Customer Reviews

Portfolios of the Poor: How the World's Poor Live on $2 a Day

5 star:		(6)
4 star:		(3)
3 star:		(1)
2 star:		(1)
1 star:		(0)

 

 

I opened "Portfolios of the Poor" feeling dubious: multiple-authored works usually feel like the proverbial camel stitched together by a committee. And what's this about the world's poorest--who we all KNOW don't have anything resembling financial savvy--having "portfolios?" Within a few pages I was completely hooked, and since finishing this masterful work I can't stop pondering--and talking with friends & colleagues about--its many powerful insights.

Rather than the usual 30,000-foot opining about The Poor, the authors spent more than a year actually living in, and closely observing residents of, some of the earth's most wretched slums. Their experiences, as reported honestly and respectfully here, will profoundly affect your views of poverty--and of what we can do to help. I won't scoop the authors' ably-told tales, nor their eminently sensible recommendations. This is the first book I've read in a long, long time that has fundamentally changed my thinking on questions of international development. Read it!

How the poor spend wisely | Smooth operators | The Economist
Page 82, May 16, 2009 ... Even those with very little money have a sophisticated approach to finance.

[...]

Smooth operators
May 16th 2009
From The Economist print edition, page 82

Even those with very little money have a sophisticated approach to finance


PAYING interest on your savings will strike most people as odd. Yet some poor people in the developing world do just that. In West Africa, for example, some people pay roving susu collectors a fee amounting to a -40% annual interest rate for looking after their deposits.

And the authors of a new book, Portfolios of the Poor, about the financial lives of people who earn less than $2 a day find that this sort of "pay-to-save" model is by no means unique to Africa. They encounter a similar phenomenon in India, where a female deposit collector called Jyothi looks after small savings for people in the slums of Vijayawada, at an effective yearly interest rate of -30%.

Some of Jyothi's customers are among the 250 families in South Africa, India and Bangladesh whose financial transactions over a year were recorded to study how very poor people manage their resources. Given that these are so meagre, this might seem to be an unpromising line of inquiry. But as many of the subjects emphasised, controlling the flow of cash becomes all the more critical when income is not just low, but also unpredictable and irregular.

These features are what economists like to call "consumption smoothing"--spreading spending out in a way that ensures that what you eat one day is not determined by what you have earned that day or the day before. The subjects used a combination of loans and savings to ensure that their lives were not, literally, hostage to fortune. Hardly anyone lived utterly hand-to-mouth.

The research provides evidence of the sophistication with which poor people think about their finances. They are acutely aware, for example, of the importance of some psychological phenomena whose effects behavioural economists have only recently begun to explore. For instance, they purposefully seek out commitments to help ensure that they meet their saving goals. Many of the South African women in the study joined several monthly "savings clubs" in spite of having bank accounts. They found that the extra discipline the clubs provided was valuable in itself, because it compelled them to save no matter what.

Some went further. The mother of a Bangladeshi man who found himself unable to stick to his monthly saving goal found she could make him save more by taking out a loan from a microfinance company. The shared obligation of having to pay the regular loan instalments meant he abandoned his spendthrift ways.

The unbanked do not have access to such luxuries as standing orders, which richer people use to overcome the temptation to spend whatever they earn. And they are forced to pay for things that are free for most--which enables women like Jyothi to earn a crust by offering a safe store for small savings. But with some ingenuity, they use unorthodox financial instruments to create a more stable life than their erratic incomes would otherwise allow.

