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September 9, 2013

Some Thoughts on Scarcity

By Timothy Ogden

Underlying, sometimes deeply underlying, much of the conversation about financial services for poor households is the question of how much control poor households have over their lives and how capable they are of making good choices. The Yunus theory of microcredit assumes that the poor have a great deal of control--the only thing they lack is credit. Once they have it, they can make smart, informed choices about how to use capital to improve their lives. The growing enthusiasm for cash-transfer-style programs is built on similar foundations. Paul Niehaus, one of the founders of GiveDirectly, a new charity that focuses on unconditional cash transfers for poor households in Kenya (if you don't know GiveDirectly, do listen to the This American Life story about them), often talks about a core motivation of the approach being the belief that poor households know better how to spend cash than outsiders do. 

On the flip side of this conversation is much of the traditional microcredit (with a focus on avoiding consumption loans and enforcing the use of credit for microenterprise) and aid world (a good example is again in the This American Life story about GiveDirectly). This view emphasizes that the poor often don't know the right choices and/or face a great deal of other barriers to making good choices. Therefore it is not sufficient, or even advisable, to give poor households so much unfettered control of resources. Help should be channeled via training, specific investments in health or agricultural inputs or infrastructure, or long-term programs directed by experts (on this, see Nina Munk's new book about the Millenium Villages Project). 

This is genuinely a puzzle. There is plenty of evidence that poor households do make good choices--at least better choices than outsiders initially think. But there is at least an equal volume of evidence that poor households are making bad choices, choices that keep them entrenched in poverty. Some experiments show evidence of both views simultaneously. Both Karlan and Valdivia and Gine, Goldberg and Yang are experiments designed to influence the on-going choices of poor households who get access to credit. For most borrowers, the interventions dont' matter much (i.e. these households were already making reasonably good choices) but the interventions do matter for a subset of people who were making apparently bad choices. In Karlan and Valdivia, microentrepreneurs who are not doing very well and don't want help, do benefit from training. In Gine et al, people who were purposefully defaulting on their agricultural loans and diverting the funds elsewhere end up investing more in their farms and earning more because of it.

Into this puzzle step Sendhil Mullainathan, an FAI affiliate and co-founder, and Eldar Shafir with their new book Scarcity. The book is getting a lot of attention (The Guardian, The Economist, The New York Review of Books) and rightly so. The book explores their research on what happens to people who operate in an environment of scarcity, be it money scarcity, time scarcity or human contact scarcity. In these situations, good and bad things happen in our brains. On the good side, we are able to achieve extreme focus on the issue, pay very careful attention and occassionally make better choices. On the bad side, this extreme focus causes us to ignore anything but the most pressing needs, and that often causes us to make short-sighted and ultimately harmful trade-offs. 

This dual reaction to scarcity goes a long way to helping sort out this puzzle of the poor as both good and bad decision-makers when it comes to money. At times, scarcity pays off and enables creative solutions that never would have occured to a wealthier person. At too many other times, it causes poor households to make choices that keep them trapped in poverty and prevent them from making profitable investments and choices that would have big payoffs in the medium- or long-term. 

There's obviously much more to be said on this topic, and on the book. Scarcity is an important book to read and think about not because it finally and fully solves this puzzle but because it opens doors to thinking better about it (and many other puzzles as well). One example is this excellent piece by Bindu Ananth of IFMR Trust in Forbes.  I'll be writing more about the book and its implications, I'm sure, for months and perhaps years. 

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