. But even with a clocklike regularity, a doorstep proximity to the parents houses there were still 8 out of 10 children that were not fully immunized. We must conclude that parents resent preventable treatments and prefer bad health care.

Could it be because they are cheap and therefore considered a hoax? could it be that people judge quality by price? this is called the sunk cost effect, people will more likely use something that they’ve paid a lot for. Remember the TAMTAM research on bed-nets which showed that people were more likely to buy if it was subsidized or free? but do they use them? Yes, 60-70% of the people were re-interviewed (officer came at home to see by himself) and they found no difference between the usage of the guy who got it for and the one who paid for it.

Duflo believes it has partly to do with faith, a combination of beliefs and theories about what kind of medicine should be administered for each type of problem. I the UK some parents still refuse to immunize their children against meases because of a supposed link with autism. In india it is believed that, to be effective, medicine should be delivered directly to the blood. Because most diseases are time-limited (disappear no matter what), most of the time patients will feel better after a shot of placebo or antibiotic and this will encourage the spurious causal relationship between them (the shot and the fact he got better). most importantly, prevention doesn’t work in India because: • even if he had a vaccine against measles it only protects the child from a specific strain

of this disease. So there’s a chance he might still get it, in that case parents will feel cheated.

There is another reason why poor may hold on to a belief, Hope. When faced with life-threatening problems (surgery, HIV) they cannot afford the treatment. But that doesn’t mean they stop hoping for a cure. To the contrary, they will keep on doing something about their health even if they know that they know they are not doing anything about the big problem. So they turn to spiritual healers, at least it gives them a sense of doing something. And so they prefer to believe that these strokes and other life threatening problems is ghost related. This is not specific to LEDC’s we also treat depression with yoga in our countries. Remember Seva Mandir who couldn’t immunize the whole village in Udaipur? The reason was belief, Indians think that the child shouldn’t go out into public display until the age of two otherwise he would get the evil eye. What the NGO did is that it offered food to fool people into getting their children vaccinated. The CEO was at first reluctant to try it out because he thought it was wrong to trick people into getting something that is actually good for them. Nevertheless, he accepted to have a trial in a small portion of the population and found that he actually cut savings by giving out food because the nurses were kept busy all day long. The politicians view: we shouldn’t try and trick people into getting what they need, instead we should inform them of the benefits of the medicineNGO view: we should continue to bribe because it saved lots of lives, not only for the child himself but for others around himDulfo thinks that both views are wrong headed because: 1. It is not true that if people were convinced of the benefits of a vaccine that they would

use it.The reason for this is the New year’s resolution principle. You have trouble sticking to your resolution: going to the gym even if it means raising the chances of a heart attack. The same can be applied to bed-nets or a bottle of chlorine. The purchase of these is left for Hugo Pratt Dos Santos Resumé: poor economics 8

tomorrow because we’ve found better use for the money right now: festivals, drinking, tv, dvd’s, better tasting food, etc.. even tough we know we should get it. Small incentives like dal for vaccines gives a reason to act today rather than postpone indefinitely (*).

2. Although some beliefs of the poor are strongly held, it’s a mistake to think that it’s always the case: the devil’s eye is not written in stone in people’s mind, not like marriage beliefs.

One obvious sign is the fact that 77% of children received the first vaccine (5 shots are needed spaced in time). People seem to want preventable medicine even without any incentive. Incentive made them come more but still not enough in order to be fully immunized despite the stainless steel plates they get by completing the 5 shots.

Small incentives like dal for vaccines gives a reason to act today rather than postpone indefinitely. So incentives are good because they nudge (encourage) people to make the right choice.

In the chlorine case, this nudge needs to be specifically tailored to the environment. M. Kremer idea was to nudge people, living with no pipe water, with a free dispenser near the villages well that provides just the right chlorine quantity.

It would be a bit foolish to think parents would postpone indefinitely as said here (*). If they truly believed in the good vaccine gave them they wouldn’t postpone. A better reason can be that people procrastinate and underestimate the benefits.

Nudges help with the convincing (e.g.: get food for free) but they are more effective when, for whatever reason, the household is dubious about the benefits. Pascaline Dupas did a second experiment on the population that got free bed-nets and found another determinant (apart from the income effect). Families may observe that their children are sick less often and wanted to see if they would still buy them. She found that people who got them for free or almost free would buy a second one at a higher price

Conclusion: primary goal of health care policy in poor countries:• make it easy for the poor to obtain preventive care• regulating the quality of treatment: • preventive care for free and even reward them• free chlorine dispenser near wells• nudge parents into immunizing their children• free deworming pills and supplements at school• public investment in water and sanitation infrastructure

These investments will pay for themselves as:• reduced illness and death• children less sick-->go to school more often--> earn more a adults

The treatment challenge: twofold: • making sure that people can afford medicine• restricting access to medicine they don’t need: can lead to antibiotic resistant disease strainsBut information alone will not do the trick, just like us, the poor have imperfect knowledge about the benefits, ... p69


Chapter 4: Top of the ClassOver the past few decades, children have flocked(crowded) 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 a 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: we know how to teach all children, if we only decide to try.

Shantarama, mother of 5 lives in Karnataka, India. Most of the primary schools are free there but absenteeism rates are high 14-50%. It is not because of: • The difficulty of access: 95% of indians have a school within a mile• Parents resistance to it• Lack of demand for educated labor:Skeptics(demand wallah’s) say that there is no need to educate people who don’t want to be educated. If there was any demand for skilled workers, the demand for education would naturally emerge and supply would follow. The thing is, they’re wrong. This region is specialized in IT.

Then what is wrong? Kids enrollment to school has sky rocketed these last few years but the problem is are they learning anything?

Problems: 1. Teachers taken out of 6 school sample in Bangladesh, Ecuador, India, Indonesia, Peru

and Uganda miss on average a day of school every 5 days. The results are not better in India where 50% of public school teachers are not in front of a class at a time they should be.

2. Kids aged 7-14 participated in a survey to test their reading and math skills, the results were very poor (p75). In fact children who have to help out their families in stores do more complicated calculations so are they un-learning here?

supply wallah: people who want to change the supply-side of schooling to make it better (e.g.: more schools, better teachers, MDG: UN millennium development, ...)demand wallah: people who think there’s no point in supplying education unless there is a clear demand for it (e.g.: William Easterly, Demand wallah’s DW’s believe that the quality of education is bad because parents don’t care enough and they don’t because the benefits of education are low. When the benefits


of education become high enough, enrollment will go up without the state having to push for it. They give examples as evidence to support their theory: the green revolution (OGM seeds). Regions where the seeds where better suited to grow experienced an increase in the value of learning (how to be a successful farmer). DW’s believe that there is no need for educational policy since parents are able to respond to changes in the labour market. Indians need to make it attractive to invest in business requiring educated labour and an educated workforce will appear. At that point, parents care about education and will put pressure on teachers to deliver what they need.So education for DW is an investment. Investing money and earn some more in the future. You invest in his education so that he can take care of you during your old days. This theory is not applicable in most situations. Imagine the child becomes adult and stops caring about them. Some parents feel that they are adequately repaid by taking pride that their children are doing well. But what about those ‘evil’ parents who prefer keeping them away from school and earning money instead?

Supply wallah’s think that society shouldn’t allow that, to be hostage to a parent’s greed. But how do we implement this, I mean LEDC’s probably don’t have the required infrastructures to welcome it’s whole population of teenagers if they decided to do like MEDC’s and make education compulsory.

Santiago Levy developed a solution to this problem. As mexican finance minister, he had the difficult task of reforming the welfare system. He thought he could eradicate poverty by fostering a well educated generation. He offered money to poor families if their children attended school (conditionality). The families received compensations which was the amount of money the family would have earned if the child was working. He tested out his theories (CCT)

with RCT’s before actually implementing the policy. CCT’s gradually conquered the world with nuances because they carried out country specific randomized trials in order to design them better. This was the case in Malawi.

A world bank study wanted to assess whether the conditionality had any effect on the malawian kids staying at school. They made up three randomized groups: one had the conditionality, the second didn’t and the third didn’t get any money at all (control group I think). They found that the dropouts for the first two groups were the same and the third were higher. Conclusion: parents did not need to be forced to send their kids to school, they just needed to be helped financially. Reasons why the financial transfer may have made a difference in Malawi:

• parents couldn’t pay for school fees• borrowing is out of the question, baks won’t lend For all these reasons income matters for education decisions. this means that if John is richer than Jamal he will get a better education than Jamal even if Jamal would be more talented than him and even tough education brings them both the same income gains in the future. To attain this social efficient outcome: every child has a chance, we need to erase differences in income.

