"Portfolios of the Poor" (book review)

Book cover for "Portfolios of the Poor"

I read the book Portfolios of the Poor: How the World's Poor Live on $2 a Day by Daryl Collins, Jonathan Morduch, Stuart Rutherford, and Orlanda Ruthven. I enjoyed this book! Here's my review of it.

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Overview of the book

This book is about research into the financial lives of people whose income is somewhere around $2/day. The researchers tracked several hundred households in Bangladesh, India, and South Africa, asking them very detailed questions, in order to get a clear picture of every single inflow and outflow of money in their household. This even includes really informal stuff like if you owe a shopkeeper $3 because you bought groceries on credit. The kind of stuff that people wouldn't really think to mention normally, and/or that researchers usually wouldn't think to ask about. (The authors reported that they needed several conversations with the participating households in order to really get all the details, because at the beginning they didn't have a good enough understanding of all the things they should ask about.) The book refers to the data collected as "financial diaries" because the goal is to track all the small day-to-day transactions.

(This research took place around 1999-2005 and the book was published in 2009.)

Usually, when you see statistics on global poverty, it's about people's annual income or average income per day. But if you only measure those things, you're missing a lot of what's actually happening. These researchers found that the turnover that these poor households had was very big, compared to their total income. They were constantly lending or borrowing money, in various types of formal or informal arrangements, they had all kinds of different strategies for saving, etc. 

The actual reality of what it means to live on $2/day is much more sophisticated than you'd expect.

The book says that for the households that participated in these studies, the problem isn't just that their income is low. There are actually 3 problems that make their financial lives difficult:

1. Low incomes
2. Irregular, unpredictable incomes. Most of the people in the study didn't have regular, salaried jobs. (Some of them did, and that was definitely a huge benefit to them.) Their income often came in irregular amounts, at unpredictable frequencies. Also, farmers often get most of their income during certain seasons of the year, and hardly anything during other seasons.
3. Lack of financial tools. Poor people don't have access to the same financial tools (savings accounts, credit cards, etc) that I am familiar with. The fact is, though, that poor households need these tools even more than rich households do. One of the big messages of this book is that it would make a big difference if a wider variety of financial services was available to poor people.

So it's not just about "they live on less than 2 dollars a day." It's actually worse than that.

The book says that there are 3 main areas that should be considered when we look at how people manage their money. 

1. Normal, day-to-day expenses
2. Saving up for big expenses. For example, capital for a business, weddings, paying for children's education.
3. Emergencies. When you suddenly need to borrow money because of medical expenses, a funeral, replacing an asset that was damaged or stolen, etc.

For each of these, there is a chapter in the book that talks about the strategies that the diary households used.

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Making it relatable and human

There's something that has bothered me for a long time about the way that people talk about global poverty. It's like... when I hear statistics about how many millions of people don't have access to clean water, or how many millions of people are living on less than $2 a day, etc, I feel like, I can't even imagine what that's like. It sounds so terrible, I can't even picture how a person can live under those circumstances. It's the sort of thing that makes one want to just throw money at a charity so then one can stop thinking about it. 

Hearing statistics about millions or billions of people living on $2 a day- it doesn't feel like they're real people, like me or anybody I know. It comes across like they are caricatures who don't really do anything or have any thoughts besides just sitting around being sad and desperate (and they need YOU to swoop in and donate money so they can get out of that state).

I once saw an article about a photographer in Africa who would take 2 different photos of each person- one photo that portrayed that kind of one-dimensional, people-in-Africa-are-just-sad-and-poor message, and another photo that showed some personality, showed the person in a setting that communicates something about who they are as a unique person. (I can't find a link to this- but if you have also heard of this and you happen to have a link, please leave it in the comment section.) I'm really interested in the way this photographer explored the stereotypes that western people have about Africa, and how that feeds into the sorts of images that are shared, and the way we talk about people.

