“Continued Existence of Cows Disproves Central Tenets of Capitalism?”

We examine the returns from owning cows and buffaloes in rural India. We estimate that when valuing labor at market wages, households earn large, negative average returns from holding cows and buffaloes, at negative 64% and negative 39% respectively.

…Why do households continue to invest in livestock if economic returns are negative, or are these estimates wrong?

A new, brilliantly named paper from Anagol, Etang and Karlan.

This is a question one can’t help wonder about if you work in rural development. The answers they explore show why so much of the theory and evidence in development economics is useful for designing and testing programs. For example:

Evidence suggests that the poor are often willing to earn negative interest in order to access reliable saving services… If livestock ownership is seen as a form of savings, the observed negative returns to cows and buffalo provide additional evidence of the high demand for savings, and perhaps specifically for illiquid savings in order to avoid temptation spending.

The question then turns to the supply side of savings: what are the constraints on the supply side that make cows and buffalos better savings alternatives than what banks offer? With technological innovations such as mobile money, the transaction costs are plummeting for offering deposit accounts to consumers in developing countries, even in highly rural areas. Thus this is an area where improvements in ability to store cash outside of the home may lead to more efficient allocation of capital, away from risky or low return home investments.

…If indeed, as we find, owning cows yields low or negative returns, this is of critical importance for NGO and government programs that promote investment in cows with an aim of poverty alleviation. In particular, the results here are critical for programs that engage in livestock grants to help households start or expand income generating activity from raising livestock (this is common amongst “graduation” programs, cited earlier, as well as many NGOs, such as Heifer International or other livestock grant programs)

Some of you are thinking “what about the social and cultural aspects? See the full paper for a discussion. I was a little disappointed not to see The Anti-Politics Machine in the references, but it is there partially in spirit. I’d like to read the behavioral economics paper that tackles James Ferguson.