Journal of Economic Literature 2012, 50:1, 115127 http:www.aeaweb.org/articles.php?doi=10.1257/jel.50.1.

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Thinking Small: A Review of Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty by Abhijit Banerjee and Esther Duflo
Mark R. Rosenzweig*
In Poor Economics, Abhijit Banerjee and Esther Duflo eschew grand theorizing about poverty reduction in favor of an approach in which intelligently designed and tested small interventions, based on a scientific understanding of the lives of the poor, marginally improve their welfare. In so doing, they describe the findings from the recent large literature describing the behavior and institutions of the poor and the consequences of policy and experimental interventions targeted to poverty populations. In this review, I assess whether thinking small with its associated policy regime of transfers, subsidies, and nudges, is both a practical and effective policy prescription for fighting poverty and whether the set of studies that have focused on populations that have not escaped poverty has improved our fundamental understanding of both the consequences and causes of poverty. (JEL I32, I38, O15)

1. Introduction he field of development economics has experienced a virtual renaissance in the last twenty years. This has come about in large part as a consequence of researchers or their proxies going into the field in low-income countries to collect new data describing the behavior of individuals, households and institutions. No longer are empirical researchers at the mercy of third-party data collection efforts, and as a consequence empirical work
*Yale University.

is much more successfully aligned with questions posed by researchers, and even theory. Data collection has also become opportunistic, exploiting changes in rules or policies and documenting before-and-after consequences. In addition, rather than having to rely on serendipitous or random events from nature or from governments as sources of exogenous variation, researchers have themselves actively intervened in the lives of the inhabitants of low-income countries using a tool heretofore underutilized in economics, randomized field experiments. The new research and data have produced, for example, the first rigorous evidence of moral 115

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Journal of Economic Literature, Vol. L (March 2012) from a focus on deep institutional reforms about which we still know little to practical, on-the-ground, rigorously assessed direct assistance. Thinking small, rather than thinking grand. There are otherwise no new radical ideas. The basic analytical approach is very much in the mainstream of contemporary microeconomics, with the poor depicted as no different from the rich in terms of how their brains are wired or in what they can enjoy, given their limited constraints. Some of this conventional economic thinking, of course, might be seen as radical thoughts to NGOs and donors. By focusing on assisting the poor on the margin, of course, the book is missing analyses of circumstances where and when there was real poverty reductionsubstantial increases in the number of people who become nonpoor. Indeed, it is elementary social science that it is not possible to understand how poverty can be eliminated, rather than made less onerous, by only studying the lives of those who have not escaped poverty, as here (there are a few anecdotal exceptions). Thus the book is missing, for example, a comprehensive analysis of the green revolution in India, which helped to raise the real wages of the poorest of the poor more than threefold over three decades, despite the fact that many of the interventions and studies cited were based in India. No intervention described in the book has anything near that effect on incomes. Studies of migration, occupational mobility, the growth of manufacturing sectors employing large numbers of formerly poor persons (e.g., the Bangladesh garment sector), major routes to the escape of poverty, are also absent. The book is about helping the poor via transfers, behavioral nudges and subventions, rather than about reducing the number of poor through economic development and growth. The message that economic science and money (aid) can be combined to directly help the poor, even in corrupt and/or

hazard and adverse selection, the importance of social networks in job acquisition and consumption-smoothing, the costs of insecure property rights, the benefits of affirmative action, and the existence of learning externalities as well as more credible (compared with those obtained from cross-country analyses) estimates of the consequences of poor health on schooling, productivity and growth, among many other findings. Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty is a book by two authors who have been among the core set of researchers contributing to and leading this newly revitalized field. And the book well reflects many aspects of the new research, encompassing scores of studies using a variety of empirical methods, not just those employing randomized field experiments. The book, is not, however, a dry review of the recent literature. First, it is very well-written, complete with exemplars of the poor (some, though, hardly representative, such as a farmer with twelve siblings), pertinent anecdotes reflecting the personal experiences of the authors as they interact with NGO factotums, and telling examples of initiatives gone wrong because of program designs that did not correctly take into account the behavior of the people they were designed to assist. Secondly, and most importantly, the authors have a point of view: they believe that in the absence of grand schemes or radical transformations of government leadership that will promote the mass escape of people from poverty, there are small interventions that can be undertaken right now that will marginally improve the health, schooling and incomes of the poor. The poor will still be poor, but they can be made better-off. It follows that, by studying the poor, we can equip ourselves, in small steps, to more effectively and intelligently help them, if not radically transform their lives. This is the radical rethinking of the subtitle, the turning away