And the ads that a lot of global poverty charities use- like, they find the saddest picture of a poor child they can find. It comes across like the child is not a whole person- that the only thing that matters about them is they don't have food/water/etc, and they don't really have a personality or feelings or dreams beyond that.

So I like this book because it takes these big scary statistics about "$2 a day" and shows you what that really looks like, how humans whose lives are just as complex as mine or yours or anybody else's keep their lives moving forward in those circumstances. 

The authors point out that none of the households in the study lived "hand to mouth", ie, spending all of their money immediately after getting it. All of them had some kind of savings strategy.

And also, you can see in all the examples throughout the book, which described the circumstances of specific households in the study, that there's a whole range of personality types here. Some people talked about how they didn't like to ask others for money, and preferred to be independent as much as they could, while other people were constantly getting into financial arrangements with everybody. Some people chose not to take microfinance loans because it felt like too much of a risk, others were happy to have access to such loans. Some people were very skeptical the first time they heard about microfinance institutions offering savings accounts, and weren't willing to open one until their friends tried it and told them how it went. All of this feels very real and human to me. It feels very different from just hearing a statistic about global poverty and thinking it's so terrible that I can't even imagine it.

The thing is, though, for some reason learning about the practical human details makes it feel like... less urgent that we take action to help? Charity appeals are like "oh noooo this is so bad, these people are so desperate, if you don't donate money then what are they going to do?????" (The book isn't about charity at all, but this is something I think about.) But the reality is more like, they have ways to scrape by. They are able to plan ahead, and ask family members or neighbors for loans, and so on. Does that make global poverty seem less bad? 

It *is* bad; we shouldn't lose sight of that. The world has enough resources that nobody should live in poverty like that, where they don't know if they'll be able to get their basic needs met. The people described in this book... yeah, the book is about how they're able to manage, and take care of themselves even on such low incomes, but the reality is that it just doesn't work as well when you're living on so little money. People die from medical issues which are no big deal to those of us who have access to good medical care. They have to deal with constant annoyances- unreliable housing, low-quality food, chronic health issues, physically demanding jobs- which could be avoided if only they had more money.

They get by, but not as well as people who aren't impoverished. They get by, but with a much lower life expectancy than people in "developed" countries.

When a potential donor hears "oh nooo these people are so desperate, they need you to send money, or what are they going to do????" that comes across differently than "these people are really in need and you should help by donating money. If they can't raise enough money, their back-up plan is xyz." Like, realistically, usually there is a back-up plan. But you don't *mention* the back-up plan, or else that will make the donors suddenly decide "oh, never mind then."

Or, I guess you can mention the back-up plan if it sounds really terrible, like maybe on a gofundme someone might write "if they're not able to raise enough money, they will be forced to sell their home!"

Has anyone studied the psychology of this- the way potential donors feel like they're off the hook if the potential recipients are portrayed in a realistic human way, taking charge of their lives and making choices about how to move forward even in a bad situation? 

People living on $2/day truly are impoverished and it would make a big difference if we donated money to help them. *But* they're not just sitting around hoping that will happen. They manage their own lives. They make plans related to their finances. Why does that make me *feel* like I don't have an obligation to help them? It's something about being unable to realistically weigh other people's needs and my own needs, I think.

But anyway, the book isn't about charity at all. It wasn't anything about "we should donate money to help them." Its message about how to help them was more like "their government and/or private businesses should invest in infrastructure that can provide them with savings accounts and loans." People manage their own financial lives- but it really helps a lot if they have access to tools that enable them to do that, just like rich people have access to such tools.

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Some financial tools that poor people use

The book described some financial tools that the diary participants used, which I wasn't familiar with. For example:

Savings clubs. This is an informal arrangement where a group of people get together at regular intervals, and each time, they all contribute a certain amount of money, and they take turns taking home the whole pot. For example, you get together with 4 friends (5 people total) once a week, you each put in 6 dollars, and then once every 5 weeks you get to take home the whole $30.

