A hypothesis for addressing rural poverty
a brief overview of a whitepaper on rural product distribution and the missing piece in poverty literature
In 1950, Africa was twice as rich as Asia, a fact that seems almost surreal when we consider the profound disparities that exist today. In the years since, Asia has surged ahead, while Africa has become synonymous with ultra-poverty. “Wealth of Nations” details much of the origin of these disparities, but what it fails to cover is the fact that not only do African countries’ extractive governments lack the resources to help their people flourish, but their economic conditions also keep the largest concentration of the world’s ultra-poor, poor in perpetuity.
This may seem insignificant but what you might be surprised to know is that most people in poverty outside of Africa escape it in 4-6 months - poverty is transient in relatively short timespans. Using net worth as a metric to measure whether someone is in poverty or not, the way people can escape poverty is through the accumulation of wealth. But what happens when people don’t have a means of accumulation?
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The answer can be found in the pages of a Dickens novel, where a character named Wilkins Micawber unwittingly provided us with a framework for understanding poverty traps.
In their seminal paper, "Well-being Dynamics and Poverty Traps," Barret et al. build on the concept of the Micawber Threshold, named after Charles Dickens' character in David Copperfield, who famously asserted, "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
This simple yet powerful idea suggests that there is a tipping point, a threshold below which the equilibrium actions of an individual perpetuate their own poverty. In the same vein, Barret et al.'s paper and the "Progress in the Modeling of Rural Households' Behavior under Market Failures" both explore the various reasons for poverty traps, offering insights into the factors that prevent people from breaking free from their economic shackles.
When people lack the means to accumulate wealth, they often find themselves unable to cover their basic expenses, resulting in a situation where their income falls short of their expenditure. This precarious financial imbalance prevents them from investing in opportunities that could lift them out of poverty like education, healthcare, or income-generating assets.
Multiple Dynamic Equilibria - How is poverty categorized
The poverty traps literature introduces the concept of multiple dynamic equilibria- "High Equilibrium Zones" (HEZ), "Low Equilibrium Zones" (LEZ), and "Chronic Poverty Zones" (CPZ). In HEZ, households have access to resources and opportunities that enable them to escape poverty, while in LEZ, they face significant constraints that limit their prospects for growth. CPZs represent areas where households are stuck in an intergenerational cycle of poverty, making it nearly impossible for them to improve their well-being.
Traditional problem-solving frameworks suggest a root cause analysis as a start to solving problems. Target each root cause and eradicate the entire problem. If I asked you to exhaustively generate the root causes of poverty, what would you come up with?
Multiple equilibria poverty traps fundamentally require some exclusionary mechanism(s) that bar units from acquiring – by whatever means, whether borrowing, investment, etc. – the assets or technologies necessary to ensure endogenous convergence towards a non-poor steady-state equilibrium over a reasonable time horizon. Multiple exclusionary mechanisms exist and they, according to the most prevalent poverty literature make up for most of the reasons why poverty traps exist.
A theoretical framework for financial exclusion
One theoretical framework consistently rises to the forefront of any understanding of multiple equilibria poverty traps: the multiple financial market failures (MFMF) model. Originally proposed by Galor & Zeira in 1993 and further developed by scholars like Barrett and Besley, this model shines a light on the complex dynamics of poverty traps.
At the heart of the MFMF model lies four essential implications, as expertly distilled by Barrett & Carter in 2013. The first idea is that "endowments are expected fate." In other words, only a select few with the right combination of initial assets and innate abilities find themselves straddling the line between multiple equilibria. For each ability level, there's a crucial Micawber Threshold - a tipping point that determines whether an individual rises above poverty or slips into its clutches.
The second insight- risk matters and shocks have permanent consequences” -is that a household plunged below the Micawber Threshold by an unforeseen event might find itself trapped in a low-level equilibrium, unable to claw its way back to prosperity. It's no wonder, then, that households are constantly striving to mitigate risks and avert such life-altering shocks.
The MFMF model recognizes that single and multiple equilibria poverty traps can coexist. While individuals with low abilities may be consigned to a unique, impoverished equilibrium, those with high abilities could find themselves in a single, non-poor equilibrium, regardless of their starting assets.
The fourth tenet of the MFMF model is that "systemic change matters." Changes in production methods, exchange technologies, or the natural, social, and market environments can all cause seismic shifts in the dynamic equilibria governing poverty traps.