Rosenzweig: Thinking Small dysfunctional political regimes and in the absence of grand strategies or major technological breakthroughs, is of obvious appeal to altruistic billionaires, aid agencies, charitable NGOs, and dewy-eyed college economics majors who see that they can both do good and learn in exotic locales. And the authors are not bashful in pointing out the enormous growth in the number of field experiments designed to better assist the poor, funded and staffed by just such groups. The book thus has two, not always congruent, purposes. The first is to present studies that demonstrate empirically that at least some, but importantly not all, relatively straightforward but intelligently designed interventions do significantly help the poor and are cost-effective. The second is to assess what research and field experience has contributed to an improved understanding of the behavior of the poor and the fundamental problems they face. While undoubtedly of great value to those who seek to assist the poor, is the book also useful for thinking economists, macro or micro? Should a researcher who, for example, is not impressed by studies rejecting the hypothesis that lowering prices to zero decreases the use of a product conditional on preferences (as apparently is believed by donors) read this book to learn about what is going on in the field of development economics? The answer is certainly yes. The set of studies whose findings are relevant to the authors focus, on helping and understanding the plight of the poor, is comprehensive and up to date, even including fresh unpublished studies. But there is an important caveatthe book is not a critical review of the literature. Qualitative and quantitative findings are reported, but the methods (apart from randomized trials) and shortcomings of each study are not provided, and sometimes critical details are omitted. Obviously the provision of such details in a book of this kind would be inappropriate given the target

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audience and the hortatory goal. Readers interested in or even wowed by particular quantitative findings should be skeptical and consult the original studies, as we will see. 2. The Ignorant, Irresponsible, and Lazy Poor? One of the recurring questions addressed in the book, which is one of its key strengths, is why the poor seem to not do what is in their best interest even when they can afford to do so. For example, they dont consume the optimal, affordable diet; they underutilize cheap inputs such as deworming pills and water purifiers and farm inputs that would make them more productive; and they do not purchase even actuarially fair weather insurance despite the costliness of crop failures unless it is heavily subsidized. There are three main reasons highlighted. First, the poor, like us, do not have a onegood utility function; they care about more than just health or schooling or even earnings. This point is illuminated colorfully in the books first chapter on hunger, where it is pointed out that hungry families spend large amounts of money on festivals and family events. The authors remind us that, essentially, we as humans like to enjoy life. The poor, however, have so little resources that they may have to trade off health for diversion and fun. But, deviations from the optimal diet could also be due to lack of information. This is the second reason that the poor may not be at even their constrained optimum. The poor may be uninformed about the returns to dietary changes or the pills available to them. The authors provide examples of experimental evidence demonstrating the educational and/or earnings gains, for example, from iodine and iron supplementation. One showcase example the authors use in many chapters of the book is from a deworming experiment in which deworming

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Journal of Economic Literature, Vol. L (March 2012) f amily size choices are motivated by constraints and returns, is the weakest chapter in the book. This is in part due to the lack of compelling evidence. But also the studies the authors do give credence to on the effects of family size on schooling outcomes, which show weak effects, or on savings, which show strong effects, are based on dubious assumptions (there are no relevant randomized field trials of the long- or medium-term effects of contraceptive subsidies that would be helpful here). What is a more novel focus, and given a lot of attention in the book, is the third reason that the poor may not be helping themselvesbehavioral constraints, in particular the inability to make sacrifices now in return for gains later even when credit constraints are not binding. Lack of self-control, manifested, for example, in procrastination is shown to play a role in reducing the level of even small investments that have alleged large future benefits. This opens up a large research agenda seeking to understand the nature of these constraints and the tweaks that might overcome them. The chapter on saving contains a brilliant and balanced analysis of why the poor do not save when it is in their own interest. First, there is the problem that savings opportunities for the poor are expensivethe fixed administrative costs for banks to manage accounts make small accounts expensive. But studies find that even when such costs are artificially lowered, as in field experiments, take up rates are low. Thus, simply providing cheaper access to micro savings accounts will not result in a major change in savings behavior. The low take-up rate of subsidized or even free savings accounts highlights the second issue, the inability of people to control their impulses to consume now. The authors point out that this is a common failing of all of us, but is a particularly important problem for the poor. In rich countries, there are pension plans as the default or mandatory