Does top-down education policy work?Hugo Pratt Dos Santos Resumé: poor economics 11

If parents don’t care about eductionisn’t this policy just a waste of resources? Easterly argues that investment in education has not helped african countries growing. Let’s study multiple countries that tried it and analyze its specifics. Conclusion of the study: schools are useful.Indonesia, General Suharto applied a classic top down policy going for a school building spree. If the lack of schools reflected a lack of interest in education this program would have been a disaster. Esther compared wages of children who had the chance to enroll into these schools and the ones who didn’t and she found a 8% increase in salary for every extra year of schooling. Taiwan, 1968, they changed the law and made it mandatory to complete instead of 6, 9 years of schooling. The effects where a positive effect on employment prospects.

But benefits for education are not only monetary. In malawi, girls who attended school were less likely of getting pregnant, are more likely to read the newspaper and understand political programs, able to run their business better, etc..

Supply and demand strategies have no reason of being mutually exclusive. Supply by itself does some good, some people find ways of getting educated without top-down polices, but t’s not the case for everyone. This doesn’t mean that top down strategies deliver as much as they should. As we saw some public schools can be dismal (disastrous). Are demand based approaches better? Let’s see the perfect example: private schools. Here it’s the parents who push and spend to give an education to their children. Have the private schools cracked the problem of school quality?

India is one of the countries where it is agreed that private schools should play an important role in the educational system. They passed the right to education act which gave families vouchers to pay for private school fees. A surprising phenomenon was taking place, private schools were cutting prices as low as $1.5/month to attract students. These low end schools tend to be held by people who didn’t have a job and started their own private schools in their house.Despite dubious credentials private schools performed better than public ones. • Private school teachers were 8% less absent than their counterparts in public schools• Kids performed better in maths and reading. 1-2 years in advance compared to their

counterpartsBut this could be explained by the fact that the kids who attend these two types of school are different, private school kids being richer. But it’s not the case. If we compare the gap in performance between private and public school it is close to 10 times the average gap between the highest and lowest socio economic category.

But are private schools as efficient as they should be?Pratham, an educational NGO has the job to expose the deficiencies of the educational system and tries to fix it. They introduced the Balsakhi program. It’s a program that helps children with their specific weaknesses at school. The teachers are volunteers, less educated than private school teachers, they are required to do a week’s training by Pratham to do this job. The results are astonishing good and Pratham wants to expand. A way to do that is having communities take over the program. Pratham went to Uttar Pradesh, one of the largest and poorest states i India and proposed parents to assess what their children learned at school. The results were bad. Brothers and mostly college students of the area held classes to help the rest of the community (after the week’s training). The key concept is that if volunteers can make such a huge difference in Indian test scores why are private schools not adopting them to perform better?Hugo Pratt Dos Santos Resumé: poor economics 12

Perhaps there is not enough competitive pressure among private schools, or parents are not sufficiently informed of what their kids learn.

Parents in Udaipur see education primarily as a way for their children to acquire wealth. But the problem is they tend to overstate the upsides and downsides (S-shape)The illusory S-shape: parents believe that the first few years of schooling pay much less (i the future) than the next ones.

The results of this belief is that when you’re poor(even the poorest) and have 4-7 children, you’ll prefer to concentrate all your money into one child rather than spreading the investment evenly across all their children. A winner is picked in the family and resources are concentrated on him/her. Misperception can be critical. In reality, there shouldn’t be an education-based poverty trap: education is valuable at every level. But the fact that parents believe that benefits of education are S-shaped leads them to behave as if there was a poverty-trap thus creating one.

Elitist school system: It is not only the parents that focus on the importance of graduation exam but the whole education system that colludes with them. Graduation exams are for most LEDC’s a major step in getting to college or successfully finish their last year of secondary school. This dates back to colonial times where schools were meant to train the local elite. A study suggested that higher cast students are given systematically higher grades than low cast ones. An unfair situation that leads children to fear of not being evaluated fairly and parents of low cast families to give up on their child’s ability to perform well at school. If parents don’t believe that their child can get to the steep part of the S-curve they might as well not try. This behavior creates a poverty trap even when none exists. If they give up they will never find out if their child can make it. Pessimism and a stereotype where high cast perform better than them leads low cast families to resent education.

To summarize the reasons why schools fail:Schools in developing countries aim to prepare the best performing students for some difficult exam that is the stepping stone towards greater things. • The children of the rich go to school that not only teach more and teach better, but where

they are treated with compassion and helped to reach their true potential. Poor kids are expected to suffer in silence until they dropout unless they are gifted

This situation gives high ranking position to mediocre children who’s parents could afford their education. Fortunately this is changing. Eg: Raman company which employs people who don’t even have degrees, their acceptance is solely based on an intelligence test.

• A combination of unrealistic goals (required by law to teach the whole syllabus content), unnecessarily pessimistic expectations, and the wrong incentives for teachers ensure that two main tasks are not done in developing country’s schools: giving a basic education and identifying talent

Reengineering education: What we’ve learned from Partham1. Every child can master school skills as long as the child and teacher put enough effort

into it2. It takes relatively little training to be effective remedial teachers, especially to lower

grade studentsWhat we’ve learned from other experiences:


1. Children should be allowed to learn at their own pace. Eg Kenya where students were put into classes according to their level, teachers could address children needs better. A way to do this would be to make the boundaries between grades more fluid so that a child in 5th grade can take 2nd grade classes

2. Change the unrealistic expectations that everyone has. Eg Madagascar where parents were told how much extra income they would earn with another year of schooling.

3. Giving scholarships to top performing students4. Integrating IT since it’s become very cheap. Eg: Vandodara, India, children had to

compete in a math game. Learning with fun. Result: increased their math scores.

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.

Sanjay Gandhi was convinced that population control is essential. During the Emergency(1975-77) his view was: “all our economic, industrial, agricultural progress would be of no use if the population continued to rise at present rates”. In 1976 the Indian cabinet approved a formal statement, a policy with 2 main objectives. Give financial incentives for those who agreed to be sterilized, and an authorization for every state to come up with compulsory sterilization laws. Failures to achieve monthly quotas would

be penalized by retrieving salaries and other penalties. The policy was a success at attaining its targets. But by 1977 the government was overthrown and family planning policies retreated to the shadows. One of the most durable residues of these violent times are families who refuse to get their children the polio vaccine because they believe it was a scam to get their children sterilized. Another impact of high levels of population: Environment: global warming and additional pressure on drinking water (drink+agriculture) In order to develop an effective population policy we need to understand why people have so many children: • inability to control their fertility?• Because they don’t want to? If that’s the case then why?


Myth defended by Malthus and Sachs: larger families is bad for children’s education. Less resources will be available to feed and educate them. This would be particularly true if parents had the S-curve in mind --> concentration of resources into one child. We’ll refute this myth in this chapter. Malthus: Resources that countries have are fixed, population growth will therefore make people poorer. In this logic, Black Death should get credit for it’s impact on the high wages that followed. But he forgot to put technological progress into the equation. Alwyn Young: HIV/AIDS reduces fertility by:• a reluctance to engage in unprotected sex• resulting labour shortages (because of the deaths) made it more attractive for women to

work rather than have babies. This drop of fertility would get South Africa 5.6 percent richer in perpetuityBecker: Nobel prize laureate: Quality-quantity trade off: more children less resources (food and money for education)J. Sachs: poor families tend to be larger, children born into those families are less likely to receive proper education, health care and nutrition. This creates a poverty trap because there is a mechanism of intergenerational transmission of poverty.

As we did so many times throughout the book, we can’t rely on theory. We need to put the big question aside and focus on the lives and choices of poor people.

It could be that poor families who have many children don’t value education as much as other families. In China a researcher found that in regions where the one child policy was relaxed to two children, parents who already had a girl as first child, well this first child (girl) received more education in defiance to Becker’s theory.In Bangladesh, A sample was halved in two, one of them received health care for their children, the others didn’t. The study showed that there was no difference (20 years later) in the height, weight, school enrollment, or years of education between boys or girls.

This seems counterintuitive, fewer resources and the children do not suffer, well who does then? The mother is a possible answer.It is believed to be bad for the women’s health to give birth too early and also results in school drop-outs.

Does contraception availability/ access change fertility rate or do people who want to reduce fertility rates find a way by themselves?

supply wallah (Sachs): high contraception availability/ access drops fertility ratedemand wallah: access is not the only thing needed, it will not do much, people have to want to change their fertility rates

In Indonesia they found that fertility rates were lower in regions where there were more clinics. But overtime, the decrease of fertility was uncorrelated to the rise in clinics numbers (supply wins)


Matlab program has long been the poster child for demand wallah’s. But it seems that matlab did a lot more than to just provide contraception. They provided female health workers to come two times a week to talk with families about it, bringing the discussion to places where it is taboo. A similar program, Profamilia, made in Colombia concluded that their program had little effect on fertility.

