Thumbs Up for Portfolios of the Poor
By Bryan Caplan
I really liked Portfolios of the Poor: How the World’s Poor Live on $2 A Day. Westerners tend to think of the world’s bottom billion as charity cases. The harsh and amazing reality, though, is that they largely stand on their own two feet. The ultra-poor not only feed, house, and clothe themselves; they raise children and work hard to give them a better life. Portfolios shows us how they do it, relying heavily on financial diaries kept by villagers and slum dwellers in South Africa, India, and Bangladesh.
The main lessons:
1. The income of the ultra-poor is not only low, but highly variable. They rarely have regular jobs in a “sweatshop.” Instead, they desperately cobble together income from many different sources. Many days they earn nothing at all.
2. No one, no matter how poor, lives “hand to mouth.” Even the poorest people save money, make investments, and plan ahead.
3. The poor also borrow a lot of money. Who would lend to them? For the most part, other poor people – family, savings clubs, small-time loan-sharks. The rates are astronomical – 20% per month is pretty common.
4. Even the poorest people spend a lot of money on things other than
food. One of their main reasons for saving and borrowing is to pay for
relatively lavish weddings and funerals.
When reading this book, I had two conflicting reactions.
One was optimistic: “Isn’t it great to see all the clever strategies the world’s poor use to better their lives?” It’s inspiring – and humbling – to learn that people in dire straits see themselves as protagonists – not victims.
My other reaction, though, was frustration. Yes, the world’s poor are striving to better their lot. But what they really need isn’t small-scale entrepreneurship and micro-credit. It’s employment in the formal sector, and access to international credit markets. What they need, in short, is globalization. Either they need to come to us, or our institutions need to go to them.
Think about it this way: Who has a comparative advantage in running a business? In lending money? An important part of the answer, in both cases, is “relatively rich people.” They’re the ones who can gamble and lose without going hungry. Why then are so many of the world’s poor self-employed? And why do they primarily borrow money from each other? Because they’re isolated from the broader economy. They deal with each other because no one else is around.
Part of the reason for their isolation is admittedly transactions costs. It would be awfully difficult for me to start a business in rural Bangladesh; I don’t know anyone who lives there, much less anyone I trust. But a lot of the isolation of the world’s poor is driven by regulation. Poor countries have policies that discourage both formal sector employment and international investment. The result: While the world’s poorest make a heroic effort to get by, their very best often isn’t good enough to save them and their children from hunger, sickness, and worse.
P.S. Coming soon – the most quotable passages from Portfolios of the Poor.