pills were offered to school-age children in Kenya, which were found to not only (marginally) increase school attendance in the short run but to have large positive effects on earnings later in life. Yet, parents and children eschewed the use of the pills even at very small costs. Of course, the adult effects could not possibly be known to the families in the experimental areas, since the results were obtained years later, but they seemed unimpressed by those immediate beneficial schooling effects (there were no improvements in test scores). But the poor also do not purchase bed nets, again in Kenya, at prices that would appear to have large income payoffs either. That lack of information is a major problem among the poor is an old idea. And there is a long history of health and family-planning education campaigns targeted to poor households predicated on the assumption of information gaps. But a strength of the book is that it tells us that things are not always so simple. The authors provide us with a telling example where what appears to be lack of information is in fact notwhere a sex education intervention had no effect on the frequency with which teen-age girls engaged in unprotected sex, and bore children, with older men. The authors point out how it was in the economic interest of the girls to do so, making the point that understanding the constraints and returns faced by the poor is necessary in diagnosing what can and cannot be remedied. In the chapter on family size, the authors appear also to be skeptical about the importance of contraceptive ignorance, or even availability, in explaining the large families observed among poor people, noting the lack of evidence supporting the effectiveness of family planning campaigns. Of course, the absence of evidence does not mean there is no role for contraceptive education, or even for the subvention of contraceptives, if one believed that there were population externalities. The chapter on family size, other than its recognition of the fact that

Rosenzweig: Thinking Small avings device, so no complex intertempos ral decisions need be made by many people. The poor, however, are on their own, and because of the seeming infeasibility of attaining through savings equally tempting future goalseven a scooter or refrigerator is too far out of reach for many of the poorselfrestraint is much more difficult. More interestingly, the poor appear to be aware of this problem of self control, and there are a number of locally organized community institutions designed precisely to deal with the problem. There are no simple solutions here, but this is a case where we have a much better diagnosis of the fundamental problems. Less novel, but also important, is the notion that many of the affordable solutions proposed have a hidden costnamely they require effort on the part of the individual. For example, piped water efficiently delivers clean water, as standards of cleanliness can be addressed at a central source. The poor cannot afford piped water, but there is a seemingly cheap alternativean additive (chlorin) that cleans water in the home. This additive, however, needs to be applied daily. Effort cost is part of the full price of the cheap solution. Here a technological fix may reduce the private cost of obtaining clean water resulting in improved health; the example given is a convenient chlorin dispenser. Similarly, bed nets need to be set up every night and ultimately replaced. Bed nets prevent malaria, which appears, based on studies assessing the outcomes of a number of malaria eradication programs, to have significant negative effects on earnings (see below). Given the costbenefit analysis of the authors, the net returns to using bed nets on incomes are strongly positive; they are underused. There is evidence discussed indicating that parents initially underestimate even the immediate health benefits of using bed nets, but inconvenience and effort may also account for underutilization. The

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authors recommend subsidizing bed nets, which may be cheaper than information campaigns and may be justified by externalities. But they never consider the alternative, proven method of malaria eradication, using insecticides or swamp removal and other methods, which would obviate the need for information campaigns or behavioral nudges and not impose any direct costs on the poor. Closer to issues of development is the example from an experiment carried out among Kenyan farmers, in which it was discovered that farmers were underutilizing fertilizer. Small and thus easily affordable increments to fertilizer evidently had a large rate of return (70 percent). What was the barrier? Among those provided free fertilizer and who actually witnessed the gains, few went on to purchase fertilizer in the next period, so it was not information.1 Rather, the authors conclude based on additional experimental interventions, it was the inconvenience associated with buying fertilizer, as the farmers needed to shop around to find which stores had fertilizer in stock. Price did not reflect the full burden on the user. What appears to be the message is that small inconveniences are at least partly responsible for unrealized high rates of return to the adoption of even cheap health or farm inputs among the poor. Is this the old prejudice that the poor are unusually lazy and indulgent? The book emphasizes the very important point that procrastination and time inconsistency and even sometimes rejection of scientific findings are not confined to the poor. In the case of nutrition, for example, the authors remind us that in modern societies we do not have to worry as much about proper diets, given micro-nutrient additives to commonly consumed foods
1This is not conclusive. Farmers may have expected higher profits, conditional on the realization of weather. One years observation on profitability in agriculture is a very noisy estimate of average returns, as discussed below.

