Poor Economics: A Radical Rethinking of the way to Fight Global Poverty
by Abhijit V. Banerjee and Esther Duflo, PublicAffairs 2011
Review by Hazel Henderson© 2011
The authors are both professors at MIT’s Poverty Action Lab with the laudable goal of re-thinking the way to fight global poverty. These are no chair-born, ivory-tower boffins. They have scoured the world for evidence in hundreds of randomized control trials and other studies and come up with surprising conclusions – particularly about microfinance, now seen as a major asset class for mainstream finance.
Banerjee and Duflo have performed the kind of due diligence needed if microfinance is to expand further an attract more investments from Deutschebank, Citibank, Bank of America an other TBTF banks looking for new cash cows. Their research shows the immense progress of Bangladesh’s famous Nobel prize-winning Grameen Bank and founder Muhammad Yunus and the less-known but even more successful BRAC, as well as FINCA and ACCION in Latin America and Women’s World Banking with affiliates in many countries in Africa, Asia, and Latin America. They affirm the entrepreneurial skills of millions of small business owners and their stellar loan repayment performance. They explain why such microcredit lenders offer high-interest rates, but lower than traditional money lenders.
Yet the authors conclude that microfinance offers no mass exit from poverty. Many small businesses don’t account for the time and labor of their operators or family members and can only appear profitable if these workers opportunity costs are zero. Many of these micro-businesses offer a similar meager inventory of products in the same villages or neighborhoods at the “Bottom of the Pyramid” envisioned by C.K. Prahalad.
There are success stories such as Grameen Phone, a partnership with Nokia which leases cell phones to hundreds of thousands of women, who then offer them to phoneless neighbors for a small fee. This business model is transforming many African countries and cell phones are used for checking market prices, business communications, and banking services. The issue is scale and whether micro-businesses can scale up to the successes of the cooperatives in India, Europe and the some 50,000 cooperatives in the USA.
The authors also compare economic theories. Jeffrey Sach’s view is that poverty traps exist in geographic locations (tropical climates, lack of access to sea coasts or rivers) as well as endemic health problems of underdevelopment, epidemics and lack of clean water and food. This view is compared with William Easterly’s defeatist view that few if any interventions have made a difference.
The authors’ conclusion is that politics is primary over economic theories – most of which are too highly abstract based on the heroic aggregations of macroeconomics. They emphasized that all markets need rules. Their field research is thus a welcome reality check. They examine the power of educational media, used most effectively in Latin America, and the conditional cash transfers (CCTs) provided in Mexico and Brazil to poor families directly which have lifted many into the official economy as consumers.
While probing the limits of markets and governments, it is striking that no mention is made of the global financial markets which arguably have, since the Asian meltdowns of 1997, plunged millions back into poverty. Nor do the authors examine the 2007-8 financial crises which plunged millions more middle-class people into joblessness, home foreclosures, loss of pensions and today’s persistent recession (Transforming Finance).
Understandably, the kind of economics underlying MIT’s Poverty Action Lab is unlikely to challenge the sources of poverty emanating from the casinos of global finance, the CDS bets on bond defaults in Greece, Ireland and other PIIG countries in Europe, nor the commodity ETFs pushing up gasoline and food prices. These, apparently, are taboo subjects with MIT. Neither is any vision offered as to the next technological breakthroughs which will undergird the evolving global economy which we at Ethical Markets Media (USA and Brazil) see as the shift to low-carbon futures and measured on our Green Transition Scoreboard®.