Having worked in economic development for some time now, I have grown accustomed to studies concerning the use of capital by the global poor being stated in simply academic terms. Portfolios of the Poor though, brings the human element back into economics and gives a more intuitive understanding of the financial challenges that people face in their daily lives. Funerals, weddings, failed health, loss of employment, religious celebrations, purchase of a new home... all of these require significant investments and require diverse access to capital. This book not only describes how people react to those challenges, but also how they prepare for them beforehand with multilayered portfolios of equity and debt. Whether it be personal assets, rotating savings groups, or relationships with informal lenders, people all over the world use thoughtful and complex approaches to accessing capital when formal financial services are inaccessible. The authors' use of financial diaries prepared by struggling families in Asia and Africa proves that millions of individuals are prepared for the risks and rewards of financial services if they were only tailored to their needs. There is so much more that financial institutions can do, and this study is a significant building block in understanding how to develop financial products for even the poorest of the poor. Thanks for such a great book, and I hope to see more work like this.

One last comment - I don't think there's a single equation in the whole book! Finally, economics without algebra... it's like heaven.

I have to disagree with a previous reviewer: this is a very easy to read book. I was going to say a high school student could read this, but really, with just a few exceptions, a middle school student could follow this, and that's a compliment.

I imagine the first thoughts people in the "First World" have when they hear how many people survive on $2 (or less) per day is how overwhelmingly impossible and desolate that must be. If they get past that, one of the next thoughts might be, "who's paying them that every day?" It's easy to puzzle out that the very poor do not, most likely, get that money on a regular basis, and then the question of how they survive becomes even more unfathomable.

This work goes a long way toward answering that question. After following over 200 families in Bangladesh, India and South Africa, the researchers made a number of surprising conclusions. First, contrary to what we might assume, the very poor do not live hand-to-mouth, immediately consuming all of their very small resources as soon as they arrive. They are able to pay for participation in festivals, weddings, funerals, emergencies and education, just to name a few. Second, and most importantly, the poor are able to do this through a variety of financial instruments- formal, semiformal and informal- that show a level of sophistication that most wouldn't expect.

However, as one can easily imagine, both the small total amount of income and the irregularity with which it arrives creates stressful situations when those sums have to be raised. In many cases, they are raised, but most have to make more use of loans than savings. While many of those loans are even interest-free, the financial and social anxiety they create have costs of their own, which many are eager to avoid.

The authors frequently refer to the "Triple Whammy" that affects their subjects: not only are their incomes small and infrequent, but the majority of the very poor lack access to reliable, flexible financial tools that allow them to save their small funds over a long-period of time. They also lack access to reliable loans. While some might argue against the credit-worthiness of such individuals, the argument that these financial diaries make is that the majority of them have already demonstrated a capacity to make small, frequent payments; they are worthy lending risks, but flexible arrangements must be allowed.

This is not to say that there are no tools. There are an impressive variety of savings clubs, savings schemes and credit instruments. But many are fraught with risk; for example, the treasurer of one savings club in South Africa was murdered while she was transporting half of the funds to the bank.

The authors spent some time debunking some myths about money lenders, particularly the high interest rates. In essence, their argument is that the high rates quoted at the beginning of the transaction is intended to be both a deterrent and insurance, as many such loans are difficult to fully recover. However, the authors quoted a few anecdotes where the interest was renegotiated or forgiven once at least a partial payment record had been established.

It was clear to both the authors and the readers that health costs, whether in the form of a sudden event or a long-expected death, was a huge strain on their subjects, both in terms of lost income potential and the cost of treatment. Clearly, this issue needs to be addressed.

Microfinancing as pioneered by the Grameen Bank was discussed through much of the book, even getting its own chapter toward the end. Access to a better, more reliable saving and lending instrument did not always improve the financial position of their subjects, particularly in Bangladesh. The relative inflexibility of the loan payments and loan objectives (funding a microenterprise) made it less than ideal for most of them. However, the revised "Grameen II" objectives added not only more flexibility but also a mandated savings account. Those who enrolled in the program began enjoying more financial flexibility. However, Microfinance is still not a perfect solution, as it is still linked to business and not households. The authors were optimistic that this would change.

I found this book to be informative about a subject that has been, frankly, bothering me for some time. However, I was surprised that it wasn't until the end of the book that we got any information about the authors. Now knowing that one of the authors founded a microfinance organization of his own, I am even more skeptical about the frequent mention of that category of business in this work. Stating that upfront would have made the work more transparent.

