The Social Economics of Poverty

Christopher B. Barrett

• Publisher: Routledge
• Year: 2006
• eBook ISBN: 9781135993733
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

A unique analysis of the moral and social dimensions of microeconomic behaviour in developing countries, this book calls into question standard notions of rationality and many of the assumptions of neo-classical economics, and shows how these are inappropriate in communities with widespread disparity in incomes. This book will prove to be essential for students studying development economics.

1

On the relevance of identities, communities, groups, and networks to the economics of poverty alleviation

Christopher B.Barrett

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)

1.1 Why social economics?

As T.W.Schultz asserted in the opening sentence from his 1979 Nobel Lecture, that perhaps the most vexing riddle in economics is why some people remain very poor for long periods of time, and why poverty persists across generations. Canonical growth models do not offer convincing explanations of such patterns because the poor should have every incentive to invest in human and physical capital accumulation and to adopt new technologies to improve their lot. Recent efforts to resolve this riddle largely rely on assumptions about exclusionary mechanisms that restrict the ability of certain groups to finance investments, to enjoy the external economies of scale resulting from the investment of others, to cooperate, or a combination of these. Of course, this trick merely displaces the riddle: why are some people excluded and others not? Conversely, why do some people enjoy access to scarce resources or the efficiency enhancements associated with cooperation whereas others do not?

This book aims to advance the understanding of the economists of such questions by exploring how the social and moral identities of individuals affect their membership in communities, groups, and networks, how those identities and social affiliations affect microeconomic behavior, and how the resulting behaviors affect poverty. Humans do not live in isolation—their behavior depends on the relations that shape their world. Variation in relationships can perhaps lead to predictable variation in behaviors and economic outcomes, which, in turn, affect social relationships through subtle feedback mechanisms. Partly as a consequence, the dynamics of human social interactions and the effects on persistent poverty have become a very active area of economic research.

The link between human relationships and behavior can operate through any of several different pathways. We highlight the effect on preferences, rules, and expectations. Individual preferences are not immutably given deus ex machina. Rather, they adapt within the communities to which these individuals belong. Nor are preferences over exclusively material things. People value social relationships, including deviance or conformity, fairness, integrity, friendship, love, etc., and their behaviors manifest the valorization of the intangible (see, e.g., Henrich et al. 2004).

Not only preferences but also the rules and expectations governing individuals’ interactions are shaped by formal groups and informal networks, be it in contracting for goods and services, in supporting those who suffer adverse shocks, in communicating potentially valuable information, or other interpersonal phenomena. The “ties that bind” create very real constraints on individual choice.

In affecting preferences, rules, and expectations, social forces thus affect both individuals’ incentives and the constraints that they perceive. Individuals care not only about pecuniary rewards, but also about intangibles such as prestige, stigma, and fairness. This has implications as well for prices, incomes and other monetary indices of wellbeing. Whether by influencing preferences or the constraints faced by individual decision makers, the social and moral milieu in which choice occurs plainly matters, as the chapters in this book illustrate.

Furthermore, outcomes affect individuals’ endogenous construction and reconstruction of the social environments in which they place themselves or from which they extricate themselves. By changing the costs and benefits of making or maintaining contacts, economic performance necessarily induces updating of the attributes that define identities and communities and of the formal and informal matching processes that define groups and networks. This feedback between individual and group behavior injects a richness into analysis that is too often absent in social science research based excessively on either methodological individualism or cultural determinism. Durlauf and Young (2001, pp. x–1) identify recent advances in this genre as the start of “a new social economics paradigm…[that] holds the promise of providing new insights into social and economic dynamics through the explicit study of the interactions that link individual behavior and group outcomes.”

This collection of chapters is distinctive in its common focus on persistent poverty. Each of the contributors applies the tools of the nascent social economics paradigm to that most vexing question of economics: why poverty persists in a world of abundant resources. The chapters thus illustrate how the new insights offered by social economics, might inform and improve the design of policies intended to reduce the incidence and duration of poverty around the world.

In this introductory chapter, I begin by highlighting the broad issues in economics and the social sciences to which this volume is addressed. Then I draw brief thematic connections among the individual chapters. Thanks to a generous grant from The Pew Charitable Trusts, through the Christian Scholars Program at the University of Notre Dame, the team of 15 contributors to this volume held two extended workshops. In the first workshop, we discussed general ideas regarding economists’ understanding of the nature of the human person—the organizing theme of each of the eight disciplinary teams organized by Notre Dame’s Christian Scholars Program. In the second, we discussed and critiqued early drafts of the chapters that comprise this volume.

