Master Classes Reading Booklet: Session 1

MASTER CLASSES
READING BOOKLET
SESSION 1
PRE-COLLEGE PROGRAMME 2022
MASTER CLASS 1
INTRODUCTION TO
DEVELOPMENT
ECONOMICS
SERGEI GURIEV
Journal of Economic Perspectives—Volume 21, Number 1—Winter 2007—Pages 141–167
The Economic Lives of the Poor
Abhijit V. Banerjee and Esther Duflo
I n what turned out to be a rhetorical master-move, the 1990 World Develop-

ment Report from the World Bank defined the “extremely poor” people of
the world as those who are currently living on no more than $1 per day per
person, measured at the 1985 purchasing power parity (PPP) exchange rate. In
1993, the poverty line was updated to $1.08 per person per day at the 1993 PPP
exchange rate, which is the line we use in this paper. Poverty lines have always
existed—indeed $1 per day was chosen in part because of its proximity to the
poverty lines used by many poor countries.1 However the $1-a-day poverty line has
come to dominate the conversations about poverty to a remarkable extent.
But how actually does one live on less than $1 per day? This essay is about the
economic lives of the extremely poor: the choices they face, the constraints they
grapple with, and the challenges they meet. The available evidence on the eco-
nomic lives of the extremely poor is incomplete in many important ways. However,
a number of recent data sets and a body of new research have added a lot to what
we know about their lives, and taken together there is enough to start building an
image of the way the extremely poor live their lives.
Our discussion of the economic lives of the extremely poor builds on house-
hold surveys conducted in 13 countries listed in Table 1: Cote d’Ivoire, Guatemala,
India, Indonesia, Mexico, Nicaragua, Pakistan, Panama, Papua New Guinea, Peru,
South Africa, Tanzania, and Timor Leste (East Timor). We mainly use the Living
1
For example, the “All India Rural” poverty line used by the Indian Planning Commission was
328 rupees per person per month, or $32 in purchasing power parity (PPP) dollars in 1999/2000.
y Abhijit V. Banerjee and Esther Duflo are both Professors of Economics and Directors of the
Abdul Latif Jameel Poverty Action Lab, Massachusetts Institute of Technology, Cambridge,
Massachusetts.
142 Journal of Economic Perspectives
Table 1
Description of Data Sets
Households (HHs) living on less than
$1.08 per person $2.16 per person

per day per day
Avg.
monthly Percent of Percent of
consumption total total
per capita Number surveyed Number surveyed
Country Source Year (In PPP$) surveyed HHs surveyed HHs
Cote d’Ivoire LSMS 1988 664.13 375 14% 1,411 49%

Guatemala GFHS 1995 301.92 469 18% 910 34%
India-Hyderabad Banerjee-Duflo- 2005 71.61 106 7% 1,030 56%
Glennerster
India-Udaipur Banerjee-Deaton- 2004 43.12 482 47% 883 86%
Duflo
Indonesia IFLS 2000 142.84 320 4% 2,106 26%
Mexico MxFLS 2002 167.97 959 15% 2,698 39%
Nicaragua LSMS 2001 117.34 333 6% 1,322 28%
Pakistan LSMS 1991 48.01 1,573 40% 3,632 83%
Panama LSMS 1997 359.73 123 2% 439 6%
Papua New LSMS 1996 133.38 185 15% 485 38%
Guinea
Peru LSMS 1994 151.88 297 7% 821 20%
South Africa LSMS 1993 291.33 413 5% 1,641 19%
Tanzania LSMS 1993 50.85 1,184 35% 2,941 73%
Timor Leste LSMS 2001 64.42 662 15% 2,426 51%
Sources: The Mexican Family Life Survey is documented in Rubalcava and Teruel (2004) and available
at 具http://www.radix.uia.mx/ennvih/典. The LSMS are available from the World Bank LSMS project
page. The IFLS and GFLS are available from the RAND FLS page 具http://www.rand.org/labor/FLS/典.
The Udaipur data is available from 具www.povertyactionlab.org/data典. The Hyderabad data is forthcom-
ing on the same page.
Notes: To compute the $1.08 and $2.16 poverty line for the countries in our sample, we use the 1993
consumption exchange rate provided by the World Bank (available at 具http://iresearch.worldbank.org/
PovcalNet/jsp/index.jsp典) multiplied by the ratio of the country’s Consumer Price Index to the U.S.
Consumer Price Index between 1993 and the year the survey was carried out. To compute average
consumption per capita and the proportion of households in poverty, observations are weighted using
(survey weight ⴱ household size).
Standard Measurement Surveys (LSMS) conducted by the World Bank and the
“Family Life Surveys” conducted by the Rand Corporation, all of which are publicly
available. In addition, we also use two surveys that we conducted in India with our
collaborators. The first was carried out in 2002 and 2003 in 100 hamlets of Udaipur
District, Rajasthan (Banerjee, Deaton, and Duflo, 2004). Udaipur is one of the
poorer districts of India, with a large tribal population and an unusually high level
of female illiteracy. (At the time of the 1991 census, only 5 percent of women were
literate in rural Udaipur.) Our second survey covered 2,000 households in “slums”
(or informal neighborhoods) of Hyderabad, the capital of the state of Andhra
Pradesh and one of the boomtowns of post-liberalization India (Banerjee, Duflo,
Abhijit V. Banerjee and Esther Duflo 143
and Glennerster, 2006). We chose these countries and surveys because they provide
detailed information on extremely poor households around the world, from Asia to
Africa to Latin America, including information on what they consume, where they
work, and how they save and borrow. To flesh out our main themes further, we also
draw freely on the existing research literature.
From each of these surveys we identified the extremely poor as those living in
households where the consumption per capita is less than $1.08 per person per day,
as well as the merely “poor” defined as those who live under $2.16 a day using 1993
purchasing power parity (PPP) as benchmark. In keeping with convention, we call
these the $1 and $2 dollar poverty lines, respectively. The use of consumption,
rather than income, is motivated by the better quality of the consumption data in
these surveys (Deaton, 2004). Table 1 provides some background information on
these surveys. It lists the countries, and the source of the survey data. It also lists the
sample sizes: the numbers and the proportions of the extremely poor and the poor
in each survey. The fraction of individuals living under $1 dollar per day in the
survey vary from 2 percent in Panama to 47 percent in Udaipur, and the fraction
living under $2 per day varies from 6 percent in Panama to 86 percent in Udaipur.
All the numbers discussed in this paper and detailed results are available in an
appendix that appears with the on-line version of this article at 具http://www.e-jep.org典.
The way in which we identify the poor does raise questions. Purchasing power
parity exchange rates, which are essential to compute a “uniform” poverty line, have
been criticized as inadequate, infrequently updated, and inapplicable to the con-
sumption of the extremely poor (Deaton, 2004, 2006). Prices are typically higher in
urban than in rural areas, and even in rural areas, the poor may pay different prices
than everyone else. Also, reporting periods vary significantly from survey to survey
and this has been shown to affect systematically what people report.
But while these issues are obviously serious for counting the exact number of
the poor, they may affect the conclusions of this essay less because instead of
counting the poor, we are describing what their lives look like. Misclassifying some
households should not change anything very important about the averages we
observe in the data, unless both the number affected are very large and those
artificially moved into or out of poverty by changes in the poverty line are very
different than the other poor. It turns out that most of our conclusions do not
change if we look at the poor rather than the extremely poor, which is reassuring.
Nevertheless, we cannot entirely rule out the possibility that our results may be
different with a different poverty line.
We also assume that the people we are describing as the poor are long-term
poor, in the sense that their permanent income is actually close to their observed
consumption. If the poor people we observe are just making a brief transition
through poverty, then some of the behaviors that we will observe (such as lack of
savings) would be less puzzling, and others (like the lack of assets) would be much
more so. We feel that this assumption is a reasonable one in most of the countries,
since the fraction of the population below $2.16 a day is actually sizeable—
40 percent of the population or more in the median country and more than
70 percent in quite a few. Thus, it is unlikely that many of these people are just
temporarily poor. However, for this reason, the poor in Panama, where only
6 percent of the population is poor, or in South Africa, where 19 percent is poor,
may not be easily compared to the poor in some of the other countries, where the
poor are a much larger share of the population.
The Living Arrangements of the Poor
The typical extremely poor family tends to be large, at least by the standards of
today’s high-income countries. The number of family members varies between
about six and twelve, with a median value (across the different countries) of
between seven and eight, compared to 2.5 in the 2000 U.S. census, for example.
Not all surveys report fertility rates, which would be the ideal way to distinguish
whether these high numbers result from the average woman having a lot of
children, or if it results from an extended family living together. However, the data
does give broad measures of the age structure in these families (the number of
those below 13, between 13 and 18, above 51, and so on). The number of adults
(over age 18) ranges from about 2.5 to about five, with a median of about three,
which suggests a family structure where it is common for adults to live with parents,
siblings, uncles, cousins, and so on. This finding is common in the literature on
developing countries. When every penny counts, it helps to spread the fixed costs
of living, like housing, over a larger number of people. Consistent with this view,
family size is larger for the extremely poor than for the entire group below $2 a day,
on the order of one half of one person or more, though at least some part of this
difference is because extremely poor families have more children living with them.
These families also have a large number of children. This fact does not
necessarily imply high levels of fertility, as families often have multiple adult
women. When we look at the number of children (ages 0 to 18) per woman in the
child-bearing age (ages 21–50) we get numbers between two and four in both the
rural and the urban sample, though the urban ratios tend to be slightly lower. This
ratio cannot be interpreted as a fertility rate, because for example, a 51 year-old
could have a child who is now 36, but we only include children who are below age
18. A more useful exercise with this data is to compare the number of young people
(those below 18) in these families with the number of older people (those above
51). The ratio varies between three and nine in the rural sample, with a median of
six, and between two and eleven in the urban sample, again with a median around
six. The corresponding ratio in the United States is around one. The poor of the
world are very young.
One reason the population is young is that there are a lot of younger people.
A complementary reason is that there are very few older people. The ratio of the
number older people (over age 51) to the number of people of “prime-age”
(21–50) tends to be between 0.2 and 0.3 in both the rural and the urban sample.
The corresponding number in the United States is approximately 0.6. A plausible
The Economic Lives of the Poor 145
explanation for this difference might be the higher mortality rates among those
who are older and poor in poor countries, but in principle it is possible that it is an
artifact of the way we constructed our sample. It could be that older people are
underrepresented in our sample because they tend to be richer. But in this case, we
might have expected to find more of the older people among the poor (as
compared to the extremely poor), whereas the data does not show such a pattern.
How the Poor Spend Their Money
A common image of the extremely poor is that they have few real choices to
make. Indeed, some people surely work as hard as they can—which may not be
particularly hard, because they are underfed and weak and earn barely enough to
cover their basic needs, which they always try to fulfill in the least expensive way.
Historically, poverty lines in many countries were originally set to capture this
definition of poverty—the budget needed to buy a certain amount of calories, plus
some other indispensable purchases (such as housing). A “poor” person was
essentially defined as someone without enough to eat.
Food and Other Consumption Purchases

Yet the average person living at under $1 per day does not seem to put every
available penny into buying more calories. Among our 13 countries, food typically
represents from 56 to 78 percent of consumption among rural households, and
56 to 74 percent in urban areas. For the rural poor in Mexico, slightly less than half
the budget (49.6 percent) is allocated to food.2
Of course, these people could be spending the rest of their money on other
commodities they greatly need. Yet among the nonfood items that the poor spend
significant amounts of money on, alcohol and tobacco show up prominently. The
extremely poor in rural areas spent 4.1 percent of their budget on tobacco and
alcohol in Papua New Guinea; 5.0 percent in Udaipur, India; 6.0 percent in
Indonesia; and 8.1 percent in Mexico. However, in Guatemala, Nicaragua, and
2
The fact that the share spent on food, which is often seen as a physiological necessity, varies so much
across countries is itself interesting. One possibility is that this represents the fact that the poor have
more choice in some countries than in others, because consumption goods are cheap relative to food
in some countries. For example, India, a large economy with a long history of being relatively closed, has
evolved a large menu of low-cost and lower-quality consumer goods that are produced almost exclusively for
the domestic market, examples include tooth-paste, cigarettes, and clothing. Other countries must buy these
goods at higher prices on the global market. If the manufactured consumer goods that the average person
buys in India tend to be inexpensive relative to their traded counterparts, the ratio between the consumption
exchange rate at purchasing power parity and the official exchange rate ought to be relatively low in India.
More generally: the lower this ratio, the lower is the share of the consumption that should be made up
of food. In our data, it turns out that the correlation between the ratio of the PPP exchange rate for
consumption to the official exchange rate in 1993 and the share of expenditure spent on food is 0.33
among these 12 countries, although this sample is of course too small to support a definite conclusion.
Peru, no more than 1 percent of the budget gets spent on these goods (possibly
because the poor in these countries prefer other intoxicants).
Perhaps more surprisingly, spending on festivals is an important part of the
budget for many extremely poor households. In Udaipur, over the course of the
previous year, more than 99 percent of the extremely poor households spent
money on a wedding, a funeral, or a religious festival. The median household spent
10 percent of its annual budget on festivals. In South Africa, 90 percent of the
households living under $1 per day spent money on festivals. In Pakistan, Indone-
sia, and Cote d’Ivoire, more than 50 percent did likewise. Only in some Latin
American countries in our sample—Panama, Guatemala, Nicaragua—are festivals
not a notable part of the yearly expenditure for a significant fraction of the
households. However, in the LSMS surveys, unlike the Udaipur survey, people are
not asked to account separately for the food that they bought because of a festival.
It is therefore probably no accident that the Udaipur spending on festivals is the
highest across the surveys. The LSMS numbers would probably have been higher if
data on food spending because of festivals had been directly collected in those surveys.
On the other hand, the under-$1-per-day households spend very little on forms
of entertainment common in high-income countries such as movies, theater, or
video shows. In all 13 countries in our sample, in the month preceding the survey
the average extremely poor household spent less than 1 percent on any of these
forms of entertainment. The comparable number for the United States is 5 per-
cent. We can only speculate about the roots of this difference. Has the importance
given to festivals and other indigenous forms of entertainment crowded out movie-
going? Or is the answer as simple as a lack of access to movie theaters?
The propensity to own a radio or a television, a widespread form of entertain-
ment for American households, varies considerably across low-income countries.
For example, among rural households living under $1 per day, ownership of a radio
is 11 percent in the Udaipur survey, almost 60 percent in Nicaragua and Guate-
mala, and above 70 percent in South Africa and Peru. Similarly, no one owns a
television in Udaipur, but in Guatemala nearly a quarter of households do, and in
Nicaragua, the percentage is closer to a half.
These phenomena of spending on festivals and ownership of radios or televi-
sions appear to be related. In Udaipur, where the share spent on festivals is the
highest, radio and television ownership is very low. In Pakistan, the fraction spent
on festivals is 3.3 percent and only 30 percent have a radio. By contrast, in
Nicaragua where among respectively the rural and the urban poor 57 and 38 per-
cent have a radio and 21 percent and 19 percent own a television, very few
households report spending anything on festivals.3 One wrinkle on this explanation
3
The ultimate source of variation here might be the relative prices of radios and televisions. There is a
strong correlation between the ratio of the purchasing power exchange rate for consumption to the
official exchange rate, and the probability that a household owns a radio (the correlation is 0.36). The
logic is probably quite similar to the argument presented earlier in the context of food consumption in
footnote 2. Radios are tradable (they are essentially all made in China). Nontradable goods are much
is that the urban poor who are much more likely to own a television than the rural
poor (60 versus 33 percent in Indonesia, 61 versus 10 percent in Peru, 38 versus
17 percent in South Africa), do not spend less on festivals than their rural coun-
terparts. While this observation is based on only a few data points, it hints at the
possibility of an unmet demand for entertainment among the rural poor—they
might like to buy a television, but perhaps the television signal does not reach their
neighborhoods.
In either case, the poor do see themselves as having a significant amount of
choice, but they choose not to exercise that choice in the direction of spending
more on food. The typical poor household in Udaipur could spend up to 30 per-
cent more on food than it actually does, just based on what it spends on alcohol,
tobacco, and festivals. Indeed, in most of the surveys the share spent on food is
about the same for the poor and the extremely poor, suggesting that the extremely
poor feel no extra compulsion to purchase more calories.
This conclusion echoes an old finding in the literature on nutrition: even the
extremely poor do not seem to be as hungry for additional calories as one might
expect. Deaton and Subramanian (1996), using 1983 data from the Indian state of
Maharashtra, found that even for the poorest, a 1 percent increase on overall
expenditure translates into about a two-thirds of a percent increase in the total food
expenditure of a poor family. Remarkably, the elasticity is not very different for the
poorest individuals in the sample and the richest (although nobody is particularly
rich in this sample). The Deaton and Subramanian estimate is one of the higher
estimates. Thomas and Strauss (1997) found an elasticity of demand for food with
respect to expenditure per capita of about a quarter for the poorest Brazilians.
Another way to make the same point is to look at what edibles the extremely
poor are buying. Deaton and Subramanian (1996) note that among grains, in terms
of calories per rupee, the millets ( jowar and bajra) are clearly the best buy. Yet in
their data, only about two-thirds of the total spending on grains is on these grains,
while another 20 percent is on rice, which costs more than twice as much per
calorie, and a further 10 percent or so is spent on wheat, which is a 70 percent more
expensive way to get calories. In addition, the poor spend almost 7 percent of their
total budget on sugar, which is both more expensive than grains as a source of
calories and bereft of other nutritional value. The same affinity for sugar also shows
up in our Udaipur data, in which the poor spend almost 10 percent of their food
budget on the category “sugar, salt, and other processed foods” (this does not
include cooking oil, which makes up another 6 percent of the expenditures on
food). Even for the extremely poor, for every 1 percent increase in the food
expenditure, about half goes into purchasing more calories, and half goes into
purchasing more expensive (and presumably better tasting) calories.
less costly in some countries than others, while traded goods tend to be more similarly priced, so people
at the same expenditure levels at purchasing power parity can have widely differing levels of purchasing
power in terms of traded goods.
Finally, the trend seems to be to spend even less money on food. In India, for
example, spending on food went from 70 percent in 1983 to 62 percent in
1999 –2000, and the share of millet in the food budget dropped to virtually zero
(Deaton, 2006). Not surprisingly, the poor are also consuming fewer calories over
time (Meenakshi and Vishwanathan, 2003), though this change may also reflect
that their work involves less physical effort (Jha, 2004).
The Ownership of Assets

