Lifting the extreme poor out of poverty trap

Since the inception of microcredit in Bangladesh, a criticism was often been made in academic circles that the microfinance programmes had possibly benefited the poor but the extreme poor (consuming less than 1,800 calorie/person/day) were been left in the lurch. The reasons for bypassing them were not far to seek:  they are fraught with various frailties (such as risks and extreme vulnerability) and, unlike the functionally landless group who own 50 decimals of land, the extreme poor are less likely to be traceable. From their side also, the extreme poor stayed away from accessing microfinance as they do not have alternative sources of income for installment payments which start immediately after loan disbursement.
It is only after the BRAC realised that the extreme poor could break through the vicious circle of poverty - nay, could become bankable - that the ice started melting. The hypothesis was that the extreme poor could be lifted out of poverty provided a 'big push' takes them to a take-off stage. The basket of the so-called big push comprised enterprise management support, a weekly subsistence support (consumption guarantee), health care facilities, and support for building social networks. The question under consideration is whether a one-off large grant to the extreme poor - hitherto bypassed by microfinance -  would enable them to graduate to microfinance programme.  Specifically, what type of asset endowments would qualify them for the graduation?
Before answering the questions, it would be pertinent to say a few words on selection of the unsung and unheard-of 'small'. In each sample village where extreme poor households were searched, a complete household listing and their ranking based on wealth level were conducted through Participatory Wealth Ranking (PWR) exercises. In a major departure from conventional selection process, it was the community-defined ultra-poor as the community decided their poverty status. The five inclusion criteria were as follows: (a) dependence on females working as maid servants or beggars as an income source; (b) owning of no more than 10 decimals of land; (c) lacking economically active adult member; (d) having school-going children engaged in paid work, and (e) possessing no productive assets. On the contrary, the exclusion criteria were, for example, absence of any adult working member, non-participation in a microfinance programme and government/NGO development programmes. Only households meeting at least two of the inclusion criteria and none of the exclusion criteria were initially selected.
There is in circulation a body of literature pointing to the performance of the ultra-poor programme in Bangladesh. The consensus seems to be that the model has been effective in addressing the concerns of the extreme poor. However, in this write-up, the writer takes on a recent paper by Debdulal Mallick of Deakin University (Australia). Published in the World Development 2013, the paper is based on a unique dataset from a quasi-experiment on BRAC's 'Challenging the Frontier of Poverty Reduction/Targeting the Ultra Poor (CFPR/TUP)'. Using a Propensity Score Matching (PSM), it was observed that the big push significantly increased the chance of participation in a microfinance programme. The treatment members have joined and borrowed from the NGOs at a significantly higher rate than the comparison members. The big push has also significantly enhanced the likelihood of an offer for membership from both BRAC and other NGOs (non-governmental organisations).
A number of existing studies examined the role of individual and household characteristics as well as economic endowments to investigate the impacts of credit on the poor. The above-mentioned researcher, in addition to the traditional tools, also looked at the roles of two intangible attributes: (i) social capital, and (ii) awareness about social malpractices and legal injustices of which the extreme poor are the worst victims. In other words, the researcher investigates the impacts of the endowment of social capital and awareness of the extreme poor on their participation in microfinance. The model adopted by him shows that social capital has a significant effect on borrowing decisions and the awareness has a significant effect on both NGO membership and borrowing decisions.
The impacts of social capital were hardly emphasised in earlier writings possibly because it was deemed to be immeasurable. Why is the effect of social capital important? It is mainly because individual decision to join a microfinance programme, borrowing and repayment is made in peer groups. The story does not end here. NGOs generally prefer clients with higher social capital so that peer group formation - a sine qua non for loan disbursement - becomes less costly for NGOs. Awareness about social malpractices and legal injustice is a reflection of knowledge about individual rights in society and also within the household. Therefore, awareness increases confidence of women to interact outside the household so that they join and borrow from NGOs at a higher rate. They also encounter less resistance from household for conducting business outside the household and can deftly deal with such resistance.
By and large, a big push has enabled the extreme poor to participate in microfinance programme. Apparently, the programme is costly in terms of value of assets transferred, complimentary support and intensive nature of monitoring and supervision by programme staff but the cost has been decreasing with expansion of the programme. "The impact of the big push is, therefore, nontrivial - shortly after the end of the intervention period. About 60 per cent of the extreme poor had received offers, and 40 per cent had already borrowed from NGOs….".
The 7th Five-Year Plan aims to end extreme poverty by the end of the plan period but it is not very clear how that would be done. The BRAC model of graduating the ultra-poor has worked well not only in Bangladesh but also outside the country.  The government could immensely benefit from this 'home-grown' model of eradicating extreme poverty - proven to be effective in lifting the extreme poor out of poverty line in a sustainable fashion.

The writer is a Professor of Economics at Jahangirnagar University.
[email protected]