1.2 The broad issues

Economic behavior is embedded in a socio-cultural context, although the discipline of economics has been relatively slow to acknowledge this in its models of human behavior. Textbook models posit individuals with immutable, exogenous preferences that reflect no concern for others. Constraints depend only on endowments, technologies, and markets. Economic theory is too often taken to be truly universal in all of its details, although many of the assumptions fundamental to mainstream theory are socio-culturally specific and lack empirical support elsewhere, perhaps especially in poor communities throughout much of the world.

By studying behaviors in communities where the textbook models do not seem to fit as neatly, the contributors to this volume hope to improve not only the relevance of economic research to poor communities, but also the foundational theory and methods of the discipline. We aim to enhance economists’ capacity to understand and explain how individuals perceive and adapt their identities and social affiliations and how these identities and affiliations shape social organization and affect the consumption, production and exchange behaviors that constitute economic life.

This effort echoes other recent advances within economics. Behavioral and experimental economists have made great strides in highlighting the inconsistencies between models of pure rational choice and observed human behavior, emphasizing the role of social norms (e.g., of fairness), bounded rationality and behavioral anomalies in understanding microeconomic behavior (Kagel and Roth 1995; Rabin 1998, 2002; Fehr and Falk 2002). The burgeoning fields of behavioral and experimental economics draw heavily on psychology, remaining tightly focused on individual behavior. This volume builds on the rapidly expanding literature in behavioral and experimental economics but aims specifically to situate economic behavior within human communities. In this sense, the work reflected here links closely to cognate disciplines of anthropology, political science, and sociology and to ongoing debates across the social sciences.¹

There have been numerous earlier efforts in this direction. For example, noncooperative game theory has now become a nearly universal language for analyzing the strategic interactions that occur among non-anonymous individuals. Advances in evolutionary game theory have been used by both economists and biologists to try to explain seemingly selfless acts and the maintenance of cooperative equilibria in systems that appear vulnerable to manipulation by self-interested agents. By explicating mechanisms of direct and indirect reciprocity, many studies in this strand of the literature effectively serve “to take the altruism out of altruism” (Axelrod 1984; Frank 1988; Bester and Güth 1998; Nowak and Sigmund 2000). One of the core points of this vein of research is that welfare enhancing, cooperative outcomes can be achieved thanks to the complex web of interrelationships that define real societies.

Formal models of interactions among individuals have likewise been used to explain the exercise of coercive power by one or more agents against others (Akerlof 1976; Basu 1986; Bardhan 1991; Naqvi and Wemhöner 1995). The key insight of the economic literature on coercive power is that networks of more than two agents can endow some individuals with the capacity to covertly coerce others into accepting exchanges that predictably leave them worse off and that they would never voluntarily undertake were the powerful member of the network unable to manipulate third parties.

Another strand of the literature that takes a richer view of human relationships than that traditionally considered in economics is the work on social capital. The literature on social capital, which began with the theoretical work of sociologists James Coleman and Mark Granovetter and economist Glenn Loury, treats social networks and social spillovers as resources that affect an individual’s ability to obtain an education, secure a job, obtain credit, and enforce contracts. After a decade of intense empirical work in this area, there is today a sense that the social capital literature is taking the wrong path to address a real omission in mainstream economics. The Nobel Laureate Ken Arrow (2000) summarized this concern when he wrote: “The concept of measuring social interaction may be a snare and a delusion. Instead of thinking of more and less, it may be more fruitful to think of the existing social relations as a preexisting network into which new parts of the economy…have to be fitted.” The contributors to this volume would go one step further, emphasizing that social relations are endogenous and dynamic elements of the social systems that underpin economic behavior. Economists need to study more carefully the microlevel processes that generate demonstrable correlations between particular social configurations and material outcomes—such as income, educational attainment, resilience to shocks, traders’ profitability, or propensity to adopt improved technologies. A new frontier of work addresses the question: What makes some social states stable, others unstable and therefore transient?

Our common approach to these issues begins with the observable attributes of individuals, what psychologists label “identity.” Collective, shared identities—according to ethnicity, gender, lineage, occupation, race, residential location, wealth status, or some other dimension—create communities. Indeed, the word “community” originates with the Latin communis, meaning “shared by all or many.” Shared identity can lead to salience. Particular attributes become prominent once a population evinces some critical mass that causes people to sort people using that criterion, whether consciously or unconsciously. This sorting may foster affinity among people, causing them to choose to associate with others sharing similar attributes, whether formally, in groups, or informally, in networks. The absence of shared identities can also affect behavior, leading to alienation and social exclusion.