While all the surveys have some information about assets, the list of assets
varies. To obtain a relatively coherent list across countries, we focus on radios,
televisions, and bicycles. The share of people who own these particular assets varies
significantly across countries.
As we already discussed, ownership of radio and television varies from country
to country, but is low in some countries. One reason may be the lack of signal.
Another reason may be that a television is an expensive and lumpy transaction for
which one has to save if one is born poor. We do see a fairly steep income gradient
in the ownership of radio and television: In all countries, the share of rural
households owning a television is substantially larger for those who live on less than
$2 a day than those living on less than $1 a day. For example, the share owning a
television increases from 14 percent for those living on $1 a day to 45 percent for
those living on less than $2 a dollar a day in Cote d’Ivoire; from 7 to 17 percent in
South Africa; and from 10 to 21 percent in Peru. This pattern has been observed in
other contexts (Filmer and Pritchett, 2001) and has been the basis for using the
lack of durable goods as a marker for poverty. Our data suggests that this proxy can
be appropriate within a country, but it could easily be misleading in a cross-country
comparison.
Among productive assets, land is the one that many people in the rural surveys
seem to own, although enormous country-to-country variation exists. Only 4 per-
cent of those living under $1 a day own land in Mexico, 1.4 percent in South Africa,
30 percent in Pakistan, 37 percent in Guatemala, 50 percent in Nicaragua and
Indonesia, 63 percent in Cote d’Ivoire, 65 percent in Peru, and 85 percent in
Panama. In the Udaipur sample, 99 percent of the households below $1 a day own
some land in addition to the land on which their house is built, although much of
it is dry scrubland that cannot be cultivated for most of the year. However, when the
extremely poor do own land, the plots tend to be quite small. The median
landholding among the poor who own land is one hectare or less in Udaipur,
Indonesia, Guatemala, and Timor; between one and two hectares in Peru, Tanza-
nia, Pakistan; and between two and three hectares in Nicaragua, Cote d’Ivoire, and
Panama.
Apart from land, extremely poor households in rural areas tend to own very
few durable goods, including productive assets: 34 percent own a bicycle in Cote
d’Ivoire, but less than 14 percent in Udaipur, Nicaragua, Panama, Papua New
Guinea, Peru, and East Timor. In Udaipur, where we have detailed asset data, most
extremely poor households have a bed or a cot, but only about 10 percent have a
chair or a stool and 5 percent have a table. About half have a clock or a watch.
Fewer than 1 percent have an electric fan, a sewing machine, a bullock cart, a
motorized cycle of any kind, or a tractor. No one has a phone. As we will see below,
this situation does not mean that most of these households are employees and have
little use for such assets. On the contrary, many extremely poor households operate
their own businesses, but do so with almost no productive assets.
The Pursuit of Health and Well-being

Should we worry about the fact that the poor are buying less food than they
could? According to Deaton and Subramanian (1996), the poorest people—the
ones in the bottom decile in terms of per capita expenditure— consume on average
slightly less than 1400 calories a day. This level is about half of what the Indian
government recommends for a man with moderate activity, or a woman with heavy
physical activity (see 具http://www.fao.org/documents/show_cdr.asp?url_file⫽/
DOCREP/x0172e/x0172e02.htm典). The shortfall seems enormous. The Udaipur
data, which includes other health indicators, suggest that health is definitely reason
for concern.
Among the extremely poor in Udaipur, only 57 percent report that the
members of their household had enough to eat throughout the year. Among the
poor adults in Udaipur, the average “body mass index” (that is, weight in kilograms
divided by the square of the height in meters) is 17.8. Sixty-five percent of adult
men and 40 percent of adult women have a body mass index below 18.5, the
standard cutoff for being underweight (WHO expert consultation, 2004). More-
over, 55 percent of the poor adults in Udaipur are anemic, which means they have
an insufficient number of red blood cells. The poor are frequently sick or weak. In
Udaipur, 72 percent report at least one symptom of disease and 46 percent report
an illness which has left them bedridden or necessitated a visit to the doctor over
the last month. Forty-three percent of the adults and 34 percent of the adults aged
under 50 report difficulty carrying out at least one of their “activities of daily living,”
such as working in the field, walking, or drawing water from a well. Diarrhea is
extremely frequent among children. About one-seventh of the poor have vision
problems, which may be caused by either poor nutrition, or the diseases that afflict
them, or a combination of the two.
Detailed information on health is not available in all the surveys, but most
report the incidence over the last month of health episodes that left a household
member bedridden for a day or more, or that required a household member to see
a doctor. The general pattern is a remarkably high level of morbidity. Among the
rural poor living under $1 a day in Peru, South Africa, East Timor, Panama, and
Tanzania, between 11 and 15 percent of households report having a member either
being bedridden for at least a day or requiring a doctor. The number is between
21 and 28 percent in Pakistan, Indonesia, and Cote d’Ivoire, and between 35 and
46 percent in Nicaragua, Udaipur, and Mexico.
Even these high numbers may be an understatement if the poor are less prone
to recall and report such sicknesses than those with higher incomes. The poor
generally do not complain about their health— but then they also do not complain
about life in general, either. While the poor certainly feel poor, their levels of
self-reported happiness or self-reported health levels are not particularly low (Ban-
erjee, Duflo, and Deaton, 2004). On the other hand, the poor do report being
under a great deal of stress, both financial and psychological. In Udaipur, about
12 percent say that there has been a period of one month or more in the last year
in which they were so “worried, tense, or anxious” that it interfered with normal
activities like sleeping, working, and eating. Case and Deaton (2005) compare data
from South Africa to the data from Udaipur and data from the United States. They
find that the answers of poor South Africans and poor Indians about stress look very
similar, while reported levels of stress are very much lower in the United States. The
most frequently cited reason for such tensions is health problems (cited by 29 per-
cent of respondents), with lack of food and death coming next (13 percent each).
Over the last year, in 45 percent of the extremely poor households in Udiapur (and
35 percent of those living under $2 a day) adults had to cut the size of their meal
at some point during the year and in 12 percent of them, children had to cut the
size of their meals. In the extremely poor households under $1 per day, 37 percent
report that, at some point in the past year, the adults in the household went without
a meal for an entire day. Cutting meals is also strongly correlated with unhappiness.
Even poor households should be able to save enough to make sure that they
never have to cut meals, because as discussed above they do have substantial slack
in their budgets and cutting meals is not that common. Additional savings would
also make it easier to deal with healthcare emergencies. For these households,
saving a bit more would seem like a relatively inexpensive way to reduce stress.
Investment in Education
The extremely poor spend very little on education. The expenditure on
education generally hovers around 2 percent of household budgets: higher in
Pakistan (3 percent), Indonesia (6 percent), and Cote d’Ivoire (6 percent), but
much lower in Guatemala (0.1 percent), and South Africa (0.8 percent). The
fraction does not really change very much when we compare the poor to the
extremely poor, or rural areas to urban areas, though in a few countries like
Pakistan, urban families spend substantially more than rural families. This low level
of expenditure on education is not because the children are out of school. In 12 of
the 13 countries in our sample, with the exception of Cote d’Ivoire, at least
50 percent of both boys and girls aged 7 to 12 in extremely poor households are in
school. In about half the countries, the proportion enrolled is greater than 75 per-
cent among girls, and more than 80 percent among boys.
The reason education spending is low is that children in poor households
typically attend public schools or other schools that do not charge a fee. In
countries where poor households spend more on education, it is typically because
government schools have fees, as in Indonesia and Cote d’Ivoire. However, mount-
ing evidence, reported below, suggests that public schools in these countries are
often dysfunctional, which could explain why even very poor parents in Pakistan are
pulling their children out of public schools and spending money to send them to
private schools.
How the Poor Earn Their Money
Walking down the main street of the biggest slum in the medium-sized south-
ern Indian city of Guntur at nine in the morning, the first thing one notices are the
eateries. In front of every sixth house that directly faced the road, by our count, a
woman was sitting behind a little kerosene stove with a round cast-iron griddle
roasting on it. Every few minutes someone would walk up to her and order a dosa,
the rice and beans pancakes that almost everyone eats for breakfast in south India.
She would throw a cupful of the batter on the griddle, swirl it around to cover
almost the entire surface, and drizzle some oil around the edges. A minute or two
later, she would slide an off-white pock-marked pancake off the griddle, douse it in
some sauce, fold it in a newspaper or a banana leaf and hand it to her client, in
return for a rupee (roughly 15 cents).
When we walked back down that same street an hour later, the women were
gone. We found one inside her house, filling her daughter’s plate with lunch that
she had cooked while making the dosas. She told us that later that day, she was
going out to vend her saris, the long piece of decorative cloth that Indian women
drape around themselves. She gets plain nylon saris from the shop and stitches
beads and small shiny pieces on them. Once a week, she takes them from house to
house, hoping that women would buy them to wear on special occasions. And they
do buy them, she said confidently. All the other dosa women we met that day had
a similar story: once they are done frying dosas, they do something else. Some
collect trash; others make pickles to sell; others work as laborers.
Entrepreneurship and Multiple Occupations among the Poor

All over the world, a substantial fraction of the poor act as entrepreneurs in the
sense of raising capital, carrying out investment, and being the full residual claim-
ants for the resulting earnings. In Peru, 69 percent of the households who live
under $2 a day in urban areas operate a nonagricultural business. In Indonesia,
Pakistan, and Nicaragua, the numbers are between 47 and 52 percent. A large
fraction of the rural poor operate a farm: 25 to 98 percent of the households who
earn less than a dollar a day report being self-employed in agriculture, except in
Mexico and South Africa where self-employment in agriculture is very rare.4
Moreover, many of the rural poor—from 7 percent in Udaipur up to 36 percent in
Panama—also operate a nonagricultural business.
4
The low level of agriculture among the extremely poor in South Africa is easily explained. The black
population, which contains almost all of the extremely poor people, was historically under the apartheid
regime not allowed to own land outside the “homelands,” and most of the land in the homelands was
not worth cultivating.
Many poor households have multiple occupations. Like the dosa women of
Guntur, 21 percent of the households living under $2 a day in Hyderabad who have
a business actually have more than one, while another 13 percent have both a
business and a laborer’s job. This multiplicity of occupations in urban areas is
found in many other countries as well, though not everywhere. Among those
earning less than $2 a day, 47 percent of the urban households in Cote d’Ivoire and
Indonesia get their income from more than one source; 36 percent in Pakistan;
20.5 percent in Peru; and 24 percent in Mexico. However, in urban South Africa
and Panama, almost no one has more than one occupation and only 9 percent do
so in Nicaragua and Timor Leste.5
This pattern of multiple occupations is stronger in rural areas. In Udaipur
district, as we discussed earlier, almost everybody owns some land and almost
everybody does at least some agriculture. Yet only 19 percent of the households
describe self-employment in agriculture as the main source of their income. Work-
ing on someone else’s land is even rarer, with only 1 percent reporting this as their
main source of income. In other words, the poor cultivate the land they own, no less
and usually, no more. Yet, agriculture is not the mainstay of most of these house-
holds. The most common occupation for the poor in Udaipur is working as a daily
laborer: 98 percent of households living under $1 per day in rural areas report
doing this, and 74 percent claim it is their main source of earnings.
This pattern is confirmed by data from a smaller survey of 27 villages randomly
sampled from eight districts in West Bengal (Banerjee, 2006). In this survey, even
households that claim to be the operators for a plot of land spend only 40 percent
of their time in agricultural activities on their own land. The fraction is not very
different for men and women—women do less direct agricultural work but more
animal rearing, along with growing fruits and vegetables. Their other activities
include teaching, sewing and embroidery, unpaid household work, and gathering
fuel. Strikingly, almost 10 percent of the time of the average household is spent on
gathering fuel, either for use at home or for sale. The median family in this survey
has three working members and seven occupations.
In most of the Living Standard Measurement Surveys, households are not
asked their main source of earnings, but the pattern of diversification among rural
households is apparent nevertheless. In Guatemala, 65 percent of the rural
extremely poor say they get some income from self-employment in agriculture,
86 percent work as laborers outside agriculture, and 24 percent are self-employed
outside agriculture. In Indonesia, 34 percent of the rural, extremely poor house-
holds work as laborers outside of agriculture, and 37 percent earn income from
self-employment outside of agriculture. In Pakistan, 51 percent of the rural, ex-
tremely poor earn income from labor outside of agriculture and 35 percent from
a business outside of agriculture. Overall, the fraction of the rural extremely poor
5
This result may reflect a data problem. Anthropologists do claim that they observe multiple occupa-
tions in South African households (Francie Lund, verbal communication to Angus Deaton).
households who report that they conduct more than one type of activity to earn a
living is 50 percent in Indonesia, 72 percent in Cote d’Ivoire, 84 percent in
Guatemala, and 94 percent in Udaipur. It is smaller, but not negligible— between
10 and 20 percent—in Nicaragua, Panama, Timor Leste, and Mexico. Once again,
an exception to this general pattern is South Africa, where less than 1 percent of
the rural poor or extremely poor report multiple occupations.
Temporary Migration to Work

Where do rural households, which are often a walk of a half-hour or more from
the nearest road, find all this nonagricultural work? They migrate.
Temporary migration is rarely documented in surveys, but in the Udaipur
survey, which had questions about this activity, 60 percent of the poorest house-
holds report that someone from their family had lived outside for a part of the year
to obtain work. For 58 percent of the families, the head of the household had
migrated. The migrants typically complete multiple trips in a year. However, people
do not leave for very long. The median length of a completed migration is one
month, and only 10 percent of migration episodes exceed three months. Nor do
most of the migrants travel very far: 28 percent stay in the district of Udaipur and
only 42 percent leave the state of Rajasthan.
Permanent migration for work reasons is rare, although many women move
when they marry. Even if we look at households currently living in urban areas,
where the inflow of immigrants is presumably higher than in rural areas, the share
of extremely poor households who had one member that was born elsewhere and
had migrated for work reasons was just 4 percent in Pakistan, 6 percent in Cote
d’Ivoire, 6 percent in Nicaragua, and almost 10 percent in Peru. The 1991 Census
of India reports that only 14.7 percent of the male population lives somewhere
other than where they were born. Indonesia is the only country in our data where
the proportion is higher: 41 percent of the urban households came from elsewhere.
Indonesia is also the only country in this sample where migration was explicitly
subsidized.
Lack of Specialization
A pattern seems to emerge. Poor families do seek out economic opportunities,
but they tend not to become too specialized. They do some agriculture, but not to
the point where it would afford them a full living (for example, by buying/renting/
sharecropping more land). They also work outside, but only in short bursts, and
they do not move permanently to their place of occupation.
This lack of specialization has its costs. Many of these poor households receive
most of their earnings from these outside jobs, despite only being away for 18 weeks
of the year on average (in the case of Udaipur). As short-term migrants, they have
little chance of learning their jobs better, or ending up in a job that suits their
specific talents, or being promoted.
Even the nonagricultural businesses that the poor operate typically require
relatively few specific skills. For example, the businesses in Hyderabad include
11 percent tailors, 8 percent fruit and vegetable sellers, 17 percent small general
stores, 6.6 percent telephone booths, 4.3 percent auto owners, and 6.3 percent milk
sellers. Except for tailoring, none of these jobs require the high levels of specialized
competence that take a long time to acquire, and therefore are associated with
higher earnings. In several ways, the poor are trading off opportunities to have
higher incomes.
The Problem of Scale

The businesses of the poor typically operate at a remarkably small scale. As we
saw, the average landholding for those who own land is usually quite tiny, and
renting land is infrequent. Furthermore, most of this land is not irrigated and
cannot be used all year.
The scale of nonagricultural businesses run by the poor also tends to be small.
In the 13 countries in our sample, the median business operated by people living
under $2 dollars a day either in a rural or an urban location has no paid staff, and
the average number of paid employees range between 0.14 in rural Nicaragua to
0.53 in urban Panama. Businesses are operated on average by 1.38 (in Peru) to 2.59
(in Cote d’Ivoire) people—most of them being family members. Most of these
businesses have very few assets as well. In Hyderabad, only 20 percent of the
businesses operate out of a separate room. In Pakistan, about 40 percent of the
businesses of those living under $1 or $2 dollar a day have a vehicle, but only
4 percent have a motorized vehicle and none have any machinery. In other
countries, even nonmotorized vehicles are rare. In Hyderabad, where we have an
exhaustive list of business assets, the most common assets are tables, scales, and
pushcarts.
Many of these businesses are probably operating at too small a scale for
efficiency. The women making dosas spend a lot of time waiting: having fewer
dosa-makers who do less waiting would be more efficient. In fact, it might make
sense in efficiency terms for the dosa-makers to work in pairs: one to make the dosas
and one to wrap them and make change.
Markets and the Economic Environment of the Poor
The economic choices of the poor are constrained by their market environ-
ment. For example, some may save little because they lack a safe place to put their
savings. Other constraints result from a lack of shared infrastructure. When the
government builds a water line to your neighborhood, for example, you no longer
need your own well. This section focuses on markets. The next takes up the issue
of infrastructure.
The Market for Credit and the Poor

