A major psychological challenge to development work is to overcome the size discrepancy between the overwhelming statistics that highlight huge problems at the root of global poverty and the comparative smallness of the individual trying to initiate change. Because hearing statistics like “one billion people live on less than $1 per day” makes us feel small and powerless, we all enjoy feel-good stories about social entrepreneurs who are changing the world. Success stories give us hope that one individual really can make a difference; however, an unfortunate consequence of this way of coping with global poverty’s size inconsistency is the tendency to see only those solutions that can be broadened to a wide scale as being worth pursuing.
In Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty, MIT economists Abhjit Banerjee and Esther Duflo interrogate the mainstream notion in development economics that big problems require sweeping solutions. They criticize both “supply wallahs,” who promote aid in all cases as a way of empowering the poor to escape poverty traps, and “demand wallahs,” who argue that poverty traps are a fantasy and that aid is inherently inefficient and ineffective. The authors contend that both groups, in their quest for definitive and far-reaching answers to the most challenging questions that confront the development community, tend to oversimplify problems and thus their prospective solutions, usually searching for a “silver bullet,” or single solution, to fight poverty. Banerjee and Duflo argue that there is an alternative to engaging the never-ending battle between aid’s proponents and its critics: rather than discuss poverty on an abstract, ideological level, the authors focus on trying to ask specific, concrete questions whose answers might help improve the lives of the poor.
The philosophy that Banerjee and Duflo advocate seems simple enough—“attend to the details, understand how people decide, and be willing to experiment”—but its adoption can have a profound effect on the implementation of development policy. The authors suggest that development policies tend to have in common what they call the “three I’s problem”: ideology, ignorance, and inertia. Too often, such policies are based on good ideas and noble principles, but do not take into account the practical and logistical challenges to effective implementation. In many cases, programs are developed with minimal knowledge of the conditions in a particular place (ignorance), and these programs are continued, even if unsuccessful, simply because nobody has put in the effort to critically analyze them and search for ways to improve them (inertia). Above all, development policies fail because the creators of such policies, in their impatient quest for big results, tend to overlook the important questions and ignore useful evidence, in doing so disregarding a set of details that could mean the difference between success and failure.
One development phenomenon that Banerjee and Duflo examine in detail is microcredit. Microcredit has been hailed as one of the greatest successes in the history of development policy, and for good reason. The sheer number of people it has reached through offering small capital loans speaks to its success. But as Banerjee and Duflo argue, microcredit has its flaws. For instance, numerous studies have shown that while microloan recipients frequently become more financially responsible than their nonrecipient counterparts, microcredit has not been the small business creator that it was promised to be. Micro-lending institutions have hedged their risk by offering only relatively small loans at very high interest rates, and by creating a group lending model that means everyone sinks or swims together. Yet many lending institutions have been unwilling to acknowledge that these methods of averting risk naturally diminish the loan recipient’s chances of rapidly pulling his/her family out of poverty. Instead of examining how the current microcredit model may be improved and recognizing that microcredit is just one of many tools that will be needed to help the poor, many banks have stubbornly defended the status quo, offering stories in place of evidence as “proof” that microcredit is the panacea we have all been waiting for.
Another example the authors consider is health insurance. Many people see in the poor a large pool of prospective health insurance recipients, for they are a group that is naturally exposed to more risk than the wealthy. So, when initial attempts to sell health insurance (typically offering coverage only against catastrophic scenarios, and not inpatient services, due to the informality of health services in developing countries) to poor people in developing countries failed, many “logical” explanations emerged: “governments have overprovided disaster relief in the past”; “poor people are too uneducated to understand the concept of health insurance”; “poor people are blissfully ignorant of risk and unconcerned about their health.” But the authors’ more thorough examination of the issue reveals that these conclusions were based on ideological assumptions, and not critical analysis. After conducting a series of randomized control trials, Banerjee and Duflo were able to reach a more complex set of conclusions that help answer the question of why poor people do not want health insurance. Because insurance companies have decided that it is only feasible to cover people against catastrophic scenarios, “time inconsistency,” or the difficulty of thinking, planning, and paying for a future occurrence that may not happen, is a major problem. As the authors explain, the payout of benefits “would not only take place in the future, but in a particularly unpleasant future that no one really wants to think about.” Additionally, prospective clients worry about credibility, as entering into a contract means trusting the discretion of the insurer. Banerjee and Duflo found that when health insurance company representatives visited the homes of prospective clients with a representative of another organization that community members were already familiar with, the likelihood of selling the insurance package increased greatly.
Banerjee and Duflo’s approach to development economics is fascinating, but many readers may find it discouraging to hear that poverty will not be ended overnight. Indeed, some might even argue that theirs is a defeatist approach, since it acknowledges, and indeed emphasizes, that we are unlikely to end poverty in any of our lifetimes. But the more important idea to glean from the book is that every initiative that is well thought out and well implemented, regardless of its scope, makes a difference. Of course we must aim to expand successful programs, but the most important piece of a given development policy, the authors contend, is the first step; we must first understand the present circumstances in great detail in order to implement policies that will be effective in changing those circumstances.
To Minerva Fellows, Banerjee and Duflo’s approach should feel empowering, for we are given the opportunity to go to a relatively small place, understand it very well, and ultimately make an impact on the people who live there. Our successes serve as proof that working at the margins, on a micro level, is far more productive than waiting around for big ideas to solve the problem of poverty. We are not in a position to change the statistics that highlight the immensity of the poverty problem, but that may well be the program’s greatest asset: to provide nine individuals each year with the opportunity to hear the word “poverty” and think of faces, not statistics. The Minerva Fellows will not change the world, but if we are thorough and patient enough to understand even the smallest details of the places where we live, we can be among those who provide an example of how changing the world might be done.