Profamilia aimed at postponing pregnancies and therefore helped women get better jobs down the line. Unfortunately, it’s not the case in every country. In some LEDC’s teenagers need parent’s consent to have access to those family planning schemes. Why?Because they:• Think teenagers are not mature enough to weigh the costs of their consequences• Don’t recognize the legitimacy of their sexual desiresAnd thus prefer scaring off kids. The results of this are high levels of teen pregnancies. They have programs to teach kids about STD’s but they are missing the mark. Early pregnancy is not bad itself but they are a marker for risky sex which in LEDC’s like Kenya means higher risks of contracting HIV. In Kenya one of these government plans with the support of local churches is to teach the kids at school ABCD. It’s a program that basically supports abstinence before marriage. Further research into it concluded that: • Kids do make carefully calculated choices: scaring them off is not effective• ABCD doesn’t work, RCT’s have tested if the effect was any different between school’s

who got the program and those who didn’t and the results were the sameA set of two strategies were proposed by Dupas and Kremer1. Make an RCT where some kids were told which population type had the most

statistically high chance to be infected. It is true that older men tend to be more likely to have HIV. others weren’t

Results: Pregnancy rates were 5.5 in schools that didn’t get the program and 3.7 to schools which did get it --> success2. Make another RCT where some kids were given free uniforms, these are expensiveResults: Pregnancy rates fell from 14 to 11% in schools that got the program. But this effect was entirely concentrates in schools were teachers didn’t get the new ABCD sex education curriculum.

What can we conclude from poor young girls fertility rate?Girls in Kenya know that unprotected sex leads to pregnancy. But they also know that if a man has a child he will take care of the kid which is an incentive. Especially for girls who want to move out of the house. This makes older men more attractive partners because they can afford getting married. Free uniforms encourages girls to stay at school but the ABCD program encourages marriage, which undoes the uniform effect.

Who makes the choice of having kids?

Usually the women, because they end up paying most of the physical costs of bearing a child. Not surprisingly, their fertility choice is much lower than men, which could bring up disagreement. It is plausible that a woman younger than her husband might have less bargaining power if she is less educated, has low chances of getting a job, the freedom to divorce, and her survival options in case of divorce. In Peru we found that when former squatters where given property right, women who got their name in the right had lower fertility rates compared to women who didn’t. One likely explanation is that it shifted bargaining power on family size decisions.


In Zambia, they also found that women who got the visit private visits with the family planners were more likely to have less children compared to cases where husbands were present during the presentation. These women where 38% more likely to ask for the modern contraceptive service when given the prospects without the husbands (and possibly without them ever knowing that they are on any kind of contraception).

Matlab experienced the same effect. A possible explanation for such high results is he accelerated social change. Fertility choice are more than just the couple’s decision, they come from the community also. Kaivan Munshi found that in Matlab villages, community’s where women of the same religion were already taking contraception where more likely to get it compared to other communities where social norm doesn’t allow it. Even tough Hindus and Muslims have the same access to family planning the fact that Hindus used contraception didn’t change Muslim habits on contraception.

In highly catholic countries like Brazil it can be hard to talk about sex, contraception, .. because asking itself reveals your inclinations and taints the way people think of you in your community. Social norms can be difficult to change but they did in Brazil. A country where the average brazilian girl had 6 children a government held tv station (extremely popular still today) used tv series (telenovelas) to change social norm. The series showed 50 year old women with no children and women with max 1 child.

Conclusion: the decision is based in two steps. At the most obvious level: poor people make their own fertility decision even if contraception doesn’t exist. What leads them to make their choice depends afterwards i a series of factors: • bargaining power of the husband• their mother in law• social norms

To what extent do poor people want children simply because it’s an economic investment (can put them to work)?

Most poor people (e.g. Pak Sudarno, the indian guy) view children as an insurance policy. The more you have, the higher the chances you have of them taking care of you in the old days. In rich countries this doesn’t happen because we have social security. In china more than half of the families live with their parents, and that increases to 70% in families where they have 7-8children.If this is the case (children are financial safety nets) then if fertility drops we should see savings plummet. 1972, China encouraged family planning and 1978 they introduced the one child policy. The theory is confirmed by the data, savings went up after 1972, a 10% increase. The effect was even stronger in households who had a girl as first child comforting the fact that sons (boys) are the one’s who should take care of their parents. These results can be undermined by the fact that it was a violent, sudden change of people’s habits. But a similar effect was found in Bangladesh in one of Matlab’s villages. When contraception was made available, families began having higher saving.

This finding could explain a result we had just before that said that smaller families doesn’t translate into healthier, more educated children. Indeed, if small families have to save more for the future because they expect lower money transfers in the future and this cuts


into funds they have available for their children. Families could actually be poorer if they had less children because they had to save so much more.

Poor families also choose their (p121) children’s gender. This practice is illegal but it permits them to be richer and avoid dowries, and financial support they would have got if the daughter would work rather than leave them and be with her husband. Consequences of this are • Girls are more likely to be brought up in large families• They get breast fed less time than boys because it is believed that breast feeding

reduces the chances of getting pregnant again (with a boy, that’s what they wish)Things are getting worse around LEDC. Andrew Foster and M. Rosenzweig found that when villages economic growth was high, the value of investing in boys increased also which lead to a wider mortality gap between boys and girls. A striking example can be found in China where gender imbalances are strong. Production of tea needs women because it needs delicate hands to pluck them, orchards to the contrary require a lot of heavy lifting. Data suggests that regions where orchard was planted had high levels of men and in tea regions high levels of women being born.

We treat families as a single unit, a paterfamilias that decide who get’s what, how many years of schooling, etc.. But that’ not the case. Family decision making comes as a result of bargaining process among family members. Theoretically, family are bound together on the long term and should attain the “efficient house hold” model which is an equilibrium. Both partners won’t agree on what the money should be spent on but if one can be made happier without hurting the other’s interest, they would make it is done. A family that runs a small agricultural enterprise will therefore try and make as much money as possible and only after that will they split up the gains among it’s members. (maximization of earnings)

Christopher Udry tested this theory in Burkina Faso, where each household member had a different land plot. The maximization of earnings wasn’t working. The men kept almost all of the fertilizers for himself and planted different crops than her wife did. Fertilizers have highly curbed yields which means that if you already use a lot of fertilizer, putting some more isn’t going to change a lot. But on the contrary is you’re using no fertilizer on your land having a little of it can increase production a lot. The situation is therefore not efficient. ‘Male’ crops are cocoa and coffee while women crops are bananas, vegetables, ... These are different crops which means that a good year for one most systematically made a good year for the other. In a ‘male’ year more money was spent on alcohol and tobacco while in a ‘woman’ year more resources were spent on feeding the family and little indulgences for the household. The husband gives the wife a fixed amount of money every month and the wife has to feed the family with it.


We’ve seen in this country that communities of women help each other when one of them is in danger of not being able to feed herself but why doesn’t it work within the family?

Because of yam. Yam is a very expensive, easy to store crop that gets grown by men, not women. But yam is not a crop that is sold freely. It is kept by families in case of high school fees and medical bills. This contract is socially enforced. One problem with this rule that relies on social norms is that norms change slowly and therefore there is a risk that norms are out of sync with reality.An example of this can be found in Indonesia. Very poor families can have children that are well dressed, fed and educated because grand parents feel obligated to take care of their grandchildren.

In order to implement an efficient policy we need to know how families function. For example the PROGRESSA program in Mexico found that putting money directly in the hands of the mothers was much more effective in directing resources toward the children. IN South africa, after the apartheid, elderly people were given a pension. Many of these people lived with their children. Men usually kept the money for themselves while women shared it in the family. Conclusion: men are more selfish than women?It might be that norms and social expectations are the things that play an important role here. Perhaps women are expected to behave like that. Public policies could do some mileage by empowering women.

Chapter 6: Barefoot Hedge-Fund ManagersThe 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. 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.

So where is formal insurance for the poor? Is that the next billion-customers opportunity?

In summer 2008, Ibu Tina tells us her story. She believes that her business fortunes were symptomatic of small business owners. She had a business of ironing with her husband that did pretty well. One day, one of her clients wrote a bad check of over 20 million rupiah. They went to the police but they wanted 2.5 million rupiah in order to start the investigation. At the end they lost 4.5 million and recovered 4 million, the guy who wrote the bad check disappeared. Poor people are like hedge fund managers, except they earn a lot less and are liable for 100%of their business which is much more than the one of an hedge fund. Moreover, poor have to start their business with the money coming from their accumulated wealth or by borrowing, a situation that head funds never have to face. They start either small businesses or farms with that money.


Risks for farmers:• owners: most of the land is not irrigated so a drought or simply delay in rains can cause

crop failure and half of the year’s income might vanish• Agricultural income is variable, and the poorer the country the higher the variability.

Agricultural wages vary 21 x more in India than in the USThe other main form of employment for the poor is casual workrisks: • if there’s a problem with the business they’re the first to get laid-off (e.g.: Pak in chap2) • Summer 2008: spike in food prices and fertilizers: they couldn’t find work in agriculture

because owners thought their costs were higher than the prices.

