Poverty is about lack of opportunity not individual characteristics

When I was a postgraduate student at Monash University in Melbourne, I had many debates with a senior academic who would become a co-author early in my academic career, about the relative importance of choice and constraint. In the standard mainstream choice-theoretic framework, people are conceived as maximising satisfaction through the choices they make subject to the opportunity set they face (the constraints). This simplistic version of human decision-making dominates mainstream economics and leads to nonsensical conclusions such that unemployment is a voluntary state where people are choosing leisure (a good) over work (bad) to maximise their well-being because the income coming from work (a good) is not sufficient on an hourly basis to offset the disutility that work engenders. That sort of thinking permeates the discipline. My former colleague kept saying that people make choices and you cannot deny that. The discussions were in relation to poverty incidence. My position was that it is trivial to say people make choices. We do, every day, but to understand complex phenomena such as poverty, it is better to focus on the constraints. That focus is likely to be more revealing. A person can be making choices but if their opportunity set is very narrow and any choice dooms that person to poverty then it doesn’t make much sense to dwell on the ‘free’ choice angle. Structuralists also agree with my emphasis here. Earlier this year (February 8, 2021), some academics associated with MIT in the US published a working paper – Why do people stay poor – and its results are revealing.

The issue examined

The MIT paper juxtaposes the “two broad views as to why people stay poor”:

One emphasizes differences in fundamentals, such as ability, talent or motivation. The other, poverty traps view, differences in opportunities which stem from differences in wealth.

So, the first view places an individual’s outcomes in terms of their own capacities and choices, while the second is about structural constraints arising from how many resources an individual can command, which, in turn, is driven by wealth.

The researchers use an interesting dataset from Bangladesh to study whether the poverty traps are more significant than the individual ascriptive characteristics in determining poverty incidence.

Over 11 years they studied 23,000 households with wide-ranging wealth positions across 1309 villages.

The villages were located in the “poorest districts of Bangladesh” and 6,000 households were tracked specifically “across 2007, 2009, 2011, 2014 and 2018”.

Half of the sample randomly were given a “large asset transfer in 2007” (that is, became relatively wealthy).

Within each village some people “own land or livestock” and use it to employ others who are casual labourers. The latter earn much less than the former.

Ownership of assets ensures a person is more productive than the casual labourers or domestic servants.

That division allows the researchers to examine for:

… the existence of asset thresholds levels above which poor households take on asset reliant occupations and rise out of poverty and below which they remain trapped.

As far as a research design goes, this study is very interesting and allows for this tricky distinction between individual and environment to be separated in a meaningful way and tested for statistical significance.

The Targeting Ulta Poor (TUP) Program

To help them design the threshold, they exploited an innovative anti-poverty program that was introduced by – BRAC – in Bangladesh.

BRAC is a non-profit organisation that was founded in Bangladesh by – Fazle Hasan Abed – in 1972.

Its purpose is to reduce poverty in Bangladesh particularly among women.

It is “the largest non-governmental development organisation in the world” and employs over 90,000 people (70 per cent being women).

It now operates in 11 nations.

Its first program was microfinance to assist people to create new opportunities for themselves.

The program – Targeting Ultra Poor (TUP) Program – The Graduation Approach – was introduced by BRAC in 2002.

They targetted the ultra poor, which was initially defined as anyone who “eat below 80% of their energy requirements despite spending at least 80% of income on food”.

But as they ventured into other nations, they found that the “population considered ultra poor depends on the local context” (Source).

Around 17.5 per cent of the population in Bangladesh are categorised as Ultra Poor.

They are exposed to all the vicissitudes of extreme poverty – chronic hunger, malnutrition, disease, low energy, poor housing and sanitation, increased exposure to natural disasters etc.

The program aims to complement traditional development aid – “food aid, cash transfers, school feeding, public works programme” combined with “appropriate labour policies, social insurance systems, and social sector policies in health, education and nutrition” that provide great benefits to the poorer nations.

The problem they identified as that these programs “are often inadvertently out of reach for the poorest” who face the worst resource constraints.

I recall some years ago, I was working in some remote indigenous settlements in the Northern Territory designing interventions that would increase self-reliance through stable employment.

At the early meetings with Territory and Federal government officials, the feds (the current conservative government) kept repeating that any program has to leverage the private market.

This refrain was repeated endlessly as a statement of faith.

I pointed out that in these communities there was no private market as such and the challenge was to make government work better not try to come up with stupid, supply-side incentive measures that would fail for lack of opportunity.

The conflict in ideologies was profound and one of the reasons those communities remain among the poorest in the world.

The point was well recognised when BRAC set out to design their program.

