A woman in India, Basanti Pradhan, used a mirco-loan to buy a dairy cow and earned enough money from selling milk to start selling costume jewelry. She also supports other women looking for business opportunities.

What the world's poor can teach us on jobs

The prospect of long-term joblessness in Europe and the US should focus attention on a new type of economics that seems to work for helping the worst-off in poor countries.

In both America and Europe, people are pessimistic about the ability of politicians to spur job growth. Traditional economic theories – either left or right – are failing as millions of people face years of being without work or underemployed. And as the stress of daily living rises, the jobless often make poor choices, such as not reeducating themselves.

Is there a solution to this gloom?

Perhaps one lies in a hot new approach being tried in the world’s poorest countries, where people living under long-term poverty may have something to teach those in wealthy countries.

A group of behavioral economists at the Massachusetts Institute of Technology, Harvard, Yale, Princeton, and elsewhere are challenging traditional antipoverty policy by conducting experiments in slums and villages to show which competing ideas of development actually work, much like randomized testing in the pharmaceutical industry. They try to avoid generalizing their results, knowing that simplistic ideas are not always easy to replicate, even in the next village.

The history of antipoverty policy, state MIT economists Abhijit Banerjee and Esther Duflo, “is littered with the detritus of instant miracles that proved less than miraculous.”

Yet if they have one overarching conclusion, it is this: The poor often stay poor because of the stress of daily survival; but given enough hope of a better future, they respond like everyone else.

What gives them enough relief to start improving their lives by themselves? That’s not so easy.

Over the past decade, MIT’s Poverty Action Lab has field-tested dozens of small interventions at the community level to better understand how people actually react to attempts to improve their lives. Unlike traditional economics that treats people as rational people making rational choices based on incentives, these researchers find that people living with scarcity can act in seemingly irrational ways.

The poor, given some money, may buy a television instead of more food. Why? To relieve boredom. They distrust government officials and so won’t listen to advice about using clean water. In the Indian state of Maharashtra, the poorest people spend 7 percent of their food budget on sugar. In many places, weddings are so important that personal savings go to pay for that purpose rather than education.

Tailoring aid to such behaviors first requires an understanding of them. Dr. Banerjee says the best way to view the poor is as a “barefoot hedge fund manager,” or people who spend a lot of time managing risk just to survive.

A field test of a microcredit program in Bangladesh found that the main benefit was a big decrease in depression. People could better organize their lives knowing they had an investment in a small business.

Another test in India that compared villages with quotas for women as leaders to those with none showed a marked increase in the aspirations of girls toward education and careers. The “role model effect” inspired half the population to work harder.

One experiment in Indonesia found that asking villagers to determine who among them was the poorest was far more effective than government officials trying to apply assessments using an abstract “poverty line.”

How can aid programs provide real hope and optimism to the poor? By first probing the poor’s perception of themselves, and how they deal with change in local conditions.

Such an approach argues against top-down, big-picture economic policy that relies on one idea of how people react to markets or government programs.

Rather, this new type of microeconomics, aimed at giving people hope based on their particular conditions, may be the best poverty buster – both in rich and poor countries.

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