What's the point of this? Well, for some people, depending on their situation, they find it doable to put in small amounts of money at frequent intervals, as a way to save up a usefully large amount of money. Yeah, but why do they need the savings club? Why not just save up the money on their own? Well, they may find it helpful having the social pressure to stick to their plan. And they might not have a good way to keep money safe in their home- there is a risk that it could be stolen, or spent by family members, or just spent by themself when they're not really paying attention to whatever their savings target is supposed to be for that week.

A similar example: Some poor households in South Africa received grants from the government every month. But, receiving the money at a frequency of 1 time per month did not work well for managing their day-to-day cash flow. So some people would pair up and make an arrangement where 1 person receives their money at the beginning of the month, and gives part of it to the other. And when the other person receives their money in the middle of the month, they give part of it to the first person. In this way, the government grant money is split up so they receive it twice a month instead of once a month- which was much more convenient.

Funeral insurance. In South Africa, funerals are expensive, and people have come up with various ways to insure themselves in case a family member dies and they need to pay for a funeral. There are formal arrangements with insurance companies, and there are informal arrangements with "burial societies." For example, there are burial societies where, if a member dies, all the other members need to contribute a certain amount for the funeral. Or, there are also burial societies where everyone contributes money on a regular basis, and it is kept in some kind of savings account, and then if someone dies, their family receives a payout.

Many of the South African diary households had multiple forms of funeral insurance, because none of them paid out enough to cover the full cost.

Moneyguards. Sometimes people deposit money with the moneyguard, for safekeeping. This is helpful if you are concerned about money being stolen or being spent by your family members. But there's a risk- what if you want your money back, but the moneyguard doesn't have it at that moment?

Also, sometimes the researchers had trouble understanding what exactly was going on when the diary participants said they put some money with the neighbor. Does this mean you gave the neighbor a loan? Does it mean you deposited money with them for safekeeping? The tools that poor people use to manage their money don't always easily match up with the categories of financial tools we are familiar with.

The financial tools varied a lot in terms of how convenient they were, and how reliable they were. There were examples in the book of people who joined a savings club, and the savings club fell apart and they ended up losing money. You always have to consider the risk that comes with any of these options.

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It's about how to add up small sums to make big sums

The book emphasized that for the people in this study, they don't have big sums of money laying around to pay for big expenses, but they *do* have small incomes which can be used to save small sums on a regular basis- so they need financial tools which can help them turn these small amounts saved up over time into big amounts.

For example, various kinds of savings accounts or savings clubs, where people are required to frequently pay in small amounts of money, and then at some point they can withdraw a big amount. Or loans- they get a big lump sum of money and then pay it back in small frequent payments. From the perspective of the poor people in this study, savings accounts and loans were pretty much the same thing. Both of them allow you to make small, regular payments, and then withdraw a big amount of money when you need it. This was surprising to me because I always heard that saving money is good and taking out loans is bad- in my mind, savings accounts and loans are complete opposites.

This concept of "these people *can't* pay for big things, but they *can* put aside small amounts of money frequently, and pay for big things that way, so they need access to financial tools that do that" is hard for me to get my head around. If you can't pay $30 one time, but you can pay $3 every week for 10 weeks, well, what? Isn't that the exact same thing? Why can they do one but not the other? Why do they need tools to help them?

I feel like I'm missing something about how to understand the psychology of this. Or rather, I feel like the way the people's budgets actually work in the real world (not just the poor people in this book, but basically everyone) is like this: It's not about "we planned out the correct amount for each category in our budget, which is more or less the minimum we feel we need to have a good life, and all the rest goes to savings." It's more like, you have a vague sense of how much money is available to you, and your lifestyle sort of naturally expands to match.

I think that "personal responsibility" Republicans might frame it as being "self-disciplined" and view it as a moral failure if you can't manage to save up money because you lack good financial tools. But the truth is, it really does take work. Let's say you want to save up $3 a week for 10 weeks. So, every week, you need to have an awareness of what your savings amount is supposed to be, and you need to make sure that you don't accidentally spend it as you pay for your normal life expenses. Remembering what the number is supposed to be, remembering to update the number in your head every week, communicating this number and its importance to your family members so they don't spend it (and/or just hiding the cash from them, maybe that's easier), always knowing how much you have left every time you make a purchase- this is work. And what if you're saving up for multiple things, with different timelines... 

