Question

Poor economics and its role in the global economy?

Answer 1

Global poverty should not be viewed a single amorphous problem, but rather the combined result of many discrete problems. We should focus on addressing these individual problems.

Many economists debate the extent to which poverty traps may exist. The authors define a poverty trap as:

“There will be a poverty trap whenever the scope for growing income or wealth at a very fast rate is limited for those who have too little to invest, but expands dramatically for those who can invest a bit more. On the other hand, if the potential for fast growth is high among the poor, and then tapers off as one gets richer, there is no poverty trap.”

Anti-poverty approaches should be based on research and data such as randomized controlled trials. Lazy thinking (being constrained by ideology, ignorance and inertia) is the enemy of progress.

Regional economic disruptions may not impact the extreme poor to the same extent that they impact the general economy because the extreme poor are already living on the absolute margin.

However because of their level of exposure, local economic disruptions such as a family’s unexpected health emergency can set the poor back substantially — especially if their ability to earn more wealth depends on current wealth (having daily credit available to buy and sell goods, for example).

While the poor are often forced to rely on wildly fluctuating sources of income like non-irrigated farms and day labor work, they limit exposure to any one risk by diversifying their income portfolio (agricultural earnings, seeking work in urban areas, microenterprise, tenant farming, large family, etc). However, this has the effect of preventing occupational specialization (and skill-building).

The psychological effect of the poor’s constant financial risk is high stress, which has been shown to impair focus and reduce productivity.

In an attempt to reduce risk, microfinance institutions have experimented with offering health insurance, but the extreme poor may not be willing to pay the required premiums at the cost of tying up cash. Subsidized insurance from governments could reduce risk exposure while also dropping premiums to a level that the poor are willing (and able) to pay.

The poor pay very high interest rates, in part because determining the creditworthiness of the poor is time-consuming (and expensive), creditors have very limited options for recovering capital after default, and while interest rates are extremely high, net returns per account are still relatively low. It is also for these reasons that the poor rarely have access to banks and instead most often have to rely on money lenders, their community, or microcredit for a loan.

The poor recognize the challenge of keeping cash on-hand and also the necessity of saving money. Having difficulty saving money isn’t necessarily a symptom of frivolous spending — rather, for those living on the absolute margins, by definition there are always necessities that they lack. The poor use non-traditional ways to save including partially building a house brick-by-brick, savings clubs, and storing extra money with money lenders.

While the poor generally aren’t profitable for banks (the per-account administrative costs are too high for the low deposit amount), research shows that when the poor have access to affordable savings accounts, they are able to save more than they otherwise would.

Many of the extreme poor see the path to prosperity being through their children getting a salaried government job — not via a small business. The long term stability these jobs afford offers the mental bandwidth and economic opportunity for long term planning and growth towards middle class.

Industrial growth has been shown to benefit the wages of the poor disproportionately.
Urban areas offer better job and education opportunities, but general reliance on the social safety net of one’s community means a move away can be difficult and risky. Better urban planning policy including public housing and improved safety nets can incentivize such moves and subsequent growth in wages of the poor.