Esther Duflo & Abhijit Banerjee – Poor Economics

On Random Reads, this week, an eye-opener on savings from Poor Economics, a pathbreaking book on poverty from the two hottest young economists today…

THE PSYCHOLOGY OF SAVINGS

Understanding the way people think about the future can help resolve
these apparent contradictions. Andrei Shleifer, probably the best exponent
of the theory that many people sometimes do silly things (he
coined, or at least popularized, the term “noise traders” to characterize
the behavior of naïve stock traders who are ruthlessly exploited by sophisticated
traders), who had just returned from Kenya, shared with us
something that he had noticed there: a huge difference between the
farms run by a group of nuns, which were lush and vibrant, and those
run by their neighbors, which were much less impressive. The nuns
were using fertilizer and hybrid seeds. Why, he asked us, were the farmers
not able to do what the nuns were doing? Could it be a sign that
they were much more impatient (the nuns’ profession presumably inclines
them to patience because the rewards are mainly in the afterlife)?

He had hit on something that had long been a puzzle for us. In surveys
conducted over several years, Michael Kremer, Jonathan Robinson,
and Esther found that only about 40 percent of the farmers in the
Busia region in western Kenya (not far from Sauri, the village where
Jeffrey Sachs and Angelina Jolie met Kennedy, the young farmer who
had not been using fertilizer before the project gave it to him) had ever
used fertilizer, and just 25 percent used fertilizer in any given year.5
Conservative estimates, based on offering a random group of farmers
free fertilizer to use on a small part of their fields and then comparing
the harvest on that plot to that on a similar plot of land belonging to
the same farmer, suggest that the average annual return to using fertilizer
exceeds 70 percent: For $1 paid in fertilizer, the average farmer
would get $1.70 worth of extra maize. Not quite the returns the fruit
vendors could make, but seemingly well worth the effort of saving a
little. Why were they not doing it more? It may be that farmers do not
know exactly how to use fertilizer. Or they could underestimate the
returns. But if that were true, then at least the farmers who got the offer
of free fertilizer (and a demonstration of how best to use it) and
earned the high returns should be hugely enthusiastic about using it in
subsequent seasons. In fact, Esther, Kremer, and Robinson found that
the farmers who were given free fertilizer one season were 10 percentage
points more likely on average to use fertilizer in the very next season
after the study, but that still meant that a majority had gone back to
not using fertilizer. It was not that they were unimpressed with what
they saw: The vast majority claimed to be convinced and initially said
they would surely use fertilizer.

When we asked some farmers why they did not end up using fertilizer,
most replied that they did not have enough money on hand to
buy fertilizer when it was time to plant and use it. What is surprising is
that fertilizer can be purchased (and used) in small quantities, so this is
an investment opportunity that seems easily accessible to farmers with
even a small amount of savings. It suggests that the issue, once again, is
that farmers find it difficult to hold on to even very small sums of
money for the period from harvest to planting. As Michael and Anna
Modimba, a couple who farm maize near Budalengi in western Kenya,
explained, saving is hard. On their farm, they had used fertilizer in the
last growing season, but not the one before, because they had had no
money left to buy it then. Saving at home is difficult, they explained,
because there is always something that comes up that requires money
(someone is sick, someone needs clothes, a guest has to be fed), and it is
hard to say no.

Another farmer we met the same day, Wycliffe Otieno, had found a
way to solve this problem. He always made the decision about whether
or not to buy fertilizer just after the harvest. If the harvest was sufficient
to pay for school fees and provide food for the family, he immediately
sold the rest of his crop and used the money to purchase hybrid
seeds, and if he had any leftover money, fertilizer. He stored the seeds
and the fertilizer until the next planting season. He explained to us that
he always bought the fertilizer in advance, because, like the Modimbas,
he knew that money kept in the house would not be saved: When
there is money in the house, things always happen, he said, and the
money disappears.
We asked him what he did when he had already purchased fertilizer
(but not yet used it) and someone got sick. Wasn’t he tempted to resell
it at a loss? His answer was that he never found the need to resell the
fertilizer. Instead, he tended to reevaluate the true urgency of any need
when there was no money lying around. And if something really
needed to be paid for, he would kill a chicken or work a bit harder as a
bicycle taxi driver (a job he did on the side when he was not too busy
with farming). Although they had never purchased fertilizer in advance,
the Modimbas had the same view. If a problem came up but
they had no money (say, because they had purchased fertilizer), they
would figure something out—perhaps borrow from friends or, as they
put it, “suspend the issue”; but they would not resell the fertilizer. It
was their opinion that it would be a good thing for them to be forced
to find an alternative solution, instead of using the cash at home.

So to help people like the Modimbas, Esther, Kremer, and Robinson
designed the Savings and Fertilizer Initiative (SAFI) program. Right after
the harvest—when farmers have money in hand—they are given
the opportunity to purchase a voucher entitling them to fertilizer at
sowing time.6 ICS Africa, an NGO working in the area, implemented
the program. Fertilizer was sold at market price, but an ICS field officer
visited the farmers at home to sell the vouchers, and the fertilizer was
delivered to their homes when they wanted it. The program increased
the fraction of farmers who used fertilizer by at least 50 percent. To put
this in perspective, the effect of this program was greater than the effect
of a 50 percent reduction in the price of fertilizer. Just as Michael and
Anna Modimba and Wycliffe Otieno had predicted, as long as it was
brought to their door at the right time, farmers were very happy to
buy fertilizer.

But that didn’t explain why the farmers did not buy the fertilizer in
advance on their own. A huge majority of the farmers who bought the
vouchers went for immediate delivery, then stored the fertilizer and
used it later on. In other words, just as Wycliffe Otieno had told us,
once they had fertilizer, they didn’t resell it. But if they really want fertilizer,
why don’t they go ahead and buy it themselves? We asked the
Modimbas. Their answer was that the fertilizer shops did not always
have fertilizer available immediately after harvest—they only got it
later, just before planting. As Michael Modimba said: “When we have
money, they don’t have fertilizer. When they have fertilizer, we don’t
have money.” For Wycliffe Otieno, this was not such a problem: Because
his job as a bicycle taxi driver brought him into town all the
time, he was able to regularly check whether fertilizer had come in,
and then buy it from whatever shop happened to have it. But for farmers
like the Modimbas, who lived about an hour’s walk from the market
town and had few reasons to go there, checking the stores was
more difficult. It was this small inconvenience of keeping an eye out
for fertilizer delivery (asking a friend to check, calling the store) that
was holding back their savings and productivity. All our intervention
really did was to remove this minor bottleneck.

  Abhijit Banerjee is the Ford Foundation International Professor of Economics at MIT. He is a fellow of the American Academy of Arts and Sciences and the Econometric Society and has been a Guggenheim Fellow. He has also received the inaugural Infosys Prize (2009) in Social Sciences and Economics.

Esther Duflo is the Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics at MIT. Duflo has received numerous academic honours and prizes including most recently the John Bates Clark Medal (2010) and a MacArthur Fellowship (2009). She has also been featured in Foreign Policy’s Top 100 Global Thinkers and Fortune’s 40 under 40.

Their book, Poor Economics, is published by Random House India this June 2011 and is priced at Rs. 499

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