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What the World's Poorest Can Teach Us About Money Management

How can anyone live on just $2 a day? Economists are starting to find out.

For much of the last half-century, one of the biggest struggles in the poverty-fighting business has simply been knowing the audience. Who are the poor? Statistics tell us they are the 1.4 billion -- or about a fifth -- of the planet's 6.7 billion people who live on less than $1.25 a day. And 2.6 billion people live on under $2 a day. The numbers are already adjusted for purchasing power -- say, the number of pesos or yuan you would need to buy $1 worth of food, clothes, or medicine. So, in a world where a Starbucks coffee rings up at $4 a cup, how can so many live on so little?

Answering that basic question is fundamental to figuring out how governments, foundations, and charities can reduce poverty. But the economic lives of the poor -- their daily choices, opportunities, and constraints -- remain largely out of view of the policymakers and philanthropists who aim to help. After tracking the spending, borrowing, and yes, savings, of the poor across a full year in slums and villages, my colleagues' research reveals that the poor are often complex financial consumers. These "financial diaries" tracked penny by penny how families managed their money. And what we found is surprising: Many poor families are, arguably, far more adept at money management than even your average Western consumer. Offering them the tools to make saving and borrowing easier would go far to help the poor help themselves.

Those $1-a-day and $2-a-day figures might be partly to blame for why we've missed seeing the poor as sophisticated financial consumers. It turns out, such measures hide as much as they reveal. That $1 a day is an average, obscuring the reality that farm families may receive much more than $1 a day during peak harvest seasons but nearly nothing for a string of slow months. Rickshaw drivers and roadside vendors have busy weeks followed by terrible weeks. Their challenge is to make sure there is food on the table every day, not just on the days when income arrives.

Dhaka, Bangladesh, is home to some of the best examples. In one slum described in the study, most residents live on less than $2 a day and earn their way through a patchwork of odd jobs and self-employment. Hamid, for example, was a part-time rickshaw driver who was lucky to secure an on-again, off-again job. His wife, Khadeja, helped out by taking in sewing by the piece while she looked after their son. Between them, their family earned an average of $2 a day per person. Yet their financial diary reveals that, rather than living hand-to-mouth, Hamid and Khadeja -- and even similar families living on $1 day or less -- were borrowing and saving actively with an eye toward the future. Hamid and Khadeja used a wide variety of facilities to save, from contributing to Khadeja's microfinance bank account to simply asking a friend to safeguard some of their spare cash.

Such observations turn the assumptions that have been guiding policymaking for decades upside-down. They debunk the idea that typical poor families are living hand-to-mouth and are so desperate to meet subsistence needs that they are unable to exhibit much agency at all. And Dhaka is certainly no exception; in India and South Africa, everywhere the researchers went, poor families were living active financial lives, not despite being poor, but because of it.

One of the most striking findings is the extent of savings among the poor. Take the example of Nomsa, a 77-year-old woman in a South African township. Her daughter had died of AIDS, and Nomsa was caring for four grandchildren on a monthly government stipend of about $120. Still, she managed to save about $40 each month. Informal savings clubs were the key; Nomsa contributed a fixed amount to a communal pot each month in exchange for a big payout at the end of the year. For example, one of her clubs required $9 of savings each month, adding up to $99 by Christmas after 11 months. Elsewhere, others in the same community relied on local "deposit collectors" who earned their money by charging a fee for making daily visits, collecting a few pennies each time, and returning the accumulation at the end of the agreed-on period. For those of us used to earning interest on our deposits, it seems odd that people are paying to save. But given how valuable such a safety net is, and how hard it can be to accumulate, paying to use it makes sense. While the salaried members of the world's richer half take advantage of automatic payroll deductions to pension accounts, the poor are left to devise their own mechanisms. Ironically, it is these poor households -- who face the most financial risks -- who have the fewest reliable tools through which to save and prepare.

That observation helps us imagine a new and different future for microfinance, the global movement founded by Muhammad Yunus that offers microloans to jump-start local small businesses. Khadeja in Dhaka, for example, used microfinance loans to run her sewing sideline. But the financial diaries of the poor show that such a vision is too limited. Among Yunus' Grameen Bank customers, for example, the research found that more than half of the families in the sample mostly used the loans for things other than business. One such case was Ramna, a frequent user of "top-up" loans from Grameen, which allow borrowers to get a cash infusion by returning the loan balance to the initial loan size once they have paid some of it off. Ramna used her loans to buy food, stock up on grain for the coming monsoon season, pay down a higher-interest private loan, and pay for medical expenses, school fees and funeral expenses. Although Ramna's borrowing was not used for business enterprise, the value of such credit was clear.

Simple tools, like new savings accounts and loans for family emergencies, are now being introduced by microfinance institutions. Grameen Bank has introduced a new suite of such products that has proven so popular that the bank today takes in more in deposits than it lends out. Of course, no savings device alone is likely to take Hamid and Khadeja, Nomsa, or Ramna out of poverty. But better tools can do something perhaps more fundamental: help poor households make the most of what they currently have -- and offer reliable ways to cope with life's ups and downs.

Photo by Flickr user B. Sandman

Feature

Want to Know More: Oil

THE BASICS

•Topping any reading list on energy is the new edition of Daniel Yergin's The Prize: The Epic Quest for Oil, Money and Power (New York: Simon & Schuster, 2008). It's "required reading for anyone wanting to get an informed perspective on the evolution of the modern oil industry," says Foreign Policy editor in chief Moisés Naím. On Yergin's own bookshelf is Leonardo Maugeri's The Age of Oil: The Mythology, History, and Future of the World's Most Controversial Resource (Westport: Praeger Publishers, 2006). Maugeri argues that ups and downs are embedded in the economic history of oil -- and politicians who panic stand to make the booms and busts even worse.

