The Economic Lives of the Poor
Abhijit Banerjee and Esther Duflo, both of MIT?s Poverty Action Lab, published a working paper back in October 2006 called The Economic Lives of the Poor. I am not usually one to urge an economics paper on anyone, but I will break from tradition here. Print this paper, take it home this weekend, and read it. I promise you that it will be 45 minutes well spent.
The Economic Lives of the Poor is based on 13 countries? household surveys, and is one of the first publications to document spending patterns among very poor people. (We at WRI are currently working on a similar, more extensive analysis of such spending patterns, using similar survey data from 100-plus countries). While Banerjee and Duflo are not writing for a business audience–their paper will be published in an academic economics journal–it should be required reading for those of interested in the connection between business and development.I like this paper so much because it shows that the ultra-poor–earning $1 or $2 per day–do in fact make choices about how to allocate their spending. Despite the ability to choose, the poor often remain so because they are badly served by the private and public sectors–victims of monopoly and monopsony. Of course, it is never simple, and Banerjee/Duflo don?t pretend that it is.
They begin by analyzing how low-income households allocate spending between food, festivals/weddings, and entertainment. The data show that there’s a strong inverse correlation between spending on festivals/weddings and televisions/radios: poor households without a radio or TV tend to spend more on traditional sources of entertainment and vice versa. What’s interesting here is that the poor–who are often undernourished and face the prospect of having to skip meals from time to time–choose to allocate some of their budgets to entertainment in the first place, instead of food.
Banerjee and Duflo go on to explore health, education, credit, and land title, all familiar topics in the development literature. My favorite section of the paper is the discussion of entrepreneurship and multiple occupations among the poor. Economists often malign microenterprise as unable to take advantage of economies of scale, but they don?t necessarily understand why. Many point to the lack of credit or systematic informality as the barriers keeping entrepreneurs from scaling up a 1- or 2-person operation, and leave it at that. This paper suggests that some poor entrepreneurs consciously choose to engage in multiple occupations as a way of hedging against a downturn in any one field–similar to how a sophisticated investor diversifies his portfolio:
Risk spreading is clearly one reason why the poor, who might find risk especially hard to bear, tend not to be too specialized in any one occupation. They work part-time outside agriculture to reduce their exposure to farming risk, and keep a foot in agriculture to avoid being too dependent on their non-agricultural jobs.
The authors also debunk the myth of poor entrepreneurs as the future of poverty alleviation–many low-income entrepreneurs run a microbusiness by necessity, not by choice:
It is important…not to romanticize the idea of…penniless entrepreneurs. Given that they have no money, borrowing is risky, and in any case no one wants to lend to them, the businesses they run are inevitably extremely small, to the point where there are clearly unrealized economies of scale. Moreover, given that so many of these firms have more family labor available to them than they can use, it is no surprise that they do very little to create jobs for others. This of course makes it harder for anyone to find a job and hence reinforces the proliferation of petty entrepreneurs.
Do small businesses create jobs and wealth, and often help people rise out of poverty? Absolutely. But Banerjee and Duflo rightly point out that simply creating more microbusinesses will not end poverty by itself. These businesses must grow, become more efficient, and specialize, eventually becoming so good at what they do such that they can afford to hire more staff (and must, in order to expand). This paradox of the un-scaleable microenterprise, is the subject of another paper that I am reading and will review soon.
The end of the paper may be the best part, where Banerjee and Duflo have reproduced their data tables. The tables show exactly how much of their budget a typical poor household in Cote d?Ivoire spends on food, health, or entertainment. This should be very interesting to business; it’s the beginning stage of market research, vetted by top-notch economists and laid out in a well-written paper. From a BOP perspective, you can?t ask for much more (well, you could ask for a full-length book, but trust me–that’s coming soon).
For more on this paper, check out Andrew Leonard’s review at Salon.com.