If it was me, I would make a Excel sheet to keep track of this. (Actually, many of the study participants were illiterate, and were just mentally keeping track of their informal loans with their neighbors. Interesting.)

It truly is work to continually make sure you're saving the right amount of money for future expenses. So of course it's helpful for poor people to have access to financial tools which will do that work for them. Even though sometimes those financial tools will charge fees. Here's a quote from pages 148-149:

An example from India shows us just how important these elements [reliability, flexibility, structure that works with a household's cash-flow timing] are to the poor saver. Jyothi works in the southern city of Vijaywada and was described in an earlier book by one of our authors. Jyothi is a middle-aged woman living in the slums she served, and her service consisted simply of walking round the slum each day collecting small deposits from her customers, most of them housewives. She gave them a crude passbook, just a card divided into 220 cells made up of 20 columns and 11 rows, so that savers could keep track of their progress. When all 220 cells were ticked off, Jyothi returned the savings to the value of 200 of the 220 cells, holding back the remaining 20 cells' worth as her fee for her service. Thus someone depositing a total of $44 with her, as 20 cents a day, would get back $40. If we consider this 20-cell fee as interest, and we assume a growing balance as 220 deposits are made over 220 days, then Jyothi is effectively paying her customers a negative rate on the savings-- minus 30 percent a year. Put this fact to the savers and they will tell you to forget your fancy calculations: the fact is that they needed their $40 to ensure that they could pay school fees to keep their children in class for another year. With husbands earning irregularly, the only sure way to build up this sum was to take pennies from the housekeeping money each day and hand it over to Jyothi. It costs them only $4 to form the $40, and Jyothi did all the work. Taken within this context, this is a reasonable price to pay to build badly needed savings.

I don't think we should view this as "poor people are not self-disciplined enough." I think there are plenty of examples in our lives where people choose to put pressure or restrictions on themselves, to force themselves to follow through with good habits they are trying to maintain. You might know someone who paid money to join a gym, even though they could just exercise at home by following workout videos on youtube for free. Why pay the money for the gym? Because they know that if their plan is just to exercise with youtube videos at home, in reality they're not going to do it. But if they're paying money for the gym, they will feel obligated to actually go and exercise. There really is value in these strategies to make yourself do something you know you should do.

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Microloans

The diary households in this book used a wide range of loans, from informal, semiformal, and formal sources. Some examples:

• Buying groceries on credit
• Getting an advance on one's salary
• Interest-free loan from a neighbor
• Loan from a local moneylender
• Loan from a microfinance organization

Let's talk about the microfinance organizations.

When I was in college, sometime around 2010, I heard a lot about Kiva, a charity that provided microloans to people in developing countries. The story that was presented went like this: These people have such low incomes, and they can't get loans from normal financial institutions because those institutions don't think it's worth the trouble of doing business with such small amounts of money. If they need a loan, they have to go to a shady moneylender- and the moneylenders charge something like 300% annual interest, oh my goodness, that's terrible. But if they had access to loans with reasonable interest rates, wow, that could really turn their lives around. That could lift them out of poverty. The microloan recipients will be able to start their own businesses- whereas, without the microloan, they never would have been able to save up enough money for the initial capital investment to start their business. And having a business would totally change their life.

"Portfolios of the Poor" shows us that the reality is not really like that.

