What Will It Take to
Alleviate Global Poverty?
What can be done to reduce global poverty? The answer, of course, is: It’s complicated.
Really complicated. There are myriad cultural, environmental, and political factors at play. Add to that the bias that those from wealthy countries often bring to poverty-reduction efforts, which can include the presumption that they, and they alone, know the best course of action.
We spoke with nine experts in development economics and social impact at Kellogg to help us break down these challenges. We asked them to each tell us one thing that they wished NGOs, philanthropists or policymakers understood about eradicating extreme poverty around the world.
Dean Karlan is a professor of finance and economics, co-director of Northwestern’s Global Poverty Research Lab, and founder and president of Innovations for Poverty Action.
Many philanthropists don’t seem to understand that solutions to global poverty will always be complex and situation dependent. Folks seem set in dogmatic ways all too often: aid works; aid does not work. Transferring cash is dangerous; transferring cash is empowering. Of course, the answer is always more nuanced. And typically the knowledge gaps are far bigger than what we do know. So think twice when someone says they know what to do.
It takes data to fill these knowledge gaps. Innovations for Poverty Action uses randomized controlled trials to rigorously evaluate potential ways of reducing global poverty. For instance, data from these trials suggest that holistic programs — ones that provide households with assets such as livestock, modest cash and food transfers, and access to education programs — can be effective for encouraging entrepreneurship and helping families achieve a higher standard of living, even after the program ends.
Nancy Qian is a professor of managerial economics and decision sciences and professor of economics (by courtesy).
There is this underlying sense among people in wealthier countries that those in poor countries don’t know what they’re doing, and if we just build them schools and highways and markets like we have, then they will be rich like we are. What we’ve learned in the past 20, 30 years is that is just not true.
Poorer countries do things very differently than we do in the U.S., but what seems incomprehensible often comes from the minds of sane people who mean well.
A good example is the one-child policy in China. It seems very extreme, and it is very extreme. Can you imagine telling a billion people that they can only have one child, no matter what? It’s inhumane, and it wasn’t a good policy for a lot of reasons — but you have to understand where it was coming from. China is the size of the U.S. geographically, but while 80 percent of the U.S. can produce food, only 13 percent of China is arable. So we are talking about three times the population on one-sixth of the land. In the minds of policymakers in China in 1978 who were pushing very aggressively for population control, they weren’t killing babies, they were saving lives.
Ameet Morjaria is an associate professor of managerial economics and decision sciences at Kellogg.
People do not live in a vacuum; they function within institutions, firms, and markets. Partly due to growing up in a trading family in rural Tanzania, I have been thinking a lot about how different environments affect the ability of the private sector to serve as an engine for growth.
For example, in the U.S., strong institutions can enforce our contracts. But in developing countries, imperfect contract enforcement is a pervasive feature of real-life commercial transactions. In these contexts, one of the things I am trying to understand is whether business can be enabled by self-enforcing contracts, such as long-term relationships based on trust and reputation. In other words, will trading partners follow through on what they promised each other because they value their ongoing relationship?
For instance, I’ve been studying the Rwandan coffee industry, where informal agreements between coffee farmers and the mills that process the coffee are unenforceable by 3rd party institutions. And what I’ve seen is that when there are too many mills, the increased competition hurts the relationships between mills and farmers. So, while we might think of an increase in competition generally improving farmers’ livelihoods, it instead potentially tempts farmers to play the mills against each other, in turn leading the mills to step back and not invest in the farmers. Just the potential of this unravels these relational agreements and reduces efficiency in the sector.
Accounting for these informal institutions is extremely important, as it can often lead to some counterintuitive policy recommendations.
Ben Jones is a professor of strategy and faculty director for the Kellogg Innovation and Entrepreneurship Initiative.
Climate plays a role in economic development — and as the world warms, this role may grow.
The literature has shown, looking historically, that when developing countries experience hot years, their economies do very poorly. Of course, higher heat can be problematic for agricultural production, and because most developing countries rely heavily on agriculture for their GDP, that can really hurt them. But it’s not just agriculture. Industrial production also drops, consistent with the view that people in factories are just much less productive when they’re hot, in the same way people don’t run as fast in a race when they’re hot.
Air-conditioning systems can go a long way toward resolving those productivity gaps. But one of the challenges of development is that all factors interact. Electricity supply is limited in many developing countries. So expanding electricity infrastructure can be central to helping developing countries limit, locally, the negative effects of global warming. Of course, expanding the electricity supply can worsen the global problem, and solutions involving non-carbon-based electricity appear all the more important.