The data from our 13 countries suggests that the fraction of rural, extremely
poor households having an outstanding debt varies between countries, from 11 per-
cent in rural East Timor to 93 percent in Pakistan. But across the surveys, very few
of the poor households get loans from a formal lending source.
In the Udaipur sample, about two-thirds of the poor had a loan at the time of
the interview. Of these loans, 23 percent are from a relative, 18 percent from a
money lender, 37 percent from a shopkeeper, and only 6.4 percent from a formal
source like a commercial bank or a cooperative. Lest one suspect that the low share
of bank credit is due to the lack of physical access to banks, a similar pattern occurs
in urban Hyderabad, where households living below $2 a day primarily borrow from
moneylenders (52 percent), friends or neighbors (24 percent), and family mem-
bers (13 percent), and only 5 percent of the loans are with commercial banks.
Indonesia is the one country where a substantial share of loans to the poor is
formal: thanks to efforts by the Bank Rakyat Indonesia, one-third of the rural poor
Indonesian households borrow from a bank. In the other countries, relatives,
shopkeepers, and other villagers form, by far, the overwhelming source of bor-
rowed funds.
Credit from informal sources tends to be expensive. In the Udaipur survey,
where we have data on interest rates not available in other surveys, those living on
less than $1 a day pay on average 3.84 percent per month for the credit they receive
from informal sources. Those who consume between $1 and $2 dollar a day per
capita pay a little less: 3.13 percent per month. This lower rate occurs in part
because they rely less on informal sources of credit and more on the formal sources
than the extremely poor; and in part it reflects that informal interest rates are lower
for those with more land—the interest rate from informal sources drops by
0.40 percent per month for each additional hectare of land owned. The monthly
interest rate we see in the Hyderabad sample is even higher: 3.94 percent per
month for those living under $2 dollars a day. Few of these urban poor borrowers
in Hyderabad have any land to use as collateral.
These high interest rates seem not to occur directly because of high rates of
default, but rather as a result of the high costs of contract enforcement. While delay
in repayment of informal loans is frequent, default is actually rare (Banerjee and
Duflo, 2005). For example, a “Summary Report on Informal Credit Markets in
India” reports that across four case studies of money-lenders in rural India, default
explains only 23 percent of the interest rate charged (Dasgupta, 1989). A well-
known study of rural money-lenders in Pakistan found that the median rate of
default across money-lenders is just 2 percent (Aleem, 1990).
However, these low default rates are anything but automatic. Contract enforce-
ment in developing countries is often difficult, and courts often fail to punish
recalcitrant borrowers. As a result, lenders often must spend resources to assure
that their loans get repaid, which drives up interest rates. The fact that lending
depends so much on effective screening and monitoring also means that lending to
the poor is especially difficult. Again, part of the problem is that the poor lack
collateral to secure the loan and therefore lenders hesitate to trust them. Given that
the loan amount will in any case be small, the profits from the transaction may not
be large enough to cover the cost of monitoring/screening. As a result, many
lenders are reluctant to lend to the poor. Moreover, informal lenders located close
to the borrowers may be the only ones who are willing to lend to the poor—since
monitoring/screening is relatively cheap for them. However, these informal lend-
ers pay more for their deposits than the more formal institutions, since they are less
capitalized and regulated and do not have any government guarantees. This higher
cost of deposits is passed on to poorer borrowers. The gap can be considerable—in
the study by Aleem (1990), the cost of capital for the money-lenders was 32.5 per-
cent in a year when banks were only paying 10 percent for their deposits.
The Market for Savings and the Poor

A main challenge for the poor who try to save is to find safety and a reasonable
return. Stashing cash inside your pillow or elsewhere at home is neither safe nor
well-protected from inflation. In addition, recent research by Ashraf, Karlan, and
Yin (forthcoming) in the Philippines and Duflo, Kremer, and Robinson in Kenya
(2006) suggests that the poor, like everyone else, have problems resisting the
temptation of spending money that they have at hand.
Few poor households have savings accounts. Except in Cote d’Ivoire, where
79 percent of the extremely poor households under $1 a day have a savings
account, the fraction is below 14 percent in the other countries in our data. In
Panama and Peru, less than 1 percent of poor households have a savings account.
In most countries, the share of households with a saving account is similar in rural
and urban areas, and similar for those under $2 a day and those under $1 a day.
Here India appears to be an exception, since only 6 percent of the extremely poor
households in rural Udaipur have a savings account, while 25 percent of them do
in the city of Hyderabad.
A lack of access to reliable savings accounts appears common to the poor
everywhere, as documented in Stuart Rutherford’s (2000) fascinating book, The
Poor and their Money. Rutherford describes many strategies the poor use to deal with
this problem. For example, they form savings “clubs,” where each person makes
sure that the others save. Self-Help Groups (SHGs), popular in parts of India and
present in Indonesia as well, are saving clubs which also make loans to their
members out of the accumulated savings (they are also sometimes linked to banks).
In Africa, Rotating Savings and Credit Associations (ROSCAs) allow people to lend
their savings to each other on a rotating basis. Others pay deposit collectors to
collect their deposits and put them in a bank. Others deposit their savings with local
money-lenders, with credit unions (which are essentially larger and much more
formally organized self-help groups) or in an account at the local post office.
Indeed, one reason why many of the poor respond so well to microcredit is not
necessarily because it offers them credit, but because once you take a loan and buy
something with it, you have a disciplined way to save—namely, by paying down the
loan.
Even participation in semiformal savings institutions (such as self-help groups,
ROSCAs, and microfinance institutions) is not nearly as common among the poor
as one might have expected. Even in India, despite the high visibility especially of
SHGs, less than 10 percent of the poor in our Udaipur and Hyderabad surveys are
part of an SHG or a ROSCA. The majority of the households who have any savings
deposit it at a bank.
The Market for Insurance and the Poor

The poor have little access to formal insurance. In many surveys, questions
about insurance are not even asked. In the six of our seven countries where such
data is available, less than 6 percent of the extremely poor are covered by health
insurance of any kind. The exception is Mexico, where about half of the extremely
poor have coverage. The numbers are not much higher in urban areas. Life
insurance is a bit more common in India (and is, essentially, a form of savings).
Four percent of the extremely poor in Udaipur and 10 percent in Hyderabad have
life insurance.6
In principle, social networks can provide informal insurance. For example,
Udry (1990) shows that poor villagers in Nigeria experience a dense network of
loan exchanges: Over the course of one year, 75 percent of the households had
made loans, 65 percent had borrowed money, and 50 percent had been both
borrowers and lenders. Almost all of these loans took place between neighbors and
relatives. Both the repayment schedule and the amount repaid were affected by
both the lender’s and the borrower’s current economic conditions, underlining the
role of these informal loans in providing insurance. Munshi and Rosenzweig (2005)
argue that the same process happens in India through the jati or subcaste networks.
Yet these informal networks have only a limited ability to protect the house-
holds against risk. The consumption of poor households is strongly affected by
variations in their incomes, as has been shown by Deaton (1997) in Cote d’Ivoire,
Munshi and Rosenzweig (2005) in India, Fafchamps and Lund (2003) in the
Philippines, and Townsend (1995) in Thailand. Poor households also bear most
health care risks (both expenditures and foregone earnings) directly. For example,
Gertler and Gruber (2002) find that in Indonesia a decline in the health index of
the head of the household is associated with a decline in nonmedical expenditures.
In Udaipur, large expenditures on health ($70 and higher, at purchasing power
parity exchange rates) are covered by borrowing or dissaving. Only 2 percent of
these expenses were paid for by someone else, and none came from the self-help
groups. Twenty-four percent of the households in Hyderabad had to borrow to pay
for health expenses in the last year. When the poor fall under economic stress, their
“insurance” often means eating less or taking their children out of school. For
example, Jacoby and Skoufias (1997) find that poor children leave school in bad
years. Rose (1999) finds that the gap in mortality of girls relative to boys is much
larger in drought years (but only for the landless households, who are not able to
sell land or borrow to weather the crisis). Poor households also are less likely to get
6
Surprisingly, weather insurance is also essentially absent everywhere the world over (Morduch, 2006),
although it would seem straightforward to provide insurance against observed weather patterns.
medical treatment for themselves or their children. In the Udaipur sample, those
who were sick in the last months and did not seek treatment (more than half) cite
lack of money more often than any other reason (34 percent). The lack of
insurance also leads the poor to underinvest in risky but profitable technologies,
such as new seeds (Morduch, 1995).
The weaknesses of informal insurance should not really be a surprise. Ulti-
mately, informal insurance relies on the willingness of the fortunate to take care of
those less favored, which limits the insurance provided. Moreover, informal social
networks are often not well-diversified. They often spread risk over households who
live nearby and have similar incomes and occupations, as Fafchamps and Gubert
(2005) show for the Philippines.
Governments in these countries are not very effective at providing insurance
either. In most countries, the government is supposed to provide free health care
to the poor. Yet health care is rarely free. Government health care providers often
illegally charge for their own services and for medicines. Also, as we will see, the
quality of care in the public system is so low that the poor often end up visiting
private providers.
A number of governments provide a form of income insurance through
safety-net “food for work” programs. Under these programs, everyone is entitled to
a certain number of days of government employment usually involving physical
labor at a pre-announced (relatively low) wage. In Udaipur, where the years leading
up to the survey had been particularly arid, 76 percent of the poor had at least one
of the household members work on a public employment program of this kind.
However, such schemes often offer only a limited number of jobs which can end up
being doled out in a way that discriminates against the poor.
The Market for Land and the Poor

For historical reasons, land is the one asset the poor tend to own. But land
records in developing countries are often incomplete and many people do not have
titles to their land. As many including most famously Hernando De Soto (2003)
have emphasized, an unclear title makes it harder to sell the land or mortgage it.
This situation is especially troubling for the poor, because they tend to own a lot of
the land that was either recently cleared or recently encroached upon, which is
typically the land where tilling is incomplete. Erica Field (2006) suggests that, in
Peru, the poor spend a lot of time protecting their claims to the land (since they
have no title, they have no legal recourse).
The poor also suffer because where titles are missing or imperfectly enforced,
political influence matters. In parts of Ghana, land belongs either to lineages or to
the village, and cultivators have only rights of use. In this context, Goldstein and
Udry (2005) show that the people who lack the political clout to prevent having
their land taken away from them by the village or their lineage (which typically
includes the poor) do not leave their land fallow for long enough. Leaving land to
fallow increases its productivity, but increases the risk that someone may seize it.
Finally, a long tradition of research in agricultural economics argues that the
poor lack incentives to make the best use of the land they are cultivating because
they are agents rather than owners (Shaban, 1987). Banerjee, Gertler, and Ghatak
(2002) found that a reform of tenancy that forced landlords to raise the share of
output going to the sharecroppers and also gave them a secure right to the land
raised productivity by about 50 percent.
Infrastructure and the Economic Environment of the Poor
Infrastructure includes roads, power connections, schools, health facilities,

and public health infrastructure (mostly water and sanitation). While markets and
the government play differing roles in the supply of such infrastructure, all ele-
ments of infrastructure are usefully thought of as part of the environment in which
people live, with some characteristics of a local public good, rather than something
that can be purchased piecemeal by individuals.
The availability of physical infrastructure to the poor like electricity, tap water,
and even basic sanitation (like access to a latrine) varies enormously across coun-
tries. In our sample of 13 countries, the number of rural poor households with
access to tap water varies from none in Udaipur to 36 percent in Guatemala. The
availability of electricity varies from 1.3 percent in Tanzania to 99 percent in
Mexico. The availability of a latrine varies from none in Udaipur to 100 percent in
Nicaragua. Different kinds of infrastructure do not always appear together. In
Indonesia, 97 percent of rural, extremely poor households have electricity but only
6 percent have tap water. Some governments provide reasonable access to both
electricity and tap water to the extremely poor: in Guatemala, 38 percent of the
extremely poor rural households have tap water and 30 percent have electricity.
Other governments do very little: in Udaipur, Papua New Guinea, East Timor, and
South Africa, the share of the rural, extremely poor with tap water or electricity is
below 5 percent.
Generally, access to electricity and tap water is greater for the urban poor than
the rural poor (which is probably fortunate since lack of sanitation in very dense
surroundings can be particularly dangerous from the public health point of view).
The only exception to this pattern in our 13 countries is Cote d’Ivoire, where rural
households seem to have better access. Moreover, access to both tap water and
electricity is typically higher for those under $2 a day than those under $1 a day.
Most low-income countries have made some attempt to ensure that poor
households have access to primary schools and basic health centers. For example,
most Indian villages now have a school within a kilometer, and a health subcenter
exists for every 10,000 people. However, the quality of the facilities that serve the
poor tends to be low, even when they are available, and it is not clear how much
they actually deliver. Chaudhury, Hammer, Kremer, Muralidharan, and Rogers
(2005) report results on surveys they conducted to measure the absence of teachers
and health workers in Bangladesh, Ecuador, India, Indonesia, Peru, and Uganda.
They found that the average absence rate among teachers is 19 percent and the
average absence rate among health workers is 35 percent. Moreover, because not
all teachers and health workers are actually working when at their post, even this
picture may be too favorable. Moreover, absence rates are generally higher in poor
regions.
In an innovative study on health care quality, Das and Hammer (2004)
collected data on the competence of doctors in Delhi, India, based on the kinds of
questions they ask and the action they say they would take faced with a hypothetical
patient, suffering from conditions they are likely to encounter in their practice.
Every Delhi neighborhood, poor or rich, lives within 15 minutes of at least
70 health providers. However, the gap in competence of the average health
practitioner between the poorest and richest neighborhoods is almost as large as
the gap between the competence of a health provider with an MBBS degree (the
equivalent of an MD in the United States) and a provider without such a qualifi-
cation. In fact, an expert panel found that the treatments suggested by the average
provider in their sample are slightly more likely to do harm rather than good, due
to a combination of misdiagnosis and overmedication.
These differences in health care and basic sanitation infrastructure can affect
mortality. Several surveys ask women about their pregnancies and the outcomes,
including whether the child is still alive. We compute an infant mortality measure
as the number of children who died before the age of one divided by the number
of live births. The numbers are startling, especially because they are likely to be
underestimates (not all children are remembered, especially if they died very
early). Among the rural, extremely poor, the lowest infant mortality that we observe
is 3.4 percent in Indonesia. At the high end, infant mortality among the extremely
poor is 8.7 percent in South Africa and Tanzania, 10 percent in Udaipur, and
16.7 percent in Pakistan. The rates are lower, but not much lower, in urban areas.
The rates also remain high if the definition of poverty is expanded to include those
who live under $2 a day. Wagstaff (2003) uses data from the demographic and
health surveys to estimate prevalence of malnutrition and child mortality among
those living under $1 a day in a number of countries. He finds very large difference
between survival chances of poor children in different countries, and shows that
they are correlated with health spending per capita in these countries.
The low quality of teaching in public schools has clear effect on learning levels
as well. In India, despite the fact that 93.4 percent of children ages 6 –14 are
enrolled in schools (75 percent of them in government schools), a recent nation-
wide survey found that 34.9 percent of the children age 7 to 14 cannot read a simple
paragraph at second-grade level (Pratham, 2006). Moreover, 41.1 percent cannot
do subtraction, and 65.5 percent cannot do division. Even among children in
grades six to eight in government schools, 22 percent cannot read a second-grade
text.
In countries where the public provision of education and health services is
particularly low, private providers have stepped in. In the parts of India where
public school teacher absenteeism is the highest, the fraction of rural children
attending private schools is also the highest (Chaudhury, Hammer, Kremer,
Muralidharan, and Rogers, 2005). However, these private schools are less than
ideal: they have lower teacher absenteeism than the public schools in the same
village, but their teachers are significantly less qualified in the sense of having a
formal teaching degree.
A similar but more extreme pattern arises in health care. Again, private
providers who serve the poor are less likely to be absent and more likely to examine
the patient with some care than their public counterparts, but they tend to be less
well qualified (for example, Das and Hammer, 2004). However, unlike in educa-
tion, where most poor children are still in the public system, even in countries and
regions where public education is of extremely poor quality, where the public
health care system has high levels of absence, most people actually go to private
providers. For example, in India, where absence of health care providers is 40 per-
cent, 58 percent of the extremely poor households have visited a private health care
provider in the last month. By contrast in Peru, where the absentee rate for health
care providers is fairly low at 25 percent (Chaudhury, Hammer, Kremer, Mu-
ralidharan, and Rogers, 2005), only 9 percent of the rural extremely poor house-
holds have been to a private health provider in the last month. Within the Udaipur
District, Banerjee, Deaton, and Duflo (2004) also found that the rate of usage of the
public health facility is strongly correlated with the absence rate at the public health
facilities in the areas.
Understanding the Economic Lives of the Poor
Many facts about the lives of the poor start to make much more sense once we
recognize that they have very limited access to efficient markets and quality infra-
structure. The fact that the poor usually cultivate the land they own, no more and
no less, for example, probably owes a lot to the agency problems associated with
renting out land. In part, it must also reflect the fact that the poor, who typically
own too little land relative to the amount of family labor, suffer from lack of access
to credit. This pattern is reinforced by the difficulties that the poor face in getting
any kind of insurance against the many risks with which a farmer needs to deal: A
second job outside agriculture offers security against some of that risk.
Why So Little Specialization?

Risk-spreading is clearly one reason why the poor, who might find risk espe-
cially hard to bear, tend not to be too specialized in any one occupation. They work
part time outside agriculture to reduce their exposure to farming risk, and keep a
foot in agriculture to avoid being too dependent on their nonagricultural jobs.
Another reason for a second job is to occupy what would otherwise be wasted
time. When we asked the dosa-sellers of Guntur why they did so many other things
as well, they all said: “[We] can sell dosas in the morning. What do we do for the rest
of the day?” Similarly, farmers who do not have irrigated land can only farm when
the land is not too dry. Finding some work outside agriculture is a way for them to
make productive use of their time when the land is unusable. However, this
argument is incomplete. We also need to explain what made the women opt to sell
dosas: After all they could have skipped the dosas and specialized in whatever they
were doing for the rest of the day. Risk spreading remains a possible answer, but
many of them seem to be in relatively safe occupations. Given the fact that almost
everyone owns the cooking implement that one needs to make a dosa and entry is
free, it does not seem that dosa-making is an extraordinarily profitable activity.
A final, more compelling reason for multiple jobs is that the poor cannot raise
the capital they would need to run a business that would occupy them fully. As we
saw, most businesses operate with very little assets and little working capital.
Likewise, some poor farmers might be able to irrigate their lands and make them
useable for a larger part of the year, but they lack the necessary access to funds. Of
course, in agriculture, some downtime will always remain, justifying some amount
of diversification of jobs. But such downtime would be much more limited than
what the data actually reveals.
Why So Many Entrepreneurs?

Once we draw this link between the tendency of the poor to be in multiple
occupations and their access to financial markets, it is clear why so many of the poor
are entrepreneurs. If you have few skills and little capital, and especially if you are
a woman, being an entrepreneur is often easier than finding an employer with a job
to offer. You buy some fruits and vegetables or some plastic toys at the wholesalers
and start selling them on the street; you make some extra dosa mix and sell the dosas
in front of your house; you collect cow dung and dry it to sell it as a fuel; you attend
to one cow and collect the milk. These types of activities are exactly those in which
the poor are involved.
It is important not to romanticize these penniless entrepreneurs. Given that
they have no money, borrowing is risky, and no one wants to lend to them, the
businesses they run are inevitably extremely small, to the point where there are
clearly unrealized economies of scale. Moreover, given that so many of these firms
have more family labor available to them than they can use, they do very little to
create jobs for others. Of course, this pattern makes it harder for anyone to find a
job and hence reinforces the proliferation of petty entrepreneurs.
Why Don’t the Poor Eat More?

