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You Think You Know What the Poor Want?

A homeless sleeping on the crossing bridge. (JG Photo / Afriadi Hikmal)

Let's say we provide the poor with cash, what do you think they would spend in on? I bet that many of us think they would buy more rice or perhaps pay for education for their kids, because, the poor have a low level of nutrition and are usually uneducated.

But suppose we found out the money was spent on buying more cell-phone credit?

Some, or perhaps many, of you would get mad and deem this act unacceptable. The poor must pay for more food and basic education, you insist, because it would help them out of poverty.

Let me take a different view. Firstly, perhaps they're not as badly off as you think. Secondly, even if they have a low calorie intake and insufficient education, in their calculation, the ability to communicate with friends and relatives using cellphones gives them more pleasure.

And I am OK with this. I believe that the poor know what they're doing.

As simple as it may seems, you will probably not share this view — you think you know what the poor should do better than they do themselves. Or you think the poor don’t know what needs to be done with that additional money.

In this interesting article, Abhijit Banerjee and Esther Duflo of MIT, with their extensive experience on poverty research around the world, suggest that such oversimplification and paternalistic view of the poor is probably of little use. So is any well-intended poverty reduction reform based on that standpoint.

Yes, better nutrition and education would eventually lead to better productivity, hence income, and less poverty. But maybe the poor have different expectations. There is one paragraph in that article that I would like to quote in full.

“We often see the world of the poor as a land of missed opportunities and wonder why they don't invest in what would really make their lives better. But the poor may well be more skeptical about supposed opportunities and the possibility of any radical change in their lives. They often behave as if they think that any change that is significant enough to be worth sacrificing for will simply take too long,” Banerjee and Duflo write.

This could explain why the poor focus on the here and now, on living their lives as happily as possible and celebrating when occasions demand it.

Granted, their decision to buy more cellphone credit or TV sets to watch infotainment or to carry out lavish traditional or religious celebrations is perfectly understandable.

Economics 101 tells you that if you want to maximize the recipient's utilities, you should not set any conditions on your money transfer — and let them decide what they should buy. But if the objective is to maximize your utility (as the giver), you can impose specific conditions on the recipient if they are to get your money to make sure you get what you want. For example, you can demand that the poor spend your money on buying rice because it satisfies your belief that more calories is what the more need.

Now the million-dollar question — what matters more, your utility or their utility?

Cafe Salemba started as a blog in 2005 by University of Indonesia economics students Arianto Patunru, Ari Perdana, Rizal Shidiq, Firman Witoelar and Sjamsu Rahardja. After continuing their work and study in different schools on different continents, they remain committed to making economics and the logic behind it fun to read. We are pleased to host the new Cafe Salemba.