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.
READER COMMENTS
Jonathan S
Oct 15 2018 at 4:05pm
Put another way, it would be 100x more effective for relief agencies to smuggle people across borders than to give the money to development organizations to improve development in migrants’ home countries.
Jason H
Oct 15 2018 at 4:25pm
This is interesting, but I don’t find it particularly surprising or powerful. To paraphrase, radically transforming the world’s immigration systems at an assumed cost of $ is theoretically drastically more effective than the average anti-poverty intervention, as implemented. I think that argument is persuasive, but it’s missing the detail needed for anyone to take practical action.
Most philanthropists aren’t asking themselves, what’s the absolute most effective anti-poverty force in the world? They’re thinking like economists, on the margin. What’s the greatest marginal benefit for the world that I can get in exchange for my donation? The fact that most poverty reduction is coming from economic growth and migration could indicate that other areas are being neglected, and thus offer more promising opportunities for an individual donor. Bednets for malaria prevention seem like a clear example of this.
Will K
Oct 18 2018 at 8:19pm
Agreed. While this paper is interesting, and I no longer doubt the outsized benefits of increased labor mobility, it seems that an “average” EA individual could have at best a proportionally microscopic marginal impact on global labor mobility if they opted to work in pro-immigration advocacy or related efforts. So in absolute terms, sure, aid is a drop in the bucket, but in marginal terms, it still seems to be the best we can do.
Hazel Meade
Oct 15 2018 at 4:38pm
Imagine if instead of letting Americans move around the country to get better jobs we insisted they all state in the state where they were born and insisted that they somehow make the jobs come to them. And then we let the other states impose trade barriers because it would be unfair to make workers in California compete with lower wage labor in Michigan. I wonder how that would turn out.
RPLong
Oct 15 2018 at 5:29pm
I’m surprised that Caplan called out that last section about personal initiative. Given the emphasis on good luck and the heritability of success found throughout Caplan’s own work, I would have expected him to heavily discount such findings, especially since they are self-reported.
BW
Oct 15 2018 at 8:03pm
I’m not sure there’s a contradiction there. It could both be possible that taking initiative is the only way a person can improve their life, and that the propensity to take initiative is highly heritable.
Matthias Goergens
Oct 15 2018 at 10:32pm
And that the reward to taking initiative is dependent on luck.
Fred in PA
Oct 16 2018 at 11:16am
One is reminded of the quote, often (mis-?) attributed to Samuel Goldwyn: “I find that the harder I work, the luckier I get.”
Fred in PA
Oct 16 2018 at 11:39am
Isn’t there a question here of what to include under that “heritable” umbrella? Perhaps activity level? (So the three-toed sloth is doomed.) Perhaps stamina? (Or is that more age & stage?) Perhaps social inheritance? (E.g., Geert Hofsyede’s Masculine vs. Feminine cultures.) Perhaps familial upbringing? (Consider all those childrearing books attempting to instill “Grit,” or n-Ach.) Is part of one’s inheritance “what your Mama taught you”?
RPLong
Oct 17 2018 at 7:35am
BW, I wasn’t suggesting that Caplan was contradicting himself. I was only voicing my surprise at what I’d read. This suggests to me that I ought to pay closer attention to Caplan’s views on these matters, as I may have misunderstood him slightly in the past.
Philo
Oct 15 2018 at 8:23pm
Also, LUCK and PERSONAL INITIATIVE are compatible explanations for a person’s moving out of poverty: s/he may have taken a personal initiative which luckily paid off (though the personal initiatives of some other people unluckily did not pay off).
David S
Oct 15 2018 at 9:44pm
I believe the case against redistribution can be made much more strongly than this. Consider this greatly simplified hamburger consuming society:
To start, “The rich 1%” own 99% of the worlds wealth. But they have such limited marginal utility from additional hamburger consumption that they only eat 10x the number of hamburgers as the 99% poor population.
A redistribution tax is done, such that all the assets of the rich are seized and given to the poor.
The next day, no new hamburgers (or at least very limited extra hamburgers) are created because we were already at maximum hamburger production. So now the price of hamburgers rises until the 1.1 hamburgers per person are distributed – approximately doubling. (No one invests in more hamburger making equipment because they know that there won’t be any rich to rob next year)
No we have no rich people, and no one is that much better off. (And the next year every dies of starvation because no one invests in making hamburgers anymore)
It seems obvious that redistribution of assets mostly cause price inflation of things that have higher marginal value to the poor than to the rich.
Matthias Goergens
Oct 15 2018 at 10:37pm
That’s a rather simplistic story. And even on its own terms only works if all the wealth and income is redistributed, and burgers have a very weird supply curve.
(Basically, no extra burgers produced at higher prices than the status quo, but supply collapses at slightly lower prices.)
The paper’s more measured argument works better.
Thaomas
Oct 18 2018 at 8:31am
This is no news to people working in development. More development aid ought to go toward helping countries remove roadblocks to faster economic growth. [Of course this is not easy when our own country is increasing trade restrictions and fiscal deficits during full employment.]
Allowing freer migration of high social capital people would also have the advantage of providing greater incentives even to those who do not migrate to increase their investments in their human capital.
IVV
Oct 19 2018 at 10:38am
Would adopting a child out of a poor village/town and raising/educating them in an industrialized society be a good idea, despite the personal expenditure involved on the adopter? Or would adopting/investing in a poor young adult with an interesting business model be better?
SaveyourSelf
Oct 21 2018 at 4:49pm
This is a really important quote because it reveals–finally–that someone has realized poverty is not an assessment of asset accumulation. It is a statement of relative productivity of an individual in their environment. This is a very confusing point for most people because we measure poverty and report it terms of money. But the lack of money is not poverty! This lack of understanding of the nature of poverty–which is to say that poverty is a feature absence of productivity, not paucity of assets–is the fundamental flaw with nearly every poverty alleviation program I’ve ever heard of. Money is like mercury. In a metered pipe, the change in the expansion of the mercury can reveal the change in the temperature of the surrounding environment. But changing the amount of mercury in the pipe does not change the ambient temperature of the environment no matter how much of the liquid we pump into the tube. Money is the same way. Manipulating the amount of the measuring tool [Money] does not change the environment or the person of interest in any way that can change their productivity and therefore has no chance to alleviate their poverty.
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