Above: Micro-credit under discussion at a village meeting in Bangladesh. Photo by Abhilash Medhi, 2009 AP Fellow. Location: Barisal, Bangladesh. Partner: BERDO

Portfolios of the Poor: How the World’s Poor Live on $2 a Day
by Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven (Princeton University Press)

So far, the economic life of the world’s poor has merely been quantified and aggregated. Some of the texture of everyday life in the world’s favellas has been documented, but what no one has done is to ask those people the pressing questions, “How do you do it? How do you manage on two dollars a day?” Two dollars a day is the UN’s current baseline definition of absolute poverty and over two and a half billion people in the global south are surviving on it.

Asking those questions is precisely what the authors of Portfolios of the Poor have done—and we are all in their debt, for the result is something astonishingly revealing. Over a six year period, they wrote year-long financial diaries with 300 poor households, both rural and urban, in Bangladesh, India and South Africa. The detailed records of their financial ins and outs were sufficiently robust for the researchers to construct balance sheets and cash flow statements for every family.

At first glance, the data revealed that two dollars a day doesn’t mean two dollars every day. It means, for most, many small irregular payments and sometimes long periods of very low or no income at all. Second, the data showed that all households have a financial turnover many times their actual income. Given that cash flow and household needs are perpetually out of synch with each other, the world’s poor spend huge amounts of time, energy and ingenuity managing the finances that they do have: saving, borrowing and repaying debt in cash and in kind. Moreover, they must do so without much formal mathematical education and at best a modicum of literacy.

What does this all signify? The financial tasks that face the world’s poor are three-fold. First comes short-term cash flow management; how to make sure that, come what may, there is food on the table every day. Second, there is the daily struggle of dealing with a highly risky economic environment in which job security does not exist and no public or formal protection against illness and disability is available. Third, given the constant pressure to immediately consume whatever is available, there is the question of how they can hope to extract savings from their tiny incomes and generate useful large sums of money; sums needed to deal with emergencies or to fund inevitable but expensive purchases, be these furniture, funerals or weddings.

The response of the poor in all three cases is to draw upon a wide array of financial devices and partners—their “portfolios”—to tackle these problems. Cash flow is dealt with, preferably, by amassing small and instantly accessible savings; money under beds and in rafters, small notes stashed with a reliable neighbour. Assets, if available can be liquidated; the pawn shop is alive and well. Then there are the large familial and social networks of borrowing and lending, often without interest, that are the mainstay of financial survival for most.

If these options have been exhausted, households turn to local money lenders—usually neighbours who are just slightly better off—who can be tapped, but at considerable rates of interest. While most families are remarkably successful at maintaining the juggling act that this all requires, it is clear that this it is mentally and emotionally exhausting, and that much of this portfolio of financial services is fundamentally unreliable; many deals lack transparency, and abuse, theft and embezzlement are persistent hazards.

Once food is one the table, the next task is to plan for the inevitable emergencies and high cost items that life entails. Insurance schemes that cover the costs of funerals and health care are desperately required, but exist only at premiums beyond the reach of even the thriftiest. Consequently many poor households are, despite their pressing consumption needs, considerable savers. One of the most intriguing elements revealed by the diaries, then, is the sheer diversity and sophistication of the forms of savings club developed in poor communities. While the wealthy look for forms of savings that maximise their returns, the mix of incentives that drives the poor is different. In India, women save a penny a day with a local collector who after 44 days returns forty pennies to them. The deduction of four pennies appears to be a negative rate of interest on their savings, but it is better understood as a worthwhile fee for someone who can securely keep and accumulate micro-savings that otherwise might be stolen, eaten up in trivial expenditure or monopolised by husbands.

In a welcome departure from statistical analysis, the researchers asked an illiterate Bangladeshi couple, Hamid and Khadeja, involved in a whole range of complex financial arrangements, how they managed to keep track of their affairs without being able to read or write. Khadeja replied, “We talk about it all the time and that fixes it in our memories…. these things are important—they keep you awake at night.” Hamid and Khadeja, the micro-savers of the Indians slums—together with two and a half billion others like them—need and deserve a decent night’s sleep. And that means better, cheaper, more transparent and reliable ways to save, borrow and mange their money.

The microcredit programmes pioneered by the Grameen Bank in Bangladesh and reproduced in many parts of the global south have already shown that stable financial services can be provided to poor communities. But what Portfolios of the Poor demonstrates is that there is a huge demand from a sophisticated market for financial services of all kinds—and that new mobile and computer technologies offer the possibility of running these services on a very low cost base.

Supporting and underwriting the creation of a new wave of micro-banking and finance should be as important to development policy as the provision of water and education. Furthermore, given how hapless we in Britain have proved at saving and given how inept we have proved as managers of our own stupendous debts, we might actually learn something ourselves in the process.