“The Real Tragedy of Poverty”: Insights from exploring the portfolios of the poor

In an interview with The Boston Globe, Darryl Collins, co-author of the much anticipated Portfolios of the Poor: How the World’s Poor Live on $2 a Day, made an interesting comment that I found myself nodding along with:

“People who do fieldwork have two views. They either think these households desperately need our help and they are just hopeless without us, or they think they are just geniuses. I think what dawned on me during this study was that you don’t lose your personality just because you go down the financial chain. Some people just couldn’t keep track of their money and some people did a brilliant job of keeping track of their money. Just like our circle of friends, you have some people who are organized and some people who are not.”

I should give you the context, of course. Collins, along with her co-authors (Jonathan Morduch of the Financial Access Initiative; Stuart Rutherford, author of The Poor and their Money; and Orlanda Ruthven) set out to answer the question: How do the financially poor—those who live on $2 a day or less– manage their money?

The answer that emerged turned out to be a lot more sophisticated and complex than anyone had imagined.

The quest, which took them to South Africa, Bangladesh, and India, began in 1999. By the time it wrapped up in 2005, they had collected information from 300 rural and urban households, making visits to households and tracking, via yearlong financial diaries, how they managed their money, down to the last penny. What they found was that “the poor are not living hand-to-mouth, but that most of them save and borrow with an eye to the future, and maintain complex financial lives because they are poor, not in spite of it.”

And interestingly, there were a few lessons from which those of us in the U.S. could learn something. For example, some households would create rule-bound savings clubs and other self-discipline devices to guard against the temptation of spending down their savings. Collins noted:

Rich Americans now may be waking up to the idea that, “Do I have a problem with self-control?” But these [poor] households very clearly said, “I get it. I need to delay gratification.” . . . They know that when they get money into their hands, they are going to spend it, because there are a bunch of useful things they could spend it on. So as soon as they get cash, they try to put it somewhere, so that their relatives don’t come asking for it, so they don’t give their children something.

So, what did they discover? One of the conclusions they came to was that “the real tragedy of poverty is not just that the poor have limited resources, but that they lack the financial tools to squeeze all they can from what they have.” These are tools like:

• financial institutions to provide better cash-flow management systems that allow for small deposits and withdrawals at any time;
• long-term contractual savings products that allow the poor to limit the effects of expensive events like weddings and funerals or with emergencies and large purchases; and
• general-purpose loans (a departure from the current trend of loaning for the purpose of setting up a business).

Collins and Morduch will be at the World Bank’s Infoshop next week to discuss their book, and their insights from their years of research should make for a thought-provoking discussion.