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Journal of Economic Literature, Vol. L (March 2012) 3. How Small Are the Marginal Gains? Small inconveniences, seemingly trivial side-effects (e.g., from consuming deworming pills), and self-control problems can loom large when absolute gains are small. Thus, it is important to know the magnitudes of the absolute gains. But it is also important to have a benchmark with which to assess absolute gains. One benchmark is the gap in wages between the poor and the well-off. The reader is never informed about this metric. For example, per capita income in the United States is twenty-eight times that in Kenya, measured in PPP$; the ratio for India is thirteen to one. By that yardstick, none of the effects discussed in Poor Economics make a perceptible dent in reducing global inequality. In some sense that is the pointthe book is about what we can do for the poor, and the relevant benchmark is where the poor are in absolute terms. However, perhaps in not pointing to the large gaps in incomes between those in poor and in rich countries the authors are applying their own diagnosis of one cause of inaction among the poor to the readers they are trying to galvanize for action: It is too hard to stay motivated when everything you want looks impossibly far away (204). The benchmark used in Poor Economics is thus not the level of living of the nonpoor but the typical level of the relevant outcome variable in the poor population. Small absolute gains evaluated on small bases of course result in large percentage gains, so for poor populations even small gains will generally be large in percentage terms. However, whether one calculates effects in terms of relative gains (percentages) or not presumably should depend on context. For example, given diminishing marginal utility, expressing income gains as a percentage of income levels is informativethat the same absolute gain is higher in relative terms for the poor than the rich is aligned with our notion of welfare. The use of percentages is less clear,

like cereals and breads,2 chlorinated water, and iodized salt. Government regulations in developed countries reduce the trade-offs (although not completely) between taste and nutrition that are faced by people in poor countries, making the consumption of nutritious foods convenient. However, in India there were substantial increases in fertilizer use after the onset of the green revolution. Indian farmers presumably have similar brains as Kenyan farmers. The new hybrid varieties of wheat and rice substantially raised the net returns to fertilizer use, and fertilizer use is much greater per acre on Indian farms than on Kenyan farms. This is unlikely to be because of differences in the uncertainty of fertilizer supply. And while smaller farmers in India underutilize fertilizer relative to large farmers, fertilizer is no more inconvenient for the former than for the latter. The point is that rates of return depend on absolute gains relative to costs. If directly measured costs are small (as in the fertilizer experiment) calculated high returns are also consistent with small net absolute gains. Christopher Udry (2011) has calculated that the absolute gains from a farmer going from using no fertilizer to the recommended dose in Kenya is $10 $15. Thus adding the small disutility or time costs associated with fertilizer acquisition to the direct cost could, in a setting in which absolute gains are small, make the true rate of return negative or zero. In post green revolution India, the contribution of fertilizer to yields in absolute terms was substantial, swamping these relatively minor costs.
2For example, consumption of one bowl of Count Chocula cereal provides, without milk, 25 percent of the recommended daily values of iron, thiamin, riboflavin, niacin, vitamin B6, folic acid, vitamin B12, and zinc, almost all due to additives. The micro-nutrient additives in Kellogs Smorz cereal include ascorbic acid (vitamin C), niacinamide, iron, zinc oxide, pyridoxine hydrochloride (vitamin B6), riboflavin, thiamin hydrochloride, vitamin A palmitate, folic acid, vitamin D, and vitamin B12.

Rosenzweig: Thinking Small however, for other outcomes; we have seen how the percentage return for fertilizer obscures what is really at stake. With respect to gains in schooling, percentage increases would seem not to be the relevant metric for gauging the effectiveness of interventions. If, as the authors claim in the book, the appropriate functional-form for the relationship between schooling and wages is log-linear, so the schooling coefficient is constant for all years of schooling (the popular Mincer wage function), then what matters for percentage gains in earnings is not the percentage gain in schooling but the absolute change in schooling. A half-year increase in schooling has the same percentage effect on earnings independent of whether it represents a 5 percent or 50 percent increase; the average level of schooling is irrelevant. The reality is many of the quantitative effects on schooling of the programs or interventions discussed in Poor Economics are very small in absolute terms. However, there is a tendency to oversell the small gains, in part by using percentages and in part by using positive adjectives and adverbs. This is explicit in the section reporting on a study examining the difference in the schooling attainment of children born to mothers who received iodine supplementation compared to mothers who did not, which was 0.3 to 0.5 years. The authors say Although half a year of education might seem a small gain, it is a substantial increase, given that most of these children will complete only four or five years of schooling (32). The authors then go on to report that if every women took iodine capsules, there would be a 7.5 percent increase in schooling attainment, taking the upper bound of the estimates. Of course, that would be one-third of a year. By my calculation, if there were an 8 percent return to schooling, the gain in earnings would be 2.6 percent, which is small by both absolute and relative standards. Among the other schooling programs discussed: the Mexican Progresa program is

