Portfolios of the Poor. How the World’s Poor Live on $2 a Day
Collins, Daryl; Morduch; Jonathan; Rutherford, Stuart and Orlanda Ruthven. 2009. . Cape Town: Cape Town University Press. 283pp.

Review by Katharine Vincent and Tracy Cull

Understanding the flows of money and decision-making behind financial transactions is important to most realms of research within development studies. After all, understanding the realities of poverty is a prerequisite for promoting appropriate and sustainable development. Most development researchers or practitioners have, at one time or another, needed to investigate the financial status of people at the grassroots level, but are always impeded by the difficulties of doing so: in-depth anthropological studies are lengthy and resource-intensive, whilst economic panel surveys provide quantitative data, but it is based on a snapshot in time.

Portfolios of the Poor represents a unique attempt to interrogate not only the balance sheets of poor households (including income and liabilities, or net worth), but more importantly the processes of cash flow and turnover, and the money management strategies and decision-making processes that govern these processes. The authors employ a new technique they call “financial diaries”, in which households are interviewed twice monthly over a two year period. The qualitative information from these diaries adds depth to the figures, and emphasises that far from being a homogenous group, the 2.5 billion global population classified as poor or ultra poor are very different and their lives and contexts are dynamic. Interviews were conducted by researchers of similar ethnic and cultural background to the interviewees, and the long period of research enabled trust to be built up, ensuring openness. Altogether 250 households, classified as both poor and non-poor by local informants, in rural and urban Bangladesh, India and South Africa undertook financial diaries between 1999 and 2004.

We are all familiar with the $2 a day benchmark of poverty, but the authors of Portfolios of the Poor stress that as well as being absolutely and relatively low, this average figure disguises two further characteristics of income that promote poverty: unpredictability and irregularity of incomes. By providing vignettes of real people in each of the countries, the authors are able to show that, on a day-to-day basis, the poor tend to necessarily be adept at short-term cash flow management. The sophistication of their financial dealings is shown by the many instruments that they employ, and in context choices that they make are shown to be rational and suited to their conditions. Interestingly, the financial diaries show that the poor are able to pay, and will use high cost instruments if it is convenient to them in terms of timing, location, and if it is less likely to cause them to lose face within their communities. Despite low balances, flows are large and turnover high (up to 500% of net income in some South African households), with all households using savings and debt. Portfolios of the Poor thus disproves the assumed “hand-to-mouth” existence of the poor in developing countries, and adds nuances to the “poor as victims” rhetoric, breaking the myth that the poor act inappropriately when it comes to money.

The results are not only highly illuminating in terms of the day-to-day and longer term money management strategies of the poor, but also have important implications for the design of new infrastructure and products within the banking sector (in particular the microfinance branch). Although many types of instruments are used, the quality of those instruments is often poor, and access to formal instruments within the financial sector are often ill-suited to the availability and flows of cash. Based on these findings, the financial sector can assist in poverty reduction at a household level in three ways: by helping the poor to manage their money on a day-to-day basis, building savings over the long term, and helping to borrow for all uses (not just microenterprises). The celebrated Grameen Bank in Bangladesh has already updated many of its products to reflect these needs – allowing flexible repayment and more frequent investment and withdrawal of smaller unit values.

The innovation in this book is undisputed, both in terms of the research technique employed and the results described. Combined with the simple, jargon-free text, Portfolios of the Poor is interesting and informative reading for anyone in the development sector. The authors are transparent with the limitations of their methodology, recognising the possibility that the process of research possibly changes the behaviour of respondents, and showing how the data became more robust over time. In terms of practical implications, the role for the banking sector is well articulated. Minor criticisms are that some of the text is repetitive, which may impede the accessibility of the message, and some of the graphs are redundant. In addition, no consideration was made of the role of in-kind transactions which, within households of low cash availability, are likely to contribute substantially.

As with any good research, the book leaves the reader with many questions that could be answered by follow-up studies. The unit of analysis here is the household, yet the appendices and diary examples within the text both show sub-household differentiation between men and women, suggesting that the next step would be to look at gender differences in portfolios and access to different instruments of financial management – following critiques from various schools (feminism, Marxism) of household economics (Folbre, Nancy. 1986. Hearts and spades: paradigms of household economics. World Development 14 (2) : 245-255). Of course now that “baselines” have been established, longitudinal research to investigate change over time is also a possibility; in particular in relation to any modified financial products and infrastructure that are prompted by these findings.