Poverty alleviation has been a prominent issue in civilized society since times immemorial. Wars have been fought, revolutions have happened and great political upheavals have taken place. Yet, we are no closer to our goal than we may have been a few centuries back. As an MBA student, I have always wondered if there is an efficient markets solution to this problem and how it can be tackled in a world where non-market forces come into play and things go beyond efficient markets. So I decided to attend the Distinguished Speaker Series event titled "Pragmatic Optimism: Using Both Heart and Mind to Fight Poverty," by Dr. Dean Karlan, organized by Social Enterprise Initiative on May 15 at Gleacher Center.
For those who don't know him, Dean Karlan '97, is a professor of economics at Yale University and was named the 2012 Chicago Booth Distinguished Alumni Public Service Award winner. Karlan is the president of Innovations for Poverty Action (http://www.poverty-action.org/), a nonprofit that creates and evaluates solutions to social and development problems and works to scale-up successful ideas through implementation and dissemination to policymakers, practitioners, investors and donors. He is on the board of directors of the MIT Jameel Poverty Action Lab and also the founder of stickK.com, a website that uses lessons from behavioral economics to help people reach personal goals, such as weight loss and smoking cessation, through commitment contracts. In 2011, Karlan co-authored More Than Good Intentions: How a New Economics is Helping to Solve Global Poverty. Karlan received a Presidential Early Career Award for Scientists and Engineers, and was named an Alfred P. Sloan Fellow.
During his talk, Karlan emphasized the need for pragmatic optimism in finding solutions for the problem of poverty. For instance, he gave the audience a scenario where the goal was to incentivize young children in an impoverished region to attend school. The options were 1) pay for school uniforms for children or 2) provide pills for deworming, to treat schistosomiasis, a parasitic disease prominent in underdeveloped countries. As pointed out by Karlan, studies showed that the second option worked much better in bringing those children to school. Karlan emphasized the importance of pragmatism in finding solutions as evident in this example where a keen understanding of the situation was needed in order to identify the best possible incentives.
Karlan also stressed the fact that efficient markets can only take us so far. We need to recognize their limitation and understand that there are plenty of situations where there is a market failure in solving a problem, especially in underdeveloped and developing economies. During those times, it is important to realize that an external intervention is critical, be it from a government, charitable donors or socially conscious businesses to solve those problems. It is also important to understand that the solution to a market failure doesn't necessarily have to solve the failure (e.g., children not going to school), but the factors that lead to it (e.g., because the children get sick).
He pointed out that most companies in the micro credit/micro loan space suffer from Omission Neglect, or the failure to consider acts of omission (i.e., look at successful results only). It happens because these companies report their results only from those people who joined the programs, and not those who didn't join the programs. Since these programs almost always seek out hardworking entrepreneurial people, the true impact of their work is often unclear.
Karlan later talked of several ways of incentivizing the right kind of behavior to alleviate poverty. For example, having a rainfall insurance or index insurance rather than crop insurance, where payout is not dependent on farmer behavior, helps a farmer in case there is a crop failure and also doesn't discourage him or her from making every effort to succeed in order to earn greater profits. In contrast, having crop insurance takes away incentives to work harder to exceed the insurance threshold. Similarly, by simply providing separate bank accounts to women in poorer regions of the world, they can be empowered to make their own purchasing decisions, which often help the entire family.
He also talked about the concept of commitment contracts, such as a website like stikK.com, where users can incur financial penalties of their own choosing, such as giving money to charities or friends, for not meeting personal goals. He also cited examples of using these concepts to encourage people to save for health or education through commitment savings accounts, such as in countries like Malawi, which give the people an aspirational goal of saving for those needs. A key inference from these experiments was that while such programs encourage people to save more, there is an overwhelming preference for having that money in liquid form to allow for flexibility in spending and not in the form of vouchers for books or medicines.
Through all these examples, Karlan emphasized that we need to look at what people do and not what they say they will do, and use that criterion in choosing the best idea to maximize social impact and alleviate poverty. He also stressed the importance of smart marketing to encourage favorable behaviors or nudge people in the right direction, to influence policy reforms, and to compensate for institutional and infrastructure challenges that limit growth. I found Dean's approach of looking at the problem of poverty alleviation through innovative models which combine business sense and social impact to be very inspirational, and I am hopeful that initiatives such as these will help us improve living conditions around the world in future.
In case you are interested in hearing more, Dean Karlan can be followed on twitter @deankarlan, and blogs regularly on Freakonomics.