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said to have substantially increased school enrollment: the effect was to increase enrollment by four percentage points for boys and 11 percentage points for girls (79); by 0.66 years in terms of expected total schooling attainment (Schultz 2004). At an 8 percent return to schooling, that would increase earnings by only five cents for the dollar-aday worker. The large effect of an unconditional transfer program in Malawi was a change in the drop-out rate of five percentage points (80), a 5.6 percent increase in enrollment. The Indonesian INPRES program (81), the largest school building program in the history of the world, is called a great success, but that program was estimated to have increased schooling by 0.13 years (Duflo 2001). This effect on schooling is not reported in the book. Instead, the estimate of the return to schooling, based on the joint program effects on schooling and wages, is reported, at 8 percent. However, in the cited study, that return was based on a sample of wage workers only. In the study cited, when the 55 percent of the workforce who were self-employed is included in the sample (based on occupational earnings), the returns to schooling are estimated to be only 3.2 percent. This estimate is not reported in the book. Whether 8 or 3 percent, these estimated private returns hardly suggest that there was a scarcity of schooling in Indonesia, and imply that the massive school-building program may have increased wages by less than one-half of one percent.3

3On the other hand, the authors say that a family planning program in Colombia that reduced total fertility by 5 percent had very little effect (112) and the over two percentage point increase in the fraction of families initiating new enterprises as a result of a randomized microcredit program (a 40 percent increase in the number of new enterprises started) is deemed not dramatic (171). What is deemed a big or small effect by the authors seems inconsistent. The reader should ignore the adjectives in the book in evaluating the importance of the quantitative program effects reported (or not reported).

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Journal of Economic Literature, Vol. L (March 2012) evaluations with larger-scale treatments to properly impute labor costs in environments where family labor predominates. Given that most businesses of the poor employ only family labor, the valuation of the profitability of the businesses of the poor is going to be misleading if family labor costs are ignored. And indeed, the authors point out in their study of businesses in Hyderabad, even when family labor is valued at the minimum wage, profits are negative for most enterprises. One solution to bypass the difficulty of profit measurement in evaluating program benefits is to use instead measures of the consumption of the households running the businesses. While collecting consumption data is costly and time-consuming, the measurement issues are better-understood. In one reported study, the gains to a program providing assistance to poor business operators are measured in terms of assets and total household consumption expenditures, which rose by 10 percent after two years as a result of a very intensive program of asset gifts to and training of randomly targeted poor business owners. A second problem in assessing earnings gains in low-income settings is that the poor engage in activities with highly variable incomes. Indeed, the book discusses well how the riskiness of incomes, due to the vagaries of weather and other factors, play a large role in the lives of the poorrisk management is one of the many challenges of the poor that are less salient for the welloff, and not just because of the absence of insurance. This means that the measurement of a wage or income effect in a single year, while unbiased due to econometric design, may be hugely different from the average effect measured over a period of time with a horizon relevant to the target population. The 80 percent return cited in the Kenya study from a small increase in fertilizer use is based on outcomes recorded in a single season. The standard error on the gains

4. The Problem of Measuring Earnings Gains for the Poor Permanently increasing the incomes of the poor, if not putting the poor on a sustained earnings growth path, is clearly one of the most important benefits of interventions that go beyond mere financial transfers. But one major problem in assessing earnings effects is that earnings are much more difficult to measure in a low-income setting. The most important problem is that most of the employed poor do not work for wages. The majority of workers in low-income countries are self-employed or work as family workers. This has two consequences. First, to gauge individual earnings effects for all the poor one must measure not only wages but also the marginal returns to labor in farms and other enterprises, netting out the contributions of other inputs, including capital.4 A second issue is that even if only total enterprise or farm profits are the outcomes of interest from any intervention, it is necessary to value the cost per unit of family labor used to compute profits. The literature is currently unsettled as to what the shadow value of family labor is on farms or in enterprises even where labor markets are not absent, given agency costs. Thus, the first question one should ask in assessing results from a study on profitability is how profits, net of family labor costs, are measured. In the case of the cited fertilizer experiment in Kenya, labor costs were not accounted for in assessing the marginal effects of fertilizer. While this was unlikely responsible for most of the gains recorded in this case (the small fertilizer doses could not have pushed up labor use very much), it is a challenge for any

4Of course, wages may also not be a good measure of productivity in the many low-income countries where a large part of the educated workforce are employed directly by the government and wages are set by legislation that is inattentive to market forces.

