Securing Cash Flow in Vulnerable Communities
There are two landmark books we need to discuss to get the full picture on grassroots economic development in the 21st century: Portfolios of the Poor from 2009 and Poor Economics from 2011. These books define the industry right now in terms of community level projects. They do so by revolutionizing our thinking on poverty and what it means to be ‘poor’. Obviously, poverty implies a lack of money, but these publications demonstrate that money management is an intense, daily activity for low-income families. Let’s think through what that means.
Imagine it: you live like almost half the world’s population, surviving on less than $2.50 a day. I challenge you to create a budget that successfully allocates this money in your life. You have to take care of your kids, pay your bills, and put food on the table with only $2.50 a day. And before you start the process, remember someone doesn’t just hand low-income households their two dollars every morning. Income in an informal economy is inconsistent, meaning you might get zero money for three days and then $10 on the fourth. Then you might get $0.25 the next day, and not see another dime for three weeks. To cover all of your responsibilities on this erratic, tiny cash flow seems impossible doesn’t it? And yet over 3 billion people worldwide do it every day. How?
There is an experiment called the Two Dollar A Day Challenge that helps us understand this problem in real time. I worked and participated in the movement for four years and now we’re global. The idea is to spend one week with only $2 a day on average. You roll a dice in the morning to see what your income is, you sleep outside in a makeshift shelter, and you don’t spend more than you’re awarded. It’s a life changing experience, because it humbles you and instills you with empathy for the people you serve. What’s more, it shows you how important money management is on a small budget. I was using $0.50 for a breakfast burrito at McDonalds, whilst saving $1.05 to ride the bus to university. I spent the other $0.45 on a can of beans for dinner. I found myself asking very important questions like, how does someone invest in the future when they’re focused on paying for daily activities? How can one afford savings or buying medicine when flu season starts? When I read Portfolios of the Poor, I saw how much more complex the issue became.
Portfolios of the Poor
The main take-away from Portfolios of the Poor is that low-income households use tons of financial instruments every day. Contrary to popular belief, ‘the poor’ almost never spend everything they make as soon as they get it. Take Hamid and Khadeja in Bangladesh, who earn roughly $2.33 a day for them and their child – the banner case study for Portfolios of the Poor. Hamid’s income arrived in unpredictable amounts depending on whether or not he got to work that day. In a typical month, he raked in $70 as a rickshaw driver. To use this $0.78 per person per day, the couple had a diverse portfolio made up of seven different financial instruments.
We’re talking $2 cash on hand for minor purchases, $8 extra with Hamid’s employer, $30 stowed in their parents house, $40 with another relative, and $76 in a life insurance savings policy. On top of that, they had $153 in debt to a MFI and $24 owed to family and neighbors. The researchers spent months visiting and tracking the family’s cash flow. When interviewed about these various means of money management, they stated the obvious: when you make so little money, you can’t have all your eggs in one basket. If they kept all of their money in the house, for example, a robbery could wipe them out. If Hamid was sick and couldn’t work, the family might go weeks without food, hence the smartest choice was eat today and pay tomorrow i.e. borrowing. By diversifying their financial lives, they could effectively survive on $2 a day, using a little here and a little there.
We can’t accuse ‘the poor’ of not knowing what they’re doing when handling money. So, how do we design grassroots economic development projects using this knowledge? Poor Economics takes a stab at answering this question. The book explores two answers to the problem: on one hand, if people know how to use what they have, maybe they just need more money to work with. On the other hand, maybe we shouldn’t intervene in the community at all, because our ham-handed methods almost always upset this fragile balancing act, causing harm and uncertainty to the household. The debate rages even after the last page of the book, but the take-away for our purposes is this: we need to consider why low-income households use their money. Consider another example, this time from Indonesia.
It is standard belief amongst the development world that low-income families have a lot of kids due to low levels of education and lack of access to contraceptives. After all, more developed nations, have lower fertility rates. However, some things don’t line up. If a couple knows each kid will cost them more money, why don’t they refrain more from sex or use contraceptives when accessible? Pak Sudarno, a scrap collector from Cica Das, explains the logic. Pak has nine children, and when researchers asked him why, he started by explaining that there was no social security; no retirement fund for the poor. When he and his wife became too old to work, they needed children to make the family income. Therefore, his chances of gaining financial security increased with every baby born. If just one could “make it” they could support Pak and his wife into old age. In other words, he viewed children as financial assets – investments – for future benefit. The Why of financial behavior in low-income households is crucial to understanding the community. (For more examples like this in a Latin American context, I recommend looking up Profamilia in Colombia.)
In review, our first take-away is that the financial lives of low-income communities are more complex than we might assume. The second is that the reasons may not be so clear either. These phenomena happen all around the world. The revelation that the poor are probably more experienced at handling their money than the rich, changes the paradigm of economic development. When every cent is precious, how you use it is extremely important. If we’re truly going to use a grassroots development strategy, we have to delve into the decision making processes behind it.
About the Author
Jeff works on the ethical considerations of economic development and cash aid programs around the world. He currently works in Honduras, supporting local community projects through micro-finance and holds two degrees in Philosophy and International Affairs.