The Social Economics of Poverty

1. The Social Economics of Poverty Christopher B. Barrett Cornell University  February 1, 2006 IFPRI seminar Washington

2. On the Relevance of Identities, Communities, Groups and Networks to the Economics of Poverty Alleviation “Most of the people in the world are poor, so if we knew the economics of being poor we would know much of the economics that really matters.” - T.W. Schultz (1980 Nobel Prize lecture) Persistent poverty remains an analytical challenge. Most current explanations turn on exclusionary mechanisms. But why are some excluded and others not? Why do only some enjoy the fruits of cooperation?

3. Social Economics The central claim of this book is that individuals’ social and moral identities affect their membership in communities, groups, and networks, and that those identities and social affiliations affect microeconomic behavior, which feeds back into identities, with poverty status a key outcome. Builds on a nascent “social economics paradigm” that draws heavily on insights from cognate social sciences to explore social and economic dynamics through study of the interactions between individual behaviors and group outcomes (e.g., Durlauf and Young 2001).

4. Social Economics Builds on previous literatures: • Behavioral/experimental economics: psychology matters, social norms condition indiv. behavior • Noncooperative and evolutionary game theory: strategic interactions matter and can yield a variety of equilibria, some of which prove unstable • Models of power in multi-agent games • Social capital – relations may be valuable or obstacles.

5. Social Economics Identities – observable, multidimensional attributes of individuals, especially payoff irrelevant attributes. Collective, shared identities create communities. Shared identity often leads to salience… popular awareness/use of the attribute to sort individuals. This sorting leads to affinity for/alienation from others, and thus to associational choice, whether informally, in networks, or formally, in groups. Identities and relationships (groups and networks) affect preferences (e.g., for the nonmaterial), constraints, expectations and incentives. Moreover, because people are aware of these effects, they actively manage their identity and their relationships.

6. Social Economics Difficult to separate individual and social-level phenomena Closely associated with polarization of communities

7. Poverty necessarily reflects relatively low productivity per capita, so work on improving productivity, especially in agriculture. The empirical puzzle that motivates this paper: Many recent studies find salutary effects of various measures of social embeddedness at micro level. But at macro level there seems a significant negative relation. Can we reconcile these two observations? This paper (i) offers a more general analytical framework that nests within it issues of identity and social networks, then (ii) illustrates the usefulness of the framework with a few, brief, qualitative examples.

8. A General Analytical Approach Build on Akerlof and Kranton (2000), acknowledging the intrinsic value of identity, and making individual identity and resulting social networks endogenous, with frictions created by identity-dependent behavioral expectations. Nests the instrumental effects found in the literature on social capital. What is identity? Collective identity and social networks

9. A Behavioral Model Max V(Aj0,Ij0,Kj0,Nj0) ≡ U(ej0,c-j0,rj0,sj0) + δV(Aj1,Ij1,Kj1,Nj1) (1) cj0,ej0 Objective function captures intrinsic valuation of one’s psychological and social status as well as interpersonal externalities due to altruism, positional externalities, or both. sj0 = s(Ij0,cj0) (2) rj0 = r(Nj0,cj0) (3) ej0 ≤ P(Ij0,Nj0)[L(cj0,Kj0) + Aj0] + B(Ij0,Nj0) - F(cj0) (4) where F(cj0) = 0 for L(Ij0) ≤ cj0 ≤ H(Ij0) (5) = Φ(cj0,Ij0,Nj0) > 0 otherwise

10. Laws of motion: Aj1 = a(Aj0,ej0,cj0,c-j0) (6) Nj1 = f(Nj0, Ij1, cj0, c-j0) (7) Ij1 = f(Ij0, rj0, cj0, c-j0) (8) Kj1 = k(Kj0,Ij0,I-j0,rj0, cj0, c-j0) (9)

11. Some Implications of the Model • Productivity and expenditures are increasing in one’s density of social networks and for those possessing particular identities due to • Higher net payoffs • Faster learning • Better access to informal finance • Social networks and identity confer intrinsic benefits as well as instrumental value. People routinely make tradeoffs between the two. • Identity-dependent behavioral expectations constrain choice. Separating equilibria based on identity. Finance problematic.

12. Some Implications of the Model (continued) (iv) Movement to a higher productivity equilibrium often depends on coordinated action among a critical mass of members within a community. - homophily and strong link networks: power to coordinate, but also power to subjugate/exploit (v) Egalitarian pressures that can impede investment by creating very high de facto marginal tax rates

13. Four Sample Puzzles • Foregoing significant productivity gains • (a) Conformity, tradition and rice intensification in Madagascar - Ceremonial expenses: famadihana, zebu sacrifice • - Green revolution methods: Taboos and work restrictions • - SRI: Ancestral tradition and social conformity • * identity and strong social networks impediments • (b) Striga control in Kenyan maize systems • - non-host trap crops (A. histrix) • * lack of strong social networks • an impediment

14. Four Sample Puzzles (continued) • Strategies to facilitate gains • (c) Boarding schools for poor children • - not just school quality differences: remaking identity • (d) Farmer field schools • - aim to stimulate farmer • experimentation and to build their • confidence: identity transformation • and creation of common knowledge.

15. Conclusions: Research Implications • Intrinsic value of identities and social networks? • Importance of coordination failures or conformity effects as adoption barriers/ • do behavioral expectations constrain individual activity and investment choice? • dynamic effects of current behaviors on endogenous identity/networks • Serious identification problems: significant role for qualitative research

16. Conclusions: Policy Implications Opportunity for policy due to (i) Coordination failures and multiple equilibria (ii) Externalities Tipping points may be influenced/overcome by - traditional instruments (subsidies, finance, etc.) - targeting: indicator/community in spite of leakage? Question enthusiasm for creating groups if one does not shape identity (FFS model) Beware overemphasis on material well-being

17. Thank you for your time, patience and comments!