Other risks for the poor apart from income and food as said here can be for example health, political violence and corruption.

During the financial crisis World Bank’s president Robert Zoellick warned that the world was too focused on bank rescues and stimulus packages and that we shouldn’t forget that poor people living in LEDC are much more exposed to this crisis. With a drop in global demand poor people would loose jobs, and markets for their products.

The relationship between income today and in the future is S-shaped. The effect on the poor of a bad break can be worse than temporary unhappiness. In chapter 1 we saw that there is a possibility of poverty trap when investments pay off little for those who invest little. Ibu Tina was in this situation. She needed a minimum scale for her business to be profitable. After the theft all they could do was pack the shorts into bags, which is not profitable (rentable). This had the effect of moving them into the poverty trap zone.

(diagram)

This process is often reinforced by a psychological process. Hope. And the fact that when we are faced by that much stress it makes us worry which in turn makes us stressed and depressed. Being stressed makes it harder to focus and thus also less productive. There is a strong link between cortisol - indicator of stress in our body and poverty. Levels of cortisol go down when families get help like Progressa in Mexico. We found that children benefiting from the program had lower levels of cortisol.

How do poor people cope with this risk?They could work more but when times are bad they would compete for each other and wages might drop. The solution is diversification:• Jobs: they have a lot of different occupations e.g.: median family: 7 occupations• Multiple plots of land: having this configuration instead of one big one ensures that when

the rains fall, different pieces of land may have different micro-climates determined by exposure - slope - etc.. thus diversifying the risk of not having enough to eat

• Temporary migration: young men might leave and work to towns so that the income doesn’t depend on a single salary

• Marriage: marrying your daughter to another village, not far away, can ensure mutual help in times of crisis.

• Children: having lots of them rises the likelihood that one of them might take care of you during your old days


Another way to cope with the risks is to rely on the others. Cristopher Udry recorded in Nigeria every gift or informal loan people gave each other. He found that families owed or were owed by 2.5 families. This doesn’t mean that they can have stable earnings in spite of this system, they still experience drops in consumption. The risks are high and this system is far from perfect. Let’s take health shocks. In indonesia, consumption drops 20% when a family member is severely ill. A study in the Philippines show that intra-village solidarity exists, for example for a bad harvest, people will come with gifts and risk free loans. But with a health shock families are left to deal with it. Why is thatMaybe because: • moral hazard: people will change behavior if they know they won’t bear the full

consequences• people may claim that they are in need when they are not• the promise of mutual help may not be carried out by the other one in the futureBut becoming sick is not a choice. The reason then can be found in moral obligation and not on the fact that “i’m giving you today but expect something for you tomorrow”. Eg: Hindu neighbor to a Muslim house, one day husband died. He was the only person earning money so the rest of the family started to starve. They sometimes came to steal from the Muslim’s house. The woman there says that she turns a blind eye because she knows she would have done the same thing in her situation. This moral duty explains why in nigerian villages, villagers help each other out on an individual basis instead of all contributing to a common pot despite the fact that it would have been a lot more efficient

Poor people are not insured because:1. it is impossible to (p148) set up health insurance in a country where anyone can set up

as a doctor 2. where patients ‘reclament’ antibiotics because they think it’s the best way of getting

cured. 3. If insurance is not mandatory adverse selection can take place: people who know they

have a high propensity of getting ill will subscribe. We could get the prices higher but that would scare of the healthy clients and attract unhealthy ones. If it is mandatory the insurer doesn’t get stuck with only unhealthy clients.

4. fraud: indians have no ID’s, there are no institutions there to enforce the law

The solution to health insurance would be to start from a large pool of people who came together for some other reason than health. Micro-finance institutions (MFIs) are the perfect match, it’s easy to collect premiums from clients since the loan officer already meets them every week. To avoid advert selection SKS would make it mandatory and to deal with fraud, benefits were capped and clients were strongly encouraged to those hospitals that SKS trusted. To sweeten the deal they offered ‘cashless facilities’: they wouldn’t have to pay anything as long as it was a covered illness. They tried to make it mandatory as said before but there was too much pressure from the clients to not have it. So, what SKS did is that it made mandatory only after the 1 st renewal, this didn’t work. (details page 151)

Robert Townsend an MIT professor wanted to measure the impact of access to weather insurance in India. He found that overall sign-up rates were extremely low and those who did asked for a coverage of 2-3%.Why is that? Do poor resent insurance?


I. Demand wallah’s blame the government: whenever there is a drought, flood the government intervenes to help out the population. The amounts that poor get from this are a very small part of what poor need

II. Poor don’t understand the concept of insurance: not true, a survey shows that respondents interviewed got it well 3/4 th of the time. The author’s not sure we would do any better here in Europe.

III. Because it only covers catastrophic scenarioseg1: stomach infection not coveredeg2: husband died but the spouse didn’t get reimbursed of the pills because he didn’t go to an hospital. Logic but not for the poor. eg3: weather insurance: get money if the rainfall is above a certain level. Problem rainfall may be different from the nearest weather station reason: micro-climates. IV. Trust: it requires the household has to pay in advance to be repaid in the future

Quando e que se renovela um contrato de empresitmo?

The author thinks governments should step in to help the poor, who bear too many risks in their lives

Chapter 7: The Men from Kabul and the Eunuchs of IndiaIt is apparently hard to be dispassionate about microcredit, which has been simultaneously presented as the biggest hope to eradicate poverty and the cause for multiple suicides of innocent borrowers.

The truth is that microcredit is an extremely impressive social innovation: the movement has managed to find a way to lend to the poor at reasonable interest rates, against all odds, where many government efforts had previously failed. And it has real, if modest, effects on the lives of its clients. But it is not a silver bullet. In particular, it leaves open the next big challenge: how to lend to larger firms, so that micro businesses can turn into viable enterprises.

Food and vegetable sellers buy their stock from wholesaler, usually on credit, in the morning and reimburse the wholesaler at night with interest. Sometimes they have to rent a cart to transport the goods because it’s far too expensive to buy one. These sellers pay moneylenders and traders very high interest rates (4.9% a day). After a year of unpaid expenses a 5$ loan would turn into 100 million $ debt. Banks won’t lend the poor so they’re stuck in this vicious circle of living everyday life on credit. What micro-finance institutions did is they dropped the interest rates. Sellers could now make huge loans with a modest but relatively high interest rate of 9,7% a month. But that gave them room to buy carts, and in a matter of months to escape poverty. But the story given by MFIs seems too good to be true. They came into a monopolistic market owned by traders and moneylenders and offered lower interest rates. In that case why aren’t all the sellers soliciting MFIs to bounce back on poverty? Are they forgetting their tickets out of poverty or is it just that MFIs are not telling the whole story?

In Udaipur (similar patterns emerge in the rest of india, about 2/3 of the poor had a loan


37% were from a shopkeeper, 23% were from a relative, 18% were from a moneylender and 6.4% were from a formal source and this low rate is not due to low physical access. A government incentive was made in India where it subsidized loans. Banks needed quotas of loans given to priority sectors such as small firms, agriculture, ... and whenever they opened a branch of the bank they had to open one as well in the poorer parts of the country. The study made by Burgess showed poverty decreased faster in those regions but in the end it didn’t work. Money had a tendency of staying on the hands of local elite, and banks that opened that many branches were becoming less profitable (p161)Why aren't investors rushing in since it’s so profitable? Banks in rich countries are can now propose to lend to people in poor countries1. It is more costly to lend to poor rather than to rich people. The lender will want to know many things such as: the borrower’s whereabouts, it’ business. The lender will also want to visit from time to time to keep an eye on things and nudging the business into the right direction (for him). This takes time, and time is money. This means that for small loans there are some expenses that don’t scale down such as collecting information on the borrower, etc.. and so interest rates will be higher than a larger loan. To make maters worse there is the multiplier effect. When interest rates group, the borrow has more reasons to try and find a way not to pay back which increases monitoring costs and thus pushes interests even higher. Or as it happens most of the time, they don’t lend to poor. The high costs of collecting information often means that they are bound to their moneylender, leaving is nearly impossible. Why? because if he goes to another moneylender he will be suspicious of the reason why and be doubly careful which means that it will drive up interest rates. But on the other hand, moneylenders know that and they can exploit this advantage they have2. Poor people have higher chances of defaultingRates of default o informal loans unlike the government sponsored ones are extremely rare. 3. Banks can’t enforce their contracts with the poor. They could through the law commission but it takes more than 8 years of bureaucracy. The solution was to make the borrower sign a check which was a criminal offense if not honored. Police could storm into the place and collect the amount given on the check. But after a few months police departments had hundreds of demands which stopped the program because they didn’t want to do it, it’s not their job. The problem is that even when they get their money back the plan can back-fire. e.g.: headlines the day after farmer kills himself over a loan.. The banks thus prefer to stay away from the poor --> monopoly for the moneylenders --> drives interests up

Muhammad Yunus and Padmaja Reddy had the difficult task of finding how to lend to the poor at reasonable prices. In order to do that we’ll analyze how MFI’s work in south asia. MFIs typically lend at a price of 25% a year, moneylenders interests are on average 3x to 4x higher. MFIs are a global phenomenon, they typically lend more to women than men, they have a profit but also a social mission. Like traditional money lenders ML, MFIskeep a close check on customers, but they do so by involving other borrowers who happen to know the borrower. A typical MFI contract involves a loan to a group of borrowers who are liable for each other’s loans. Some organizations require the borrowers to know each other, others don’t. Like ML, MFIs cut off all future lending in case of default and do not hesitate to put pressure on these reluctant clients. However, unlike MLs, they don’t use physical force. The power of shame is enough (e.g.: by shouting in front of the doorstep, neighbors see --> humiliation).