Still, this is a groundbreaking work, and the methodology used can easily be replicated to further the work in this important subject.

The book begins with what I believe is the flawed theory that only 3% of the poor have a negative net worth so I read the book through this lens (pg 10). Writers also say that South Africa has almost stopped child labor which I know to be untrue (pg 37-8). Child labor is a huge problem in the continent of Africa because the public schools are bad or non-existent and most people can't afford to send their children to private school so they work as soon as they are able. The Millennium Development goals only hope to have kids in school through 8th grade so you know that completing high school is not a real goal for the poor.
The authors rightly tell us that their research is done in countries that are not a war (ie more stable) and have functional governments (this is questionable). These 2 qualifiers already make them less likely to study the poorest of the poor because war and corrupt leadership are two of the main reasons (and of course there are others) why poverty continues to exist.

The summaries at the end of each chapter are helpful and you may want to read them before you read the chapter itself.

I believe the thesis of the book can be found on page 159. Poor households are financially active, work with many financial partners primarily in the informal sector. The poor borrow large amounts for school, weddings, funerals, health, business relative to their net worth. The western world would consider them lacking in collateral. What is surprising for the western mind is that the poor pay interest to others to hold their savings because few banks will hold the small amounts the poor save.

One of the most informative arguments is that the poor have money to manage but their portfolios are fragile and incomplete (pg177). THE READER QUICKLY DISCOVERS THAT THE POOR SPEND AN INORDINATE AMOUNT OF TIME JUGGLING THEIR MONEY BECAUSE THEIR ACCESS TO MONEY IS SO LIMITED AND SO DETERMINATIVE OF WHETHER THEY LIVE OR DIE.

I found it disturbing that the families studied in the book were not paid but instead were given gifts. This seems like flawed logic. THE ENTIRE BOOKS THESIS IS BASED ON THE FACT THAT THE POOR DON'T HAVE ACCESS TO CASH AND YET THEY DON'T PAY THE PARTICIPANTS IN THE STUDY. IT WOULD HAVE BEEN MUCH MORE ETHICAL TO PAY EACH FAMILY AT THE END OF THE STUDY SO THAT THE PAYMENT WOULD NOT SKEW THE RESEARCH RESULTS. (pg 261-2)

Another important fact that I learned here was that when you say a person lives on $2 a day you mean that that person may get $1 a day for months at a time and then get $3 a day for a period of time and then make nothing. The poor are not salaried employees who can count on $1 or $2 a day. This is why portfolio management is so crucial to their survival.

This book walks you through case studies of many people who are, for the most part, stone broke. Yet, despite this, they cover unforeseen expenses, feed their kids, and build savings. How they do it, broken down dollar-by-dollar, is explained in comprehensive detail.

While this book specifically addresses poor people in poor countries, it can and may apply to anyone, including you or me. This book shows how others made it through, with amounts of money most of us take for granted.

Fascinating and useful. It doesn't get better than this.

The work done in Portfolios of the Poor has greatly impacted the way I view development, microfinance, and poverty. The focus on improving methods of money management rather than income augmentation is, in my opinion, crucial to approaching development. Great read.

This book doesn't really tell a captivating story, but for someone with an academic interest in microfinance it offers a lot of good insights on how microfinance plays out in different communities. It is helpful to understand how the needs of different cultural groups affect the kinds of financing that are most helpful. I also appreciated the point that people don't absolutely need outsiders to provide financing, and that they will organically come up with their own solutions for their biggest problems. It teaches that outside development workers can learn a lot about what a community needs if they get to know what is already happening in that community before setting up their MFI using products that were developed in entirely different locales.

The book arrived in great condition! Thanks for your help! It came in the condition it was described, and it arrived promptly.

I'm working on a mission team that works in partnership with a development organization in Africa ... if you want to understand just how financially talented those who are living on $2.00 per day really are, it's a must read.