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Business Unusual

A potential solution to poverty

16 October 2019 7:15 PM
Here are four related stories that may offer an insight to better address poverty.
  • How better research can lead to better programmes to combat poverty
  • How you can earn money for doing nothing
  • How being poor causes you to make bad decisions
  • How to pay for lifting the poor out of poverty

Better Research

This week the 2019 Nobel Memorial Prize in Economic Sciences went to three researchers who worked on understanding and addressing issues affecting the poor. Their work is current and challenges the way governments and aid organisations have approached devising programmes to help those that need.

Rather than just the theoretical models, they do randomised controlled trials which reveal both the short term effect and the long-term impact of an intervention sometimes with surprising results.

One study investigated how the supply of textbooks in English to impoverished children in Kenya would affect results. It does for those that are academically inclined and already performing adequately. It has little to no impact on most other students. It was not that textbooks did not work, but rather that to a child with limited skill in English and already struggling with academic subjects the textbook was not going to improve things much. A comparison to an intervention that was tested in India saw struggling learners working with tutors for two hours a day rather than attending class. That had a greater and more lasting impact.

This is a simplification of the studies but this type of research is more useful to finding actual solutions that although run on a small scale may have more impact. Large scale and expensive interventions with little actual testing might not only not work, but there would be a motivation to attempt to hide poor results given the investment.

Namibia published a follow up to their experiment with a basic income that applied to a small town in 2008. The effect was positive and even attracted new residents to the town even though they would not qualify for the R100 monthly payment. The two-year experiment ended in 2009 and reflects on the effects a decade later. It highlights the potential positives, the challenge with the political will to apply it and that is not sustained for long enough does not raise people far enough out of poverty to prevent them returning one the income ends.

Money for nothing

The wealthy may be relieved to know that most poor people don’t believe you can get money for nothing. The fact that most wealthy investors rely on this fact seems lost on those that typically don’t invest. The point of an investment is to get a return on that investment that is greater than the input. The definition of a good investment is getting money for doing nothing.

What the wealthy will no doubt point out is that you only get that money when things go well, you don’t get it with no strings attached. That is true but despite the potentially volatile and even depressed global markets Oxfam reports that just 3 African billionaires (Aliko Dangote 14.1 billion, Nicky Oppenheimer 7.7 billion and Johann Rupert 7 billion dollars, according to Forbes 2019 billionaires list) have the same wealth as the poorest 650 million Africans which is half of the total African population.

It is not that the 650 million worked less than the three billionaires, it is that the billionaire's investments generated returns while 650 million Africans had little or no investments that generated returns.

Creating an investment that could rival the assets of the most wealthy and then use some of the proceeds to pay those most in need may be worth pursuing.

There are some likely objections. Governments are no good at setting up and managing large sovereign funds. Governments are not good at managing the payments of funds. Governments only raise large sums by incurring unsustainable debt.

These are fair criticisms and you might think governments, like the poor, are destined to keep making bad decisions and you may have a point.

Being poor leads to bad financial decisions

A poor financial decision is not only one with poor returns, but it may also describe the typical decision by someone who is poor.

Experiments in 2013 tried to determine what might cause it. People in the US and India that were not financially secure were presented with cognitive tests before and after experiencing financial distress. In the US subjects at a mall were asked to consider options for settling a large and unforeseen bill. Those that were first presented with the sudden debt performed worse than those that had not. In India, farmers were tested before and after their crop harvests. They had the least cash before the harvest and the most after. Their scores improved when they had more cash.

The finding appears to be that when the poor are so focused on dealing with short term cash flow problems they have little capacity left to evaluate the best way to address it and possibly less still to consider long term solutions.

In this respect, you could argue that governments focused on their next 5-year term lack the ability to raise the funds they need from a sustainable source nor do they allocate it to maximise its effectiveness.

Even companies that struggle with cash flow tend to try options they would otherwise never consider and generally with equally disastrous results.

So if you could determine what the most effective programmes are to reduce the pervasive effects of poverty then simply giving the poor money may see them allocate it more productively, but where are you supposed to get the money.

Taxes

A line first used in the 1700s said nothing is certain except death and taxes. That hardly seems to apply to the wealthy anymore. The same Oxfam release states that 75% of the wealth held by the wealthy in Africa is held offshore and collectively represent $14 billion in uncollected tax revenue.

Many of the worlds wealthy do make substantial payments to foundations and charities in part to do good, but often only because they are doing good and spreading some of it around enhances your perception of being a good citizen, it does not often focus on how the money was made and who stood to lose out as a result.

Even so, the wealthy are justified to be wary of handing over their taxes with little faith they will be managed and allocated correctly.

So for this to work we need all of the four stories to align.

Governments need to demonstrate that they have investigated programmes that will make a difference, that they have enacted laws and appointed the right people to manage the collection, investment and distribution of funds.

All governments need to work to close tax loopholes and offshore tax havens. The OECD is taking steps to better tax large corporates who hide their revenues from EU countries with elaborate tax avoidance schemes.

Sufficient but sustainable amounts need to be distributed to those that need it and then more research needs to be carried out to determine that everything is running according to plan.

Norway created a large nest egg with its oil wealth. Oil-rich Middle East countries invest their oil proceeds in future projects that will not rely on oil receipts.

Africa will need to both ensure it gets more from the commodities extracted and companies that operate in the continent while also investing in its own capacity to expand infrastructure and opportunities for its citizens.

The path to addressing much of this can be drawn from other nations that either failed or succeeded and if we are lucky this might have the same effect that the distressing obituary had on Alfred Nobel and led to him to change the way history would remember the creator of dynamite not as the merchant of death but rather the creator of the world's most recognised peace prize.

Image credit: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2019

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16 October 2019 7:15 PM

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