By Bryan Caplan
Lant Pritchett’s new working paper, “Alleviating Global Poverty: Labor Mobility, Direct Assistance, and Economic Growth” should be required reading for every Effective Altruist. Bottom line: Virtually all poverty reduction comes from economic growth and migration – not redistribution or philanthropy. The evidence will be fairly familiar to EconLog readers, but the framing is novel and powerful:
So think of two ways to help the global poor. One is for rich people (in a global sense) to give a dollar and get roughly a dollar’s worth of benefits for the poor. The other people is for rich people to allow people who would like to work at the prevailing wage of their country to do so and not deploy active coercion to prevent this—which reflects the person’s contribution to product and hence is (or can be made to be) zero net cost to the host country. Of course, a dollar for a poor person could produce vastly more human well-being than had the richer person spent the money as the marginal utility was much, much higher for the poor person, but this redistribution effect is the same for both options. This means, at least in current conditions, the least you can do—just increasing the freedom of people who want to work and people who want those people to work to carry out that mutually beneficially transaction across national borders—is better than the best you can do of trying to directly help people in poverty but without allowing them to move to opportunity.
The best anti-poverty programs are better than nothing, but compared to the size of the problem, they’re a drop in the bucket. Here’s Pritchett’s analysis of the much-touted “Ultra Poor Graduation” program:
The average income gain for the “treated” households in year 3 of the program is $344 dollars (this is the “intention to treat” effect). What did that program cost? The five country average NPV of costs per household of the 24 month program was $4,545.
Economists often argue that in-kind redistribution is bad because the recipients don’t appreciate what they receive. According to Pritchett, this simple insight is even more empirically important than it seems:
When many people think of philanthropy they often don’t think of cash or incomes, they think of giving specific items or treatments that improving people’s lives directly—like food, or scholarship for school, or a bed net in malarial areas or building a toilet. But roughly the same logic applies here as it would be very hard to give someone a specific good in a way that makes them better off in their own evaluation than just having the equivalent amount of cash. Dupas and Miguel (2016) review studies of the Take-It-Or-Leave-It (TIOLI) purchase rates—the fraction of people who will purchase something at various prices—of various health promoting items from vitamins to soap to latrine slabs to bed nets. They find that purchase rates—which are the revealed preference indicator of the consumer’s valuation — are very low even at a small fraction of the costs. For instance, a water filter in Ghana that cost $15 elicited only a 10 percent purchase rate even at the highly subsidized price of less than $6. A $15 dollar latrine slab in Tanzania had only a 20 percent purchase rate at $6.
Even I was surprised, though, to learn about this semi-ethnographic study:
Empirically, their own initiative is how most people report escaping poverty. As part of a massive exercise of participatory assessment of how people’s well being had changed over a 10 year period we held village meetings in 14 countries and three states of India (Narayan, Pritchett, Kapor 2009). In a ranking exercise people ranked the level of living of households today and their level 10 years ago. This identified almost 4000 people who, by their village neighbor’s assessments, had moved out of poverty. We then interviewed them and asked them what they thought the primary reason for their move out of poverty was. This is of course subject to all the subjectivity biases about how people narrate the story of their lives but 87.7 percent of them reported their own initiative (60.1 percent an initiative outside of agriculture, 17.4 percent in agriculture, 4.7 percent accumulation of assets, and 5.5 percent hard work). Only .3 percent (12 people of 3,991) who moved out of poverty named NGO assistance as the cause.
Overall, a great read for laymen and experts alike.