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: problems, such as negative real rates of return, theft, and temptation to spend.

Economists have proposed many theories of persistence of poverty. A lot of these are variations on the theme of a vicious cycle. The poor are malnourished, which makes them less productive, earn less, and this keeps them malnourished. The poor save less because they discount the future more heavily (or have greater temptations to spend money on alcohol and tobacco) and that is why they stay poor. The poor have little to offer in the way of collateral, and as a result lenders are wary of lending to them, as a result they cannot expand their small businesses or acquire skills or afford education for their children. A simple way to classify them would be under the heads of market failure (e.g., the credit market story mentioned above), and behavioural problems (e.g., self-control, heavy discounting of the future).

This might seem too dry and academic, but poverty is the result of complex processes, and one cannot hope to blast it away by some magic bullet without understanding these processes. For example, there are some policies that can be helpful in addressing both market failure and behavioural problems of the poor. Reducing the costs of financial intermediation, for example, by innovative financial products (e.g., microfinance) that enable the poor to save and borrow more easily is an obvious candidate. Another policy that fits the bill is conditional cash transfers to poor families in exchange for regular school attendance by children (along with health clinic visits, and nutritional support) such as the well known Progressa programme in Mexico (now called Oportunidades). Designing and evaluating such programmes, to see what works where, is the central focus of current research in development economics.

*“The Economic Lives of the Poor,” Journal of Economic Perspectives, 2007, Vol. 21 (1), pp. 141-167