Another puzzle is why the poor do not spend more on food both on average
and especially out of the marginal dollar. Eating more and eating better (more
grains and iron-rich foods, less sugar) would help them build their body-mass
indices to healthier levels.
One possibility is that eating more would not help them that much, or not for
long, because they would become weak again at the first attack of disease, which will
invariably occur. For example, Deaton, Cutler, and Lleras-Muney (2006) argue that
nutrition is at best a very small part of what explains the tremendous gains in health
around the world in the past few decades. However, some improvements in
nutrition (reduction of anemia in particular) have been linked to increased pro-
ductivity (Thomas et al., 2004). Moreover, as we saw, not having enough to eat does,
at a minimum, make the poor extremely unhappy.
Provided that eating more would increase their productivity, it is unlikely that
the low levels of good consumption can be explained by a simple lack of self control
(that is, the poor cannot resist temptations to spend on things other than food). As
we noted above, the poor also spend surprisingly large amounts on entertainment:
televisions, weddings, or festivals. All of these involve spending a large amount at
one time, which implies some saving unless they happen to be especially credit-
worthy. In other words, many poor people save money that they could have eaten
today to spend more on entertainment in the future, which does not immediately
fit the idea that they lack self-control.
The need to spend more on entertainment rather than on food appears to be
a strongly felt need, not a result of inadequate planning. One reason this might be
the case is that the poor want to keep up with their neighbors. Fafchamps and
Shilpi (2006) offer evidence from Nepal in which people were asked to assess
whether their level of income as well as their levels of consumption of housing,
food, clothing, health care, and schooling were adequate. The answers to these
questions were strongly negatively related to the average consumption of the other
people living in the same village.
Why Don’t the Poor Invest More in Education?

The children of the poor are, by and large, going to primary school. However,
parents are not reacting to the low quality of these schools, either by sending their
children to better and more expensive schools or by putting pressure on the
government to do something about quality in government schools. Why not?
One reason is that poor parents, who may often be illiterate themselves, may
have a hard time recognizing that their children are not learning much. Poor
parents in Eastern Uttar Pradesh in India have limited success in predicting
whether their school-age children can read (Banerjee et al., 2006). Moreover, how
can parents be confident that a private school would offer a better education, given
that the teacher there is usually less qualified than the public school teachers? After
all, researchers have only discovered this pattern in the last few years. As for putting
pressure on the government, it is not clear that the average villager would know
how to organize and do so.
Why Don’t the Poor Save More?

The arguments based on lack of access to credit and insurance or labor market
rigidities, by themselves, do not help very much in understanding why the poor are
not more interested in accumulating wealth. After all, the poor could easily save
more without getting less nutrition, by spending less on alcohol, tobacco, festivals,
and food items such as sugar, spice, and tea.
It is true that the poor typically have no bank accounts or other financial assets
with which to save, but many of them have their own businesses, and these tend to
be chronically underfunded. So why not save up to buy a new machine, or increase
the stock in the shop? Moreover, as we saw above, a very substantial fraction of the
poor have debt, and the interest rate on the debt often exceeds 3 percent per
month. Paying down debt is therefore a very attractive way to save. Even if you have
no business to grow, and have no debt to repay, just holding some extra stocks for
the proverbial rainy day (or “the drought”) can save both worry and the misery of
watching your children go hungry. In other words, precautionary motives for saving
should be especially strong for the poor.
Part of the answer is probably that saving at home is hard. The money may be
stolen (especially if you live in a house that cannot be locked) or grabbed by your
spouse or your son. Also, if you have money at hand, you are constantly resisting
temptation to spend: to buy something, to help someone to whom you find it
difficult to say “no,” to give your child a treat. Such temptations may be especially
hard for the poor, because many of the temptations they are resisting are things
that everyone else might take for granted.
The poor seem aware of their vulnerability to temptation. In the Hyderabad
survey, the respondents were asked to name whether they would like to cut
particular expenses, and 28 percent of the poor named at least one item. The top
item that households would like to cut is alcohol and tobacco (mentioned by
44 percent of the households that want to cut on items). Then came sugar, tea, and
snacks (9 percent), festivals (7 percent), and entertainment (7 percent).
Self-knowledge does not help in addressing self-control problems; in fact,
self-knowledge about a lack of self-control means that you know your saving will
probably just end up feeding some future indefensible craving, and the machine
for which you are trying to save will never actually be bought. Being naı̈ve might
actually help—you might be lucky and save enough to buy the machine before the
temptation gets to you.
Beyond Market Failures and Self-control Problems

An interesting example that spans many of the arguments we have used above
is a study by Duflo, Kremer, and Robinson (2006) on investment in fertilizer in
Kenya. According to surveys conducted over several years, just 40.3 percent of
farmers had ever used fertilizer, and just 25 percent used fertilizer in any given year.
Conservative estimates suggest that the average return to using fertilizer exceeds
100 percent, and the median return is above 75 percent. Duflo, Kremer, and
Robinson conducted field trials of fertilizer on the farms of actual randomly
selected farmers, which were meant to teach the farmers how to use fertilizer and
the rewards of doing so. They found that the farmers who participated in the study
are 10 percent more likely on average to use fertilizer in the very next season after
the study, but only 10 percent more likely—and the effects fade after the first
season.
When farmers were asked why they did not use fertilizer, most farmers replied
that they did not have enough money. However, fertilizer can be purchased (and
used) in small quantities, so this investment opportunity seems accessible to farm-
ers with even a small level of saving. The main issue, once again, appears to be that
farmers find it difficult to save even small sums of money. The program in Kenya
offered to sell farmers a voucher right after the harvest, which is when farmers have
money in hand, which would entitle them to buy fertilizer later.
This program had a large effect: 39 percent of the farmers offered the voucher
bought the fertilizer; the effects are as large as a 50 percent subsidy on the cost of
fertilizer. The voucher seemed to work as a commitment device to encourage
saving. But a puzzle remains: farmers could have bought the fertilizer in advance on
their own. Indeed, a huge majority of the farmers who bought the vouchers for
future delivery of fertilizer requested immediate delivery, and then stored the
fertilizer for later use. Moreover, almost all of them used the fertilizer they bought.
They apparently had no self-control problems in keeping the fertilizer, even though
they could easily exchange the fertilizer for something more immediately
consumable.
Why Don’t the Poor Migrate for Longer?

A final puzzle is why the poor do not migrate for longer periods, given that
they could easily earn much more by doing so. Munshi and Rosenzweig (2005)
argue that the lack of long-term migration reflects the value of remaining close to
one’s social network in a setting where the social network might be the only source
of (informal) insurance available to people. Those who migrate for short periods of
up to a few months leave their entire family, who presumably can maintain their
social links, behind. However, the ultimate reason seems to be that making more
money is not a huge priority, or at least not a large enough priority to experience
several months of living alone and often sleeping on the ground in or around the
work premises.
In some ways this puzzle resembles the question of why the Kenyan farmers do
not buy fertilizer right after the harvest even though they are happy to buy (and use
it) if someone made the (small) effort to bring it to their farm. In both cases, one
senses a reluctance of poor people to commit themselves psychologically to a
project of making more money. Perhaps at some level this avoidance is emotionally
wise: thinking about the economic problems of life must make it harder to avoid
confronting the sheer inadequacy of the standard of living faced by the extremely
poor.
y We thank Andrei Shleifer for motivating us to undertake this exercise. We thank him and
the editors of this journal for detailed suggestions on the previous draft of this paper. We thank
Danielle Li, Marc Shotland, and Stefanie Stancheva for spectacular assistance in assembling
the data, and Kudzai Takavarasha for carefully editing a previous draft. Special thanks to
Angus Deaton for extremely useful advice and guidance and extensive comments on the
previous draft and to Gary Becker for helpful comments.
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MASTER CLASS 2
VOICELESS AND
INVISIBLE CITIZENS: A
NEW SOCIAL DIVIDE?
EMANUELE FERRAGINA
The Rising Invisible Majority
When Fiction Meets Social Science
By Emanuele Ferragina & Alessandro Arrigoni
A period of political and economic turmoil calls for a new analytical

framework to be developed. Drawing upon the tools of social
science and fiction, the “Rising Invisible Majority” project examines
how the shifts of a long-term political economy rendered a large
share of its population ‘invisible’.
“I don’t think we did go blind, I think we are blind, Blind but

seeing, Blind people who can see, but do not see” (Blindness, Saramago,
1997).
The ‘Rising Invisible Majority’ project began informally in 2013 as a reflection

on the transformation of Italian society. The work originates from the encounter of two
different intellectual perspectives that we developed separately in our academic
research. The first relates to international political economy and precarization; the
second to welfare state institutions and social change. Our starting point was to go
beyond analyses of what we should do to reduce precarization and inequalities, and
to investigate the social forces that contribute to the transformation of obsolete
institutional structures and to governmental policy making. The comments we
received when presenting our book, La Maggioranza Invisibile (Ferragina & Arrigoni
2014)—in political clubs, trade union meetings, libraries, universities, occupied squats,
theatres, pubs and associations—offered encouragement enough to elaborate an
assessment of the Italian experience, and to compare this with European counterparts
(Ferragina et al. Forthcoming).
We mixed social science with fiction, and employed Saramago’s dystopian

imagery—of a nation whose entire citizenry go blind—as the metaphor to describe
how shifts of a long-term political economy can render a large share of its population
‘invisible’. A Rising Invisible Majority for ‘mainstream’ political parties, a Rising
Invisible Majority unable to recognize its interest for redistribution and political
change. A period of political and economic turmoil calls for a new analytical
framework to be developed. So our framework is encapsulated in the following
questions: how does the transformation of the international political economy context
contribute to the changing composition of society? And can this changing composition
of society have a feedback effect on the international political economy context?
International Political Economy and the Changing Social

Composition
Capitalism can be described historically as unfolding through different phases:

a liberal phase in the late nineteenth century was followed by a Fordist phase during
most of the 20th century1 and, since the crisis of the 1970s, a Neoliberal phase followed.
Each phase is marked by different strategies of capital accumulation (Aglietta, 1979;
Boyer, 1990). The advent of a new strategy—regulated by the transformation of
existing institutional forms—redefines the composition of society. Institutional
dynamics influence occupational status, relative wage and household income, as the
new accumulation strategy alters the relation between capital and labor; in turn, this
affects the intensity and modality of political and social participation. Accordingly, the
interconnections between the political economy and the changing composition of
society can be traced through the different phases of capitalism and the roles played
by various mediating factors (see Figure 1).
1Gramsci (1971) employed the term Fordism to describe broader societal effects of the system of
production (and its increased productivity) introduced by Henry Ford.
2
The Rising Invisible Majority
The notion of a Rising Invisible Majority2 encapsulates three dimensions: the

material, the social and the dynamic.
The material dimension appraises growing unemployment, labour market

precarization and poverty, whose trends are associated in a similar fashion to the
transformation of the political economy context. The general trends over four decades
of economic growth, wage levels and labour force participation illustrate that while
new institutional, productive and demographic dynamics have unfolded, wage
compression and income stagnation have become common across Europe. In addition,
certain socio-demographic characteristics—e.g. gender, education, citizenship, age—
seem to play a considerable role in the likelihood of inclusion within the Rising
Invisible Majority. The 2008 crisis has accentuated these trends, as unemployment
started to increase in parallel to the rise of atypical forms of employment and the
perpetration of wage stagnation. Moreover, for the moment, we can only speculate on
the effect the Covid-19-related lockdowns might have on these dynamics.
2 For further details see Ferragina et al. (Forthcoming).
3
The social dimension suggests that the social and political participation of
growing segments of the population is impacted negatively by their adverse material
conditions (Ferragina 2012). Worsening working conditions and income compression
reduce the possibilities of individuals to participate socially and to become members
of institutions and secondary groups. Moreover, trade unions and ‘mainstream’
political parties, especially those that had marshalled the lower classes during
Fordism, have been unable to understand or organise the needs and interests of the
invisibles.
The dynamic dimension follows long-standing political economy and

institutional patterns, and suggests that the continuing trends highlighted by the
material dimension will impact upon the majority of the population. Therefore, we
hypothesized that the growth in the number of the invisibles will eventually constitute
a ‘new normal’ for European societies, unless neoliberal mechanisms of regulation are
slowed down or reversed.
The Political Economy Context

The crisis of Fordism began in the mid-1960s with the progressive decline of
capital profitability (Dumenil & Levy 2004).3 The economic stagnation and increasing
inflation of the 1970s challenged the Keynesian approach to macroeconomics, and
made monetarism highly influential. ‘Finance’ became the central engine of capital
accumulation (Boyer 2000) in a context characterised by the extension of capital
mobility and innovations in communication and financial technologies. Growing
financial markets attracted capitals invested previously in the industrial sector, which
hastened the de-industrialization of western countries and boosted the service-based
economy. In this context, the ‘neoliberal revolution’ came to light first in Chile during
Pinochet’s regime. Thatcher and Reagan’s policies in the UK and the US became then
the blueprint for a worldwide affirmation of neoliberal measures. International
organizations like the IMF and the World Bank reinforced this process (see Willamson
1990). Progressively, the neoliberal paradigm influenced policy-making across the
world and promoted monetarism, free trade, deregulation, privatization, regressive
3The rate of profit is the indicator of the profitability of capital. It relates the mass of profits realized
during a given period, one year, to the total sum of funds invested (Dumenil & Levy, 2004, p. 22).
4
taxation, austerity, and, more importantly for our argument, labour market
flexibilization and welfare state retrenchment (Harvey 2005).
European integration was greatly shaped by the transition from the Fordist to
the neoliberal phase of capitalism. The uncertainty of intra-European exchange rates—
following the demise of the Bretton Woods monetary framework—contributed to the
process of European monetary integration. Monetary integration favoured the
German export economic strategy, which became a model for the entire continent and
promoted labour cost competition among European partners. This contributed to the
advent of a ‘competitive austerity game’, where each country tries to increase
productivity and accrue the export of goods and services while at the same time it
curtails wage increases and cuts social benefits (Cafruny & Ryner 2007).
Institutional Transformations as Mediating Factors

Throughout the Fordist era the growing productivity of the industrial sector
guaranteed consistent wage increases for the working class, and constituted an
important redistributive mechanism; this growing productivity favoured mass
consumption and economic growth. It also created the conditions for trade unions and
left-wing parties to organise the working class collectively; higher salaries could be
negotiated and better social protection attained through the expansion of the welfare
state. During the neoliberal phase, the relevance of the service sector as a mass
employer dramatically expanded. However, the service sector does not guarantee the
same productivity increases as the industrial sector (Baumol 1967). Only a minority of
workers are able to take advantage of productivity increases, while a growing number
of workers remain stuck in low productivity patterns, and occupy labour rather than
capital intensive jobs. These workers—in particular women, people with low
education, non-citizens and young people—are more likely to bear the costs of the
labour market and welfare state transformations. Moreover, trade union membership
among atypical, low-service sectors and new workers is lower than for permanent and
industrial sector workers. As a result, unions often focused on the protection of their
core, although shrinking, constituencies. At the same time, the implementation of
neoliberal reforms, hitherto the preserve of right-wing parties, became increasingly a
feature of the social democratic agenda. The neoliberal mantra that the structural
rigidity of labour market arrangements inherited from Fordism led to growing and
long-term unemployment became widespread. This favoured—together with
5
structural dynamics linked to the European monetary integration—the deregulation
and flexibilization of labour markets.
The imperfect nature of the common currency area (De Grauwe 2009; Hencké
2013) strengthened these labour market dynamics in Europe. An Optimum Currency
Area (OCA) can theoretically handle shocks with coordinated fiscal policies, labour
mobility, and price flexibility (Mundell 1961). However, redistributive fiscal policies
were underdeveloped, while cross-national agreements restricted national budgets
and limited the possibility to implement countercyclical macroeconomic policies. Also
labour mobility across Europe remained low compared to the United States due to
cultural and legislative barriers (Recchi 2015). Hence price flexibility became the
prevalent political economy strategy to absorb shocks within the OCA and to compete
in the international market. Competition on price flexibility contributed to the creation
of precarious forms of employment, moderate wages, and reinforced the European
competitive austerity game. EU countries engaged in supply-side politics in the hope
that an increase in export would compensate for the decline in levels of consumption.
This created an incentive for a race to the bottom, which further privileged the
minority working in high-productivity sectors, and punished those employed in low-
wage service sector jobs.
The idea that deregulating the labour market was a magic bullet to reduce
unemployment boosted the proliferation of part-time and temporary contracts, and
was in part responsible for the reduction of social protection afforded by open-ended
contracts. In this context, most European welfare states reduced the generosity of
unemployment protection, rather than recalibrating it to accommodate the increased
need of claimants. Moreover, the austerity measures implemented after the 2008 crisis
further limited social expenditure in most European countries. As a consequence, the
welfare state, with the weakening of its core ‘market breaking policies’, seems to be
geared less towards the social protection of the lower class and more to the fulfilment
of employers’ needs in a competitive, international economic environment (Jessop
1993).
6
The Italian Case
Italy is a relevant case for our analysis because it followed similar political,
economic and social dynamics to most other developed nations, yet remained
peripheral to them at the same time. It was subordinate to the American-driven
transition from Fordism to neoliberalism, and even though a founder member of the
European Community, was a follower in the process of European Integration rather
than its prime mover. Italy’s peripheral position provides us with a vantage point
because we can observe how changes and pressures that come from the international
political economy context influenced labour market and welfare state
transformations,4 and contributed in turn to redefine the composition of society.
The Italian Political Economy Context
During the early 1970s, Italy underwent the fundamental economic changes
concomitant with the crisis of Fordism. Moreover, the political adjustments inherent
in the Communist party’s relationship with the Christian Democracy party—
reoriented in the wake of the economic and social fallout of the Chilean coup d’état in
1973, and which led eventually to a ‘historical compromise’—were intense (Ginsborg
2003). These changes made the trade unions change tack. If in 1975 they signed up to
a system of automatic indexation of wages to inflation rates (via a revision of the ‘Scala
Mobile’, legislation which favoured the working class), only three years later they were
to accept harsh governmental measures aimed at reducing labour costs and boosting
competitiveness (the so-called ‘Eur-line’). In the 1980s, the condition of the working
class deteriorated further. The Socialist party, led by Craxi, broke its relationship with
the communists and forged a coalition with the Christian democrats; in government
together for nearly a decade, they prepared the ground for ten years of epochal change.
In 1984, a restrictive revision of the Scale Mobile to reduce inflation was introduced.
More importantly, clientelistic governance was developed and was financed by an
indiscriminate use of public spending, forcing public debt to rise dramatically; public
debt was boosted also by the rapid augmentation of interest rates (the debt/GDP ratio
increased from 54% in 1980 to 117% in 1994). In this setting, neoliberal ideas gained
traction among the technocratic elites holding sway in the Bank of Italy and the
Treasury, and became increasingly the intellectual framework of reference for policy
reformers. The neoliberal reforms of the early 1990s were the consequence of
4 For more detail see Ferragina and Arrigoni, Forthcoming.
7
international and internal reasons: the Cold War narrative, an acceleration of the EU
integration process and dynamics within the Italian political system. During this
period, rapid political, economic and institutional changes unsettled the previous
order. 1992 is the year that we consider as a watershed moment for the Rising Invisible
Majority, when deep change at the institutional and economic levels were set in
motion.
The end of the Cold War, together with the judiciary investigation ‘Mani Pulite’,
contributed to the demise of the post-war political system. The Communist party
became a third-way type of social democratic force, which gave way eventually to the
Democratic Party (PD); the Christian democratic and Socialist parties stumbled into
an irreversible crisis after the disclosure of widespread corruption. These changes led
to the formation of two centre-left/right catch-all coalitions that took command of the
political landscape until the 2013 elections. A rapid sequence of legislation was enacted
throughout 1992. In February, the ‘Carli law’ sanctioned the central bank’s greater
independence from the treasury. In July, Amato’s government approved a draconian
program of public expenditure cuts; the ‘Scala Mobile’ was abolished then also, ending
the automatic adjustment of salaries to the variation of living costs. In August, the
government launched a first phase of large-scale privatizations. In September, a series
of speculative attacks against the Lira displayed the growing disciplinary capacity of
markets over governmental decisions. Moreover, the process of monetary integration
created structural downward pressures on labour markets through the dynamics of
the imperfect OCA, the competitive austerity game, the articulation of a European
Employment Strategy, and a focus on reducing Employment Protection Legislation.
The Maastricht criteria (1992), the Stability and Growth Pact (1998 and revised in 2005
and 2011), and the Fiscal Compact (2012) worked as budgetary constraints that also
limited welfare state expenditures.
Both the centre-left and centre-right Italian coalitions exploited the popularity
of the European project among Italian citizens as a cloak to mask the political costs of
liberalization and to overcome the domestic resistance to institutional change.
Successive governments proposed a bundle of reforms that were, in effect, congruous,
each to be part of what became a continuous narrative; these reforms were built upon
a framework of thought that prevails still among the European elites. These
governmental coalitions were not only constrained by these mechanisms but worked
8
in line with them, and exploited European pressures to justify the implementation of
unpopular labour market and welfare state reforms.
Labour Market and Welfare Reforms