Rosenzweig: Thinking Small stimate is clearly not the appropriate gauge e for assessing confidence in the estimate because the unobserved profit error (e.g., weather) interacts with all farm inputs. Thus farmers may have been less impressed than the investigators with the single experimental result, given their knowledge of weather variability, even if the experimental outcome was measured in a normal weather year.5 The most impressive effects prominently reported in the paper are from two studies showing direct and large earnings gains from health-augmenting interventions. In particular, a study is cited finding that a person who is malaria-free for the first twenty years of life compared to someone who is not earns a 50 percent wage premium. This estimate of the 50 percent increase in wages from being malaria-free is also used by the authors to calculate the enormous rate of return to investments in bed nets. Inspection of the cited study (Bleakley 2010) reveals that actual earnings were not measured at all, rather the outcome variable is an index of earnings based on reported occupation weighted by the occupation-earnings structure in a particular year. In the case of the analysis for the United States, the study examined the effects of a malaria eradication program in the Southern United States using information on the occupations of age cohorts from the 1880 to 2000 censuses and the occupation-earnings structure in 1950 as weights. It is not obvious how the use of this proxy for earnings biases the estimate in any particular directionwage gains using this measure only arise from changing occupations but earnings from occupations like farming, which were still important even in 1950, clearly overstate actual labor returns,
5In assessing any program, the second moment of the income gains distribution is of interesthow the new technology, input, or program affects the variability of incomes is of major importance for the poor in the absence of consumption-smoothing mechanisms. Many program evaluations, however, do not last for more than one round.

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unless of course 1950 was a very bad year for U.S. agriculture.6 The other finding, highly promoted in the book, is from a recent unpublished study examining the adult earnings of school-age children that were subject to a deworming experiment. In particular, the finding is that school-age children who were in a deworming program for two rather than just one year earned 20 percent higher wages as adults (Baird et al. 2011). This was despite that fact that the effect of the program on schooling achievement was zero. The earnings result is cited three times in Poor Economics and highlighted in the short conclusion as an example of how small interventions can matter. Indeed, given the trivial cost of deworming pills, a deworming program evidently has an enormous rate of return. However, in this study the wage effects reported are only for workers who earned a wage in the month prior to the survey, and over threefourths of the sample did not report a wage. While the authors of the study could not find any evidence of selectivity, the randomized evaluation methodology was of no advantage in solving the thorny identification problem of sample exclusion by occupation choice. An estimate of any program effect based on one months wage observation for a small segment of the working-age population should be more cautiously used, and is a fragile foundation for costly program initiatives let alone a research agenda. We have seen that in the INPRES evaluation study, for example, excluding the self-employed
6Farmers were almost one-half the labor force in 1880 and 12.2 percent of the labor force in 1950. Thus a large part of the measured change in earnings over the period is due to the escape from farming, and none from how the eradication of malaria changed the actual incomes of farmers. Measuring farm income correctly is critical here. Cited studies of the effects of malaria eradication programs in other countries use household consumption rather than occupation or wages to infer earnings gains, and find results that are similar, although some of these estimates are well below 50 percent.

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Journal of Economic Literature, Vol. L (March 2012) and given the credible findings that these constraints do significantly lower profitability, it is no wonder that the authors find that on average the small businesses of the poor are not profitable, taking into account the cost of their labor. However, since most of the high-interest cost loans are repaid, this implies that the marginal return to these businesses must be high. And experiments providing cash grants to small firms indeed show very large marginal returns. Clearly then, if the constraints on the income growth of these enterprises can be lifted, the poor would be better-off. The authors make the point, however, that while the returns on small loansto hold a larger inventory, to purchase another goatare high, the return on larger loans or cash grants is actually smaller, because further profitability would require an expansion of scale. And the skill and know-how for scaling up businesses is not the same as that for running a small business. Not everyone is a risk-taking entrepreneur, according to the authors, capable of creating jobs. Real entrepreneurship, as they say, is hard. It is not a surprise then that the one randomized evaluation of microcredit indicates little effect on the start of new businesses, whatever its effect on the stock of cows. The authors conclude that the large number of small enterprises observed among the poor is not an indicator of nascent entrepreneurial capacity that can be unleashed by some clever constraint-alleviating micro program. It is a symptom of the lack of better opportunities, of, essentially, the failure of aggregate economic policy! They go on to say that better jobs are the solution jobs that pay assured wages; i.e., factory jobs. Such jobs reduce the need for reducing risk in costly ways while also increasing mean levels of income. But why are there no factory jobs? The authors here have little research to go on and speculate about rigid labor laws and suggest loan guarantees to not small but

