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

Collins, Daryl
Morduch, Jonathan
Rutherford, Stuart
Ruthven, Orlanda
Princeton University Press, Princeton, NJ, 2009, ISBN: 9780691141480, 320 pp.
Reviewed by or other comment: 

Pike, Sally Jane

In the rich world, where US$ 2 represents the cost of a cup of coffee, the prospect of living on so little would be unthinkable. But, according to the World Bank, this is the reality for more than 2.5 billion people - nearly 40 per cent of the world's population. With as little as US$ 2 a day - and for the bottom billion even less - people feed and clothe their families, try to educate their children, and find ways of coping with life's ups and downs. This book examines how they manage to live on so little. In doing so it challenges many of the assumptions that are made about low-income families. Contrary to popular belief, poor families do not simply live hand to mouth: they plan for the future and make some attempt to save.
The book's findings are based on the financial diaries of 250 poor households in India, Bangladesh, and South Africa. Over the course of a year, families from a mix of poor urban settlements and rural villages were asked to record all their financial transactions, however small and seemingly unimportant. The researchers, who interviewed the families every two weeks, discovered that it was only after at least six visits, when a level of trust had been established, that they could really understand the full complexity of a family's financial activity and relationships.
It is this very innovative approach, which incorporates both qualitative and quantitative research methods, that is the real strength of this book. Other surveys that are based on one-off interviews can only give a snapshot of a family's finances at a particular point in time. The diaries analysed in this book track people's behaviour over a period of a year and provide a much richer and more nuanced portrait of their financial lives. What they reveal is how actively and creatively the poor manage their money, and more importantly why they make the financial choices that they do.
To illustrate the main findings of their research, the authors successfully weave in extracts from the diaries. By using these real-life illustrations, the book avoids being just a dry analysis of balance sheets and cash-flow statements, and the reader is helped to understand the motivations behind the financial strategies adopted.
What is clear from the portfolios is that a small income is only part of the challenge for poor households. It is the fact that their income is also irregular, often patched together from a variety of different unpredictable sources, which makes financial management so problematic. The research findings illustrate how inventive poor families have to be in order to ensure that there is food on the table every day, even on days when no money has come in. The financial tools that they use to achieve this turn out to be remarkably similar across India, Bangladesh, and South Africa.
One of the most common resources was an informal savings club. The clubs took many different forms but were typically a group of neighbours, friends, or work colleagues who had got together to save small amounts of money that would be disbursed as lump sums among the group at a later pre-agreed date. We meet Pumza, who sold sheep's intestines in a township near Cape Town. She belonged to eight different savings clubs. This was not untypical. Each one served a different financial purpose and enabled her to spread the risk.
But savings clubs were often unreliable and fell apart when members could not keep up with their payments. Migrants from rural areas without family or friends in their new urban homes found that without a track record it was difficult to find clubs that would accept them as members. The authors' message to microfinance institutions is that households do need to have access to more reliable ways to save and borrow money, but what they are looking for is the provision of financial services that closely match their actual cash flows and needs. However, it is also clear that households want to spread their risk by accessing a variety of formal, semi-formal, and informal financial facilities.
A limitation of the book is its geographical spread. There are no diaries, for instance, from Latin America. Two of the countries chosen are from the same continent, and South Africa with its developed economy and stable government is not representative of the rest of Africa. A series of financial diaries from one of the so-called fragile states, such as Democratic Republic of the Congo or Chad, where life is even more unpredictable and political institutions barely function, would provide useful insights into the financial lives of the so-called 'bottom billion'. Do they use similar mechanisms to manage even smaller and less reliable incomes?
Poverty is a complex phenomenon and is determined by more than a mere lack of income. The financial diaries, although primarily designed to examine the financial lives of poor households, also give a compelling insight into the reality of what it means to be poor. Through the family profiles we learn how precarious and insecure their lives can be.
Reducing poverty is one of the world's most intractable problems, and it is important that policy makers develop poverty-reduction strategies that reinforce rather than undermine the structures that the poor themselves have put in place to make the most of their meagre incomes. This book makes an important contribution to understanding how creative but also fragile those mechanisms are.