Seth Nemeroff

Portfolios of the Poor: Financial Diaries of the Bottom Billion

Last night I had the pleasure of attending a book discussion for Portfolios of the Poor: How the World’s Poor Live on $2 a Day, written by Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven. The event was presented by the Financial Access Institute (FAI) and Africa House and took place on the campus of New York University. The discussion was led by Jonathan Morduch – Co-author, Portfolios of the Poor, Professor of Public Policy and Economics, NYU and Managing Director, Financial Access Initiative and Daryl Collins – Co-author, Portfolios of the Poor, Senior Associate, Bankable Frontier Associates. Other participants included Rogan Kersh – Associate Dean, NYU Wagner School of Public Service; Matthew Bishop – Chief Business Writer/American Business Editor, The Economist; Bill Easterly – Professor of Economics, NYU, author of The White Man’s Burden; and Yaw Nyarko – Professor of Economics, NYU, Director of Africa House.

The recently released book focuses on methodology and new ways of thinking about the bottom billion. They focused on roughly 300 urban and rural households in Bangladesh, India and South Africa over the course of one year.

Often times in the development community the bottom billion is thought of in terms of aggregate statistics without much attention given to the individuals and their day to day lives. The goal of the authors was to find a happy medium between aggregate data/statistics and individual anthropological research. What they developed as a result were Financial Diaries, which give a basic overview of every financial transaction made and service used over the studied timeframe.

Through the use of Financial Diaries, the researchers meticulously tracked every detail of their subjects’ financial lives by interviewing them bi-weekly for one year using metrics of the portfolio management world, including cash flow and income statement analysis. While gathering evidence, they discovered that it took approximately six interviews with each respondent to develop the trust required to obtain accurate data and account for margins of error. This is in interesting implication for research that is often times based on one interview. Their analysis approached households as start-up organizations and adjusted their research using these metrics.

There are many assumptions that people tend to make when trying to solve the problem of poverty: that people live hand-to-mouth, do not plan for the future, and do not save. This book refutes those broad based assumptions through concrete examples. In South Africa, many of those interviewed participated in locally run savings clubs, an informal but powerful commitment to save that operates outside of the established financial institutions available to them. Families in Bangladesh were shown to juggle a variety of ‘financial’ service products including shopkeeper credit, saving with a money guard, interest free loans from neighbors and family, and remittances to home villages among others.

These examples are used to back up some of the major lessons of the book; to understand that those living on $2 a day maintain financial lives because they are poor not in spite of being poor. The main conclusion of the book was presented as the poor suffer from the irregularity and instability of their incomes. One of the best ways to alleviate this problem would be to offer better financial services including more options for those living with the volatility of these income streams.

If you were to look at a chart of their weekly/monthly income it will average out to this number of $2 per day, but with many peaks and valleys that need the help of financial services to smooth out these bumps. This is the area of the market being underserved and offers significant opportunity for improvement.

The end of the presentation was enhanced by a few remarks from distinguished invited guests Matthew Bishop, Bill Easterly, and Yaw Nyarko. All three men commented on how the book was able to cut through a lot of the hype surrounding micro-finance and really present the view of what the people living in these conditions actually want. Bill Easterly made the point that the conventional views of micro-finance are generally insufficient and that a more accurate term would be micro-credit because many of the loans are used for day to day living expense purposes rather than entrepreneurship. This extension of credit is vital to these communities however it counters the theory that micro-finance can be a panacea used to alleviate poverty.

The evening provided a thought provoking discussion and can be used as starting point for new dialogue in the development and public policy communities concerning how best to improve the lives of those living on $2 per day. I look forward to reading the book and determining how my own reflections fit in with the interpretations presented at this event.