made a substantial difference in inferring the rate of return to the program. As the authors of the book say about the findings from their own experiment evaluating a micro-credit program (whose estimated small effects sparked controversy among program advocates), but perhaps more aptly here, one must consider whether the deworming finding is simply a fluke (171). 5. The Economics of Smallness: Missing Markets for the Poor The strongest parts of the book are where the authors take heed of the popular premise that a route to alleviating poverty is through the development of microenterprises. Here is where on-the-ground research provides a nuanced view, somewhat lacking in the chapters on health, fertility, and education, of the efficacy of popular approaches to helping the poor, including micro-credit, microinsurance, and subsidized savings accounts. The book notes that many of the poor, even in rural areas, run small nonagricultural businesses and, while this is not discussed, in most poor countries farms also are quite small, and relatively unproductive, by international standards (Foster and Rosenzweig 2011). An important theme running through the books chapters on savings, credit, and risk is that scale matters in terms of the cost of doing business. Being small is costly. Given fixed administrative costs, not only is savings pricier for the small enterprises of the poor compared to larger enterprises, but so are insurance and loans. At prices that cover administrative costs, the poor are generally unwilling to purchase insurance or set up savings accounts, and, given adverse selection and moral hazard and their small amounts of collateral, the poor are unable to obtain loans without paying very high rates of interests for their businesses. Given the inability of small enterprises to save, to self-insure or to acquire cheap loans

Rosenzweig: Thinking Small medium businesses, although it is not clear why large firms should not get the same subsidy. In the chapter on entrepreneurs, then, the authors appear to have adopted the stance of what they call demand wallahs, those policy advocates who think that the absence of investments by the poor is due to the absence of large returns and hence any subsidies to such investments will have little effect. This is in contrast to supply wallahs, who always push for investments on behalf of the poor as a means of improving their welfare. Though the authors confine the discussion of these policy-wonk archetypes principally to the chapters on family planning and educational policy, it is a useful distinction with which to view many policy debates and for reading Poor Economics. There is explicit and implicit support for the demand wallah view in the book: for example, there is research that suggests that when good jobs raise the returns to skill, schooling investments responds positively. And the demand wallah could also certainly interpret the low schooling levels and minor effects of educational interventions, and even the documented lack of interest of the poor in health and productivity-augmenting investments, not just the existence of multitudes of unprofitable enterprises, as symptoms of the overall failure of economic policy to create an economic environment where large firms, employing semi-skilled workers at good wages, can thrive and all private investments have high absolute payoffs. But Poor Economics is mainly about how tweaks and subsidies can be used to marginally improve the lives of the poor in the absence of any major changes in the demand for or productivity of labor. It is a handbook for the sophisticated supply wallah, a clarion call for thinking small and doing a little good efficiently based on an improved understanding of the lives of the poor, while we work on ultimate solutions for what had

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created poverty to begin with. What are the policy prescriptions from this agenda? At the end of each chapter and in the conclusion, the authors recommend subsidies for education, health, savings accounts, insurance, and loans. The case for subsidizing education is actually not well made in the book, as the implicit argument is principally that education interventions work, although it appears that they do not do much. But the major reason that education subsidies could be justified is the standard commitment problem that children cannot credibly promise to repay parents for their educational sacrifices (despite guilt) and learning externalities. With respect to the latter, the recent development literature contains a number of careful studies that document not only that more educated people learn more rapidly, and adopt new technologies more readily, but that people learn from each other (when there is something to learn). These studies, including the bed net experiments discussed in the book, thus suggest a specific rationale for the subvention of schooling and at least initial subsidization of new technologies. Similarly, the argument in the book for subsidies of health inputs emphasizes the high private health and earnings returns and the overcoming of behavioral barriers, but the magnitudes of the health externalities that are clear justifications for health subsidies are not discussed. This is surprising, as the main scientific contribution of the Kenyan deworming experiment is not the curious new finding on adult wage effects, but the careful measurement of the external health effects of the disease. There are no obvious externalities associated with the inability of, say, a farmer to insure his income, obtain credit or save. Here the authors argue convincingly that due mostly to administrative costs the market cannot provide most of the financial services that are helpful to the poor and that subsidies are necessary to make these

