The Volatility of $2 a Day

Portfolios of the Poor: How the World Lives on $2 a Day has become one of the most talked-about book in the world of development.  It is an analysis of how poor – specifically, the poorest – people live.  The authors chronicle how people make and spend their money – tracking the inflows and outflows to better understand the daily routine.  The subjects keep detailed financial diaries of everything having to do with money in their lives.  The results are as illuminating as they are beneficial in the practice of development.  Here is the description from the website:

Portfolios of the Poor: How the World’s Poor Live on $2 a Day (Princeton University Press, 2009) tackles the fundamental question of how the poor make ends meet. Over 250 families in Bangladesh, India, and South Africa participated in this unprecedented study of the financial practices of the world’s poor.

These households were interviewed every two weeks over the course of a year, reporting on their most minute financial transactions. This book shows that many poor people have surprisingly sophisticated financial lives, saving and borrowing with an eye to the future and creating complex “financial portfolios” of formal and informal tools.

Indispensable for those in development studies, economics, and microfinance, Portfolios of the Poor will appeal to anyone interested in knowing more about poverty and what can be done about it.

The reason research like this is so useful and even groundbreaking is that it blows the doors off the misconception that the poor live on $1-2 a day, everything. The reality is that they live on $5 on Monday, and $0 until Friday.  The implications for these findings are huge because it shows researchers and practitioners what poor people need.  In the past, much of aid and development has focused on what people think poor people need.  With the insights from books like Portfolios of the Poor, economic development strategies can be targeted to make the biggest difference.

If only it were that easy.

One of the unifying themes of this journal is that the most effective strategies for poverty alleviation understand the existing dynamics and work within the current structure.  The ones that fail are those that are ignorant to the realities on the ground and try to get people to adopt things they don’t actually need.  One of the big winners from this kind of researchers is savings accounts.  When income is volatile, which Portfolios of the Poor demonstrates, it is good to have somewhere to put the money when it flows so that you can access it later.  Otherwise, it goes under the mattress and is less likely to be there in case of emergency.  David Roodman of the Center for Global Development explains this dynamic in his review of the book:

[Portfolios of the Poor] emphasizes that being poor in a poor country means having an income that is not just low but variable and unpredictable. At least as much as a family’s average level of income (such as $2/person/day), the volatility around the average drives how the poor manage money. If you make $1 today, $4 tomorrow, and nothing the day after, but need to put food on the table every day, you will engage in complex patterns of borrowing and saving to smooth the mismatch between your income and outflows. Thus out of necessity poor people deploy more complex financial strategies than do the rich. The book tells stories of families who are constantly juggling small loans to and from friends and family; saving with local “moneyguards”; participating in savings and insurance clubs (such as burial clubs in South Africa); buying groceries from the local shopkeeper on credit; and otherwise patching together an extraordinary diversity of financial devices in order to get by.

Microfinance Podcasts conducts interviews with microfinance researchers and practitioners about various topics.  For the last few weeks, many of the preeminent voices have been discussing the book and its impact on their field.  William Easterly, a professor of economics at NYU and author of the blog Aid Watch talks about how this understanding of the volatility of income among the poor will impact how we view development.  It is worth a watch(Hat tip: Andrew Sullivan)


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One Response to The Volatility of $2 a Day

  1. Javert says:

    “The reality is that they live on $5 on Monday, and $0 until Friday. The implications for these findings are huge because it shows researchers and practitioners what poor people need. In the past, much of aid and development has focused on what people think poor people need.”

    I love how shamelessly arrogant we are. We should probably just bombard them with foreign aid and thereby disrupt these fragile economies and create trophies to chop each others’s arms off over.

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