MFIs differ from ML also in the flexibility of repayment. Most contracts lend a fix amount and expect the group to repay every week at the same time, during the group meetings. The job of the lon officer is to check whether the total money matches which means that they don’t need to be that educated, cuts costs. His main prerogative is to recruit new clients and making sure that everyone pays (variable salary, the more clients he gets in the more he earns). MFI has earned it’s place into the anti-poverty policies but does it actually work?

October 2010 the pradesh government blamed SKS for the suicide of 57 farmers who were allegedly put into too much pressure by loan officers’ practice. A law was passed making it imperative that during the weekly sessions, where groups had to pay together, an elected official had to be present. This measure drove profits of SKS down. One reason lacking a powerful argument in their defense is their reluctance to analyze and evaluate their impact on society. Which they refused. The problem is their whole staff believe that they are better than others to help the poor. Thus gaining huge support from banks as reduced rates, subsidies.

Together with Padmaja Reddy (Spandana’s CEO), we performed a study on Spandana, one of the most profitable MFIs in India and found the effects on poverty low but they still had a positive impact on the lives of the poor. Of 104 neighborhoods 52 were left for Spandana to enter, the others were left as a comparison group. Spandana’s neighborhoods were • more likely to have started a business. • more likely to have bought durable goods (tv, refrigerators, bicycles, ..)An interesting distinction appeared, people who started a business were less likely to increase their consumption because they wanted to make the most out of the opportunity. There was no clear evidence of reckless spending. People were actually consuming less “wasteful” expenditures e.g.: snacks, tea, ..

On the other hand there was no clear sign of empowerment on women (social objective: women are more likely to spend on education for their kids etc, ..). They didn’t exercise any additional control over the household on how the money should be spent. Nor did we see a difference on spending on education, health, or on the probability of their kids enrolling in a private school. in the end, the percentage of families that started a new business went from 5 to 7%, a small impact but not a revolution. MFI are a tool to stop poverty but the impact was not as much as everyone expected.This study grabbed the headlines and concentrated the attention on the bad side of the study.


Limits of microcredit: why does no one use it then?• Lack of flexibility with rules:

• They have to gather together every week to pay up what they owe. They are all liable over the debt (joint liability). Some people don’t want to take the risk of others defaulting

• They might be reluctant to include other people they don’t know into their group• Timing issues

• weekly repayment (rule) starting a week after the loan is given. Isn’t ideal to people who need the money now but don’t know when they could repay

• e.g.: some MFIs make exceptions about health care. People are exempted from the weekly repayment rule

• What happens if your son is offered a chance to go to university? Or any other investment, project that only pay off in some time. Together with an MFI, Rohini Pande and Erica Field persuaded them to allow a randomly chosen set of clients to start their prescribed repayment after 2 months. The results were an increase in client satisfaction for those who got it. Clients under the old rule were more likely to start a riskier, larger business compared to people with the new rule. But the MFI didn’t want to implement it because they saw that under the new rule (where they were given 2 months) default rates where higher by 8 %.

But isn’t it socially and commercially ineffective to such stringent rules on default. After all entrepreneurship is bound to a certain level of failure. Most MFI leaders don’t want to take that chance and maybe they are right. They have very little recourse if a client decides not to pay them.

Let’s focus on the group liability over the debt. Studies show that (p175) there is no difference in default rates between contracts where joint liability is enforced to the one’s that are not. But a particular equilibrium comes with the joint liability agreement. If everyone believes that the others won’t repay, there is no reason for us to pay (don’t forget that if you default once you’re banned from the MFI). In 2005 rumors were circulating about Padmaja Reddy, they said that her MFI was in trouble. This crisis was easily adverted by Padmaja Reddy making public appearances and denying the accusationsIn 2006, Spandana and Share were accused ofkilling farmers by pushing them to over-borrow and put unfair pressure on them to repay. The commissioner of Krishna decreed that repaying their loans to these 2 MFI was illegal. All hell broke loose. People didn’t repay even tough they changed the commissioner’s mind a few days later. Bottom line is, people repay because others repay. A year later 70% of the outstanding loans had yet o be repaid. The decision of MFI leaders to prioritize repayment discipline over everything else (by enforcing joint liability, ...) might make sense now. This implies that micro finance is not the best way to finance entrepreneurs (social objective not met). For each successful entrepreneur in the Silicon Valley or elsewhere many had to fail before them. MFIs are simply not designed to put large sums of money in the hands of people who might fail. This is no accident, it’s the necessary by-product rule(incentive to play it safe) that have allowed microcredit to lend to a large amount of poor people at low interest rates.

Cest possible que les pauvres épargnet toute leur vie et que le montant qu’ils peuvent emprunter augmente avec la seniorité dans le MFI


How can larger firms be financed?The problem in developing countries is that is that micro credit is limited to 700$. Firms who’d want to grow bigger could go to a bank but there is a gap. They will need to be sufficiently large for them to borrow.In 2010 Miao Lei had a business of setting up computer systems for companies. One day he got a huge contract which he accepted. The problem was he had to pay for the equipment before, set it up and only then would he get paid. He took a huge risk on accepting this contract because defaulting this contract would mean the end of his career. The problem was no one would lend him money, not even the banks. So he decided to gamble. He signed up on a bid for a government contract to set up computers. he knew that this contract would pay before hand so he had to win it. He asked for an extremely low price in order to be sure to win the bid. He won, financed the first project with the money provided by the second. He’s now doing pretty good, banks lend him money. But he had to gamble his life to get where he is.

In Tirupur, South India, the place is well known for it’s t-shirt industry. There are two types of companies: companies owned by gounders (cast of wealthy farming faimlies) and outsiders. Outsiders have typically smaller investment rates but are more effective and productive compared to gounders. For any level of capital, outsiders produce and export more (more efficient). But what is more surprising is that gounders won’t invest in outsiders firms, they will instead set up their own business. Despite the fact that they have no experience at all (gounders). To help gounders, the indian government has a priority sector regulation. Banks have to lend at least 40% to agriculture, micro finance, small and medium enterprises which can include large firms. Although it is very unpopular these days, bankers want to abolish this because they say it’s too risky and expensive incentives came in to help the private sector.

Miao Lei, because of his experience decided to finance young entrepreneurs by purchasing equity from them, but it’s scale is too low o make a difference in China.

Improvements in the functioning of courts may well make a difference in the future. But this is not a magic bullet because when India introduced the faster court action. Loans to bigger firms plummeted but loans to small ones dropped. The reason is bankers preferred lending to more profitable investments, with higher volumes involved, now that they were sure to get paid by the loan

In conclusion MFI’s aren’t perfect but it’s one of the only programs who has managed to help so many poors. However the structure of MFIs, which is the source of its success in lending to poor, is such that we cannot count on it as a stepping stone for larger businesses to be created and financed. Finding new ways of financing medium sized enterprises is the next big challenge for finance in developing countries.

Chapter 8: Saving Brick by BrickThe Victorians used to think that poverty went hand in hand with impatience, at best, and sloth (aversion to work), at worst. It was believed you had to frighten and punish the poor into thinking that any misstep off the straight-and-narrow would cause them to plunge into even more terrible conditions.


Today’s more benign version of this argument is: “How can the poor save when they have no money?" In fact, the poor do save and they do it despite considerable odds: no bank will take their savings, and money saved at home is not very safe. Still, like the rich, they tend to procrastinate and give in to temptations. The double injustice is that these temptations are more likely to derail the poor, and that they have fewer guards against them.

In developing countries most of the houses are unfinished. In Tanger, houses that stand out are the ones that are actually finished. Some didn’t have a roof. When we asked them the reason for this they said it was their way of saving up money.2 problems: • Security: when rain comes, the house could collapse• If sold incomplete, the partial construction may be worth less than it originally cost to buy

the bricks. But why don’t they save more in order to be able to finish the house at once?It could even give them a buffer for a bad year in the field. Knowing that they have little access to credit and limited insurance shouldn’t they save up even more than rich people do?

