How the Bottom Billion Get By on $2 a Day (Hint: It Takes Savvy)


MANY OF US HAVE a mental picture of the world’s so called Bottom Billion — or 40 percent of the planet — as a desperate, hand-to-mouth population. And that’s understandable, considering that one of the most common poverty thresholds in developing countries is an income of $2 a day — what many people in developed countries might pay for a latte.

But those who take the time to read the new book “Portfolios of the Poor: How the World’s Poor Live on $2 a Day,” written in part by economist Jonathan Morduch of NYU Wagner, are likely to come away with a far better understanding of the financial lives of the world’s poor — and the notion that their financial lives are, in fact, surprisingly complicated.

The book, newly published by Princeton University Press, has particular relevance for the development and anti-poverty community, and tackles the fundamental question of how the poor make ends meet. The work is based on the financial diaries of more than 250 families in Bangladesh, India, and South Africa compiled from bi-weekly interviews over the course of one year. 

On May 7, 2009, Morduch launched the book — which he wrote and researched with Daryl Collins, Stuart Rutherford and Orlanda Ruthven– at an event cosponsored by New York University’s Africa House and the Financial Access Initiative, a research consortium that Professor  Morduch heads. Other participants included Professor Rogan Kersh, associate dean at Wagner, Matthew Bishop, chief business writer/American business editor for The Economist, Bill Easterly, NYU professor of economics and author of “The White Man’s Burden,” and Yaw Nyarko, NYU professor of economics and director of Africa House.

The book refutes the assumptions people often make about the very poor, such as that they fail to plan for the future or save for a rainy day. The opposite is true. In their case, necessity is the mother of financial savvy — which, as Easterly noted (and The Economist.com reported) far exceeds that of some of the celebrities and aid workers who speak on their behalf. “Portfolios of the Poor” finds that the poor are active money managers. People in South Africa, for example, participated in informal, locally operated savings club, in part to help them fight the temptation to spend in the short-term or because they lacked access to traditional banking. Other households, as in Bangladesh, used shopkeeper credit, saved with a money guard, accepted interest free loans from relatives and friends, and relied upon remittances.

In addition, the authors found that the poor don’t usually earn a steady $2 a day as many might imagine. Rather, the book reports that the more typical income stream at the lowest economic strata includes many unpredictable highs and lows, also a lack of  basic financial tools to help them manage those ups and downs.
 
Morduch and Collins shared stories about Hamid and Khadeja, a Bangladeshi couple who earned only $70 a month but were active money managers. Another voluntary financial diarist, Pumza, a sheep intestine vendor in South Africa, never knew how much she would sell on a daily basis, and was forced to use informal and often unreliable financial tools to address her irregular cash flows. Still another interviewee, Nomsa, an elderly South African woman supporting her five grandchildren on a government old-age grant of $115 a month, managed to save $40 a month using informal mechanisms.

In other words, the poor are doing all they can with what they have. They are saving, borrowing, managing risk and looking toward the future. But they could do more with better financial tools. It’s not financial savvy they lack, but access to financial services

To some, such as Easterly, who made brief remarks, “Portfolios of the Poor” shows that the microfinance strategy to alleviate poverty has limitations in its current incarnation, since the carefully amassed anecdotal evidence of the book shows that micro-loans are used for day-to-day living purposes rather than entrepreneurship.

The book puts forth new ways to think about poverty; broaden the scope of microfinance to deliver loans for general purposes; enable savings; add meaningful consumer protections; and ultimately create the next generation of banks for the “bottom billion.” Through the ongoing work of Morduch and the Financial Access Initiative (www.financialaccess.org) a new, 21st century vision for microfinance may evolve, grounded upon a careful review of its notable successes, potentially expanded use (as in insurance), and limitations. Enlarging our understanding of the real lives of the poor is an important first step .