Understanding poverty

The central ideas in the book are simple. The first is that we cannot eliminate poverty (as of yet), but that is no excuse for inaction. Poverty leads to a waste of life and talent, which is undesirable. Therefore, we should do whatever we can to reduce it. The second is that simple actions can have a sizeable impact. These actions include deworming children (makes them healthier), adding chlorine to water (prevents diarrhoea), providing adequate Iodine to pregnant women (creates healthier babies), using bed nets (prevents malaria), and many others. Unfortunately, easily preventable problems cause many deaths and misery.

To discuss the content of the book, it is important to understand some concepts. A stable job differentiates the middle class from the poor. One is in a poverty trap if their future income is projected to be lower than their present income. This implies that one cannot get out of poverty themselves (hence, “trap”), and intervention is needed.

How do the poor spend money/what is their priority?

When it comes to food, even among the poor, most people can afford to get the required amount of calories. The problem is the nutritional content of the food, mainly vital micronutrients like iron, zinc, and vitamins. Looking at things from a privileged perspective, the spending priority of the poor must be on getting better quality foods, but that is not the case. Appearing as less poor is preferable to trying to get out of poverty. As a result, they spend a lot of money on festivals, weddings, dowries, funerals, etc. Things that make life less boring seems to be another priority. It’s common for families to have TVs and smartphones in their homes while not sending their kids to school. Moreover, returning to food, the focus is on getting better tasting foods rather than better quality ones. Considering the extent of suffering present in their lives, such behaviours make sense.  

Why making services that could help the poor free/cheap does not work?

One obvious reason is the lack of knowledge. If one doesn’t know the benefits of adding chlorine to drinking water, why would one do it? One common problem is that after people get these services for the first time, they don’t use them after that. Consider this:

A person doesn’t understand the diseases prevented by immunization. They get their children immunized. If the child gets sick after that (by a disease not prevented by immunization), parents feel cheated and won’t immunize them again.

But, the answer isn’t as simple as the lack of knowledge. In Zambia, 98% of the people knew chlorine cleans drinking water, it’s cheap, but only 10% use it to purify water. The reason is simple: procrastination. Because these services tend to be low cost or free, people feel like they can purchase these items at any time and need to do more important things with their money right now. As humans, we’re bad at making decisions whose benefits only materialize in the future. Everyone, at one point in their life, has thought about going to the gym. They know about the cardiovascular and mental benefits it provides, but we don’t see everyone in the gym. The reason is the benefits materialize in the long term while the cost is borne in the present (the cost of going to the gym and working out). Immunization benefits them in the future, but they have to go to the immunization centre now,i.e. the cost is borne in the present.

In this case, providing 2 pounds of dal (lentils) and stainless steel plate to the parent for immunizing their children (in addition to making it free) was a revolutionary idea because it increased immunization by sevenfold. This worked because some benefits (lentils and stainless steel plate) could be obtained immediately after bearing the cost.

Be careful while making rules/policies

While making rules, having good intentions isn’t enough. We have to ask the question: what behaviour does this incentivize? For example, the poor don’t have access to an insurance policy because it is difficult to monitor them. The ICICI Foundation in India decided to provide cattle insurance to the poor. To get insurance money, the poor had to present the ear of the dead animal. Unfortunately, this created a black market for cow’s ears. People could buy cow ears and claim insurance money from that.

Poverty trap in education

The problem with education isn’t access. Many poor children are enrolled in a school, but they simply don’t go to their classes. As most believe, the absence isn’t caused mainly by parents’ resistance or home responsibilities.

To understand the reason, we have to look at two things. Parents’ and teachers’ focus on education. Parents want their kids to be educated so that they can get a job later on and earn money. This means that they deem education useful only if their child is bright and can pass the school. So if parents have many children, they tend to invest more in the brightest kid, the rest get left behind. For teachers, the focus is to prepare students for a public exam, which requires them to cover a range of topics. They have to cover a lot of topics and do it fast. So, they only focus on the bright kids and make sure that they do well in the public exam. This leaves the rest behind.

This creates a poverty trap. If you’re not bright, your family isn’t that invested in your education and teachers don’t care much about you. Hence, you don’t want to go to school.

What are the potential ways to improve education?

• The priority in schools should be to ensure that every child learns the basics well. Dividing students based on their performance makes sense as this allows them to learn at a pace that they feel comfortable. People might be against this policy saying that it creates a division, but that division exists regardless, the divide doesn’t get any better by keeping all the students together.
• One of the cheapest ways to improve education is by letting teachers tell parents about the marginal gain in income for every additional year spent in school.
• Learning through technology can be another powerful tool. From a western perspective, learning through technology isn’t considered good when the alternative is learning from a good teacher. But in the case of the poor, the alternative is much worse. In this context, providing education through technology (through educational games) can be very effective.

Why do the poor have so many children? 

 The poor depend on their children to take care of them in the future. Having more children is a good strategy because the likeliness of one being successful enough to take care of them goes up.

Will they live a better life if they have fewer children? 

 Raising a child is expensive. So, it makes intuitive sense that parents will have more money to spend if they have fewer children. But, that is not the case. Parents have many children as a retirement plan. When they don’t do that, they save more (hence, less money left to spend in the present) for their future. Hence, their quality of life isn’t increased by having fewer children.  

Marriage as an insurance policy

The poor don’t have access to insurance. Not getting adequate rainfall means facing complete loss. How do they deal with this? By marrying their daughter strategically. Parents marry their daughters to villages that are just far enough to have a different weather conditions. Sometimes, the rain may favour one village and not the other. In such a case, the two families help each other out.  

(This picture was taken by Shrijan Pandey)

Why is it hard for the poor to save?

For the poor, most things that they want are very expensive to them. They think that they’ll never save enough for it and get discouraged. It’s similar to how we procrastinate if we have a long to-do list because we feel like we’ll never get it done.

For the middle and upper class, the decision to save only needs to be taken once. We have access to a savings account where a certain portion of our salary can be automatically deposited. It’s unfair for us to say the poor lack discipline and motivation because institutions that make good decisions for us, which we take for granted, don’t exist for the poor.

Why do the poor run so many businesses?

The poor own many businesses. The marginal rate of return of investing in these businesses is extremely high. Seeing this, one might be tempted to conclude that they have an entrepreneurial spirit. But, that is not the case. The marginal rate of return means the additional profit that can be gained by investing an additional dollar. Suppose someone is running a shop with empty shelves. If you give them money, they will buy goods and fill the shelves. As a result, their profit increases rapidly. But, after the shelves are full, investing additional money won’t increase profit. This is how the business of the poor stagnates after a while. So, instead of growing one business, the poor operate a lot of businesses.

When parents were asked what they want their children to be, almost no one says the entrepreneur. They prefer stable jobs. It’s no surprise that most want their kids to work at a government office because it’s the most stable.

In conclusion, the poor own a lot of businesses not because they have an entrepreneurial spirit, they do so because they can’t find stable jobs and need to do something with their free time.  

Note: This is NOT a summary of the book, just SOME ideas I found interesting.