Because individual identities are both cause and consequence of group affiliation, social networks, and the moral codes associated with groups and networks, identities may co-evolve in ways that make it difficult—and perhaps misleading—to separate individual and social level phenomena. The joint determination of many individual attributes and of the social structures that depend on the affinity and alienation induced by identities makes it difficult to isolate the impact of particular attributes or relations, as emphasized in the burgeoning literature on the empirical analysis of social interactions (Manski 1995; Brock and Durlauf 2000; Manski 2000).

Social identity is multidimensional: an individual can belong to multiple communities, groups, and networks. Interlocking networks and groups may reinforce the alienation of some subpopulations and contribute to the persistent poverty of certain social groups; or they may bridge divides. The multidimensional nature of identity is central to understanding social and economic polarization—who feels affinity for whom and who is alienated from whom—as well as the intensity of these positive and negative relations between individuals.

Two core questions emerge naturally from this formulation. The first concerns the evolution of social organization. How do communities, groups and networks form, evolve, and interact? Why do dysfunctional social relationships emerge and what causes them to persist? How should economists define and measure identities, communities, groups, and networks for the purpose of placing individual behavior in its appropriate social context?

Second, how does social organization affect economic outcomes: incomes, information flow, expenditure patterns, productivity, transfers, contracting forms, technology adoption, etc.? Here, the methodological advance of social economics meets the practical concerns of poverty alleviation and social justice. Does the social organization of individuals matter to the welfare of the poor? Does it affect what policy tools are available to and useful for outsiders who might wish to assist disadvantaged people? This is a much richer approach to understanding how the socio-cultural context affects economic outcomes than the sort of scalar-valued stock concept at the root of much of the current empirical work on social capital. Recent theoretical advances—such as the multi-community social interactions model—derive the membership of communities and the nature of local social capital. This literature demonstrates the possibility that market forces may lead to communities with very different levels of social capital, exacerbating initial inequalities among individuals (Bénabou 1996; Hoff and Sen 2005). The promise of social economics is that by marrying the methodological rigor of the economics toolkit with the insights of empirical anthropologists and sociologists, real progress can be made in uncovering some of the structural mechanisms that lead to persistent poverty.

1.3 Key thematic connections among the chapters

The next 14 chapters tackle these two core questions about the nature and evolution of equilibrium social organization and the consequences for economic outcomes. Several themes appear repeatedly: identity and conflict, social norms, and the nature and formation of groups.

Identity and conflict Following the seminal work of Esteban and Ray (1994), Akerlof and Kranton (2000), and Platteau (2000), several chapters emphasize the role of social and psychological identities in trapping individuals in poverty. Fang and Loury (Chapter 2), Dasgupta and Kanbur (Chapter 6), Akerlof and Kranton (Chapter 8), and Barrett (Chapter 9) study the emergence of individual identities that critically shape behaviors that subsequently reinforce those identities. Moreover, following the identification-alienation framework introduced by Esteban and Ray (1994), identities by multiple individuals create not only communities but, equally, alienation of individuals and groups from...

Table of contents

• Cover
• Halftitle
• Title
• Copyright
• Contents
• List of figures
• List of tables
• List of contributors
• Acknowledgments
• 1 On the relevance of identities, communities, groups, and networks to the economics of poverty alleviation
• 2 Toward an economic theory of dysfunctional identity
• 3 Polarization: concepts, measurement, estimation
• 4 Evolutionary equilibrium with forward-looking players
• 5 Is inequality an evolutionary universal?
• 6 Bridging communal divides: separation, patronage, integration
• 7 The extended family system and market interactions
• 8 Social divisions within schools: how school policies can affect students’ identities and educational choices
• 9 Smallholder identities and social networks: the challenge of improving productivity and welfare
• 10 Social networks in Ghana
• 11 Coping with disaster: morals, markets, and mutual insurance—using economic experiments to study recovery from Hurricane Mitch
• 12 The role of ethnicity and networks in agricultural trade: evidence from Africa
• 13 Altruism, household co-residence and women’s health investment in rural Bangladesh
• 14 Self-help groups and income generation in the informal settlements of Nairobi
• 15 Community ties and land inheritance in the context of rising outside opportunities: evidence from the Peruvian Highlands
• Index