Friday, April 8, 2011

The Economic Lives of the Poor

Today my Economics of Compassion class will be discussing two articles from Abhijit Banerjee and Esther Duflo. First, "The Economic Lives of the Poor" (2007) chronicles the living conditions and spending habits of people classified as living on $1 and $2 per day. Then, in a follow-up paper titled "What is Middle Class About Middle Classes Around the World?" (2008) Banerjee and Duflo investigate those people living on $2 to $4 and $6 to $10 per day. Both of these papers utilize the same World Bank Living Standard Measure Surveys and the RAND Family Life surveys which are considered high quality datasets. The authors also use data they have generated through field ". With these datasets the coverage of locales is a great feature of the articles. Countries from Mexico, Guatemala and Peru to South Africa, East Timor, and Tanzania, to India and Pakistan, and more were covered by these data. So, I thought the first thing I would start out with are 10 Facts about those living on $1 to $2 per day and 10 Facts about the middle class. Then, I will close with what I think are some interesting points I gleaned from the readings.

10 Facts from "Economic Lives of the Poor"
1. Those classified as extremely poor are often entrepreneurs, but, not in the glamorous way we think of entrepreneurs in the United States as inventing a new product and striking it rich. Often these entrepreneurs engage in activities such as rickshaw driving, selling sheep intestines, frying dosas (think Indian pancakes), or having a modest storefront operation. They engage in these activities in part because of the flexibility but often because they do not have other options for regular and steady work. In fact, the poor often work 2 to 3 jobs to try to cobble together income.

2. Rural households are more likely to engage in agricultural work but even rural households will work multiple jobs often migrating into city areas. The thought here is that the harvest season does not bring income all year. Also, many poor work multiple jobs to spread out risk. Because many times their jobs are temporary having multiple jobs is a benefit because it reduces risk.

3. In urban areas the extremely poor spend 56% to 74% (56% to 78% in rural areas) of their income on food. Moreover, when they spend this money they do not spend the money to maximize calories. Instead, the poor buy seasonings and sugar in addition to staple grains.

4. Households are often crowded with a median of 7 to 8 people per household. Access to electricity and sanitation varies enormously from country to country.

5. The extremely poor are "frequently sick or weak". For example, Banerjee and Duflo report data from Udaipur citing that 65% of men and 40% of women had a BMI below 18.5 which is the cut off for being underweight. Moreover, in Udaipur they have survey data that 72% of respondents had a disease and 46% report and illness that left them bed-ridden and unable to function. Moreover, only about 6% have health insurance. In theory this shouldn't so bad; however, many of the public health facilities available sometimes charge money when they're not supposed to and are often incompetent (give medical advice that harms rather than helps).

6. Banerjee and Duflo report that education expenditures "hover around 2 percent" for these extremely poor households. Even though the poor frequently attend public schools there is "mounting evidence . . . that public schools are dysfunctional".

7. The median household spent 10 percent of their income on festivals per year. They report the median because the Latin American countries spend substantially less on festivals each year.

8. Television ownership is all-over-the-map. In Udaipur almost nobody owns a TV; however, in Peru and South Africa there is 70% ownership

9. There are not many formal channels through which the poor can save and if they keep the money at home, "The money may be stolen or simply grabbed by your spouse or son. Perhaps equally important, if you have money at hand, you are constantly resisting the temptation to spend." This lack of saving really hampers critical investments in goods such as fertilizer or capital equipment such as a sewing machine.

10. Significant amounts of money are spent on alcohol and tobacco products about 4% to 8%. When asked what they believed they could trim in their budgets 44% of the poor viewed these consumption items as the things they would want to cut.

10 Facts from "What's Middle Class About . . . "
1. The middle class are far more likely to have steady salaried jobs. Banerjee and Duflo write, "The key distinction between the middle class and the poor is who they are working for and one what terms."

2. The middle class spend a much smaller share of their income on food. Where those living on $1 or $2 per day tended to spend upwards of 60% of their income on food the middle class tends to average around 50% of their income spent on food.

3.Fertility is difficult to measure because there is no consistent fertility histories in the survey. The authors try to figure out fertility by looking at the ratio of people aged under 18 to those above 18. It seems that the middle class are having less children.

4. The rural middle class spend approximately the same percentage of their budget on education as the rural poor; however, the urban middle class spend "a substantially larger fraction" of their income on education. (This is amplified when you consider that the absolute amount is higher and you consider Fact #3 that the middle class have less children). Moreover, in many urban areas parents spend money on tutors for their chidlren. Presumably these parents realize that the best way out of the middle class is through an education.

5. The middle class have significantly improved access to clean water. In rural areas over 30% compared to under 10% for those earning less than $4 per day. In urban areas the percentage gap is approximately the same though more of the extremely poor have access to clean water.

6. The middle class spend more money on health care (in countries where public health is not covered through government expenditures). The middle class are more likely to see a health care provider when they are sick. Moreover, when asked in a survey whether their parents are alive the middle class are far more likely to report their parents are still alive than the poor.

7. The middle class have better access to information through television ownership.

8. Better access to credit. These middle class people in poor countries are better able to obtain savings accounts and formal loans. They have collateral and are better credit risks because they have a steady job.

9. There is no clear pattern for what happens to alcohol and tobacco consumption as income goes up.

10. More entertainment. The poor spend more on festivals as their income increases.

These are really interesting stylized facts about the economic lives of the poor, but, causality is not specified in many of these facts. For example, are people poor because they have more children -or- are people who are in poverty having more children because children can earn more than they cost? Do people become poor because they became sick -or- are people who are poor more likely to be sick because they cannot afford good health care? There are a number of these questions where the arrow of causality is running amuck.  With both of these questions causality likely runs both ways. But, understanding causality is no mere trifle ---what I mean is, causality isn't important only to academic economists. Identifying causality is important because policies are often designed in hopes of tackling "root causes" of problems. My next post will be a review of a book I recently finished called "Portfolios of the Poor" that discusses some of the on the ground money management strategies of the poor and how different financial instruments could potentially help the poor manage their cash flows.

Some interesting things I found when reading the articles were how similar humans in different parts of the world behave. First, even when earning a paltry $1 or $2 per day people do maximize on caloric intake, rather, people like the way food tastes. When people become middle class they do not buy more food but they buy "better food". Second, people have a difficult time not spending money. The temptation of "this money is burning a hole in my pocket" is real for the poor the same way it is for us. Third, poor people spend a sizable chunk of their income on festivals or other important ceremonies because there is this deep-seated desire to engage in social activity. For me these facts draw me closer to their humanity because I am able to see these people as not so different from myself and others I know. But, these vignettes of the poor also are vitally important because if we want to help the poor we must first know the poor. This has been the great tragedy of compassionate activities that we try to help people when we lack knowledge about what would help them.

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