Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty

These notes are old and were written while reading — they don’t necessarily reflect my current views.

The question of the book is basically if there are poverty traps and if yes, how to escape them. The analysis is (as expected from them) very nuanced. The first thesis is that there is a poverty trap of nutrition, which leads people to be underfed and therefore unable to work enough for more food. This is not relevant anymore, as everyone has sufficient access to food. Furthermore, often people value other things (cheap luxuries) much more than additional food.

One would expect to see expect additional income to be spend over proportionally on food. More technically: Relative marginal utility of food is higher that relative price.

This extends to the type of food. Increased income will lead to higher consumption of luxury food instead of higher consumption of calories. One could imagine a diagram comparing calories and taste, with an indifference curve that at that point favours taste over calories.

Fertility is another fascinating topic. Studies show that there is no quantety/ quality trade-off in the number of children.

Two ways of possible intervention are from the demand and the supply side. The supply siders want to increase the supply in education or healthcare etc. While the demand siders want to strengthen demand.

The main point I take from this is that poverty itself is an externality and that there are poverty traps that inhibit the equality of opportunity. These are the points where government might intervene.

Micro-financing has shown to be effective, but is far from a magic solution to the problem. The reason why not more of the poor try to expand their businesses, can be modelled by standard theory. The needed investments are too large and the projects that are most efficient at a low input level are less scaleable than the projects that are more effective at a high input level. This leads to the logical choice of the project with lower required input. Expansion of entrepreneurship is just too costly for the poor and not desired. Instead of foregoing pleasure for years to get out of poverty it is more attractive to consume immediately.

They are against the institutionalist view (Acemoglu et. al) that opposes random controlled experiments.