Portfolios of the Poor: How the World’s Poor Live on $2 a Day

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ECO 442 Development Economics
Analytical paper on Microfinance #1
23 February, 2012

‘Portfolios of the poor: How the world’s poor live on $2 a day’ Summary

The book describes the findings of four researchers who studied how extremely poor households in India, Bangladesh, and South Africa manage their money by saving when they can and borrowing then they need to – through very creative process, which involves different methods: storing savings at home, joining savings clubs, insurance clubs, borrowing from lenders, neighbors, relatives, employers, or financial institutions. Authors highlight that managing money well is absolutely central to poor people, they represent challenges of living on one or two dollars per day by constructing so called ‘financial diaries’ – tracks of poor people cash flows and household balance sheets over a one year period of time. The recorded behavior and commentary of the 250 diarists show how and why poor people could benefit from institutional financial services offering flexible payments and cash flows to meet their variable and uncertain needs. In the book researchers are addressing three fundamental needs of the poor: 1) being able to manage daily expenses, 2) coping with emergencies like funerals, lack of food, and 3) opportunities to accumulate lump sums. The authors draw attention to the fact, that they call ‘triple whammy’ – small, irregular incomes, that have to be managed with not suitable financial instruments, and how poor households cope with that. Irregularity and unpredictability of informal labor are addressed as causes for serious challenges in cash-flow management. Similar insecurities, which exist in formal labor in South Asia, unlike in South Africa were labor laws allow households access more financial opportunities, are discussed as well. Authors as well talk about usual way to carry transactions with ‘informal’ partners, such as friends or relatives offering interest-free loans rather than formal...
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