Amongst the most interesting economists who do this is the team in Harvard. It is best known for the book, Poor Economics, by Esther Duflo and Abhijit Sen, which has been translated into 17 languages in five years. They are known for their solid, reliable, unsentimental work on social issues. An example is a recent paper by Esther Duflo, which shows the uselessness of the Indian government’s promotion of improved cooking stoves. She used a sample survey and showed that most women who were given these stoves stopped using them and went back to old smoke-rich ways of cooking within a few years. Apparently, improved stoves malfunction; unless there is a local, easily reached machinery for repairing them, they will go out of fashion pretty soon.
The earliest idea of idealists was that the government should take over all economic activity and use it to give everyone jobs and a generous wage. It was tried out in the Soviet Union in the 1920s and thence exported to China and Eastern Europe after World War II. It did not spread any further. Socialist economies did not succeed economically as much as capitalist economies. There is one exception, China, but though it calls itself People’s Republic, its economy is a mixture of private and public enterprise.
Another approach, called the livelihood approach, was to turn poor people into businessmen by helping them start some profit-making activity. It started in Bangladesh, and has spread to many other countries. It was pioneered by Fazle Hasan Abed soon after the liberation of Bangladesh from Pakistan, It sought to give the poor, especially women, a means of livelihood such as a cow or a goat, and to give them some training and capital to manage it. It has spread to 20 countries, and probably covers over half a million people; the number of beneficiaries would run into millions. Banerjee and his colleagues made randomized control trials (rcts) of programmes in six countries, and reported the results in Nature last year. They measured parameters of the covered sample before the beginning of the programme, two years later, and one more year later, to give an estimate of how much difference the programme made to those whom it included. The comparisons over time gave an idea of the difference made to the chosen persons; in addition, the same parameters were measured for a sample not covered by the programme.
The programme comprised eight things. First, the eligible persons were chosen on a set of criteria. The most common one was what was called participatory wealth ranking; that is, the participant must be one of the poor in the village. Next. the chosen person was given a productive asset, such as a cow or chicken. Third, for some months, she was given some money or food. Fourth, she was trained in the skills required to keep the asset – for instance, feeding the cow. Fifth, volunteers kept visiting her frequently at home. Sixth, a bank account was opened for her to accumulate savings; in some instances, volunteers went and collected savings from her. Seventh, some education in looking after herself and her health was given. Finally, she was taken on visits to comparable programmes elsewhere.
The assets she was given were goats cattle, chicken, pigs, guinea pigs, bees and shea nuts in descending order of frequency (shea nuts are nutritious nuts which grow on a tree in Africa). She got cash assistance in most countries; but in Ethiopia she got 15 kilos of wheat, 660 grams of chickpeas and 400 mililitres of oil. What she was given was a fraction of the total programme costs in most countries. In India, she got $700 out of the total $1257 (purchasing power parity) spent. She got a third to a fifth of the total costs in other countries; in other words, costs were much higher than direct benefits. This is not necessarily bad, since the point of the six experiments was not to help the beneficiaries but to experiment; but comprehensive assistance such as these experiments sought to give is expensive or inefficient, depending on how you choose to look at it. If, however, benefits were defined as the rise in consumption and assets in four years, they exceeded costs in all countries except Honduras; but the benefits were less than 0.4 times the standard deviation of the control group – that is, quite small – except in two countries: Ethiopia saw larger increases in assets and in financial inclusion index, and India saw larger increases in asset value and in income and revenue.
The researchers asked whether the recipients’ assets increased more over three years than the value of the assets that had been given to them. The answer was yes in all countries; but the increase in assets varied positively with the initial assets of the recipient. In other words, livelihood programmes increased income inequality.
The simplest way of making poor less poor is to give them money. Another politically popular way is to give them foodgrains. A third is a livelihood programme of the kind discussed here – a package of resources and advice designed to make them become more productive and earn more. The first is the simplest; if every family is given a bank account, a computer entry is all that is needed to transfer cash to it. The second is popular in India, partly because rationing was started in 1939 by the British, became a lucratively corrupt programme after independence and hence became a favourite of politicians. The third is the livelihood programme. How does it compare with the other two?
For one thing, it is expensive. It requires handholding of the poor by people who can teach them to do business; that costs money, and requires skilled bureaucrats. For another, it benefits the poorest much less than the less poor. Third, it does not benefit equally all those who are covered; some will be better at learning to look after themselves. So it is not suited to a country like India where bureaucracy in general is corrupt and inefficient.
Hence after studying the results of the randomized control trials, I am confirmed in my preference for direct cash transfers. If they are combined with giving everyone a cellphone and using it as an instrument for storing and transferring a third kind of money other than cash and bank money, they can improve income distribution more effectively and at a lower cost than the various ways tried out by the last Congress government in its futile attempt to create a captive electorate. Its successor has not shown much courage and inclination to try out social innovations; but just in case it decides at some point to do better for the country, than here is an experiment waiting for it.