Social networks and exclusion
When informal arrangements take the place of anonymous markets for finance and information, individuals may find themselves locked in a cycle of destitution as a result of their limited social networks. The natural tendency for people to associate with others of similar socio-economic backgrounds – the poor with the poor, the rich with the rich – can create multiple equilibria through signaling, sharing, or learning effects.
Literature shows that social exclusion can perpetuate poverty traps in three distinct ways:
When individuals rely on social networks to overcome information costs or adopt improved technologies, associational tendencies can result in multiple equilibria based on society's wealth distribution.
When social networks serve as platforms for learning and signaling in labor markets - it can significantly impact employment outcomes.
When information is unevenly available, well-connected members can reap substantial benefits, while group-wise discrimination can limit opportunities for others based on their social group membership - social networks help migration - people escape geographical poverty traps by reducing migration costs and expanding their options.
Natural capital and non-financial capital accumulation
For the rural poor, their well-being is heavily tied to the dynamics of human health, nutrition, and natural resources like land, water, and wildlife. In order to understand the potential for poverty traps in these areas, let's explore some real-life examples.
In the realm of human capital, early childhood nutrition, health, and education are crucial to breaking the cycle of poverty. For instance, disadvantaged mothers tend to give birth to less healthy infants, who then grow up to have poorer education and health outcomes. By intervening early in life, we can reduce the intergenerational transmission of poverty. One way to do this is by providing essential resources and support to families in need, enabling them to invest in their children's well-being and future potential.
Adult human capital is also significant in breaking poverty traps. For example, workers who cannot maintain their physical work capacity due to low wages and inadequate nutrition may be unable to secure employment. This vicious cycle reinforces their poverty and makes it increasingly difficult to escape. On the other hand, addressing issues like disease prevention and treatment can help break this cycle, as spending on these areas naturally increases with income and affects future disease prevalence.
Natural capital plays a vital role in the lives of poor communities, especially in rural areas where they rely on natural resources for their livelihoods. An example is the classic problem of the commons, in which communities overexploit natural resources like fisheries or forests due to coordination failures. This depletion can lead to a poverty trap. However, local economic growth can stimulate demand for ecological services, presenting an opportunity to overcome ecological poverty traps.
With a concrete understanding of the problem with poverty traps, the problem becomes when nonprofits take money from governments and philanthropic organizations to tackle complex issues. The greatest paradox of extreme poverty lies in the fact that if tackling its root causes were a straightforward endeavor, reallocating philanthropic funds would suffice in lifting people out of poverty. However, it is difficult to argue that donations alone can resolve the issue. In reality, sustainable solutions to poverty involve not only overcoming its immediate causes but also fostering wealth accumulation beyond the threshold of poverty.
Specific poverty literature focuses on the details of the causes above. There seems to be a missing piece in addressing what could potentially be a needle mover root cause for addressing this problem.
The hypothesis is that the three most important poverty-sustaining market failures are as follows:
Three primary market failures perpetuate poverty:
Asymmetric information failure, commonly known as "The Market for Lemons" (paper here - highly recommend reading!), which prevents high-quality products from reaching the majority of low-income rural Africans.
The absence of market compensation for the positive economic externalities generated by the use of products that alleviate poverty and enhance health.
Misaligned incentives render the delivery of welfare-maximizing products to low-income communities prohibitively expensive. Current misaligned incentives encourage governments and NGOs to withhold goods and services from needy communities until they can negotiate profitable contracts with aid providers and philanthropies - governments and NGOs (and others) act as "gatekeepers," charging fees for access to their trusted relationships with rural communities.
Considering the hypothesis that these three market failures significantly contribute to the persistence of poverty in rural Africa, our proposed solution involves leveraging new information technologies to develop low-cost, decentralized distribution systems. These systems would deliver products with substantial net welfare benefits to village-based shops across rural Africa, providing access to high-quality goods at affordable prices. This innovative distribution system would be specifically designed to address all three market failures.
The origins of this hypothesis comes from my understanding of the not for profit ecosystem and the process of creating solutions. Simply put, most people don’t have access to products that have the potential to increase their welfare long term which is evident by the fact that many NPOs and NGOs import goods from other parts of the world to sell directly in rural communities (even though they provide subsidized costs) This problem, however, is multi dimensional because just having access to higher quality, more expensive products may not necessarily mean that people willl buy them (more discussed in the following section).
