Thursday, January 10, 2008

The layout of poverty

I mentioned in a previous post why certain people stay poor. In the meanwhile, there have been lots of articles on poverty I have highlighted those below as well. Yet, I don't think enough work has been done to classify and understand different types of poverty. I believe the efforts in classification will help devise better solutions to the problem. I do not claim to be an authority on the subject but I am trying my best to think through the issue.

A different poverty - volatility induced poverty
I have highlighted two broad levels of classification i.e. transient and structural. Under structural poverty, we have a type off poverty that arises out of high net-income volatility combined with adequate average income. This kind of poverty is induced by volatility -in gross incomes and in expenses - both on unpredictable time scale (un-seasonal). Day-laborers, artisans etc suffer this kind of poverty more often. Farmers dependant of rain-water also suffer this kind of poverty. Dean Karlan and Sendhil Mullainathan have explored this here.

The unpredictability of expenses leads to in-debtedness. The flow of credit to this sector comes at high costs hence in-debtedness tends to be self-reinforcing - particularly with higher expense volatility. Hence cash-flows are directed towards life-sustenance rather than investments. In other words - expenses for healing, medicine, food, essential tools etc tend to be favored against education, savings etc. Such people find themselves caught in a structural poverty. I suspect healthcare is the most critical expense of the rest. It reduces income and increases expense at the same time! Also healthcare costs tend to be higher as nutrition is not proper. For them snakes-and-ladder game of scaling the income pyramid seems hopelessly crawling with snakes of healthcare costs denying them the ladders of savings and education.

Framework for solution
A first principles approach suggests that anything that reduces volatility (both income or expense) will be of great benefit. We can also easily conclude that smoothening incomes comes first, before smoothening expense is important. Next, it is absolutely essential to reduce expenses - particularly healthcare, food (proper nutrition) and education (for future). Yet most solutions to their problems tend to addressing volume not volatility. These solutions are likely to fail unless they add an element that suppresses volatility.

Income diversification
The growth in rural incomes in India has come from income stream diversification. Farmers have used tractors, pick-ups for transportation thereby leading to stable earnings and alongwith highly volatile agri-income. This resultant reduction in income volatility has set them on path of prosperity.

Expense smoothening Credit?
Simply throwing credit at this kind of poverty problem is not a solution. Credit repayments impose a smooth addition on their volatile expenses making their situation worse. (Hence farmer suicides in India). Indian rural banking is abound with stories of farmers wanting to pay two months installments together when they have money - and not being able to pay even one months installment in distress times. If their loan repayment schedule were to match the income generation schedule they will have much less to worry about.

In sum
Poverty reducing initiatives need to appreciate the differences in poverty. Volatility induced poverty can be tackled by addressing income volatility first, then expense volatility and then quantum of income and expenses. Expenses on healthcare, food and education are critical and need to be reduced.

Must read links:
Innovation for Poverty Action
MIT poverty action lab -
Is microfinance too rigid?
Marshall Jevons highlights course on poverty and some other links
Poverty in pictures -
Does poverty kill PSD blog links to some important conclusions