Poverty Reduction Policy from an Economist’s Perspective

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CHICAGO, Illinois — Electrification seems like an essential poverty reduction policy. However, The Borgen Project spoke with Professor Fiona Burlig, an economist at the University of Chicago Harris School of Public Policy and a fellow at the Energy Policy Institute at the University of Chicago. Professor Burlig conducted a recent study on a government-led rural electrification program in India. She clarified that electrification is only worth it if the village getting electricity has a large population. Smaller villages with only 300 people receive too small a benefit relative to the cost of electrification. Therefore, this poverty reduction policy is not as beneficial for this population.

Instead, Professor Burlig said that development economists, nonprofits and non-governmental organizations should focus on two strategies. First, they should try to make electrification technology cheaper. Then, they should fund other poverty reduction policies that have been proven to improve welfare in a cost-effective manner.

The RGGVY Electrification Program

The electrification program that Professor Burlig investigated in her paper, Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), roughly translates to “The Prime Minister’s Rural Electrification Program.” Launched in 2005, RGGVY aimed to provide free electricity to all households below the poverty line.

While Professor Burlig’s paper states that RGGVY achieved its goal of electrifying rural villages, leading to “substantial increases in electricity access,” the paper also reveals that RGGVY did not lead to any significant gains in positive outcomes like increased education access or household wealth. In other words, this poverty reduction policy increased electricity access, as intended, but it did not decrease poverty rates.

Villagers’ Views on Electrification

The findings of Professor Burlig’s paper also highlight the fundamental trade-off of public policy, especially in the context of development economics. How can a budget-constrained government do the most good in the cheapest way possible? In this case, rural electrification of small villages is far too expensive to justify that kind of poverty reduction policy. Conversations Professor Burlig had with villagers in India illustrate this trade-off as well. Most villagers seemed happy about gaining access to electricity. However, many people were also willing to admit that gaining access to electricity did not meaningfully change their opportunities to do business or improve their farming practices.

Furthermore, Professor Burlig’s conversations with villagers highlight that studies like hers struggle to find appropriate measures for happiness or well-being. Professor Burlig looked at overall household consumption expenditure as a result of electrification. She also analyzed a household’s willingness to pay for electricity as a measure of the amount of happiness electricity brings to the household. However, neither of these measures show any significant benefits as a result of the electrification program for small villages.

What development economists should take away from this study and others like it is that large-scale initial public goods investments or projects, like electrifying an entire district, are more beneficial than smaller, “last-mile” public goods projects. Yet, these projects that seek to bring public goods to the outliers in rural areas are sometimes too expensive to justify. Instead, governments, nonprofits and NGOs should focus on poverty reduction policies that have been shown to benefit everyone.

Financial Loans Study

A different study conducted by Professor Burlig’s colleagues investigates the impacts of financial loans on small farmers in rural Kenya. Before receiving financial assistance through the study, these farmers were unable to take advantage of price fluctuations in the local grain markets. Due to various factors, the farmers were selling low and buying high. Thus, they were lowering their total income per year. In a nation like Kenya, where the poverty rate is 36.1%, it is absolutely vital that farmers are able to extract as much income as possible from selling their crops.

The loans given in the study ended up enabling the farmers to generate a return on investment of roughly 28%. This was a significant increase. Additionally, giving loans to some farmers changed the grain market conditions enough to allow other farmers, who did not receive loans, to benefit from the program as well.

One Acre Fund

This kind of targeted financial intervention is one that has demonstrated positive results in some situations. While public goods projects like RGGVY can be expensive in last-mile scenarios, more targeted poverty reduction policy interventions, like giving loans to farmers or local businesses, appear beneficial. One Acre Fund, a nonprofit that partnered with the authors of the paper on Kenyan farmers, provides these kinds of loans to farmers regularly.

The nonprofit’s tagline, “market-based strategies to fight rural poverty,” explains its methodology well. One Acre Fund helps rural farmers prosper financially by providing asset-based loans, like seeds and fertilizer, to farmers. The organization is also flexible about repayment. One Acre Fund also assists farmers with training and storage solutions. This allows them to maximize profits on their crop yields.

In its work, One Acre Fund allows farmers not only to get by but to prosper. As Professor Burlig explained to The Borgen Project, that is what development economists should be striving for. “Development economists are interested in bringing about the most good for the least amount of money,” Professor Burlig concluded. “Just giving up isn’t an option.”

– Thomas McCall
Photo: Flickr

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