The first wave of structural labour market reforms came with the ‘Treu Package’
in 1997 and the ‘Biagi Law’ in 2003. These legislative interventions multiplied the
typologies of atypical employment, and created a contractual maze for new entrants
on the labour market. Every government followed the neoliberal mantra—that to
reduce the protection offered by permanent contracts would simplify the access of
unemployed and inactive people (especially women) to the labour market. This
process continued during the more recent economic crisis with the ‘Collegato Lavoro’ in
2010, the ‘Fornero Reform’ in 2012, the ‘Law 99 in 2013’, the ‘Decree Poletti’ in 2014
and the ‘Jobs Act’ in 2015. These reforms introduced stricter rules to appeal against the
unlawful use of atypical contracts, increased their scope and length and defined a new
open-ended contract in the private sector. This new contractual typology did not
replace the plethora of atypical forms of employment, but served to diminish the
entitlements of workers who would have been otherwise employed and protected by
the more consistent social guarantees of previous permanent contracts of employment.
Italy flexibilized its labour market at the margins, unloaded the cost of its political
economy transformations onto the shoulders of newcomers, and, after two decades of
continuous reforms, reduced the rights of all workers employed in the private sector.
Changes to the labour market legislation not only impacted on employment status but
also contributed to wage compression. Trade unions played an important role and
participated actively in tripartite agreements, such as the end of ‘Scala Mobile’, the
‘Giugni Agreements’ (1993), and further social pacts in 1996, 1998 and 2002. These
agreements led to the adoption of anti-inflationary measures and a revision of the
mechanics of wage negotiation; indeed, they intensified trends of wage compression
which began at the end of the 1970s.
The lack of adequate basic social protection—witnessed by the absence of

universal measures of income assistance and a national minimum income guarantee—
amplified the socio-economic consequences of labour market flexibilization. The
Italian welfare state system left atypical workers unable to qualify for social protection
established during Fordism; only recently have mild corrections been introduced
(with the NASPI and Reddito di Cittadinanza). Italy has also a fragmented and
9
corporatist welfare state system characterized by clientelism and a collusive mix
between public and private providers. Successive governments over the last two
decades have reduced further social entitlements and followed the neoliberal
imperative of controlling public spending, instead of restructuring the welfare state in
a universal direction to act as insurance against new social risks for the most
vulnerable population.
The Rising Invisible Majority in Italy

A dramatic transformation of the Italian labour force took place after 1992.
Unemployment increased from 8.6% in 1983 to 12.3% in 1998; it then declined sharply
to 6.2% in 2007. This decline in unemployment coincided with a growing
flexibilization of labour market legislation. The ‘Treu Package’ (1997) and the ‘Biagi
Reform’ (2003) encouraged part-time and temporary contracts. Unemployment
increased again in 2018 to 10.8%, yet the number of atypical workers increased at a
greater rate. The Italian active workforce included a record level of part-timers (18.4%)
and temporary employees (17.1%); this was a steep increase on comparative figures
for 1996 (respectively 6.5% and 7.4%). The aggregate percentage of people in
unemployment and atypical work across the workforce remained almost stable
between 1983 and 1991, then increased substantially in the early 2000s and skyrocketed
in 2018. A measurement employing the European Social Survey Data suggests that in
Italy ‘the invisibles’ were 38.3% of the working age population in 2002; this increased
to 46.7% in 2016. Almost a majority.
The likelihood to be invisible varies significantly by socio-demographic

characteristics. Women are more likely to be invisible than men, and this gender
cleavage increases more with education. Age makes also a considerable difference:
those aged 35-64 are in a better position than younger cohorts. When comparing Italian
nationals to migrants, the difference in the likelihood to be invisible increases with
education, as it is with gender. Finally, those living in the South display much higher
probabilities to be invisible than those living elsewhere in the country. The invisibles
tend to participate less in political elections and have a lower union membership. They
have less confidence than the rest of the population in the political system’s ability to
enable participation in political life, and are less inclined to express their opinion about
governmental decisions. Moreover, they have a lower propensity than the rest of the
population to trust institutions that regulate social life, including parliament and
10
political parties; indeed they show less trust in the political system as a whole. The
invisibles participate less in political life, but when they do participate they prefer
mostly political options perceived as challenging ‘mainstream’ parties. A disconnect
between mainstream parties on the centre-left and the invisibles is observed (see also
Piketty 2018). Moreover, the Rising Invisible majority, more than leading to the growth
of a specific party, seems to contribute to political volatility. Volatility in Italian
elections is recorded at its highest in the 1994 general election, the first held after 1992;
Total Volatility (TV, i.e. the number who voted for a different party compared to the
previous election) was 39.4%. The second and third highest peaks were recorded in
2013 (TV: 36,7%) and 2018 (TV: 26,7%).
In 2013, the centre-left and centre-right parties which had dominated the
government coalitions in post-1992 elections, were much in retreat. The PD and the
Popolo delle Libertà (PDL/Forza Italia), which polled 70.6% of the vote in 2008, had
declined to 32.8% of the vote in 2018 (a loss of 15 million votes over ten years).
Moreover, in 2018, the PD could be considered a party for ‘insiders’, receiving only
14% of precarious workers’ preferences and 8% of the unemployed (when 18.7% of the
entire population). The rise of political challengers mirrored the decline of the
‘mainstream’ parties. In the 2013 Italian elections, the 5 Stars Movement (5SM)
received 25.5% of the vote; it ranked as the first party of choice among unemployed
(34.8%) and atypical workers (52.6%). In the 2018 electoral campaign the 5SM— which
proposed a universal income support—attained 32.7% of the popular vote and
performed well in areas with high unemployment and also in the South, where it
attained 43.4% of the vote. The Lega—which sublimated its anti-southern Italian
rhetoric into an anti-immigration policy—witnessed a dramatic increase of its vote
share, from 4.1% in 2013 to 17.4% in 2018. Together, the 5SM and the Lega obtained
58% of the atypical worker vote and 66% of the unemployed. This dwarfed the
‘mainstream’ parties (PD and Forza Italia) share which attained 25% of the atypical
vote and 18% of the unemployed.
To summarize, we can say that the invisibles seem to display a low level of
participation in the traditional activities which regulate social and political life.
However, their electoral behaviour that sidelines the ‘mainstream’ parties is a major
contributory factor to the destabilizing of the political system. This growing electoral
volatility provides empirical support to our reflection on feedback effects.
11
Feedback Effects?
The continuous expansion of market mechanisms, a corollary of the transition

from the Fordist to the neoliberal phase of capitalism, created new forms of political
instability, and illustrated that a transformation of the social composition can influence
the political economy context. The transformation of the social composition can
produce feedback effects on the political economy context, but the advent of a
countermovement (Polanyi 2001)5 would require political agency. A growing part of
invisibles votes much less for traditional ‘mainstream’ parties than the rest of the
population. Therefore, a constant increase of invisibles as a percentage of the total
population may delegitimize the political forces that have governed through the
neoliberal phase to date. ‘Mainstream’ parties are caught between a rock and a hard
place. They can continue to expand market mechanisms, yet will commodify further
and impoverish the rising invisible majority. This can only heighten the distrust the
invisibles hold in the system. Otherwise, ‘mainstream’ parties may choose to enact
protective measures to constrain self-adjusting market mechanisms. However, by
doing so, they would jeopardise the position of the country, in an international
political economy context characterised by neoliberal rules. At the same time, some
political forces and social movements have taken advantage of the rise of the invisibles
(as in Italy the 5MS and the Lega). Nevertheless, these political challengers face the
difficult task of appealing to broader sections of the population, to elaborate mid- to
long-term political projects and to address the mechanisms of neoliberal governance
leading to the rise of the invisible majority.
5 Polanyi (2001) argued that an excessive liberalization and commodification of social life eventually
leads to societal countermovements challenging the political status quo of the time.
12
Conclusion
The Rising Invisible Majority concept helps us to chart an important social

transformation in Italy and across Europe throughout the neoliberal phase of
capitalism, and identifies societal forces that can fuel political and social change (for
more detail about the application of our framework to the rest of Europe, see Ferragina
et al. Forthcoming). More specifically it allows us to make two observations: that a part
of the population—eventually, given the outlined mechanisms, a majority—is
materially and socially marginalised by the regulatory mechanisms of the neoliberal
phase of capitalism; and that this overall societal transformation opens significant
space for feedback effects and perhaps counter movements. These societal reactions
could in the long run change the political economy context, potentially to unravel the
present economic and political order.
Acknowledgments
This research was funded by a public grant overseen by the French National Research
Agency (ANR) as part of the “Investissements d’Avenir” program LIEPP (ANR-11-
LABX-0091, ANR-11-IDEX-0005-02) and the Université de Paris IdEx (ANR-18-IDEX-
0001).
FURTHER READING
• Aglietta M., A Theory of Capitalist Regulation, Verso, 1979
• Baumol W.J., “Macroeconomics of unbalanced growth”, The American

Economic Review, vol. 57, 1967, pp. 415–426
13
• Boyer R., The Regulation School: A Critical Introduction, Columbia University
Press, 1990
• Boyer R., “Is a Finance-Led Growth Regime a Viable Alternative to Fordism?”,

Economy and Society, vol. 29, n. 1, 2000, pp. 111–145
• Cafruny A.W., Ryner J.M., Europe at Bay: In the shadow of US hegemony, Lynne
Rienner Publishers, 2007
• De Grauwe, P., “Some Thoughts on Monetary and Political Union”, in L. S.

Talani (Ed.9), The future of EMU, pp. 9–28, Palgrave. 2009
• Dumenil G., Levy D., Capital Resurgent: Roots of the Neoliberal Revolution,
Harvard University Press, 2004
• Ferragina, E, Social Capital in Europe, Edward Elgar, 2012
• Ferragina E., Arrigoni, A., La maggioranza invisibile, BUR-Rizzoli, 2014
• Ferragina, E., Arrigoni, A., “Selective Neoliberalism: How Italy Went from
Dualization to Liberalization in Labour Market and Pension Reforms”, New
Political Economy, DOI: 10.1080/13563467.2020.1865898, Forthcoming.
• Ferragina E., Arrigoni A., Spreckelsen T.F., “The Rising Invisible Majority:
Bringing Society Back into International Political Economy”, Review of
International Political Economy, DOI: 10.1080/09692290.2020.1797853,
Forthcoming.
• Ginsborg P., Italy and its Discontents, Penguin, 2003
• Gramsci A., Selection From the Prison Notebooks, International Publishers, 1971
• Harvey D., A Brief History of Neoliberalism, Oxford University Press, 2005
• Hencké B., “Labour Markets and the Crisis of the European Monetary Union”,
Books & Ideas, 2013, https://booksandideas.net/Labour-markets-and-the-crisis-
of.html
• Jessop B., “Towards a Schumpeterian Workfare State?”, Studies in Political

Economy, vol. 40, n. 1, 1993 pp. 7–39
• Mundell R.A., “A Theory of Optimum Currency Areas”, The American

Economic Review, vol. 51, 1961, pp. 657–665
• Piketty, T., Brahmin, Left vs Merchant Right: Rising Inequality and the Changing
Structure of Political Conflict, WID. world Working Paper, 7, 2018
• Polanyi, K., The Great transformation, Beacon Press, 2001
14
MASTER CLASS 3
FACING A DECADE OF
POLYCRISIS: THE
EUROPEAN UNION AND
ITS INSTITUTIONS
NATASHA WUNSCH
MASTER CLASS 4
HOW CRITICAL IS THE
CRISIS OF
MULTILATERALISM?
THIERRY BALZACQ
Rev Int Org (2007) 2:371–393
DOI 10.1007/s11558-007-9015-0
Exit, voice, and loyalty in international organizations:

US involvement in the League of Nations
Kathryn C. Lavelle
Received: 30 September 2006 / Revised: 18 December 2006 / Accepted: 28 January 2007 /

Published online: 6 March 2007
# Springer Science + Business Media, LLC 2007
Abstract Recent challenges to traditional international relations theory have

questioned the nature of international organizations (IOs) as agents of powerful
state-members and have examined various conduits through which non-state actors
can voice their concerns. Yet little work has focused on participation in IOs when a
powerful state’s official position contradicts the goals of actors within it. This article
examines the archival record of American involvement in the League of Nations’
economic section to explore such a circumstance. I correct the prevailing historical
view of American isolationism in the interwar period and argue that participation by
advanced, industrial democracies can better be understood as combinations of exit,
voice, and loyalty on the part of individual components of state and civil societies.
Keywords League of Nations . International organizations . United Nations .

Rockefeller foundation . Princeton mission . Bruce committee
JEL Codes B15 . B19 . B30 . F33 . N14 . N20 . N42
1 Introduction
International relations theory has demonstrated that international organizations (IOs)

