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Consumption and Poverty

Omer Moav explores the link between conspicuous consumption and poverty

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In rural India, spending on festivals is believed to account for an estimated 15 percent of households’ total income. Poor people in many parts of the world spend a large portion of their incomes on elaborate funerals, weddings and festivals – all examples of what could be considered conspicuous consumption. This insight into their spending habits may prove useful in devising policies to encourage poor people to make similar investments in more productive pursuits, such as children’s education, with the potential to alleviate poverty.

‘CONSPICUOUS CONSUMPTION’ KEEPS PEOPLE LOCKED IN POVERTY

The desire to impress others by conspicuous spending on phones, jewellery, funerals and festivals can keep people locked in poverty, especially those with low levels of education. That is the central message of recently published research by Omer Moav, Professor in the Department of Economics at the University of Warwick, and his co-author, Zvika Neeman at Tel Aviv University.

Published in the latest issue of the Economic Journal, their study suggests that offering parents the opportunity to signal their wealth through investing in private education and other productive yet conspicuous outlets would help to break the cycle of poverty.

Poor families around the world – those living on less than $2 a day – spend much of their income on goods that do not appear to alleviate poverty, the researchers note. For example, the average spending on festivals is as high as 15 percent of income in some regions of India. Similarly, South Africans spend on average a year’s income on an adult’s funeral, often financed by borrowing.

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People care about making a show.

These consumption patterns are puzzling because they seem to come at a high cost for the poor. For example, they spend only 2 percent to 3 percent of their income on their children’s education. They do not eat well. They experience ill health. They are anxious to such an extent that their worries interfere with their sleep and work. They also fail to make trivial investments in their businesses and cannot avoid cutting back on meals when they suffer a temporary decline in income.

The research offers a new perspective on the reasons for these decisions. Current explanations suggest that these decisions stem from temptation and a lack of self control. But if conspicuous consumption also influences these decisions, then public policies could be designed to channel spending in more beneficial ways.

‘I am not saying that the problems of temptation and lack of self control don’t exist, but people also spend money in conspicuous ways. People care about making a show,’ Moav said.

For instance, he noted, many poor families do manage to save for elaborate weddings or religious celebrations, which indicates that temptation is not the sole problem, and that conspicuous spending likely is a factor. This implies that if people’s motivation to spend in ways that gain attention could be directed towards productive but visible investments such as education, poor families could improve their economic prospects. ‘This is something we should think about more seriously,’ Moav said.

A New York Times article (‘Moonshine or the Kids’ by Nicholas Kristof, 22 May 2010) offered other examples of spending decisions that perpetuate poverty and which the researchers interpret as conspicuous consumption. One was the Obamza family from the Republic of the Congo.

They had no mosquito nets... Yet Mr and Mrs Obamza spent $10 per month on mobile telephones.

The family were eight months behind on their $6 per month rent and in danger of being evicted; they had no mosquito nets even though they had already lost two of their eight children to malaria; and they could not afford the $2.50 per month tuition for each of their three school-age children. Yet Mr and Mrs Obamza spent $10 per month on mobile telephones and Mr Obamza drank several times a week at a village bar, spending about $12 per month. As Kristof notes, ‘...if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children’s prospects would be transformed.’

The ruinous impact of conspicuous consumption on the lives of the poor is also reflected in a Tajikistani government policy. Tajikistan’s President, Imomali Rahmon, banned gold teeth, the use of mobile telephones in universities and large birthday parties, a report on National Public Radio (16 February 2008) noted. The President criticised wealthy citizens ‘for showing off their wealth by throwing elaborate parties and thereby setting a standard for others who try to appear wealthy by holding a large party despite having only modest incomes,’ according to a report on Radio Free Europe (29 May 2007). The President restricted the number of people and amount of food served at weddings to prevent Tajiks, 60% of whom live below the poverty line, from ‘using their life savings just to compete with their neighbours’.

The consumption of flashy jewellery worn as an indication of wealth, known as ‘bling’ among young African-Americans, is another example of conspicuous consumption that could come with a significant cost in terms of persistence of poverty. Missy Elliott, a successful rapper, has argued that ‘bling culture’ encourages young black men and women to spend their money irresponsibly and that artists should encourage young people to invest in stable, long-term assets, according to an article on ‘Bling-bling’ on Wikipedia.

Conspicuous consumption is nearly universal in human societies, and is common among many other species. The argument among evolutionary biologists is that higher status, or more precisely the costly signal that generates this status, such as the peacock's tail, is positively correlated with other desirable genetic characteristics that are associated with greater fitness. Hence, higher status increases mating opportunities and so confers an evolutionary advantage. Indeed, experiments among human beings illustrate that sexual motives induce conspicuous behaviour. Romantic motives, for example, seem to produce conspicuous displays of consumption and benevolence, with men tending to spend more on conspicuous consumption compared to women. Moreover, men respond more strongly than women to romantic situations, by discounting future income for present consumption.

Conspicuous consumption is nearly universal in human societies, and is common among many other species.

In their research, Moav and Neeman propose that people care about their economic status and try to signal their income through conspicuous consumption. The analysis shows that if human capital is somewhat observable and correlated with income, then an unfortunate outcome driven by ‘signalling’ one’s wealth can emerge, in which poor individuals spend a large fraction of their income on conspicuous consumption.

In particular, individuals with high human capital have a recognisable earning ability – professional titles, degree certificates, prestigious jobs, etc. – and relatively little need to signal success. In contrast, those without certified accomplishments have a relatively stronger motivation to impress via conspicuous consumption.

As a result, the fraction of income allocated to conspicuous consumption can decline as the level of human capital rises – and the income allocated to savings and education can increase. Thus, the analysis predicts that among poor families with low levels of education, there will be low saving rates and low investment in the future – particularly in children’s education.