Victorians thought that poor were impatient people and unable to think far enough ahead. Consequently, the only way to keep the poor from sloth is to threaten them with extreme misery. (e.g.. Charles Dickens debtor’s prisons). Gary Becker, nobel prize, supports this idea. He said that possession of wealth encourages people to invest in becoming more patient . By implication, poverty makes people more impatient. Fortunately, recent movements recognize the capitalist movement in the poor and is moving away from the idea of poor people being carefree and totally incompetent. In chapter 6 we saw that the poor took a lot of preemptive actions to limit risk. In our 18 country data set we saw that poor living in rural areas 9% (en moyenne) have a savings account and 12% in the urban set. In brazil

it is less than 1%. But they save, nonetheless.

Rutherford is the founder of Safesave, it’s an institution to help poor save. He found out a lot of things about poor: • They have ingenious ways of saving:They form saving clubs. In india they’re called self help groups SHGs, where poor can also get loans. In Africa they’re called rotating savings and credit associations ROSCAs. In ROSCAs members meet regularly, bring the same amount of cash and, on a rotating basis, one member gets the whole pot. Jennifer Auma belongs to 6 ROSCAMs, all different i size (17- 2$) and a loan to buy maize. Large ones are used for long term investments: school fees, house improvements, ... and smaller ones are for her rent. She also has shares on the village bank, has small stakes of money hidden around the house for emergencies and she was owed money from a liability group (MFI) because one of them defaulted --> extremely complicated and costly. But they don’t have the choice, banks are simpler but don’t want to manage small accounts. ROSCAMs advantages:


• no fees: withdrawal, ...• can make small deposits: banks don’t want to have small accounts• faster fro them to save because the rotation comes quicker than if she had to do it all by

herself. Bank’s disadvantages for poor• administrative costs: annual fee, opening fee, ...• withdrawal fees are high• are usually far away from their home because they’re located in town center’s

Are poor people saving less than they would if they had a bank account?In Bumala, a randomized group chosen and given a free opening fee. Few men ended up using those accounts but 2/3 of the women deposited money at least once. And these women saved more than comparable women who were not offered accounts, and also were less likely to draw on their working capital when ill (used the bank’s savings instead).

What’s been done to cut costs:

1. SHG groups have a solution to this, they can open up accounts with the pot of money coming from the group. Bank’s will allow it because they’re larger in volume

2. Another solution to cutting costs is using technologies. Some banks use an SMS service for people to manage their accounts.

An important drawback is that banks use highly paid employees to handle depositor’s money, which raises costs. They should use less qualified people to do this but the problem is trust, banks don’t trust low qualified workers to handle accounts. They fear they’ll just keep the depositary’s money to them.

Micro saving is going o be the next micro finance revolution. But is it the lack of access to savings account the only issue? Most men in our previous survey decided not to use these free accounts and only 40% of the women did not make a single deposit. We’ve already seen i the previous chapter an example of lucrative opportunity that wasn’t used by the poor. The fruit vendor in Chenai that borrowed 1000 rupees each morning. They could avoid that heavy usury burden by not buying 2 cups of tee during, after 90 days the vendor would be debt free. Why aren’t they using this method?In Kenya only 25% of the farmers use fertilizers when it has a 70% return. 1$ invested today = 1,7$ extra maize next year. A study conducted by Esther found that free fertilizers increased the likelihood of using it by 10% in the next season. Why didn’t they use it we asked them? Because they don’t have the money at the time that fertilizers were available. Farmers have money just after harvest but fertilizers are not available in stores. So they keep that money at home. The problem is that that money disappears. They’ll give the money instead to someone who needs in the street (clothes, food). Esther then conducted another survey to confirm this. Farmers were given vouchers, at market price just after harvest. The program increased the fraction of farmers using fertilizers by 50%. What if someone had health problems, would they resell the fertilizers? they bought? No, most people we asked said they would find another way, either borrowing from a friend, working extra hours, or kill a chicken ^^.

The examples of the Kenyan farmer and the fruit vendor suggest that a lot of people fail to save even when they have access to good saving opportunities. Part of the problem comes from human psychology. In essence we have a vision of how w should act in the future that is often inconstant with the way we act today. e.g.: spend now and at the same Hugo Pratt Dos Santos Resumé: poor economics 28

time plan to save in the future, buying alcohol and sugar but planning on spending money in more responsible ways tomorrow: school fees, bed nets, roof repairs.

In Hyderabad, we asked dwellers which were the goods they would like to cut on. They said tea, snacks, alcohol and tobacco. It’s clear that these make up significant parts of their budgets. the same self-knowledge was found by Esther with the kenyan fertilizer program: a large fraction of them bought the vouchers just after harvest because they knew they would be tempted into not saving the money. Poor save not only to keep it safe from others but also from themselves. Building a house brick by brick is another way to make sure that your savings remain focused toward your concrete goal.

Paradoxically, some MFI clients may borrow in order to save..thus paying a 24% annual interest rate. When we asked why she did that she said she was starting saving for a dowry in two years time. She preferred paying more and being forced to save rather than just saving by herself, because she wouldn’t have the self control to do it, other things to pay would keep coming up. It’s not normal to us but for them it’s a normal way to save.

Knowing that Dupas and Robinson proposed vendors in Kenya to become members of a health program. Some of them were given locked health boxes and others unlocked ones where they could put their money to save up. The locked one could only be opened for health reasons. The results were striking, giving them a health box wold increase their spending on health care but locked boxes did not. For fear that they would need the money for something else

Awareness of our problems thus does not necessarily mean that they get solved. It may just mean that we are able to perfectly anticipate where we will fail

Self control is harder for the poor for two reasons- Vicious cycle: saving is less attractive for the poor because for them the goal tends to be

far away, and they know that there will be lots of temptations along the way- Saving decisions rehire thinking: the richer we are, the more these decisions are made

for us e.g.: sécurité sociale. The money is automatically deduced from their bank accounts as for the poor they need to surmount temptation every month to go to the bank (usually in the city center) and deposit their savings. This is compounded (making matters worse) by the fact as we’ve seen in chap6, that poor live under considerable stress, and self induced cortisol which makes us choose more impulsive decisions.

In this diagram you can see an S-shape between net worth today and net worth tomorrow. The difference between the curve and the diagonal is the amount of savings. Very poor people (below P-point) don’t save enough and therefore their resources in the future tend to be lower. As people get richer they start saving a higher fraction of their resources, which means that they will have relatively more resources in the future. Finally, rich people don’t have to save as much to meet their aspirations for the future.

This s shape creates a poverty trap as we saw. People at the left of P will not get richer than that point. Those on the right are saving more than they need and thus getting richer.


Saving behavior depends on what people expect will happen in the future. Either they’re optimistic and have hope or they’re pessimistic about it. Optimistic one’s will have strong reasons to cut on frivolous consumption and invest in the future, the others won’t. Most MFIs disapprove that clients use they’re borrowings to buy consumption goods and some actually enforce it by contract. Padmaja reddy (seen before) is happy as long as their money is spent on achieving long term goals. The study found later that it does, micro credit actually cuts spending on wasteful expenditures (tobacco, tea, ...). This just proved that micro credit helps the poor think in terms of future where some of their goals can now be attained. Let’s look at another way to have this same effect. A social safety net: minimum income that they would get if their income fell below a certain range. effects:• motivation, optimism: something that seemed impossible to achieve becomes possible

with a bit of saving. People are now on the right of the P-point • lowers the stress level: as seen before stress impedes good decision making abilities.

temptation>economically rational person

Moving the goalposts closer may be just what the poor need to start running towards them

Chapter 9: Reluctant EntrepreneursAre there really a billion barefoot entrepreneurs, as the leaders of MFIs and the socially-minded business gurus seem to believe? Or is it just an optical 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.

Microcredit and other ways to help tiny businesses have an important role to play in the lives of the poor, because these tiny businesses will remain, perhaps for the foreseeable future, the only way many of the poor can manage to survive. But we are kidding ourselves if we think that these businesses can pave the way for a mass exit from poverty.

MFI CEO’s say that the poor are natural entrepreneurs, e.g.: women who picked up wet sand by the ocean and converted it into dry-sand thanks to car wheel’s heat in order to sell it. We could thus eradicate poverty by giving them the right environment and a bit of help. But at Al Amana, a moroccan MFI, only 1 in 6 families is getting that loan. When asked Ben Sedan a farmer why he didn’t he said he didn’t need it, says he had enough with what he had. Al Amana’s CEO argues that if we gave Sedan a business plan about how to increase it’s wealth he would get the loan. Sedan didn’t wish to remain poor but he still didn’t get the loan. We’ll answer this later on.Muhammad Yunus, founder of Grameen Bank. His view, shared by many in the MFI world is that everyone has a shot at being a successful entrepreneur. And there are two reasons why poor might be successful. • They haven’t been given the chance: their ideas were never put in motion• the market ignores the bottom of the pyramid.