have the ability to exercise authority in particular ways. Moreover, they can forge
genuine connections to civil society exclusive of formal state representation. Some
authors view the expansion of participation through activist networks and non-
governmental organizations (NGOs) at the end of the twentieth century as having a
“pluralizing” or “democratizing” effect on world politics, despite a general
consensus that IOs are not, in fact, democratic institutions (Dahl 1999; Gordenker
K. C. Lavelle (*)
Department of Political Science, Case Western Reserve University, 10900 Euclid Avenue,
Cleveland, OH 44106-7109, USA
e-mail: kathryn.lavelle@case.edu
372 K.C. Lavelle
and Weiss 1996; Payne and Samhat 2004). Other authors show how activist networks
can circumvent channels in their own state and, together with international allies, bring
pressure to bear from outside states and IOs (Keck and Sikkink 1998). Still others
situate the study of non-state actors in longstanding debates over whether or not IOs
possess autonomy from their most powerful state-members (Barnett and Finnemore
2004; Claude 1984; Cox and Jacobson 1973; Keohane 1984, 1988). These debates
have their origins in the paradoxical yet understudied nature of participation in IOs.
Particularly in advanced industrial democracies, concentrations of great material
wealth and political acumen allow for a state’s formal representative apparatus to
pursue one set of clearly identifiable goals in IOs while private citizens, interest
groups, activist networks, philanthropies, and even firms within its boundaries may,
or may not, pursue quite different goals through the same outlets. The upshot of
these activities is that at times a given actor’s decision not to participate can be as
significant as its decision to participate in the substantive work of an IO.
I consider the nature of participation in IOs through the prism of the more than
20-year history of American participation in the economic activities of the League of
Nations. This episode is particularly illustrative of the role individuals, activist
networks, and firms within a powerful state can play outside the formal state because
the US was not itself a member. Previous historical examinations of the League have
a tendency to focus on its political activities and the failure of the US to join
(Northedge 1986; Scott 1973; Walters 1952).1 Nonetheless, American citizens were
employed at the secretariat; American academics contributed to League-sponsored
research projects; American philanthropies financially supported these same
economic projects, and American representatives from the banking and financial
communities sat on its economic and financial committees. One prominent
American working in the League secretariat in the 1920s judged its economic and
financial work to be so significant that this work would soon take center-stage from
its humanitarian and political activities.2 This web of interactions at the highest
levels of the League, and with the tacit acceptance of some government officials in
the Roosevelt administration, culminated in the section’s physical move to Princeton,
New Jersey during World War II and the eventual creation of an Economic and
Social Council (ECOSOC) in the United Nations (UN).
I find that private citizens, philanthropies, and activist networks were able to exert
a considerable degree of influence as some constructivist understandings of IOs
would allow. However, a close examination of the archival record demonstrates that
these individuals and networks are not as easily separated from the formal American
state as they would initially appear to be. I draw upon Hirschman and argue that this
episode of diplomatic severance, yet private involvement, constitutes an example of
simultaneous exit and loyalty on the part of different elements of the American state
1
Pauly’s (1996, 1997) work on the origins of IMF surveillance is a notable exception.
2
“S. M. Gunn’s Diary” 31 July 1928, folder 148, box 18, series 100, RG1, Rockefeller Foundation
Archives, Rockefeller Archive Center, Tarrytown, New York (hereafter RAC). See also “League of
Nations—Financial Section and Economic Intelligence Service Analytical Research” February 1938,
folder 156, box 19, series 100, RG1 and “Memorandum: Interview with J.S. Condliffe, Geneva” 26
November 1931, folder 148, box 18, series 100, RG1 also Rockefeller Foundation Archives, RAC.
Exit, voice, and loyalty in international organizations... 373
and civil society (Hirschman 1970). Combinations of exit, voice, and loyalty have
the effect of transforming the international organizations themselves, as their work
mandates shift to accommodate some alliances among states and private interests,
yet discourage others.
This early example remains highly relevant because examples of combinations of
exit, voice, and loyalty, have grown, albeit they have changed significantly in the
present era. While the membership rolls of most UN agencies are nearly universal
since the end of the Cold War, powerful states can demonstrate “exit” by lowering the
diplomatic rank of representatives sent to meetings, by refusing to send representa-
tives at all, or by withholding financial contributions. At the same time, NGO
participation has grown and frequently contradicts the official voice of powerful
member-state representatives in the organization on issues as wide-ranging as the
environment, human rights, indigenous peoples, landmine survivors, and people with
disabilities. The tradition of private philanthropic support continues as well.
Individuals make substantive contributions. Private foundations within powerful
states provide funding for technical assistance and academic research programs,
NGOs, and even the travel costs for NGO representatives to attend certain meetings
where they, too, can “voice” their support for, or opposition to, global initiatives.
To demonstrate this argument, the article contains six additional sections. The
following, second, section considers notions of participation, institutional legitimacy,
and exit, voice, and loyalty in IOs. The next three sections then consider the
American involvement despite lack of formal membership in terms of financial
contributions, influence in institutional reform, and providing a home for the section
during World War II. The sixth section connects this history to later episodes of
American ambivalence concerning participation in IOs and considers how
combinations of exit, voice, and loyalty hold the potential for success as well as
danger to the institutions in the future. A seventh section offers a brief conclusion.
2 Combinations of Exit, Voice, and Loyalty in IO Participation
Hirschman’s (1970) classic Exit, Voice, and Loyalty points out that some institutions
can gain a degree of moral legitimacy even in the absence of internal democracy
(Tobin 1999). He argues that in an atmosphere of competition, unhappy members
can leave one organization for another, and management is compelled to search for
solutions to the problems that led to the exit. Conversely, the unhappy members can
express their dissatisfaction to the management through “voice,” and it must search
for possible cures (Hirschman 1970: 4). Since membership in IOs is not
compulsory, IOs likewise compete for the attentions of global actors considering
which forum would be the most likely to offer them the best result (Drake and
Nicolaidis 1992; Krasner 1985; Shanks et al. 1996; Wilkinson and Hughes 2000).
While the analogy of state participation to firm behavior is not perfect, Hirschman’s
logic operates to the extent that participation can render an IO a degree of moral
legitimacy even when it does not operate according to overtly democratic
principles. States can “exit” a forum by pulling out outright, by lowering their
monetary contributions, and/or by lowering the diplomatic rank of officials on
delegations. Conversely, they can remain loyal by making a given forum their
374 K.C. Lavelle
chosen outlet for conflict resolution. Finally, they can “voice” dissatisfaction while
remaining within it.
Conceptually incorporating the participation of non-state actors into this
framework is more complex because they are not members of organizations that,
by definition, have states as members. Nonetheless, the historical record of
international organizations reveals participation by non-state actors that extends to
their origins. This participation chiefly took the form of financial support for the
technical assistance programs of the League of Nations by wealthy individuals such
as Edwin Ginn, Edward Filene and John D. Rockefeller, Jr. (Murphy 1994: 158). In
addition, the larger labor movement and peace movement also played a role in
sponsoring League institutions that eventually became the UN specialized agencies.
At times, these wealthy individuals and members of movements contradicted the
views of their democratic member states when they took issues to forums that were
not those selected by states. Therefore, combinations of exit, voice, and loyalty have
always been possible within IOs through both democratic states and non-state actors,
albeit non-state actors are more constrained in their participatory mechanisms.
According to Hirschman’s logic, ease of exit and voice have an elusive optimal
mix. If an easy exit is possible, allowing the remaining members equal “voice” may
not be the best response to decline because those left may not be the best suited to
articulate it. Keck and Sikkink (1998: 37) hint at this problem when they warn that
the growing role of activist networks in international forums could ultimately erode
the premise of IOs as organizations having states as members. Therefore, Hirsch-
man’s logic attempts to explain two mechanisms that lead management to search for
causes and cures for participants’ dissatisfaction with an organization. Combinations
of these mechanisms can either reinforce or impede a potential solution.
Early theoretical analyses of international organizations within international relations
downplayed the significance of participation of individual interests and analyzed
instead the more powerful state-members’ activity within them (Rochester 1986). As
the field matured in the 1970s and 1980s, structural realist regime theorists argued that
powerful states choose to work in IOs where they hold voting advantages (Krasner
1985). These studies thus implicitly acknowledged the existence of exit because states
could take a given issue to their IO of choice and thereby de-emphasize the IO not
selected, even if they did not completely withdraw from it. Thus, IOs such as the IMF
became more significant players during the 1970s in providing development finance,
and UN agencies less so. However, these theorists remained overwhelmingly
concerned with the formal participation of states and did not consider the participation
of groups within states. Not having done so, structural realism missed a considerable
amount of political activity because the interests of interest groups, firms and other
private actors do not configure neatly along state lines.
“Constructivist” or “structural idealist” approaches to international relations
theory eventually addressed changes in the operations of IOs and acknowledged that
groups within states play a significant role in public agenda-setting, deliberations,
and outcomes (Wendt 1999). Constructivists agree that NGOs participate in the
construction of knowledge and thus introduce new voices into international debates
(Payne and Samhat 2004; Weiss and Gordenker 1996). Nonetheless, they diverge
quite dramatically beyond this point (Zehfuss 2002). The wide spectrum of
constructivist thought means that applications vary accordingly. For the most part,
these authors take a relatively sanguine view of NGOs as beneficial to the world
community because they are motivated by a “common good” (Risse 2002: 256). In
investigating the origins of norms, they do not directly examine the funding mechanism
of agents of civil society that may amplify some voices at the expense of others,
particularly as groups have obtained the opportunity to exercise voice in formal
organizations. Those theorists that are more critical of rising NGO activity do question
some of the funding issues associated with their involvement. They challenge the
representative nature of NGO participation in policy issues related to economic
development because there is an intrinsic lack of accountability on the part of
transnational NGOs to the populations affected by global policies. Some point to
“pathologies” of IOs (Barnett and Finnemore 1999, 2004). At the extreme end of these
criticisms, authors emphasize the role of transnational corporations as well as NGOs in
international agenda-setting, and argue that their combined activities are responsible for
the imposition of broader patterns of economic and cultural globalization (Gill 1990;
Gill and Law 1989; Mittelman 2000, 2002; Rupert 1995). Marxists’ criticisms
characterize NGOs as a new petit bourgeois who seek to lead and “speak ‘for’ the
poor” yet fail to acknowledge their own role in the class struggle (Petras 1999: 439).
Yet relationships among states, NGOs, the business community, and international
organizations reside within particular historical contexts. Thus, combinations of exit,
voice, and loyalty are not static. History shows that the relationship between
business and the UN, for example, is not inherently adversarial. Moreover, civil
society is not a homogeneous category. Distinctions among the business community,
states, and NGOs are not easily drawn when funding considerations are taken into
account because states and business fund some NGOs, and large NGOs may
contribute to the provision of some state services. Thus, an analysis of state and non-
state actors that exited an international institution, remained loyal to it, or voiced
opposition to it on a given endeavor allows for a degree of prediction in its success
or failure, if it can be shown that the actors in question control necessary material
elements. As discussed above, non-state actors directed material resources at the
League of Nations’ technical activities even when the American state was not a
member. They were successful in influencing its research agenda, moving the
section to the territorial US during World War II, and in reforming its structure.
3 Loyalty to the League: The Overlooked Role of American Financial

Contributions
The legacy of the League of Nation’s economic and financial section is often
overlooked because the actual work mandate of the section was initially quite
narrow. Although France and Italy attempted to forge some kind of ongoing
economic cooperation at the Paris Peace Conference after World War I ended, the
US and Great Britain rejected these proposals. Nationalists overtly excluded any role
for the organization in negotiating reparations, war debts, trade restrictions, tariffs or
currency exchange. Thus, the Covenant of the League says very little about
economics. Any additional proposals for broader economic functions were later
rejected out of fears that they would result in possible conflicts with domestic
concerns. Despite the minimal official role, the 1920 Council of the League called
376 K.C. Lavelle
for the Brussels financial conference to be held in 1920 and the First Assembly at
Geneva provided for the appointment of an Economic and Financial Advisory
Committee to provide the requisite information to the Brussels Conference. The
provisional economic committee comprised officials from ministries of commerce,
and the provisional financial committee comprised well-known bankers, government
officials, and officials from central banks. Although League membership resisted the
creation of permanent committees, a permanent Economic and Financial Organiza-
tion did come into being in 1923 (Hill 1946: 22).
Despite Wilson’s failed attempt to gain ratification of the Treaty of Versailles,
there had been a significant degree of domestic American political support for the
League of Nations along the lines of today’s NGO activist networks. While a group
of conservative nationalists opposed the League in and of itself, many Republicans
and business associations supported the notion of international organization because
it would promote an American system of laissez-faire throughout the world and act
as a countervailing force against Bolshevism (Kuehl and Dunn 1997; Murphy 1994:
158). Other opponents had simply opposed the League because it was a part of a
treaty they objected to; thus they did not object to a multilateral organization in
principle. These groups remained loyal to the League even though the US
government did not ratify the treaty. Moreover, they were able to exercise a degree
of voice within the organization through the ongoing connection between individuals
at the secretariat and financial contributions that shaped the sections’ physical
apparatus and work program.
3.1 Activist Networks and the Rockefeller Library Gift
An early network of supporters at the highest levels of the American political,

academic, and business establishments grew out of the association among those
within Wilson’s administration who felt that the League could ultimately resolve the
problems of the treaty. One of the most influential within this group was Raymond
Fosdick, who had served as a civilian aide to General Pershing in France during the
Paris Peace Conference in 1919 and later as the American who would work with
Eric Drummond of Great Britain and Jean Monnet of France to construct the League
(Fosdick 1966). When it became evident that the US would not join, Fosdick
returned to the US and formed a legal practice in New York with a former Assistant
Secretary of the Treasury, James Curtis, and a third partner, Chauncey Belknap.
Drummond became the new organization’s first secretary-general.
Despite his retreat into the private sector, Fosdick remained a committed and
outspoken League supporter and continued to work on its behalf by forming the
League of Nations News Bureau and later the bipartisan League of Nations
Association. In order to keep abreast of developments in the organization and offer
his advice on public opinion in the US, he vacationed in Geneva and visited with
Drummond for many years (Fosdick 1920, 1958: 225). Significantly, Fosdick’s first
client upon his return to the legal world was John D. Rockefeller, Jr. A Republican
who initially held misgivings about the League, Rockefeller sought Fosdick’s advice
and representation on several boards in which he held a financial interest (Fosdick
1958: 217). Their ongoing association ultimately resulted in Fosdick’s election to the
Presidency of the Rockefeller Foundation in later years.
Fosdick also introduced Drummond to Herbert Houston of the American

Chamber of Commerce. Houston had been an early supporter of the League who
had worked with Fosdick to form the League of Nations News Bureau. Houston
shared the view that international organizations promoting international business
held the potential to prevent future wars. To Houston, business was the one truly
international force because it “employs the one truly international language, that of
figures, understood in every country. Today money is international because it has
gold as a common basis. Credit based on gold is international. Commerce based on
money and on credit is international” (Houston 1918: 37). The war showed that all
nations were bound together through commerce in an interdependent organism.
Houston compared the commercial world to the early Christian Church according to
the Apostle Paul that “they were members one of another” (Houston 1918: 38).
The American academic community, as well as men who moved in and out of the
US government, were well represented within this network. The network in turn
shaped the direction of development of the social sciences at the highest levels of the
American academy. For example, Abraham Flexner traveled to Geneva with
Raymond Fosdick in the 1920s at the inception of Rockefeller’s library gift. In
1930, he founded the Institute for Advanced Study. When the Institute began a
school of Economics and Politics in the mid-1930s, Flexner visited the head of the
Economic and Financial Section, Alexander Loveday, in Geneva and sought his
advice specifically on the formation of the discipline of economics within the
Institute.3
Despite the treaty’s defeat in the US, this network continued to attempt to
formalize American membership in the League and to gain support for the
organization in unofficial ways. They looked to the Rockefeller Foundation not
only because direct ties existed between Fosdick and Rockefeller, but because so
many of the Foundation’s interests overlapped with the interests of the League. Since
Rockefeller’s advisor Frederick Gates had prioritized medical research, the
Foundation initially became involved with grant making to the League through its
Health Organization. Foundation grants enabled exchanges among public health
personnel in many countries, and were informed by the thinking that modern
medicine could be used to foster unity in human society. They eventually totaled
$2,000,000.
Nonetheless, the network of activists succeeded in gaining financial support
directly from John D. Rockefeller, Jr. when the League developed plans for a
complex of buildings in Geneva in 1927. Fosdick knew of Rockefeller’s interest in
funding libraries, and he approached Rockefeller and then Colonel Robert Olds, the
Under-Secretary of State, on Rockefeller’s behalf to clarify that the US State
Department would not object to a private gift. Olds gave the project his entire
blessing, telling Fosdick that “while the American Government is officially out of
3
“Geneva” notes by Abraham Flexner, May 30, 1938 IAS Archives: General Files, Box 38, Institute
Organization, Flexner Correspondence. Loveday to Flexner, October 17, 1938 and Flexner to Loveday,
November 4, 1938 IAS Archives: General Files, Box 39, League of Nations, Invitation to Economics
Group, IAS Archives Institute for Advanced Study Archives, Princeton, New Jersey (herafter IAS
Archives).
378 K.C. Lavelle
the League and abstains from all political connection with it, in all matters that relate
to social and economic ends they try to cooperate with it to the fullest extent.”4
Fosdick next had to consider the political sentiment of the League. Members did not
want private sources of funds that would come under conditions that would affect
the organization’s normal development and freedom. He visited Drummond with
Abraham Flexner, a doctor who had worked at the Carnegie Foundation and who
later founded the Institute for Advanced Study. Fosdick determined that were
Rockefeller to make a gift, he would have to do it quietly to avoid publicity. The
League did not want to be in the position of having asked Rockefeller for the library,
and Rockefeller did not want to be in the position of having made an offer and been
declined. Therefore, Drummond would express a desire for a library, and at the same
time funds could come from outside. These maneuvers resulted in Rockefeller’s
considerable private gift to the League of Nations to fund and endow a library that
was eventually considered to be the best-stocked library on international affairs in
Europe. When the Villa Rigot was available for purchase in the area of the new
headquarters, Rockefeller bought it to serve as a tennis club that would improve the
lives of diplomats in Geneva and would prevent speculative building in the area.
Therefore a complex web of connections existed from the inception of the League
of Nations through World War II among public and private-sector individuals in the
US. Joined in a belief system that the spread of international business would prevent
war and that scientific enterprises such as modern medicine would foster a unified
global society, these individuals endorsed the League as a vehicle that would
enhance the prospects of world peace. In addition, these individuals supported their
belief system with material support in the form of monetary grants. The Rockefeller
library gift was so large that the site for the organization’s headquarters had to be
moved to accommodate the structure from its initially planned location. At the same
time, the gift established a pattern of deference to official state diplomatic
mechanisms and of working behind the scenes so that support for the League not
be seen as openly contradicting the official policy of non-membership.
3.2 Contributions to the Construction of Economic Knowledge in the 1930s
Barnett and Finnemore (2004: 24) have argued that IOs derive a degree of autonomy
from member-states by establishing specialized expertise in a given area. Along
these lines, the League of Nations economic section became a notable center for
international economic research early in its history by taking advantage of its unique
ability to generate data from governments that were of use to private business and
research institutes. However, the degree of autonomy that the League’s section held
from a powerful state that was not itself a member is arguable. As with the bricks
and mortar library gift, the Rockefeller Foundation made significant contributions to
the research output of the section and in this manner remained loyal even when the
state had exited. Alexander Loveday, the director of the economic section, saw the
League’s mission to be in elucidating mechanisms that could contain the spread of
4
“Raymond Fosdick to John D. Rockefeller, Jr.” 15 August 1927, folder 21, box 3, cultural interests
series, RG 2, Rockefeller Family Archives, RAC.
economic depression. By conducting high-level research, the section could