Kara Palamountain is a research associate professor within Kellogg’s Public–Private Interface Initiative and president of the Northwestern Global Health Foundation.
Well-intentioned donations often cause a lot of problems for the people and governments that receive them.
In the medical field, for instance, people drop off used equipment that is nearing the end of its useful life, without providing any spare parts, and without thinking about preventative or corrective maintenance. So the hospital wards in low- and middle-income countries are often littered with junk medical equipment. “Equipment graveyards,” we call them.
Even when the donated equipment works, it can hurt entrepreneurs on the ground. In one country I visited, an entrepreneur was working with a local government to develop its own system for making HIV tests. But then another country just started giving away free HIV tests. And it killed any opportunity for the local entrepreneur or government to create something itself.
A more helpful approach is to invest capital in local businesses. I see untapped talent in individuals that I meet every day. What I don’t see enough of is capital being invested in this talent.
Megan Kashner is a clinical assistant professor within Kellogg’s Public–Private Interface Initiative, and director of social impact.
A big problem is that work in many agricultural economies is commoditized. Communities beset by poverty are growing sugar, mint, tea, cocoa, cotton: inputs that the global producers of food or textiles take for granted. The truth on the ground, though, is that there are often layers and layers of middlemen, and at every stage, any kind of margin that farming families might have hoped to earn is getting whittled away.
Today we see that many companies whose supply chains are dependent on things that grow are starting to act out of concern about the longevity and durability of the farmers at the very end of the supply chain. But while there are several efforts focused on trying to help the farmer stand up against these market forces, we haven’t seen, in a broad way, interventions trying to address the market forces that commoditize the labor of farm families and foster intermediaries who strip potential profits before they can reach the growers.
Edoardo Teso is an assistant professor of managerial economics and decision sciences at Kellogg.
If you look around the world today, you hear a lot of talk about how bureaucracies are important in implementing policies. But bureaucracies can also be used to put political supporters in power.
In my work in Brazil, a middle-income country, I show that political connections are a very important part of how public officials are selected and that an important motivation of politicians when selecting officials is to reward supporters rather than to find the best people for the job.
I can’t say for sure that these employees hurt public welfare. But public workers who are hired thanks to their political connections tend to be of lower observed quality in terms of education and ability. Not just the top bureaucrats, but also school headmasters, nurses and community workers, all of whom are frontline service providers where ideology shouldn’t be important.
Erika Deserranno is an associate professor of managerial economics and decision sciences at the Kellogg School.
Many antipoverty programs are evaluated in perfect conditions, where everything is tightly monitored. Community health-worker programs, for instance, have been shown to be very effective in these conditions. But the reality is that community health workers often underperform in the absence of such tight monitoring.
This makes it important to understand how to incentivize civil servants. A number of studies show that if governments pay well, civil servants will work more.
Even more important than pay, however, is the question of who is recruited. In my research, I show that if governments hire health workers who are pro-socially motivated, infant mortality goes down. But here is where it gets complicated: when jobs pay more, they attract people who are less pro-socially motivated. This means that for civil servants already on the job, higher pay is good. But for recruiting, paying more may attract the wrong candidates.
Jacopo Ponticelli is an associate professor of finance at Kellogg.
In order to create opportunities for economic development, or in response to international pressure, we often see developing countries introducing new regulations that are copy-pasted from more advanced economies.
One example is bankruptcy laws. These laws are important, because credit markets can hardly work without laws protecting creditors’ rights in bankruptcy. But one insight that comes from my work is that changing the laws on the books isn’t enough. Developing countries are often missing a judicial system with judges who are fully trained and have enough time to deal with complex cases such as bankruptcy.
Inefficient courts have economic consequences. If a bank gives a loan to a firm and that firm defaults, that bank might have a very hard time getting its money back in court. In many developing countries, the case could take five years, ten years, fifteen years, until there’s nothing left to recover for creditors. This, in turn, makes banks charge extremely high interest rates, which leaves entrepreneurs less likely to start or expand their business. And this affects lots of people down the line: the employees who would have been hired, their children who might have been sent to school, their suppliers, etc.
In short, a process of economic development that lifts people out of poverty cannot simply be a matter of introducing regulations borrowed from abroad, but needs the institutions that make those regulations work in practice.