Poor economics: A radical rethinking of the way to fight global poverty

The issue is therefore not how much the poor spend on health, but what the money is spent on, which is often expensive cures rather than cheap prevention.

It is probably even harder to learn from experience about immunization, because it does not fix an existing problem, but rather protects against potential future problems. When a child is immunized against measles, that child does not get measles. But not all children who are not immunized actually contract measles (especially if others around them who are the potential source of infection are immunized), so it is very difficult to draw a clear link between immunization and the lack of disease. Moreover, immunization just prevents some diseases—there are many others—and uneducated parents do not necessarily understand what their child is supposed to be protected against. So when the child gets sick despite being immunized, the parents feel cheated and probably resolve not to go through with it again. They may also not understand why all the different shots in the basic immunization regime are needed—after two or three shots, parents might feel that they have done what they should. It is all too easy to get misleading beliefs about what might work in health.

Designing financial products that share the commitment features of the microfinance contracts, without the interest that comes with them, could clearly be of great help to many people. A group of researchers teamed up with a bank that works with poor people in the Philippines to design such a product, a new kind of account that would be tied to each client’s own savings targets. This target could be either an amount (the client would commit not to withdraw the funds until the amount was reached) or a date (the client would commit to leave the money in the account until that date). The client chose the type of commitment and the specific target. However, once those targets were set, they were binding, and the bank would enforce them. The interest rate was no higher than on a regular account. These accounts were proposed to a randomly selected set of clients. Of the clients they approached, about one in four agreed to open such an account. Out of those takers, a little over two-thirds chose the date goal, and the remaining one-third, the amount goal. After a year, the balances in the savings accounts of those who were offered the account were on average 81 percent higher than those of a comparable group of people who were not offered the account, despite the fact that only one in four of the clients who had been offered the account actually signed on. And the effects were probably smaller than they could have been, because even though there was a commitment not to withdraw any money, there was no positive force pushing the client to actually save, and many of the accounts that were opened remained dormant.

Yet most people preferred not to take up the offer of such an account. They were clearly worried about committing themselves to not withdrawing until the goal was reached. Dumas and Robinson ran into the same problem in Kenya—many people did not end up using that accounts they were offering, some of the because the withdrawal fees were too high and they did not want to have their money tied up in the account. This highlights an interesting paradox: There are ways to get around self-control problems, but to make use of them usually requires an initial act of self-control.

This highlights an interesting paradox: There are ways to get around self-control problems, but to make use of them usually requires an initial act of self-control.

So are there really a billion barefoot entrepreneurs, as the leaders of MFIs and the socially minded business gurus seem to believe? Or is this just an illusion, stemming from a confusion about what we call an “entrepreneur”? There are more than a billion people who run their own farm or business, but most of them do this because they have no other options. Most of them manage to do this well enough to survive, but without the talent, the skills, or the appetite for risk needed to turn these small businesses into really successful enterprises.