Every MFI has a few successful micro finance clients who took advantage of this opportunity to make a fortune proudly posted on their website.


In guntur, a woman together with her drunk husband went from picking up trash into head’s of a large network of trash collectors.But there are also the one’s who don’t need help from MFI’s, like Xu Aihua, daughter of farmers that had no money but was extremely bright. She went to her town with a megaphone and offered to teach how to make garments (couturier). She recruited 100 students charging 15 $ per head. With that money she bought the machinery. At the end of the class she created a company with her 8 best students and now she’s exporting and selling to big names in the business like Benetton and Macy’s. Everything seems to militate against poor people being entrepreneurs: less capital, no insurance, almost no untied external finance: only moneylenders are. But in our 18 country data set we see that 44% of the rural extremely poor (<99cent) run a non agricultural business. The fact that they enter these business and pay high interest rates means that their rate of return is extremely high. Otherwise they would not borrow.interest rate 4%/month = 50%/year = a bit more than you get investing on dow jones

Of course not everyone borrows. Perhaps only the entrepreneurs who have high returns borrow, and everyone else has low returns. True or false? false A lottery was organized in Sri Lanka and randomly chosen little businesses were given the average equivalent of their starting capital : 250$The returns on these were 60% a year on averageAnother program, the BRAC, a large MFI gave the opportunity to extremely poor people to become entrepreneurs in small businesses. The persons were chosen by village neighbors for this for this program. The results of increasing their wealth by only 10% made them:• have less to complain about food• have more animals and business assets• work longer hours• the way they describe their happiness, economic status, ... is much more positiveSeeing these results we understand the MFIs enthusiasm for the potential investment in the poor. However, there are two drawbacks: they operate tiny businesses and making very little money.

In our 18 country sata set1. majority of businesses had no paid staff2. assets are limited: only 20% in Hyderabad have a dedicated roomIf these were profitable, we wouldn’t have poverty. The problem i s that the vast majority of businesses never get to employ an employee or much in the ways of assets.3. Most of the businesses fail after 2 years(In mexico 40% survive)4. Out of these 40% one in five businesses had recruited an employee5. They are not making that much money: most of the businesses generate just enough

money to pay one member

This low profitability may be part of the answer of why microcredit doesn’t lead to a radical transformation of its clients lives.

In point 5 we say that they’re not making that much money but earlier we’ve said that the rate of return was high. It’s the difference between revenue and marginal revenue. Here marginal revenue is high but total revenue’s low.


amount of investment in the firm as function of the overall return. Marginal is high when investment is small.

The paradox with the poor is that they are energetic and resourceful and they make a lot out of nothing but most of this energy is spent on businesses that are too small and utterly undifferentiated from the many others around them e.g.: countless women selling dosas(croissant equivalent) in a slum in Guntur. At a given time many of those were just waiting for customers, they could have merged their businesses and dispatched the other women to work at something else. Result: they can’t earn a decent living.The small scale of their business explains why their overall returns are so low, despite the high marginal return. This brings to light another problem: high marginal returns means that it is easy to grow the overall returns. So why aren’t these businesses growing really fast?

Part of the answer was already given. They cannot borrow as much as they’d like because it’s expensive. But it’s only part of the answer. As we saw with Sedan who had access but choose not to. In Hyderabad only 21% of the 27% eligible to borrow borrowed. Moreover, even those who can’t borrow could save. The experiment in Sri Lanka provides a striking illustration that financing is not the only barrier to expansion. People given 500$ grants did not increase their profits - revenues any more than the people given 250$. Part of the reason is that those who received 500$

didn’t invest it all. Why? Because they thought the business couldn’t absorb it. Investing all of the money may require hiring a new employee or finding more storage. This figure shows 2 worlds. If the world is OP it’s easy for a small firm to grow but the growth tappers off fast. Once the shelves of your shop are full, any further expansion would not have enough marginal return to pay off the very high interest rates on the loan you might use to make it happen. Our readings of the evidence suggests that the world of the poor looks like OP. Of course we know that everything can’t be like OP otherwise there wouldn’t be any large firms.


Getting large requires either • a massive investment to buy the right equipment. Xu aihua: her big break came when

she started exporting, without it she would have hit the limit of the local market. In order to do that she required automatic sewing machines which required 100x the initial investment

• with some special skill. For example for Microsoft to stay at the cutting edge of some new product

If the world is more like OZ there is much more scope for growth in your business.

Lets look at Xu aihua case in detail. This figure brings back the usual S-shape dilemma: invest little and make little money or invest enough to cross the hump and become richer by investing even more. Although small loans are available they’re not enough to cross it. Moreover getting bigger needs management skills --> stuck small. What poor do to increase earnings is that they run several businesses without growing them.So how did Xu aihua make it? she was extremely bright and was at the right place at the right time. When she started China was opening up, there was very few competitors and demand was massive.

SO the reason the poor don’t grow their business is because they can’t borrow enough to cross the hump and saving up will take too long unless it has really high returns. If Xu aihua had a 25% profit per dollar invested she would have needed 40 years (saving up 50% the other is used for living consumption) to cross the hump. Furthermore, once a micro entrepreneur realizes that they won’t be able to make that much money (further than M-point) it may be difficult to fully commit to the business. e.g.: shopkeeper that is on the left side of M, even if she saved up to acquire more inventory that wouldn’t change her life in a meaning full way. His business is destined to remain small and make small money. This can explain why MFIs business programs were not effective in Peru and India. It’s rather a lack of enthusiasm rather than a lack of knowledge. Business owners were given free courses on how to manage their business. Results: no changes in profits, sales, assets. Taken together, evidence contests the myth that the average small business owner being a natural entrepreneur.


definition of natural entrepreneur: “someone who is willing to take risks, work hard and runs a business that has the potential to grow” p225

I’m not saying that they don’t exist amongst the poor, it’s just that a majority are doomed to remain small and unprofitable. Why are so many poor people running business anyways if they don’t like it?We found the answer in a poor family in Bandung slums, Indonesia: they can’t find work. And when they do they get paid by the day. Starting their own business is the only option they have even tough there was already the exact same shop 50 meters away and the fact that they don’t like running the business. This is why when they were given the opportunity of a second loan to expand their business they refused. The enterprises of the poor seem more of a way to buy a job. Most of those businesses are run by women, they prefer a house job so that they can take care of the children at the same time.This is why when small businesses were given 250$ (Sri Lanka program) for their business most women used it for something else and men business owners used it to expand. The businesses of the poor are less a testimony of their entrepreneurship spirit than a symptom of the failure of their country’s economy.

Poor around the world want their kids to have government jobs (vast majority) private sector jobs and almost none aspire their kids of becoming entrepreneurs. The emphasis on government jobs suggests a desire for stability which is one thing that distinguishes poor from middle class.We came across a small village were a zinc factory was established. Almost everyone had work there. There were signs of prosperity: iron roofs, motorcycles, school-kids with uniforms, ... The factory came at the time to a village were people were very poor and offered higher paid jobs and stability.The results: a steady job brings• soar of the health and education expenses. • taller children. Results proven by a mexican study over the ‘maquiladoras’ that have the

reputation of being exploitive and paying poor wages. Nevertheless, women without qualifications can work there and it’s a better job prospect - in Maquiladoras they don’t have much higher wages but they have regular jobs and can work longer hours than in the retail and food service industry. Women born in these towns that had a factory and were 16 years old at that time had taller children because these jobs allowed them to focus on their careers and the one’s of their children.

• In chapter 6 we saw the effects of risk on household behavior. Poor families take actions to limit risk even at the cost of higher levels of income

• Here we see another consequence: stability is needed for people to be able to take the long view. People who don’t envision improvements might opt to not do anything. Eg: education is S-shaped (example seen before) parents won’t invest in education if they think they won’t be able to continue to invest in the future.

• makes it possible to commit to future expenditure e.g.: schooling, health treatment in hospitals,

• makes it easier and cheaper to borrow

In a slum Hyderabad we found a muslim family. Their oldest daughter had drop out of school and married soon after, and her three younger brothers and sisters had either already completed a masters degree or were in their bachelor years. What happened? how did this happen? Just after the marriage, the father had retired from the army, moved to the city with the rest of the family and got a government job as security guard. The city of Hyderabad has a number of affordable and high quality schools and universities for Muslim children partly due to the fact it was a semi-independent kingdom in the 1940’s. Hugo Pratt Dos Santos Resumé: poor economics 34

Why aren’t other people adopting this strategy? Schools are better in cities and poor people do move to cities to fid jobs, but only 10% of them stay for more than 3 months and very few move with their families. In our 18 countries data-set the share of extremely poor that had migrated for work reasons:3% in Pakistan6% in Nicaragua10% in Peru25% in Mexico

Why? why don’t they move permanently to the cities with their family?

