Sunday, May 23, 2010

A bit of moonshine in Kristof's "Moonshine or the kids?"

Hesitantly, reluctantly, Nicholas Kristof today suggests that the poor in many countries need to spend less money on alcohol and tobacco and more on education -- while also saving more.  It's an "ugly secret of global poverty," he writes,
that if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children’s prospects would be transformed. Much suffering is caused not only by low incomes, but also by shortsighted private spending decisions by heads of households.
Kristof's basis is largely anecdotal -- families he interviewed in Congo Republic. But he calls for backup from a study, to which he helpfully provides a link:
Two M.I.T. economists, Abhijit Banerjee and Esther Duflo, found that the world’s poor typically spend about 2 percent of their income educating their children, and often larger percentages on alcohol and tobacco: 4 percent in rural Papua New Guinea, 6 percent in Indonesia, 8 percent in Mexico. The indigent also spend significant sums on soft drinks, prostitution and extravagant festivals.
The results Kristof pulls from this study need some qualifying. First, Banerjee and Duflo reported findings from thirteen countries, with large variations in spending habits among them. It's true that Banerjee and Duflo find that the extremely poor in a range of countries spend between 4.1% and 8.1% of their income on alcohol and tobacco, and just about 2% on education averaged across the countries studied. But: "The reason spending is low is that children in poor households typically attend public schools or other schools that do not charge a fee" (9). Where fees are charged, the percentage of household income spent on education rises: it is 6% in Cote D'Ivoire. The study did not include Congo Republic, but one might imagine that since fees are ubiquitous there, school spending would also be relatively high.

In the 13 countries studied by Banerjee and Duflo, moreover, "food typically represents from 56 to 78 percent among rural households, and 56 to 74 percent in urban areas" (5). Perhaps one tenth of the average poor family's consumption budget goes to alcohol and tobacco, then -- and these averages cover large differences between countries and communities.  Families in the study also spent an average of 7% of their food budget on sugar, and 10% on sugar, salt and processed foods. Kristof might as well have lamented that fact -- though who wants to live without sugar and salt?

To reduce the alleged waste of the poor's resources, Kristof favorably cites programs aimed at giving women more control over family finances, along with microsavings programs (the vast majority of the world's poor lack easy access to banks). "It’s becoming increasingly clear," he writes, "that the most powerful part of microfinance isn’t microlending but microsavings." Here too, Kristof's conclusions need qualifying.

Kristof's three claims -- that the poor don't save enough, that they need microsavings programs, and that microsavings is more valuable than microlending -- can be illuminated by data from the remarkable 2009 book Portfolios of the Poor: How the World's Poor Live on $2 a Day, by Daryl Collins et al. -- which Kristof has read and written aboutPortfolios is based on detailed financial diaries compiled over the course of a year (based on biweekly interviews) with 250 poor families in Bangladesh, India and South Africa. It shows that the poor lead complex financial lives -- it takes a good deal of ingenuity to meet basic needs when income is not only minuscule but erratic, as it usually is for the poor. The portfolio families draw on a broad range of informal financial resources, including a diverse array of privately run savings clubs and burial clubs as well as loans from family members, employers, moneylenders and microfinance organizations. They use this financial intermediation both to "smooth" their cash flow and to amass occasional relatively large sums for purposes such as weddings, funerals, land and jewelry purchases (a few pieces of gold jewelry can be a kind of old age pension), micro-business investments, and emergencies.

Regarding Kristof's main point: according to Portfolio, poor people generally manage to save remarkable percentages of their scanty incomes.  Here they are somewhat at variance with the Banerjee and Duflo paper cited by Kristof, though the difference in conclusions might be attributable in part to different countries studied (and per below, Portfolio cites a later Banerjee/Duflo paper to which I don't have access). According to Portfolios:
We found that, in all three countries, all families, even the poorest, attempted to accumulate lump sums of money over time through building up savings and paying off loans (99). 
Examples follow, e.g.,  a vegetable seller with a government pension of $115 a month who puts $40 a month into an informal savings club.  In sum:
It seems, then, that at both ends of the spectrum of households in our sample--from the responsibility-burdened Nomsa, to the fit but precarious Sita, to the frail and elderly Sultan--there was room in the budget to set aside money on a regular basis. Other research suggests that this may be true for poor households worldwide. In a 2007 paper, MIT economists Abhijit Banerjee and Esther Duflo report that surveys from around the globe show that the poor do not spend every available cent on food, leaving room in the budget for financial transactions that lead to larger expenses. The financial diaries data show that most South African households spent no more than 75 percent of income on goods and services: the balance went toward financial intermediation such as insurance, savings, or debt servicing. The next, crucial step is to find ways to protect the money that has been set aside and to transform it into usefully large sums (100-101).
It is certainly true that the poor could benefit enormously from safe, reliable, convenient and hopefully interest-bearing vehicles for savings. At the same time, Portfolios describes in detail a remarkable array of private savings clubs, in which individuals pool their resources and make the proceeds available usually to different members in turn. These clubs provide social reinforcement, motive and discipline -- but their security and reliability naturally varies, and the cash flow of the proceeds doesn't always match individuals' needs. Secure, insured, interest-bearing savings accounts -- especially if tied to electronic payment and withdrawal systems, such as the nascent cell phone banking -- could be a tremendous boon to the poor in many countries.

Kristof's claim that microsaving is more powerful than microlending, however, may be an oversimplification -- or perhaps just besides the point.  In the lives described in Portfolios, savings and loans are symbiotic -- in some senses almost interchangeable means of amassing the large sums needed for life cycle events, emergencies, and business opportunities.  From Portfolios:
When we began to look at the relative shares of saving and borrowing in the strategies used by the diary households to build larger sums, we were struck by an unexpected observation. Savings and borrowing turn out, in practice, to be surprisingly similar. Both involve steady, incremental pay-ins -- saving week after week in small amounts, say, or paying back loans week after week in small amounts (110).
The authors map the source every major large sum raised by diary households over the course of the year: the vast majority in all three countries were raised by loans. Why?  Listen to a couple of borrowers:
In a slum in Vijayawada, a town in southern India, Seema negotiated a loan of $20 from a moneylender, at 15 percent a month, just after leaving a meeting of her local savings cooperative where she had $55 in a liquid savings account. This struck us as an expensive, perhaps even an irrational choice.  But asked why she had done it, Seem said, "Because at this interest rate I know I'll pay back the loan money very quickly. If I withdrew my savings it would take me a long time to rebuild the balance" (110).

Khadeja, who took a loan of 36 percent a year and spent much of it on gold jewelry that she saw as a vital store of value for her future, used the pressure that the weekly discipline of her microcredit provider exerted on her. Like Seema, Khadeja saw the truth of an odd-sounding paradox: if you're poor, borrowing can be the quickest way to save. Khadeja knew that without some external force to help her, her chances of saving enough money to buy the gold necklace were small (111; my emphasis).
As almost any American who's bought a house or a car knows, loans also have a time value relative to savings. That's not a matter simply of instant gratification: many opportunities not seized now are not opportunities at all.

One key takeaway from Portfolios is that the poor are savvy, sophisticated, resourceful stewards of their small, irregular incomes. That doesn't mean that they never waste money, or that there aren't destructive cultural patterns in many parts of the world, or that Kristof's negative exemplars today do not point to real problems.  But to deploy those anecdotes to proclaim " an ugly secret of global if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children’s prospects would be transformed" is an overgeneralization.

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