An approach for hypothesis validation
After exploring poverty literature, the next step is to find literature on the impact of “The Market for Lemons” market failure. As this isn’t generally cited as a reason for the existence of poverty, the alternative approach to validation from the existing literature is through the exploration of adjacent products that, because of their quality, have documented impacts on rural populations.
To summarize, the market failure hypothesis is: A combined market failure of Asymmetric Information Uncompensated Positive Externalities often creates or sustains poverty traps, thus mitigating or resolving those market failures for productive assets can release people from poverty traps.
The proposed method:
Step #1: Examine literature on health care and development for evidence of the combined market failure and its impact on poverty traps
Step #2: Examine the electricity access and development literature for evidence of the combined market failure and its impact on poverty traps
Step #3: Creating a simple model of impact leverage
Results: Health and development literature review, Electricity access literature review, Impact leverage model to estimate the distribution of impact leverage factors
Here’s the justification:
What is not discussed in the literature is the market for lemons - the idea that what is simply not available can not be used.
A high-impact area where this is well documented is within the distribution of healthcare products. A simple review can find a correlation between better products/services, increased quality of health, increased productivity, and people being brought out of poverty traps. By mapping this correlation that might be existing in the literature between health and labor productivity, a similar extrapolation/justification can be made for things that can be true for most lifestyle-impacting products.
Expanding from healthcare, a focus on electrification access literature is useful to assess whether there’s a similar dynamic. We’re answering the question: what is the extent to which the market for lemons is preventing access to high-quality products?
The last step before creating an impact leverage model is being able to quantify the quality of products outside of healthcare and electrification. Through the use of indicator products and measurable quality metrics, models can be created for new incentivization and distribution structures for the most impactful poverty-reducing groups of products.
Review - healthcare
Starting the literature review with “Private Sector Pharmaceutical Supply and Distribution Channels in Africa” and corroborating ideas from others including “Innovations in Health Product Distribution” and “Physical Distribution Challenges and Adaptations:A qualitative study of South Africa-based organisations operating in emerging African markets”, three key themes emerged as solution streams to improving healthcare distribution challenges:
(1) Strengthen the position of consumers/patients versus suppliers by providing adequate information and using new technologies.
(2) Improve the regulatory environment for new businesses and new business models.
(3) Support access to financial services appropriate for the pharmaceutical sector.
These three activities are addressing three areas of potential market failure. The first one is specifically an asymmetric information market failure, the second one is trying to make sure that markets are competitive and innovative, and the third is addressing the lack of access to capital which prevents people from making investments that have longer-term benefits.
Exploring the impact of electrification through literature, a similar but more surprising thesis comes to light for products that individuals deem to be less necessary to their survival (will explain more in later post).
Of course, validating a hypothesis is only the beginning. The ideal result of a whitepaper is understanding and proposing a way of assessing whether high-leverage poverty-reducing investments have a high or low potential and what amount of leverage might actually be possible in the non-health/electrification sector.
Distribution and access are only half the problem as I mentioned previously. Getting subsidized products to be paid for by people with relatively little purchasing power is even more difficult when there may be a cheaper lower quality item available. A concept known as an implicit discount rate suggests that people below the MT make purchase decisions significantly differently than those above the line - placing minimal importance on long-term investments and a lot of emphasis on initial costs. Every dollar spent on a better product is a dollar that could have been used for more food.
While the hypothesis validation portion is only the beginning, understanding the complex dynamics of poverty and poverty traps in rural areas as specifically different than other types of poverty proves to be the most effective framework for suggesting projects, investments, etc. that would have the greatest impact on the bottom percentages of the world’s population.
A quick note on why I wrote this: over the past few months, I’ve read a lot of poverty literature. More recently, I started working on a project with a solar initiative in Africa. One of my mentors, Robert who’s piloted many successful projects in rural settings first proposed this idea to me. While I’m still reading and synthesizing for the paper, I’ve learned a lot about the economics and incentives of solving world problems and thought I would share it in a quick post.
feel free to send me your thoughts and other considerations I may have missed - would love to chat broadly about anything related too. reach out through any links here :)
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