The reality is more like: 

Okay, so those predatory moneylenders you've heard about? It doesn't really make sense to talk about their annual interest rate, since the loans are often paid back very quickly. It makes sense to think of this cost as more of a fee, rather than interest. Also, people often renegotiate with the moneylenders about their interest payments and the term of the loan. It's very common for part or all of the interest to be forgiven. So if you see a moneylender loan presented as "it's x dollars, for y period of time" and then you use those numbers and calculate the annual interest rate, and your jaw hits the floor, well, no, that's not really an accurate way to look at it. When all is said and done, the total interest might be much lower, and the repayment schedule might be much longer. And there may be benefits in using a moneylender- like convenience, and how the moneylender may be someone who's been a member of your community for a long time, so you know they are reliable, and will probably be understanding if you need extra time to pay back the loan.

And the formal microloan organizations: Yes, it is good that those exist. It is an extremely useful resource to have. But the loans are not all used for entrepreneurial purposes. There was one example in the book of a household that used part of the money from a microloan to buy a cabinet to store their rice in. Something like that, which I would never think of as something one would need a loan for. I would take it for granted that you already have that. Something that doesn't really make for a good story about how these microloans are so amazing and they're rescuing people from poverty. No, it's not really like that.

There weren't any examples in the book where having microloans allowed someone to get to a standard of living that *in my opinion* can be described as "rising out of poverty." These people all had very hard lives- but having financial tools like microloans allowed them to get by, more or less, rather than having a financial emergency cascade into a disaster that affects every part of their life.

The book emphasized how extremely important it is that options such as microloans from formal providers are available to poor people. This is something that helps them a lot. But it doesn't look like the glamorous stories that charities tell, about how everyone is going to be an entrepreneur and escape from poverty. (The book emphasized that it would be most helpful if the loans could be used for any purpose at all- rather than requiring them to only be used for entrepreneurial reasons.)

The microloan organizations are a good thing. Don't misunderstand me. It is a very helpful resource to have. It's good that such organizations exist. But the reality doesn't match the romanticized story that we in the US have heard about microloans.

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The point is that poor people need a variety of financial tools

The book is all about how, when people's incomes are so low and irregular, it's even more important that they have access to financial tools to help them manage their money. The financial lives of these diary households were very complex. They had various methods of saving money, and chose to take different kinds of loans in different circumstances.

They use so many different financial tools, and it would benefit them even more if they had better ones. If they had reliable savings accounts. If they had access to loans with flexible repayment schedules. And so forth.

(And this was published in 2009, based on research from 1999-2005. So probably the situation has changed since then.)

I found this book extremely interesting and I'm glad I read it, because it paints a picture of what life is like for people in extreme poverty, in a way that actually feels *real* to me. I've always felt that, when I read statistics about global poverty, or see ads for charities, it doesn't make them look like real people. It makes them look like, their lives are so terrible I can't even imagine, so I should feel bad, until I give money to a charity, then I can stop feeling bad. Not so with this book. This actually shows poverty in human terms. People making plans, making choices based on their own preferences related to risk and so on. 

"Portfolios of the Poor" was not about charity at all (it was about how governments and private businesses should invest in building the kind of financial infrastructure that would help poor people), but I have some thoughts. It makes me think, maybe charity should actually be really boring. It shouldn't be about me swooping in and making a big payment that feels like a very dramatic, emotional sacrifice. It shouldn't be about how I'm gonna make a big difference and save people so easily. Instead, maybe we should think of it like, people who have high enough incomes should have a habit of regularly giving money to charities. Like, just really really boring stuff, just regular automatic donations that you don't really think much about, but you'll notice them if you look at your bank statements. It's not okay that poor people don't have good options for savings accounts, but at the same time, it doesn't make for an exciting story that people will rally around. (Though the issue about access to bank accounts should really be addressed by governments and businesses, rather than charities, so maybe this is not a good example for talking about charity.) So I think, it shouldn't be a big emotional thing, like it's super meaningful and you're saving people's lives and you have all kinds of feelings about it. It should be that, when you think about it morally, rich people *should* have the habit of giving money to charity. And those boring regular payments do make a difference- but it's sort of in terms of what's going on in the background, rather than being a really dramatic "wow I saved a child's life just now."

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Follow-up post: On Skipping My Daily $5 Starbucks

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