•David Victor, Amy Myers Jaffe, and Mark Hayes ask whether natural gas could be the "new oil," in Natural Gas and Geopolitics: From 1970 to 2040 (New York: Cambridge University Press, 2006). "Not just because I was an editor," Jaffe adds, "this is the best and only book on this important topic." Such analysis will prove even more pertinent if David Goodstein gets it right in Out of Gas: The End of the Age of Oil (New York: W.W. Norton, 2004), where he predicts that oil will run out in just a decade. For a change of pace, Yergin recommends the story of journalist Wanda Jablonski, whose groundbreaking work in the 1950s, 1960s, and 1970s not only helped demystify the oil industry but also changed it. Her story -- of a woman who broke through to the top of what had been a man's world -- is told in Anna Rubino's Queen of the Oil Club: The Intrepid Wanda Jablonski and the Power of Information (Boston: Beacon Press, 2008).

•"The best book out right now," according to Jaffe, is Daniel Sperling and Deborah Gordon's Two Billion Cars: Driving Toward Sustainability (New York: Oxford University Press, 2009). Lisa Margonelli's Oil on the Brain: Adventures from the Pump to the Pipeline (New York: Doubleday, 2007) makes the oil industry feel real for the everyday consumer, tracing petrol's journey from ground to gas tank.

•For the evolving role of national oil companies, see the book by Valerie Marcel of Chatham House, Oil Titans: National Oil Companies in the Middle East (Washington: Brookings Institution Press, 2006). "Sometimes, people forget that the oil business is also about science and engineering," Yergin says. For a good clear guide to how oil actually gets produced, he recommends Martin S. Raymond and William L. Leffler's Oil and Gas Production in Nontechnical Language (Tulsa: PennWell, 2006).

ENERGY INDEPENDENCE

•What if the United States made ending dependence on oil its true priority No. 1? U.S. Assistant Energy Secretary David Sandalow imagines this scenario in one of Yergin's picks, Freedom from Oil: How the Next President Can End the United States' Oil Addiction (New York: McGraw-Hill, 2008). To think about breaking the carbon addiction, contributor Michael Grunwald turns to a 2007 pamphlet from Arjun Makhijani, president of the Institute for Energy and Environmental Research, Carbon-Free and Nuclear-Free: A Roadmap for U.S. Energy Policy. Tim Searchinger's work on biofuels, including his analyses for the German Marshall Fund where he is a fellow, also gets Grunwald's recommendation.

•For what Jaffe dubs a "good overview of the security challenges coming from the sources of U.S. oil supply," see the Council on Foreign Relations report from John Deutch, James R. Schlesinger, and David G. Victor, "National Security Consequences of U.S. Oil Dependency." Yergin points readers to the National Petroleum Council's report "Facing the Hard Truths About Energy." Looking 30 years out, the study suggests that coal and natural gas will remain vital in coming years, that energy independence is different from energy security, and that a knowledge gap could arise when a whole generation of baby-boomer professionals in the energy sector soon retires.

THE RESOURCE CURSE

•Terry Karl was among the first to "detail the mechanisms through which dependence on oil distorts the politics and economics of a country," says Naím; Karl's The Paradox of Plenty: Oil Booms and Petro-States (Berkeley: University of California Press, 1997) is a classic. A "foundational study" also came from Jeffrey D. Sachs and Andrew M. Warner, says Peter Maass; that 1995 working paper is "Natural Resource Abundance and Economic Growth." Maass adds that "anything by Paul Collier is invaluable" on this topic, including a book the prizewinning British economist coedited with Ian Bannon, Natural Resources and Violent Conflict: Options and Actions (Washington: World Bank, 2003).

•Oil's "curse" has played out differently across the world, including in Ecuador, where Joe Kane's Savages (New York: Knopf, 1995) offers "a nicely written look at how oil extraction affected indigenous people in Ecuador's Amazon," Maass says. For a sense of the African oil experience, read journalist John Ghazvinian's Untapped: The Scramble for Africa's Oil (Orlando: Harcourt, 2007) or Ken Saro-Wiwa's autobiographical A Month and a Day: A Detention Diary (New York: Penguin Books, 1995), the piercing account of a Nigerian environmental activist who was later executed for his work.

Escaping the Resource Curse, edited by Macartan Humphreys, Jeffrey D. Sachs, and Joseph E. Stiglitz (New York: Columbia University Press, 2007), is "the best compendium of our current knowledge about what options are available to mitigate the effects of the resource curse," says Naím. Global Witness, a London-based advocacy organization, "should win a Nobel Peace Prize for the amazing investigative work they've done on the impact of resource extraction in the developing world," Maass says.

ON THE WEB

•The Web site of Yergin's IHS Cambridge Energy Research Associates offers events, publications, and expert commentary. The International Energy Agency's flagship publication, "World Energy Outlook," is highly anticipated by industry professionals each year. The latest domestic and international statistics are available through the U.S. Department of Energy's Energy Information Administration. Another source of statistics as well as the oil industry's perspective is the Web site of the American Petroleum Institute.

•Several universities run notable programs that study energy. Yergin recommends the Massachusetts Institute of Technology's Energy Initiative, where you can find such treasures as a list of the latest energy innovations: a virus that powers car batteries, for example, or a new mapping system that creates images of underground oil reserves. The Baker Institute Energy Forum at Rice University, where Jaffe is a fellow, runs a series of research programs and on-the-ground studies worth seeing; spin through photos of an energy sustainability project in Lesotho or read catalogued congressional testimony on the latest oil debates. Harvard University's Energy Technology Innovation Project focuses on three big consumers of oil: the United States, China, and India.