“educate” nations into more cooperative behavior (Pauly 1997; Toye and Toye
2004). Two significant studies came out of this program: a study by Gottfried
Haberler published by the League in 1937, and a later empirical study by Jan
Tinbergen that sought to test Haberler’s hypothesis with statistical studies. Both were
directly connected to the Rockefeller funding.
The Rockefeller Foundation’s financial support for the section’s program of
research on business cycles had commenced approximately mid-point in the League’s
history. Several uncoordinated official economic commissions, national economic
advisory councils, and business cycle research institutes had formed around that time
to consider the problem of business cycles with a focus on mechanisms to stabilize
them. Many of these projects had received funding from the early Rockefeller
philanthropies. The League held a conference on economic depressions in 1931 that
brought together a number of these research entities and subsequently sought to
expand its own research in this area (Endres and Fleming 2002: 18).
The funding connection grew out of the already quite elaborate web of
relationships among individuals at the Foundation, the League, and a variety of
research institutions. John B. Condliffe, a newly hired economist in the section who
had his own connections to the Foundation, initiated the request for funding. When
Loveday and Condliffe made a formal request to the Foundation in late 1931, it
looked favorably upon the request because its representatives thought the quality of
the section’s research was high. Moreover, the section’s analytical concern with
research in economic stabilization was plainly within the Foundation’s areas of
major interest. Its activities were visibly hampered by lack of funds, even to protect
data already gathered. Perhaps most importantly, the Foundation felt that as an
organization, the League’s section was uniquely placed to secure the data from
governments that would be necessary to analyze problems of economic stabilization.
In addition to contact with governments, the section was in contact with almost all of
the private institutes that were concerned with the same research. Addressing the
problem that states might object to any findings of the section that were politically
sensitive, Condliffe and Loveday argued that the analytical side of the research
could, under those circumstances, be subordinated to its “fact finding” aspects, and
ultimately the findings would speak for themselves. In addition, if the staff hesitated
to draw conclusions that were politically unpopular, the outside researchers could
draw them.5 Objections aside, the Rockefeller Foundation awarded the first grant of
US $125,000 over 5 years in April 1933. The second award was authorized in
December 1937 for SF 350,000 for the period 1 September 1938 to 31 December
1942. These grants were to be used not for monies already appropriated, but for
additional work on economic depressions.
The ongoing connection between the American-based Rockefeller Foundation
and the economic section meant that individuals constantly had to address the
peculiar nature of the lack of US formal membership. In 1937, Loveday sought
5
John V. Van Sickle “The Financial and Economic Intelligence Section of the Secretariat of the League of
Nations” 21 December 1931, folder 148, box 18, series 100, RG 1, Rockefeller Foundation Archives,
RAC.
380 K.C. Lavelle
monies from the Rockefeller Foundation to provide for American collaborators in

the Financial Section. One official would potentially have knowledge of European
affairs to interpret events to Americans, and another would potentially have
knowledge of American affairs to interpret the US to Europe. This idea was rejected
because the Rockefeller Foundation did not want to provide monies to pay members
of the staff. From the perspective of the Foundation, if Americans were hired and the
US was not a member country, the Foundation would be expected to contribute to
the regular budget. The source of the funds may need to be explained, which would
leave the section and the Foundation open to criticism.6
The Rockefeller Foundation also confronted issues related to how its monies were
shaping the intellectual agenda of business cycles work across states. After leaving
the section in 1936 to take a position at the London School of Economics, Condliffe
warned the Foundation that the manner through which the Foundation funded the
broader business cycles program threatened the agenda itself. Funds for research in
most European countries were so small, and required matching funds, that Condliffe
used the analogy of a military front where “The Foundation was pushing out
dangerous salients with the resultant weakening of the whole line.”7 In particular,
Condliffe warned that the business cycle research program might come under the
undue influence of “The Vienna School” and Oskar Morgenstern whom some
regarded as having ceased to be a “real scholar” and was “overly ambitious.”8
Hence, the Rockefeller Foundation’s contributions to the construction of
knowledge about international economics in the 1930s were considerable, and its
dedication to these pursuits through the League continued throughout the war. As
was the case with the library gift, the Foundation remained loyal to the League and
certain of its activities at the same time it navigated the non-membership of the US
government. Overtly conscious of avoiding sensitive political issues or of
challenging the US government’s domestic position, this support represented up to
one-third of the section’s budget at its peak, and allowed for the exchange of
information on business cycles research that would not have been possible in its
absence. Its manner of funding influenced the direction of the research itself, and the
delicate balance between government and foundation influenced the manner in
which research results were disseminated to the public.
4 Influence Having Exited: The US and the Bruce Committee Reforms
Hirschman’s logic allows for influence even when an actor has exited an
organization. Having left, the directors search for solutions to the problems that
led to the exit. Although the US exited the League between completion of the
Covenant and the failed ratification in Congress, its actions rendered it a degree of
6
Seymour Walker to Alexander Loveday, 31 January 1938, folder 151, box, 18, series 100, RG1,
Rockefeller Foundation Archives, RAC.
7
J. Van Sickle “Standing Committee of Business Cycle Institutes” 15 September 1937, box 17, sub-series
2, series 700, RG 1.1, Rockefeller Foundation Archives, RAC. p. 1.
8
J. Van Sickle “Standing Committee of Business Cycle Institutes” 15 September 1937, box 17, sub-series
2, series 700, RG 1.1, Rockefeller Foundation Archives, RAC. p. 4.
influence over what remedies could entice formal participation, particularly in terms
of institutional design. The Bruce Committee reforms were one set of changes
specifically targeted at attracting American membership if technical activities could
be appropriately segmented from the political activities of the organization. In
addition, the League continued to look to the Rockefeller Foundation for financial
reinforcement of these reforms.
The League’s economic and financial organization had been in a near constant state
of reform since the Brussels financial conference of the 1920s. Toward the late 1930s,
a set of proposals for re-orienting this work mandate called for a distinct reorganization
of the machinery of all of its economic and social work. Known colloquially as “the
Bruce Committee Report,” the Report of the Special Committee for the
Development of International Cooperation in Economic and Social Affairs sought
the active participation of non-member states such as the US in these affairs, and
embodied the notion that international economic policies should be directed toward
improving the well-being of the masses. Hence, the Bruce Committee Reforms are
significant because when the US did eventually join a universal IO after the war, the
reforms became a blueprint for the UN Economic and Social Council (ECOSOC).
While the Bruce Committee appeared to de-emphasize the political work of the
League, it acknowledged that political issues are inherent in a variety of social and
economic problems (Dubin 1983: 63). The League’s welfare ethic had grown from
the participation of Australia’s resident minister and High Commissioner in London,
Stanley Bruce. At the time, Australia was one of the world’s major agricultural
economies and Bruce rejected policies aimed at lowering production to increase
producer prices. A free-trade representative to the London Monetary and Economic
Conference of 1933, he argued that lowering trade barriers would expand
agricultural markets in industrial countries, lower poverty in agricultural exporting
countries, expand demand for industrial goods, and end the global depression (Dubin
1983: 48). As a part of this overall project, the League technical organizations
should collect data on national efforts to improve nutrition, and in turn, a committee
of agricultural, economic and health experts should be appointed to report findings
on the agricultural and economic effects of improved nutrition. Subsequent reports
on the problem of nutrition in 1936 and 1937 linked the problem of poverty, poor
eating habits, bad health, and early death. Similar work was done on the protection
and welfare of children, and rural hygiene.
League promoters thought that this work resonated with the American public.
Within the network, Arthur Sweetser may have made the most significant individual
contribution. A journalist who had been appointed by Wilson to a League position
before the Congressional vote, Sweetser wrote frequently on the topic and traveled
to the US to lecture and confer with government officials. His position and
friendship with Drummond meant that he spoke authoritatively. Moreover, Sweet-
ser’s wife had an independent income that allowed him to host visitors to Geneva in
a lavish style (Kuehl and Dunn 1997). While in the US to arrange a League exhibit
at the 1939 World’s Fair in New York, he met with Cordell Hull and Franklin
Roosevelt. At this time, Roosevelt advised Sweetser that the League should abandon
its political activities, disband its Council and concentrate on the non-political
questions where it had achieved a degree of success. Sweetser agreed that the US
might join an “independent” Economic and Financial Organization. When Dr. James
382 K.C. Lavelle
Shotwell of the Carnegie Endowment for International Peace and President of the
American League of Nations Association visited Sweetser in Geneva in May of
1938, he likewise concurred (Dubin 1983: 54).
League historians debate the motives of the League’s secretary-general, Joseph
Avenol, who also supported the reforms. Avenol was a conservative French
nationalist and an expert in international finance. To some, he sought the reforms
as a way to appease the totalitarian European states and entice them to return to the
organization once it was ethically neutral. Others saw Avenol’s support for the Bruce
Committee reforms as a way to abandon the League’s main political responsibility
(Dubin 1983). Regardless of their rationale for supporting the reforms, League
staffers saw them as a way to encourage US participation in particular in both
Committees and the Council. They also hoped to invite the views of non-
governmental associations and highly qualified persons outside of governments
(Dubin 1983: 46). In this way the League would continue to function and perhaps
could re-establish its political footing (Dubin 1983: 52).
The American response to these overtures was similarly multifaceted. During
Sweetser’s 1938 visit to New York, Claude D. Pepper (a member of the US Senate
Committee on Foreign Relations) remarked that it was not widely known in
Washington that non-member states could participate in the League’s non-political
activities (Dubin 1983: 55). Sweetser wrote Loveday in 1939 that he found the
economic and financial work to be unquestionably the most appealing to Americans
who don’t know much about it, but intuitively sense its necessity.9 Cordell Hull sent
a message to the League Secretariat wherein he remarked (among other comments)
that the US government considers its progress in the economic and financial area to
be very real “of this order national and international that is, in its opinion, essential
for real peace (Ghebali 1970: 17).”10 Other sympathizers in the Roosevelt
administration included Henry Grady who was the chairman of the League’s
Economic Committee and a US Assistant Secretary of State. Nonetheless, Roosevelt
was concerned that membership in an economic organization might entail financial
obligations. If requested, and the reality of American cooperation became widely
known, Congress might pull back on what collaboration the US had already
exhibited. Particularly with the 1940 Presidential elections approaching, the
administration could not risk a more close association (Dubin 1983: 55; Ghebali
1970: 22). Other historians have taken the view that the administration feared the
reforms would ultimately destroy the organization, and the United States would be
blamed for its demise (Ostrower 1983: 140).
The 1939 Assembly approved the Bruce Report. The approval meant that all of
the social and economic activities of the League would be unified under a single
agency. The organization would recognize the interconnections among activities and
provide for coordinating direction. The agency would expand publicity for these
activities and it would give non-members an opportunity to participate as equals in
the direction and supervision of these activities (Dubin 1983: 58). The Economic and
Financial Section was divided into separate Economic Relations and Financial
9
“Arthur Sweetser to Alec Loveday,” 3 July 1939, P 145 Box 146, File 19, 1938, “A Loveday letter book
1939” second half, LON archives.
10
Hull quoted from Ghebali, author’s translation.
Sections. A special Economic Intelligence Service unit was to continue the reporting
and analysis provided at the Paris Conference by the Supreme Economic Council.
Taken together, this group was known as the “Economic and Financial Organization.”
A meeting took place in the Hague in February of 1940 so that the Bureau could
appoint an organizing committee that would form the nucleus of the future Central
Committee. The advance of German armies in 1940 prevented any further
organizing or Central Committee meetings. In discussions of the Bruce Committee
report, members of the League argued that the work of the Economic Intelligence
Service was valuable and would become more so when reconstruction would take
place after the war. They also argued that the lessons of the economic and financial
organization should be studied, and its committee work carried forward.
Once the Bruce Committee reforms were accepted, the League turned to the
Rockefeller Foundation for additional money. Small countries felt that the Bruce
Committee was a response to Cordell Hull’s letter expressing American interest in
the League’s technical activities. They hoped that the US would contribute and be
the first non-member to participate in the new organization. Individuals at the
League thought that if the Rockefeller Foundation were to contribute money, it
would appear that the US was willing to join.11 However 2 months after these
discussions commenced, the Rockefeller Foundation closed its European offices due
to the advance of the Nazi armies. When the Dumbarton Oaks talks turned to the
issue of economic coordination after the war, the United States proposed an
economic and social council to initiate studies and work with individual govern-
ments along the lines of the Bruce Committee. The Americans perceived an
umbrella organization covering economic and military relations, with autonomous
functional agencies (Toye and Toye 2004: 25). The British gave lukewarm support
for the proposal, whereas the Soviets were more skeptical. Thus, the Economic and
Social Council (ECOSOC) of the United Nations institutionalized the League’s
experience in this area, and was conceived as the Central Committee proposed in
1939 and 1940.
The reforms demonstrate the navigation of public and private concerns among the
same activist network, philanthropy, and US government has had been the case with
the financial initiatives in the previous section. However, with the Bruce Committee
reforms, the goal was not financial support (although US membership would have
undoubtedly involved financial contributions) but the political advantages of gaining
the US as a member at a time when the future of the organization itself was in doubt.
Not only did the members of the Roosevelt administration intimate that the US
would join under certain circumstances, it did join the United Nations according to
this same institutional design.
5 Exit and Loyalty: Support for the Princeton Mission and IOs During World
War II
Loyalty to the economic section of the League of Nations came to the ultimate test
during World War II, a time when the physical safety of the economic section’s
11
Kittredge to Willits, 1940 March 16, folder 152, box 18, series 100, R61, Rockefeller Foundation
Archives, RAC.
384 K.C. Lavelle
members could not be guaranteed. The outbreak of World War II did not only
seriously strain the financial resources of the League of Nations, it jeopardized the
lives of many individuals working in the secretariat, particularly during the early
stages when it was not clear whether the Nazi armies would advance into
Switzerland.12 How to preserve the economic data collection of the section, as well
as the intellectual community of scholars conducting research, became a pressing
question for individuals in the US and Geneva. Once again, a committed network of
league activists and support from the Rockefeller Foundation at a critical juncture
allowed the section to preserve its records, and to continue to generate international
economic data nearly throughout the war. Many of the individuals involved in the
move including Sean Lester, the acting Secretary-General, and traditional League
supporters like Arthur Sweetser, felt that a physical locus of operation in the
territorial US would guarantee American membership in any multilateral organiza-
tion that might follow the war. Individuals resident in Princeton lobbied for
American membership in such a universal IO. Moreover, the effects of the move to
Princeton transformed both the section’s work mandate as well as the study of
economics in the US since many researchers who had an inability to collaborate in
Europe reestablished connections in the secure environment.
Thus the pattern of combined American exit and loyalty only intensified during
the war years as the location of the section in a non-member state permitted even
higher levels of access and mutual influence. Moreover, the geographic location in
the territory of the US resulted in a more pronounced integration of Latin American
concerns into the section’s affairs.
5.1 The US and the Functioning of the League of Nations during World War II
Realizing that the German occupation of France meant that committees could no
longer meet in Geneva and that all communications with the exception of those sent
by telegraph were effectively ended, the twentieth session of the Assembly
prolonged the terms of office of members until further notice. Thus, in the period
from December 1939 when the Assembly adjourned until April 1946 when a new
(and final) session was called, a skeleton secretariat continued to function in Geneva
with a Secretary-General. Eventually the ILO moved its activities to Montreal and
the Treasury, Permanent Court of International Justice, and High Commission for
Refugees operated out of London.
In late May of 1940, Sweetser made a trip to the US and on the day of his arrival
in New York, King Leopold of Belgium surrendered. Sweetser immediately
commenced discussions within the circle of Americans promoting the League
concerning the fate of the work of the technical sections. Problems arose on both
sides of the Atlantic insofar as certain individuals in the League did not want to see
the sections dispersed, and individuals within the Roosevelt administration were
lukewarm to the idea because the ILO and technical section transfer would have
12
For example, 20 members of the ILO’s staff were wanted by either the Nazis or the Fascists. See J.H.
Willits 2 July 1940 interoffice correspondence. Folder 153, box 18, series 100, RG 1, Rockefeller
Foundation Archives, RAC.
political repercussions. Roosevelt and the State Department were unwilling to make
a political guarantee that they could “still function as an international organization,”
particularly in an election year.13 The discussions continued, however, because they
were both informal and private.
Sweetser thought that Princeton, New Jersey would be advantageous because
Washington, DC was perceived as “too political,” New York seemed “too big.” If the
League section came to the US during the war, he felt that the US would identify
with whatever international organization followed it after the war. He wrote Loveday
“It is my belief that, if this country gave asylum now in this moment of emergency, it
would be integrated forever. Our people are sentimental, as you know; the fact of
coming to aid would create a bond which would be permanent.”14 Winfield Riefler,
an American who had served on League financial committees and was then in the
Economics department at the Institute for Advanced Study, happened to be in
Washington at the time and approached Frank Aydelotte with the idea for the move.
Aydelotte, had recently assumed the directorship of the Institute for Advanced Study
from Flexner.15 In addition to contacting Riefler, Sweetser contacted Henry Grady
who was working at the State Department and had sat on League committees.16
Sweetser then cabled Sean Lester (the deputy Secretary-General) and Alexander
Loveday on the 30th of May suggesting a transfer of the technical sections to the
US. In a letter dated June 6, he explained that he had discussed the matter with
Riefler, Aydelotte, and Fosdick—and commented that Fosdick had graduated from
Princeton. Joseph Willits and Fosdick at the Rockefeller Foundation were
enthusiastic about the transfer, and stressed the general advantages, as well as the
technical. They concurred with Sweetser that even a brief stay in the US would
become permanent.17 The invitation was prepared on Wednesday, June 12, the day
after Italy entered the war. Sweetser, Brakeley, Riefler and Aydelotte took it to
Washington where they met with Cordell Hull.18 Hull gave his permission for the
invitation to go ahead, with the understanding that the invitation was to be sent
under private initiative. The State Department was not associated with it, yet would
not object to it. They cabled the invitation that evening.
13
Aydelotte Notes, IAS Archives: General Files: Box 39, League of Nations, Invitation to Economics
Group.
14
“Sweetser to Loveday, June 4, 1940” IAS Archives: General Files, Box 39: League of Nations,
Invitation to Economics Group.
15
At the time, his official capacity at the League was in question. Loveday wrote Riefler that the
delegation he would attend was a “scientific body” and not governmental. See http://www.rich.frb.org/
research/specialtopics/treasury/bios/riefler.html accessed 2/22/2005. See also Obituary for Winfield
Riefler, New York Times. 10 April 1977; “Winfield W. Riefler to Dr. A. Loveday” 16 May 1938, and
“Dr. A. Loveday to Winfield W. Riefler” 30 April 1938, Loveday papers, P145, Box 145, File 18 LON.
16
Grady had been a member of the League of Nations Economic Committee and he was widely known to
have held the opinion that the economic activities of the League were among its most successful activities.
In August 1939 he was appointed Assistant Secretary of State. See Washington Post October 11, 1939, J.
C. Rocca to Mr. Alexander Loveday August 4, 1939, Washington Star August 4, 1939.
17
“Sweetser to Loveday, June 6, 1940” IAS Archives: General Files, Box 39, Correspondence with
Arthur Sweetser. Fosdick had assumed the Presidency of the Rockefeller Foundation in 1935.
18
George Brakeley was the financial vice-president of Princeton University.
386 K.C. Lavelle
On the more immediate front, Joseph Willits sought to preserve the section’s
records, regardless of the fate of the section. Those concerned held a meeting in
Princeton to discuss the possibility of microfilming the records and smuggling them
to the US.19 Willits cabled Loveday accordingly and within days, the Rockefeller
Foundation provided exchange valued at 1,500 Swiss francs for microfilming
costs.20 Preserving the broader intellectual integrity of the section was more
complicated, but also of importance to Willits. He argued within the Foundation that
if the League and British Empire were to disintegrate, and the Nazis were to keep
their hold on Europe, the American intellectual task would be as important as its
military task, or more so. Hence, preventing the dissolution of the economic and
financial section was of great immediate concern.21
As these discussions progressed in the US, the League secretariat was in a state of
mild turmoil. Joseph Avenol harbored increasingly open pro-Nazi sympathies and
any communications between the Foundation and Avenol were also privately wired
to Loveday (Barros 1969).22 Avenol had rejected the initial invitation to Princeton on
the grounds that the initiative had not come from member countries.23 His view
changed as the war progressed and prominent individuals in the League pressured
him to accept it. Namely, Lord Lothian at the British Embassy in Washington asked
the Foreign Office to urge Avenol to accept the invitation. Lothian’s view held
weight because Great Britain and the states of the British Empire were the principal
dues-paying members left in the League. Dr. Carl Hambro also intervened with
Avenol, when he arrived in New York in July and visited Princeton. Although not
technically an “official of the League,” Hambro was the President of the Assembly
as well as President of the Supervisory Committee. Unknown to these men, the
Vichy regime was also pressuring Avenol (a French national) to resign his position
(Barros 1969: 246). Avenol approved the move with the understanding that they
were conducting a “mission” to the US, whereas their home remained in Geneva.
The next day, Avenol resigned his position. In the month before leaving office,
however, he continued to impede other sections from moving.24
The Rockefeller Foundation continued to provide financial support in these
circumstances by paying for their move to Princeton. The Foundation also continued
to fund approximately one-third of the section’s activities, and to supplement
19
“Aydelotte to Willits” 18 June 1940, folder 153, box 18, Series 100, RG 1, Rockefeller Foundation
Archives, RAC.
20
“Grant-in-Aid” 24 June 1940, folder 148, box 18, series 100, RG1, Rockefeller Foundation Archives,
RAC.
21
J. H. Willits “League of Nations” 3 July 1940, folder 153, box 18, series 100, RG1, Rockefeller
Foundation Archives, RAC.
22
See also J. H. Willits interoffice correspondence 2 July 1940, folder 153, box 18, series 100, RG1,
Rockefeller Foundation Archives, RAC.
23
“Extract from the Report of the Director to the Trustees of the Institute for Advanced Study, October 14,
1940” folder 154, series 100, RG1, Rockefeller Foundation Archives, RAC.
24
In particular, the Americans hoped that the remnants of the combined Health, Social and Opium
Sections would come as well. Most of the assistants, clerks and secretaries had left the section in Geneva
by August, yet Avenol continued to stall. The Opium section did eventually move to Washington, D.C.
expenses that the Institute for Advanced Study incurred as hosts.25 Whereas the goal
of policymakers after World War I had been to return to “life before the war,”
League staffers were aware that economic problems before World War II had most
likely exacerbated the political conflicts. Thus, they attempted to plan policies that
would not lead to “life before” World War II. The work comprised three fields:
economic intelligence, studies of the problem of post-war depression, and studies of
the general problem of post-war economic reorganization (i.e. commercial relations,
international financial organizations, currency, etc.) that had been discussed in
League conferences and committees for 20 years.26
The work of the staff was facilitated by the location in Princeton because other
countries’ could easily be consulted either because they were stationed there, or they
were visiting in connection with official duties. Staffers could also maintain contact
with the ILO office in Montreal from New Jersey after it relocated in 1940.
Therefore, the Princeton mission obtained statistical and other information from four
of the five continents, and Geneva obtained information from Europe. They even
continued to receive trade and monetary statistics from Axis powers through neutral
sources. Staffers reproduced the statistical archives on microfilm and the archives
between Geneva and Princeton were kept up to date. The results of this collaboration
were such that when Switzerland was totally encircled by the Axis Powers, the
League was nonetheless able to continue to produce The Bulletin of Statistics, albeit
a separate edition came from Princeton in 1942 and 1943. By late autumn of 1945
when communications improved, the Princeton edition of the Bulletin was
terminated. Meeting in Princeton six times, the delegation on economic depressions
published The Transition from War to Peace Economy from there.
The Princeton mission served as a focal point for other League activities, or as a
“rallying nucleus” for the League in the US.27 For example, approximately 200
Americans who had served on League committees were invited to a special
conference in April of 1941. The League of Nations Association held a joint all-day
session of the New Jersey and Pennsylvania branches in November 1941 in
Princeton. When it became apparent that some sort of international organization
would form after the war, the League of Nations Association called another meeting
in 1943 of the 200–250 Americans who had served on League Committees. At this
later meeting, the Carnegie Endowment for International Peace and the Woodrow
Wilson Foundation cooperated.
The contributions of Loveday and his staff to future UN agencies is more
debatable. From Sweetser’s perspective, Loveday and his staff were constantly
called to Washington to lay the groundwork for the UN agencies that succeeded the
League, as well as for the Bretton Woods institutions.28 Although Alexander
25
See “Grant-in-Aid” New York 29 October 1940, and “RASS 4134 Detail of Information” 28 May 1940
and “Document 40383” 15 November 1940, folder 148, box 18, series 100, RG1, Rockefeller Foundation
Archives, RAC.
26
“Loveday to Riefler,” 27 November 1939, P146 1939, Box 146 File 19, LON.
27
“Extract from a letter to Frank Walters, November 27, 1948” IAS Archives: General Files, Box 39,
League of Nations, Invitation to Economics Group.
28
“Extract from a letter to Frank Walters from Arthur Sweetser, November 27, 1948” IAS Archives:
General Files: Box 39, League of Nations, Invitation to Economics Group.
388 K.C. Lavelle
Loveday did travel to Bretton Woods in July 1944 to represent the department, some
observers assigned him an inconsequential role (Pauly 1997: 74). Furthermore,
observers of the San Francisco UN Conference remarked that Sean Lester (acting
Secretary-General), Seymour Jacklin (treasurer), and Alexander Loveday had been
snubbed by the sponsoring powers. Loveday attended his committee for 2 weeks
before he was invited to comment on details of League committee structure.29 The
remainder of the Princeton mission was ultimately appointed to the Department of
Economic Affairs transferred to UN headquarters on Long Island after the war. The
continuity of the enterprise meant that the technical and economic work of the UN
dates to 1920 and not 1946. The department followed the tradition of producing an
annual World Economic Report that reverted to the League’s title World Economic
Survey in the 1950s (Toye and Toye 2004: 87). However, the department itself did
not remain intact.
6 Combinations of Exit, Voice, and Loyalty in Contemporary International