They realised that the ultra poor are:

Largely disconnected from markets …

That is a very important insight.

Accordingly, the logic of the intervention was to not only build skills and provide employment opportunities but also to build as “asset base” (wealth) which would ensure the individuals could permanently escape poverty.

The two-year program gives an asset (usually a cow or some poultry) to the individual and provides skill development in addition to food and income support and other benefits (health care, etc).

The evidence so far (after 19 years of operation) is very positive.

One 2013 study from LSE researchers (Bandier, O. and colleagues – ‘Community Wide Impacts of an Ultra-Poor Program’) – found that after 4 years of operation there was a:

• 38% increase in participant annual earnings
• 92% increase in hours devoted to more stable, productive work
• 8% increase in increase in consumption expenditure
• 10-fold increase in savings
• Additional economically and statistically significant effects on asset ownership, food security, non food per-capita expenditures, and well-being

Other studies at different intervals have found similar results.

The results of the current study

The TUP program allowed the researchers to identify the thresholds mentioned above.

The TUP “transfers large assets (cows) to the poorest women in these villages and the value of the transfer is such that it moves over 3,000 households from the low mode to the lowest density point of the asset distribution in treated areas”.

That is, pushes people to the threshold.

And then the study traced “how assets evolve after the transfer” which allowed them “to test for poverty traps”.

They differentiate the part of their sample that receives various transfers (food, etc) but who are not given an asset from those who receive the same transfers but also get the cow.

They want to find whether:

… small differences in initial asset holdings can lead to divergent trajectories in terms of assets, occupations and welfare depending on whether a household begins above or below the threshold.

Their results are instructive:

1. “the path of asset accumulation for beneficiaries that receive the transfer in the 4 years after the treatment is consistent with poverty trap dynamics.”

2. “Treated households whose baseline assets were so low that the transfer was not enough to bring them past the unstable steady state are more likely to slide back into poverty, whilst those who manage to go past the threshold escape poverty.”

3. Over 11 years of study, “the two groups diverge over time – beneficiaries who start above the threshold accumulate assets (including land), move into more productive occupations and increase consumption.”

This finding supports the poverty trap contention.

4. “The average household is trapped in poverty: they cannot move into productive occupations due to an initial lack of assets.”

5. “… in the absence of credit constraints only 2% of households would be best off doing wage labor, while 97% of households are exclusively reliant such work at baseline. Conversely, only 1% work in livestock when 90% would do so if they had access to the same asset wealth as the middle and upper classes. Overall, this implies that 96% of households are forced to misallocate their labor.”

This is an important result.

Poverty not only has dramatic individual consequences but also wastes talent and allows less talented people from wealthy backgrounds to assume positions of power and decision-making importance that they are not capable of doing effectively.

So we get a lot of poorly performed politicians and other ‘leaders’ because we do not sample widely from the talent pool.

What does it all mean?

Contrary to the mainstream model that emphasises the characteristics of the individual and their choices, the study finds that:

Most people are not poor because they lack innate ability, instead they are constrained by a lack of access to more productive activities. Interventions that do not suffice to move people above the threshold will not be successful at improving outcomes in the long run …

big push policies that move a large share of households past the threshold can be effective at lifting them out of poverty permanently.

Poverty is about lack of opportunity.

It is not the characteristics of the individuals that keep a person poor “but rather their circumstances”.

Focusing on individual choice when the opportunity set is so narrow is a waste of time.

In more advanced nations, where the transfer of a cow might be less relevant, the principles still apply.

An individual has to be given a chance to shift occupations to escape poverty and consumption dependencies from transfers.

It is not about motivation but ensuring there are available jobs.

The state has to guarantee that availability and ensure the jobs are secure, well-paid (relative to context) and provide a socially-inclusive income.

Within that structure, then a range of career advancements should be designed – skill development etc.

It also means that providing just income support (like a UBI) will not be sufficient to reduce poverty.

The evidence from the TUP is clear – “Small pushes will work to elevate consumption but will not get people out of the poverty trap.”

That is one of my major criticisms of basic income guarantees that are pitched at a level that will not be inherently inflationary – they treat the individual as a consumption unit and cannot provide for occupational mobility.

So the person is stuck in poverty – allegedly being creative!

Conclusion

Whether the UBI set like it or not, poverty reduction requires programs that generate employment and allow a person to risk manage their own lives.

Enhancing the making of choices when the opportunity set is so bleak should not be a guiding principle in poverty intervention.

Rather, empowering people through occupational advancement and appropriate other supports has been demonstrated to be the way to go.

That is enough for today!

(c) Copyright 2021 William Mitchell. All Rights Reserved.