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Journal of Economic Literature, Vol. L (March 2012) diminishing the numbers of poor. But thinking bigfinding the key constraints that prevent people from escaping povertyand focusing on marginally improving the lives of those who do not escapeare ultimately complementary agendas. It may be impossibly costly to even marginally help all the poor without reducing the size of the poor population through economic growth. The scale of poverty is too big to only think small. On its own terms, if there is a weakness of the book, apart from the overexuberance about some program effects, it is the lack of a coherent scientific research agenda. The authors indicate that they believe that small research increments together can build up a body of knowledge useful to fulfill their humanitarian goals, but offer no guidance for pursuing the next small steps. It is not clear, for example, how more studies of the effects of public works audits or vitamin supplements contribute to building knowledge about the behavior and constraints of the poor. What, based on the evidence so far, are the key questions to be answered to obtain a deeper understanding of poverty or to move to implementable, large-scale programs informed by small thinking? With respect to any immediate policy inferences, most of the evidence discussed is based on scientifically sound but one-off studies from different countries of particular interventions. This is a young research program. There is reason therefore to be skeptical, just as the authors suggest the poor are, about the supposed opportunities (38) suggested by any one study. Do we need more replications of prior studies in different contexts? New randomized interventions but with simultaneous combinations of alternatives so the relative efficacy of different tweaks and subventions can be assessed? Finally, it is not clear when there are no externalities that a simple cash grant is not a superior way to help the poor, in the absence of ideas for achieving real development and

services affordable. But that fact that the provision of these services is productive at the margin is not sufficient to embark on a general policy of subsidization of such services without attention to direct and implementation costs. In any case it is not obvious that governments in poor countries or aid agencies could afford or have the capability to subsidize all of the activities suggested by the authors given the vast size of the poor population. The cost of implementing the policy prescriptions from small thinking thus seems to be very large. It is obviously useful to have a better understanding of which among the many services, initiatives and subsidies suggested by the authors are relatively more costeffective, a comparative exercise. This is so far lacking, but would appear to fit into the small-thinking agenda. But more generally, any intervention that actually promoted poverty exit, while simultaneously increasing the scale of operations within and outside of agriculture, would also reduce the costs of the subsidy programs targeted to the vast population of the poor that are suggested in Poor Economics. And, the potential remedies for the fundamental problems holding back income growth might be much cheaper, in dollars, to implement than the set of programs in total promoted in Poor Economicsthe strategic removal of some red tape, de- or more efficient regulation are one-shot tweaks at the more macro level that might matter enormously for attracting good jobs and thus can have sustained future benefits. It may be a riskier strategy to think big about development and growth-augmenting policy tweaks, and may not help a single poor person while it is being pursued. But the expected return inclusive of implementation costs for the poor may be enormously higher than that of a research program aimed solely at marginally assisting the poor cope with poverty, subsidy by subsidy, without ever

Rosenzweig: Thinking Small growth, compared with a multitude of individual subsidy programs.7 Despite these limitations, ultimately Poor Economics does a masterful job of illuminating, using both research findings and personal experiences, just how complex and challenging are the lives of the poor. One cannot help admire, as the authors seem to, how the poor, within the context of their families and social groups, both survive through and get joy from life with their meager and highly uncertain resources, with no formal support mechanisms and almost none of the everyday health and financial services available to the well-off. In doing so we also gain insights into our own lives, and the important, but almost invisible, welfare-enhancing role of governmental regulations and government and market institutions. While the policy positions of demand and supply wallahs may not be moved much by the book, each will have learned a great deal about the issues that

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need to be addressed in helping the poor, as will any reader. Thinking small may or may not have large future payoffs for the poor, but it has surely already done some good.
References
Baird, Sarah, Joan Hamory Hicks, Michael Kremer, and Edward Miguel. 2011. Worms at Work: LongRun Impacts of Child Health Gains. Unpublished. Bleakley, Hoyt. 2010. Malaria Eradication in the Americas: A Retrospective Analysis of Childhood Exposure. American Economic Journal: Applied Economics 2 (2): 145. Duflo, Esther. 2001. Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment. American Economic Review 91 (4): 795813. Foster, Andrew D., and Mark R. Rosenzweig. 2011. Are Indian Farms Too Small? Mechanization, Agency Costs, and Farm Efficiency. Unpublished. Schultz, T. Paul. 2004. School Subsidies for the Poor: Evaluating the Mexican Progresa Poverty Program. Journal of Development Economics 74 (1): 199250. Udry, Christopher. 2011. Esther Duflo: 2010 John Bates Clark Medalist. Journal of Economic Perspectives 25 (3): 197216.

7Also absent is a discussion of the standard but major problem in the implementation of any programs or transfers targeted to the poor and that do not really spur developmentmoral hazard.

This article has been cited by: 1. W. Bentley MacLeod. 2013. On Economics: A Review of Why Nations Fail by D. Acemoglu and J. Robinson and Pillars of Prosperity by T. Besley and T. Persson. Journal of Economic Literature 51:1, 116-143. [Abstract] [View PDF article] [PDF with links]