Organizations
This examination of American involvement in the League of Nations economic

section has revealed several dimensions of the influence of civil society that resulted
from combinations of exit and loyalty that are commonly overlooked in international
relations theories that privilege examinations of voice, and that continue to the
present day. What began with informal networks and a limited consultative capacity
for NGOs at the League expanded with the birth of the UN, and grew in the 1960s
and 1970s with the growth of the UN Conference system. Many researchers have
shown the plethora of opportunities available to NGOs to advise state officials in the
post-Cold War era, albeit states remain the principal agents within the UN process
(Cooper 2002, 2004; Gordenker and Weiss 1996; Payne and Samhat 2004). As
Cooper (2004) argued in his study of Canadian diplomacy and UN conferences, the
contours of the state-society nexus remain uneven in this arena. Nonetheless, three
key continuities between the past non-state participation and contemporary NGO
consultative activities are apparent and reflect the historical experience of American
support for the League.
The first main continuity is the diversity of participatory mechanisms utilized by
elements of civil society in Western industrial democracies to access international
organizations, which allows for combinations of voice, exit and loyalty. Just as the
Rockefeller Foundation’s funding mechanism through the League section enhanced
the prestige and legitimacy of the section as a source of economic knowledge and
legitimacy, when contemporary elements of civil society participate in international
organizations, the organization can gain a degree of moral legitimacy even when the
views of civil society participants clash with the official state views, and despite the
lack of democracy within IOs. By virtue of taking their concerns to the UN,
organizations like Amnesty International and Oxfam, as well as social movements
like the Jubiliee debt cancellation movement, reinforce notions that IOs are
29
“‘Snub’ is Charged of 3 League Aides” 23 June 1945 New York Times.
legitimate, appropriate, global forums within which to resolve conflict. Participants

in League committees gained an esprit de corps infused with the notion that
international business could serve as an agent of peace. In the current era, the act of
attending meetings at the UN secretariat and interacting with UN diplomats
transforms the agents of civil society themselves by imbuing them with an
international consciousness and sense of global responsibility that they might lack
in an exclusively domestic political context. These considerations are not
insignificant in an era of globalization.
The second main continuity with the past is the ease of exit of IOs. In the
contemporary era, states rarely demonstrate the type of dramatic exit that the US and
some European states did in the 1920s and 1930s League. Nonetheless, there are
examples of exit, and threats to exit. In 1984 the US, Great Britain and Singapore
officially withdrew from the United Nations Educational, Scientific, and Cultural
Organization (UNESCO) due to a lack of satisfaction with its political orientation
and management.30 The US repeatedly threatened to withdraw from the United
Nations Conference on Trade and Development (UNCTAD) during the same years,
albeit this action was complicated by the fact that UNCTAD is an organ of the UN
General Assembly. In both cases, the UN agencies maintained operations with non-
governmental organizations and universities in the US through a variety of
programs. In both cases, the threat to exit, and the exit with enticement to rejoin,
enabled the US to exert a high degree of influence over internal reforms.
Moreover, while states rarely make a complete exit, there are subtle diplomatic
strategies that they can use to exercise degrees of exit from a given UN organization
or conference initiative. Chiefly, they can lower the diplomatic rank of those
attending meetings and conferences and lower their financial contributions below the
sustainable level. For example, in 2001 the Bush Administration replaced Colin
Powell as representative to the UN sponsored World Conference Against Racism,
Racial Discrimination, Xenophobia and Related Intolerance with a lower-level
delegation in response to objectionable comments about Israel in the conference
documents. Representatives from American NGOs chose to attend the conference
nonetheless. In natural disasters, economic crises, and development aid, the US
government has a variety of options in terms of how to channel its financial support.
In most of the post World War II era, it has sought to de-emphasize funding for
economic development funding through UN organs in favor of the Washington-
based International Monetary Fund and World Bank or bilateral aid.
The third clear continuity with the past is the heavy involvement of private
foundations from advanced industrial democracies that do not necessarily act in
concert with their home state’s official position. Foundation support can either be
direct, or it can be mediated through NGOs. For example, Ted Turner pledged US$ 1
billion to the United Nations, which was responsible for establishing the UN
foundation in 1997. Foundation support for the growing NGO movement overtly
seeks to raise the profile of civil society organizations in international settings
30
Echoing its history with the League’s technical assistance programs, the US never completely severed
its ties with UNESCO. It retained its observer status during these years and contributed to some UNESCO
programs such as the Intergovernmental Oceanographic Commission and the Man and the Biosphere
Programme. The US rejoined in 2003 as part of the struggle against global terrorism.
390 K.C. Lavelle
through funding for their participation in international forums. To name a few, the
Open Society Institute seeks to shape public policy and build alliances across
borders and continents on issues of human rights abuses. The Charles Stewart Mott
Foundation in Flint, Michigan, has a program to develop civil society internationally
and specifically to better represent their members at the public policy level. In
Germany, the Heinrich Böll Foundation seeks to facilitate the access of civil society
representatives from developing countries to international policy processes and to
ensure that development concerns are taken into account in various world capitals.
Despite these continuities, current combinations of exit, voice and loyalty contain
significant differences. In the historical case, participants remained loyal to the
League when the US exited it, but sought to keep many of their activities out the
public view. They were highly deferential to the US Presidential administrations. As
non-state voices proliferate in UN forums, they can at time clash openly with the
views of official representatives from democratic states. For example, the Bush
administration presently opposes the passage of a UN Convention on the Rights of
People with Disabilities while American NGOs within the disabilities rights
community champion it. Situations like these point to Hirschman’s assessment of
the problem with combining ease of exit and voice in IOs: the voices that remain and
their connection to the grievances that led other actors to exit. In the League era, the
loyal actors worked with the actor that had exited. They sought to bring the disparate
communities of the official American state, business and philanthropic support for
research about global problems together under one roof. The connection between
contemporary NGOs and actors that exit is highly uneven across civil society. NGOs
do not generally seek to work with for-profit enterprises through the UN. In
combining ease of exit with voice, UN bodies ultimately risk becoming an irrelevant
forum for issue-specific dialogues among NGO representatives that are only
responsible to narrow constituencies.
7 Conclusion
The case of American participation in the League’s economic section is analytically

useful because the exit of the American state makes the contrast between state and
non-state participation particularly stark. Activist networks and private foundations
remained loyal to the League and were able to secure funding and a physical home
for the section at a time when it was not at all clear that Nazi armies would not
occupy Switzerland. These contributions had a transformative effect on the
individuals and research involved since Rockefeller Foundation funding helped to
preserve 20 years of data, to connect researchers on business cycles before and
during the war, and to allow for travel opportunities to Latin America that linked the
research program to the developing world at an early date in the development of the
social sciences. Although they made no effort to set policy or dictate priorities,
individuals within the Rockefeller Foundation consciously chose to fund the
economic section of the League to enhance the organization’s overall prestige.
These individuals knew that the work could have been conducted for less money if
grants had been made to the organizations where individual researchers held
academic appointments. However, the Foundation funded the projects the way it did
because individuals there felt that the entire project gained authority, and its results
would more likely be applied, if it was conducted under the sponsorship of the
League. In addition, conducting the research gave the League prestige. That is, the
Foundation’s assistance helped to make the League a recognized focal point for
international economic research at a time when its future may have depended on
some general recognition of the value of the service it can perform in the field of
research and classification.31 Combined with the loyalty of certain elements of civil
society, the exit of the US state rendered it a degree of influence as some individuals
in the secretariat sought to fix the problems that had ostensibly kept the US out in
the first place. Thus, the hints that the US would join under certain circumstances via
the network of activists resulted in the enactment of a series of reforms that became
enshrined in the UN when it was created.
The ambivalence in American participation persists. While participation in IOs is
unlike participation in industrial democracies because IOs are not themselves
democratic institutions, the participation of broader segments of their member-states
contains many of the same opportunities for personal transformation and dangers to
institutional stability as participation in domestic political institutions does.
Combinations of exit and voice pose a danger in the present if the voices that
remain do not possess the material capabilities to resolve issues of import to IOs.
Nonetheless, there are limits to the analysis. It is not a systematic study because it is
constrained by the archival record that is currently available. The numbers, shapes,
and budgets of non-state actors have all escalated since the 1930s and cannot be
considered as a monolith. Despite these limitations, managing the exit, voice, and
loyalty of broader participatory elements into the future functioning and operations
of IOs will continue to pose a challenge to policymakers within them. Incorporating
civil society is a necessity in order to build on the successes of the past and to keep
these institutions relevant and connected to the communities they serve; yet
reserving a sphere of exclusively state-based participation with material capabilities
is likewise a necessity in order to ensure the efficacy of the results IOs, states,
interest groups, and philanthropies seek.
Acknowledgments The author would like to thank Ansoumane Diara and Bernhardine Pejovic at the
League of Nations Archives, Erica Mosner at the archives of the Institute for Advanced Study, and
Kenneth Rose at the Rockefeller Archive Center for their assistance. She would also like to thank Randall
Germain, Kenneth Grundy, Eric Helleiner, Craig Murphy, Louis Pauly, Kenneth W. Thompson and the
anonymous reviewers at Review of International Organizations for their very useful comments. Grants
from the College of Arts and Sciences and the W.P. Jones Presidential Initiative Fund, Case Western
Reserve University, supported the research.
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MASTER CLASSES

The Economic Lives of the Poor

Abhijit V. Banerjee and Esther Duflo

I n what turned out to be a rhetorical master-move, the 1990 World Develop-

Households (HHs) living on less than

$1.08 per person $2.16 per person

Cote d’Ivoire LSMS 1988 664.13 375 14% 1,411 49%

The Living Arrangements of the Poor

How the Poor Spend Their Money

Food and Other Consumption Purchases

The Ownership of Assets

The Pursuit of Health and Well-being

How the Poor Earn Their Money

Entrepreneurship and Multiple Occupations among the Poor

Temporary Migration to Work

The Problem of Scale

Markets and the Economic Environment of the Poor

The Market for Credit and the Poor

The Market for Savings and the Poor

The Market for Insurance and the Poor

The Market for Land and the Poor

Infrastructure and the Economic Environment of the Poor

Infrastructure includes roads, power connections, schools, health facilities,

Understanding the Economic Lives of the Poor

Why So Little Specialization?

Why So Many Entrepreneurs?

Why Don’t the Poor Eat More?

Why Don’t the Poor Invest More in Education?

Why Don’t the Poor Save More?

Beyond Market Failures and Self-control Problems

Why Don’t the Poor Migrate for Longer?

By Emanuele Ferragina & Alessandro Arrigoni

A period of political and economic turmoil calls for a new analytical

“I don’t think we did go blind, I think we are blind, Blind but

The ‘Rising Invisible Majority’ project began informally in 2013 as a reflection

We mixed social science with fiction, and employed Saramago’s dystopian

International Political Economy and the Changing Social

Capitalism can be described historically as unfolding through different phases:

The notion of a Rising Invisible Majority2 encapsulates three dimensions: the

The material dimension appraises growing unemployment, labour market

2 For further details see Ferragina et al. (Forthcoming).

The dynamic dimension follows long-standing political economy and

The Political Economy Context

Institutional Transformations as Mediating Factors

The Italian Political Economy Context

4 For more detail see Ferragina and Arrigoni, Forthcoming.

Labour Market and Welfare Reforms

The lack of adequate basic social protection—witnessed by the absence of

The Rising Invisible Majority in Italy

The likelihood to be invisible varies significantly by socio-demographic

The continuous expansion of market mechanisms, a corollary of the transition

The Rising Invisible Majority concept helps us to chart an important social

• Aglietta M., A Theory of Capitalist Regulation, Verso, 1979

• Baumol W.J., “Macroeconomics of unbalanced growth”, The American

• Boyer R., “Is a Finance-Led Growth Regime a Viable Alternative to Fordism?”,

• De Grauwe, P., “Some Thoughts on Monetary and Political Union”, in L. S.

• Ferragina, E, Social Capital in Europe, Edward Elgar, 2012

• Ferragina E., Arrigoni, A., La maggioranza invisibile, BUR-Rizzoli, 2014

• Ginsborg P., Italy and its Discontents, Penguin, 2003

• Harvey D., A Brief History of Neoliberalism, Oxford University Press, 2005

• Jessop B., “Towards a Schumpeterian Workfare State?”, Studies in Political

• Mundell R.A., “A Theory of Optimum Currency Areas”, The American