• one of the consequences of temporary migration is that they never become indispensable enough to the employer to be made permanent

• the housing conditions in the city are insalubrious• cities have very little planned housing for the very poor• villages are greener, airier, quieter, the houses are bigger, there is space for children to

play, etc..• Their friends live in the villages• Single males (most common migration) will sleep under the bridge or at the construction

site in order to save up the rent and come and visit their families more frequently. They don’t want their families living on those conditions.

Even if they do move what if someone gets sick or he looses his job? This is why it’s easier to move when you know someone in the city. He can help you out with a job or help you when someone’s sick. Kaivan Munshi found that in Mexico migrants chose to go to cities where they knew people, even if the first migration was accidental. It’s obviously easier to move when you have a steady or some sort of steady income. The muslim family from Hyderabad had both.

How can we help create good jobs? 1. policies on urban land use low income housing are vital2. effective social safety nets: public assistance and market insurance3. labour laws: provide job security but shouldn’t be stringent otherwise they would be

counter productive4. Credit: as seen on chapter 7 it’s unclear how we should do this5. loan guarantees to medium-sized ventures. Eg: China, government businesses handed

out their equipment, land and buildings to their employees. Stable and higher wages would give them the mental space, necessary optimism and financial resources to invest i their children and save more. With those savings and access to easier credit that a steady job brings the most talented would start their business and in turn hire other people.

Conclusion: There are more than a billion people that run their own farm or business, but mot of them do this because they have no other option. Most of them manage to this well enough to survive but without the talent, skills or appetite for risk needed to turn these small businesses into successful enterprises. For every Xu Aihua who starts a clothing empire there are a million of Ben Sedan’s who know that the only way out of the poverty is not another loan to grow his business but a son with a secure job in the army/government. Micro credit and other ways to help tiny businesses still have an important role to play in the lives of the poor, because tiny businesses will remain the only way for the poor to


survive. But we are kidding ourselves if we think that micro credit can pave the way to a mass 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. Unfortunately, the gap between intention and implementation can be quite wide.

The many failings of governments are often given as the reason good policies cannot really be made to work. Is there any hope for poor countries that are often still living under the “long shadow” of extractive colonial institutions. Countries that suffer from corruption and capture by the elite? Or should they - can they - be rescued from themselves?

Politics, we feel, is not that different from anything else. Well-designed incremental changes in the rules of the game, often implemented at the most local level, can make real differences on the ground. And although one never knows when the spark will come, local progress can pave the way to a quiet revolution.

Even the best policies may not have an impact if they are not implemented properly. Two often used raison: many failings of governments and government inadequacy.

In Uganda, the government fund heavily the national education, but a simple research showed that only 13 percent of the funds ever reached the schools. Inquiries suggested that a lot of the money most likely ended up in the pockets of district officials. This is the case in other countries too. Finally after publishing the result of Uganda in all national newspapers, the trend changed, and the average passed from 13% to 80%, only by fighting corruption.

So the real problem of development, is not one of figuring out good policies, it is to sort out the political process.

Jeffrey Sash sees corruption as a poverty trap. Poverty causes corruption and corruption causes poverty. His suggestion is to break the trap by making people in developing countries less poor (malaria control, food production, safe drinking water and sanitation).

Political Economy

Definition of institutions:" Economics Institutions shape economic incentives, the incentives to become educated, to save and invest, to innovate and adopt new technologies, and so on. Political institutions determine the ability of citizens to control politicians."

These institutions are the prime drivers of the success or failure of a society. One problem is that rules, which have the power to shape economic institutions, do not necessarily find it in their interest to allow their citizens to thrive and prosper. And bad institutions tend to perpetuate bad institutions, creating vicious circle "the iron law of oligarchy".


Why? This is the case in the developing world where, during the colonial period, the institutions put in place were made to maximize the extraction of resources for the benefit of the colonial powers. After decolonization, the news rules found it convenient to hold on the same extractive institutions. To avoid that you need the right alignment of forces combined with a fair amount of luck. The two other points of view: In one view, if countries are stuck, it is incumbent on the rich countries of the world to help them get better institutions, by force, if need be. In the other view, any attempt at manipulating institutions from the top down is doomed to fail, and changes can only come from within.

One solution: import change from outside. If you cannot run your country subcontract it to someone who can, or at least some cities. (Example: Hong Kong in China) Concept of "charter cities". But leaders in poor countries probably don't want this kind of agreement.

How many? The WB says they are 16 basket case countries, in which about 1 billion people live.

Free Market (not helping them and let them do what they want) could be a solution, but there are 2 problems. The poor may not be able to participate in the market, and need to be helped until the market finds a way to reach them. Second, some rules are necessary for makers and society to function.

Details matter. The institutions are no exception. To really understand the effect of institutions on the lives of the poor, you need the "view from below".

Changes at the margin

The view from below allows us to see that it is not always necessary to fundamentally change institutions to improve accountability and reduce corruption. There are many instances where democrat has been introduced, to a limited extend and at the local level, within an authoritarian regime. Electoral reforms have been taken place in otherwise authoritarian states (Mexico, Saudi Arabia, Yemen, China,). Those reforms have great effects at a local level. So fighting corruption appears to be to some extend possible even without fixing the larger institutions.

The threat of public publication reduces dramatically the corruption. For that our need a clear ID poor each citizens, which is not the case in India, but they are tying to build one. This could contribute to make life significantly better for the poor.

Decentralization and Democracy in practice

The fairness and outcomes of the decision process in such environments crucially depend on such detail as project selection rules, who is invited to the meetings, who speaks, who is in charge of implementing the project on a day-to-day basis, how these clued minorities or the poor, it is not clear that this kind of decentralization will help them or that handing power to the locality will maintain communal harmony. On the contrary, groups that now discover they are disenfranchised by their own neighbors may in fact become angrier. If the rules make such a difference, then it becomes very important who gets to make them.

In India, it appears that women tend to do more with the same limited budget, and less included to take brides. Hugo Pratt Dos Santos Resumé: poor economics 37

Ethnic politics is damaging for many reasons. One of them is that if voters choose based on ethnicity rather than on merit, the quality of candidates represent if the majority group will suffer. And over time, the winners of the dominant group were more likely to be corrupted.

Why do some people vote based on caste but readily change their minds when an NGO asks them to rethink? One answer is that, often, voters actually know very little about what they are choosing.

So politics is not very different from policy: It can be improved at the margin and seemingly minor interventions can make a significant difference.

Against political economy

There is scope for improving the functioning of institutions. Policies are not completely determined by politics. Good policies happen in bad political environments. And perhaps more important, bad policies happen in quite good ones.

Poor people have o safe place to save because the regulatory standards that governments set for institutions that are allowed to legally accept their savings are absurdly high. Part of the problem is that even when governments are weal intentioned, what they are trying to do is fundamentally difficult, and because often the market cannot solve those problems.

Simple observation: First there is no easy way of assessing the performance of most people who work for the government. Second, the temptation to break the rules is ever present, both for the bureaucrat and for us, which leads to corruption and dereliction of duty.

Government can be more severe: 1 if they try to get people to do things whose value they don't appreciate (helmet). 2 when what people are getting is worth a lot more than they are paying for it (hospital). 3 when bureaucrats are underpaid, overworked and not well monitored, and have little to lose by getting fired anyway. This is one important reason why government programs (& NGOs) often do not work. The problem is inherently difficult and the details need a lot of attention. Failures are often not the result of sabotage by a specific group, but come about because the whole system was badly conceived to start with and no one has taken the trouble to fix it. In such cases, change can be a matter of figuring out what will work and leading the charge (ex: Absenteeism among health workers).

Monitoring is not always effective on the long term. The rules were not designed with the objective of undermining the effectiveness of the entire health care system in India. On the contrary, they were probably put on paper by a well-meaning bureaucrat, who had his own views of what the system should do and did not pay too much attention to what that demanded on the ground. This problem is called "the three Is" problem: ideology, ignorance, and inertia.

Concerning ASER and the potential role of parents and the VEC, neither of them made any difference in parental envolment in the VECC, VEC activism, or child learning. It was not that the community wasn’t ready to mobilize, the difference was explained by the fact Hugo Pratt Dos Santos Resumé: poor economics 38

that the villagers had been given a clear, concrete task: Identify volunteers and send the children in need of help to the remedial classes.

It illustrate that large-scale waste and policy failure often happen not because of any deep structural problem but because of lazy thinking at the stage of the policy design. Good politics may or may not be necessary for good policies; it is certainly not sufficient.

Can good policies be a first step to good politics? Good policies can help break the vicious cycle of low expectations: If the government stars to deliver, people will start talking politics more seriously and put pressure on the government to deliver more, rather that opting out or voting unthinkingly for their ethnics or talking up arms against the government. Also, a credible message can convince the voters to vote in favor of general-interest policies. Once the trust is there, the individual politician's incentives also change.


Poor Economics Final

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