New ways of looking at poverty

Review

New ways of looking at poverty

Roger Senserrich,
Director of Communications at Connecticut Voices for Children;

Martin Ravallion. The Economics of Poverty. History, Measurement and Policy. Oxford & New York: Oxford University Press, 2016.

Sendhil Mullainathan & Eldar Shafir. Scarcity: The New Science of Having Less and How It Defines Our Lives. New York: Times Books, Henry Holt and Company, 2013.

Analysis of a society’s wealth and income distribution may show how gains from growth are distributed, but does not necessarily offer any coherent explanations regarding the experience of living under extreme scarcity, or which public policies help those who have least.

The books concerning us here attempt to answer these two questions through economic analysis strictly focused on the reality and experience of poverty, but from completely different perspectives. Ravallion’s approach in The Economics of Poverty is to provide a global overview of poverty; his book is a comprehensive manual that offers a journey through the theoretical and empirical knowledge of poverty. In Scarcity, in contrast, Sendhil Mullainathan and Eldar Shafir approach the problem of poverty from the opposite extreme by studying how it affects those who suffer from it.

Ravallion opens his book with a broad review of the role played by poverty analysis in economic theory. Classical economists in the early 19th century usually only considered solutions or strategies for improving the situation of the neediest as tools for promoting social stability, not as an end in themselves. It was not until the end of the same century, firstly with utilitarianism and secondly, above all, with the emergence of the labour movement, that poverty and inequality started to occupy a central role in public debate in the industrialised countries.

Ravallion uses this historical rundown of theoretical debates as an introduction to the complexities involved in analysing, measuring and fighting poverty. Each section of the book combines non-technical information with formal explanations of economic theory.

The Economics of Poverty is exhaustive. Following the theoretical overview, the book’s second part details the problem of the definition of poverty, which varies according to how we measure the access to resources, opportunities, services or financial security of those affected.

The empirical part of the book highlights the relevance of indicators. Ravallion examines the extensive literature on the global evolution of inequality and poverty levels, both overall and for each country, plus theoretical models of inequality and development, and how they adapt to the reality of data. Ravallion closes the book with a run-through of dozens of strategies for fighting poverty, from direct transfers to trade liberalisation, and including universal services and administrative reforms, and shows the empirical evidence of the effects of each.

The principal virtue of The Economics of Poverty is its enormous scale: it examines an extraordinarily complex problem from a wide variety of perspectives. Ravallion is fully aware of the considerable theoretical and practical differences involved when talking about poverty in developing countries and in rich countries. The author focuses above all on the problems of the first group, undoubtedly more compelling, and often sidelines the problems and public debates of the richer countries.

Despite these limitations, The Economics of Poverty is an authentic encyclopaedia of public policies, indicators and strategies used the world over. It is an immensely useful reference work, both for understanding poverty and for thinking about and assessing possible solutions.

When analysing poverty from an aggregate perspective it is easy to miss nuances regarding what is happening behind the statistics, the story behind the data. If Ravallion offers a large-scale view of poverty, Sendhil Mullainathan and Eldar Shafir take the opposite route: Scarcity: The New Science of Having Less and How It Defines Our Lives revolves precisely around the experience of poverty. Scarcity does not seek to talk about poverty’s causes, but its consequences. It is an almost minimalist book, which focuses on those suffering poverty directly and how it affects their lives.

The starting point for Mullainathan and Shafir is found in behavioural economics, and specifically, in the effect of scarcity on the capacity of those suffering it to take rational decisions. The authors start off with an apparently simple but very powerful idea: the difficulty we all experience when making decisions in situations of stress. Their argument is that poverty brings with it situations of deprivation, which means that those affected by it live in a state of continual tension that prevents them from taking effective action. 

Those affected by situations of deprivation live in a state of continual tension that prevents them from taking effective action.

Mullainathan and Shafir combine a dense volume of empirical evidence from both natural and laboratory experiments to develop this idea. Scarcity and deprivation generate a cognitive response that makes us focus on the short term, on trying to find solutions for immediate problems. The authors describe decision-making as a bandwidth problem: in the absence of stress we can evaluate options and prioritise by thinking about the long term, but in situations of scarcity our brain responds on the defensive, trying to fix only what is right before us. This focus on the immediate explains, for example, the difficulty that people on low incomes experience when trying to save money, avoid indebtedness or attend training courses for several months without being distracted by other problems. Our mind is designed to respond to emergencies and focus all our attention on what we have right before us; this can be useful in situations of danger, but is not very operational when trying to find a job or pay the rent. 

The direct implication of this theory is that apparently irrational decisions by poor people are in fact a consequence, not a cause of poverty. The constant tension of not knowing whether you will make it to the end of the month is an extraordinarily tough experience, almost unimaginable for a middle-class person. It can even be a cause of post-traumatic stress; it is no surprise, therefore, that this clouds the decision-making process. 

The complexity of poverty: from the data and major tendencies to the difficulty of translating public policies into effective interventions.

The result is that families facing poverty often act impulsively, attending immediate needs instead of planning for the medium-term. Scarcity explains why a poor family will spend money on escapist activities, seeking ways to relax in the face of an overwhelming avalanche of emergencies and problems, and how family tension can lead to children performing less well at school or the work performance of parents themselves suffering.

If we want to reduce poverty, therefore, the priority must be to promote public policies that change this vicious circle by simplifying the decision-making process or through programmes designed to reduce the immediate stress levels of families.

According to the authors, a system of public nurseries could be more effective if places are automatically assigned, thus parents do not have to waste time deciding on which nursery they are going to send their children to. A professional training programme will begin with basic general training classes, and will only give options to choose and specialise once the students are comfortable with the system.

One effective intervention would be to make cash transfers directly to people needing them, whether through assistance grants aimed at services (public housing, for example) or direct cash transfers. Any programme that reduces the perception of scarcity in an immediate way will mean that its recipients will be able to face other long-term problems (savings, health, education) more calmly.

The problem of the argument presented in Scarcity, however, is that it responds to a very limited question, the experience of poverty, but without tackling its causes. Although it is a useful answer and necessary for a certain rhetoric that tends to lay blame on victims of poverty for their own situation and to understand why escaping from it is so complicated, this analysis is only valid to explain the persistence of poverty in certain contexts, not the causes. It is very useful for assessing the design of public policies that aim to break with poverty traps and promote social mobility, but not for tackling economic development strategies.

It is here, again, that the monumental volume of Ravallion, with its ambition, complexity and detail, proves itself to be essential. Both books, overall, are a powerful reminder of the complexity of poverty. Ravallion offers us the data and major tendencies; Mullainathan and Shafir, the difficulty of translating public policies into effective interventions. 

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