The economics of hope and poverty

The anticipation of future poverty will exacerbate current poverty, says economist Esther Duflo

Why does the policy of reserving seats for women in some of West Bengal’s panchayats improve the state of girls’ education? Why do Kenyan farmers refuse to use cheap and easily available fertilisers, though they know it will improve harvests? Or, for that matter, why don’t Bangladeshi migrant workers travel to cities for work during lean periods by spending merely $8 for returns worth more than 10 times that amount?

The answers, Esther Duflo, an economist at the Massachusetts Institute of Technology, believes, lies in understanding the role of hope, or the lack of it, in the decisions made by the poor. “The fear of loss may lead to conservative behaviour,” she said about Kenya’s fertiliser-averse farmers, even as “changes in aspiration” could be why fewer girls dropped out of middle-school in certain villages after alterations were made to their panchayat systems in West Bengal.   

“Could the lack of hope potentially affect people’s ability to decide?” reasoned Duflo, who co-authored ‘Poor Economics’ along with her MIT colleague Abhijit V. Banerjee in 2011. Although, by her own admission, literature on such theorisation — that often straddles the extremities of economics and neurosciences — is in its infancy, there is evidence of a “strong correlation between depression and poverty.”

That could provide a “micro-foundation for the possibility of a poverty-trap based on (shattered) hopes and shocks,” Duflo said in her acceptance lecture for the Mahalanobis Memorial Medal, awarded by the Indian Econometrics Society, here today.

“The anticipation of future poverty will exacerbate current poverty,” argued French-born Duflo, who received the American Economic Association’s prestigious John Bates Clark Medal in 2010. “If you know that you will never get a loan to increase a business to a meaningful scale, then why bother optimising every business decision?”

There is also the individual’s experience of dealing with shocks that determine the attitude towards the future. Many Bangladeshi migrants, for instance, who usually scrape through agricultural lean periods in their villages, do not seek work elsewhere despite the opportunities available. “Those who risk suffering the most negative shocks may think the least about the future,” Duflo said.

“Hope operates as a capability. A little bit of hope can allow people to realise their potential,” she said in her concluding remarks, adding that policy makers could make a minimum income available to everyone without tying them to targets or other deliverables. “Just make some small amount of money available to everyone, which means that if everything fails, that remains an option.”