If you are living on more than $2 a day in a developing country, you are not living in poverty according to the World Bank. Indeed, you are a lot better off than those poor people who live on less than $1.25 a day, the Bank's measure of extreme poverty.
But what is life really like on $2 or so a day? Not so easy, based on the excellent study of "Portfolios of the Poor" by Collins, Morduch, Rutherford and Ruthven which analyses financial management by poor people in Bangladesh, India and South Africa.
When you are living on $2 a day, you spend most of your money on the basics, especially food. There is one big problem, though. You are very unlikely to receive $2 a day in a steady cheque or payment from your boss. It is just an average, since you are surely casually or part-time or self-employed in the informal sector. Thus, you make more on some days, less on others, and often get no income at all. The government offers you very limited help, and when it does, the quality of assistance is apt to be low. Your greatest source of support is your family and community, though most often you'll have to rely on your own devices!
So how do the poor budget? In particular, how do they make sure that there is something to eat and drink each day? How do they deal with emergencies? How can they be sure that they can pay for the doctor and drugs when their children fall sick? How do they put together the funds for big ticket items like a home and furniture, education and marriage for their children, and some income for themselves when they are too old to work?
The evidence shows that for the poor, money management is a fundamental and well-understood part of everyday life as they cope with incomes which are small, and often highly irregular and unpredictable. Indeed, even those living on less than one dollar a day per person, rarely consume every penny of income as soon as it is earned.
Money management by the poor involves: storing savings at home, with others, and with banking institutions; joining savings clubs, savings-and-loan clubs, and insurance clubs; and borrowing from neighbors, relatives, employers, moneylenders, or financia institutions. At any one time, the average poor household has a fistful of financial relationships on the go.
The case of Hamid and Khadeja, a poor couple living in a Bangladeshi village, provides a window on financial management by the poor. When their first child was born, they moved to Dhaka where they settled in a slum. After spells as a cycle-rickshaw driver and construction laborer and many days of unemployment, Hamid whose health was not good, was taken on as a reserve driver of a motorized rickshaw. Khadeja stayed at home, earning a little from taking in sewing work. Home was one of a strip of small rooms with cement block walls and a tin roof, built by their landlord on illegally occupied land, with a toilet and kitchen space shared by the eight families that lived there.
They earned on average $70 a month, almost all by Hamid, whose income arrived in unpredictable daily amounts. One-fifth of the $70 was spent on rent (not always paid on time), and much of the rest went toward the most basic necessities of life -- food and the means to prepare it. This put them among the poor people of Bangldesh, but not the very poorest.
Hamid and Khadeja are an unremarkable poor household: a partly educated couple trying to stay alive, bring up a child, run a one-room home, and keep Hamid's health in shape -- on an uncertain $0.78 per day. But they are very active money managers. They had built up reserves in six different instruments, ranging from $2 kept at home for minor day-to-day shortfalls to $30 sent for safe-keeping to his parents, $40 lent out to a relative, and $76 in a life insurance savings policy. In addition, Hamid always made sure he had $2 in his pocket to deal with anything that might befall him on the road.
Hamid and Khadeja are also borrowers, with a debt of $153 to a microfinance institution and interest-free private debts from family, neighbors, and employer totaling $24. They also owed money to the local grocery store and to their landlord. Khadeja was even acting as an informal banker, or "money-guard", holding $20 at home that belonged to two neighbors seeking a way to keep their money safe from their more spendthrift husbands and sons. Hamid himslef also used money-guard, storing $8 with his employer while waiting for an opportunity to send it down to the family home.
In addition to saving, borrowing and repaying money, Hamid and Khadeja, like nearly all poor and some not-so-poor households, also saved, borrowed and repaid in kind. Khadeja, sharing a crude kitchen with seven other wives, would often swap small amounts of rice or lentils or salt with her neighbors. She would keep a note of the quantities in her head, and so would her partners in these exchanges, to ensure that their transactions were fair over the long haul.
And while the case of Hamid and Khadeja shows that people with low and irregular incomes can cope and survive, the instruments for financial management are not satisfactory in several ways. First, they are not reliable -- your partners may not have the cash when you need it. Second, they lack privacy since informal finance is accessed through networks based on kin, community and workplace. Third, they suffer from a lack of transparency and cheating, and they rely too heavily on kindness, goodwill and norms of mutual obligation.
Microfinance institutions originally came into being to provide microcredit to microenterprises. But poor people need finance for other reasons, notably for: (i) Managing basics: cash-flow management to transform irregular income flows into a dependable resource to meet daily needs; (ii) Coping with risk: dealing with the emergencies that can derail families with little reserve; and (iii) Raising lump sums: seizing opportunities and paying for big-ticket expenses by accumulating usefully large sums of money.
Embracing the notion the notion that households seek loans for these purposes will open possibilities for innovation and expansion for microfinance providers, as well as providing great service to poor people.
Collins, Daryl, Jonathan Morduch, Stuart Rutherford, and Orlanda Rithven. Portfolios of the Poor: How the World's Poor Live on $2 a Day.
Stuart Rutherford on "Portfolios of the Poor".