The Economics Lives of The Poor - A Summary

I'm one of those who has been excited about the possibilities offered by bottom-of-the-pyramid business models, that is, for-profit businesses that effectively and efficiently engage the underprivileged while serving unmet needs. I recommend Prof Prahlad's "Future at the Bottom of the Pyramid," if you want to look at several successful examples ranging from Casas Bahia and Cemex in Latin America to the Jaipur Foot and Aravind Eyecare in India.

A few months back, a friend pointed me to "The Economic Lives of the Poor," a working paper from the Poverty Action Lab, associated with the MIT Department of Economics. If you grew up in the developing world, you may find the data in the paper corroborating many of your observations and experiences. Nonetheless there are a few insights... (I've tried to higlight them by italicizing).

It's a 20-page paper, one I had put off reading it for quite sometime now and there's plenty of data in there. Here's a quick summary:

Data surveyed in the paper has been collected from India, Pakistan, Nigeria, Kenya, Indonesia, South Africa, Peru, Guatemala etc.

The paper defines the poor as those whose daily budget is $2.16 in purchasing power parity. The extremely poor are looking at a daily budget of $1.08. The authors use consumption rather than income because they have more accurate data on consumption.

Living arrangements

There are more people per household among poor families. The paper points out that this helps in spreading fixed costs over a larger number of people. There are many more people of prime working age (21-50) in these households than those above 50. About 0.3 is the ratio between number of old people to those of prime working age. Compare that to 0.6 in the US. High fertility and high mortality rates among older people are possible reasons. It's also possible that older people are underrepresented because they tend to be richer.

[No major surprises here.]

Spending Habits

Conventional wisdom has been that the poor don't have enough money to eat. Yet the average poor person does not spend every penny per dollar on gaining calories. Alcohol and tobacco (4%-8%), entertainment and relegious festivals (10%) occupy a prominent portion of every dollar consumed. Just eliminating alcohol and tobacco could give them 30% more to spend on food!

[I have to say not much of this is surprising to me. The poor may have more constraints to work with but they are humans too, and not necessarily more rational.]

What's somewhat interesting here is out of the money spent on food, a good chunk is spent on food that is not calorie efficient (rice, wheat, sugar as opposed to millets such as bajra or jowar) or even healthy. Based on the data from India, it appears that the trend is to spend lesser on food - 70% in 1983 to 62% in 1999.

Assets

Interesting paradox here. Among the poor land ownership is prominent: 4% in Mexico own land, 30% in Pakistan and 99% in Udaipur, India! Otherwise, the poor own very few durable assets. Quite a few people seem to own radios and about 1/2 of them own a clock or a watch.

[To me this is an interesting paradox. Is it true that the poor own land which they can't monetize?]

Health

Based on data from India, the poor consume 1400 calories per day and they have a BMI (body mass index) of 17.8. Compare that to a BMI of 18.5 which is the cut-off being underweight. Despite widespread occurence of disease, anemia, diarrhea, poor vision etc, level of self-reported happiness is not particularly low. Main causes for stress appear to be health related issues, including death.

[Wealth/happiness and poverty/sadness don't go hand in hand. I knew that!]

Based on a survey in New Delhi, India, it appears that there is good access to health care providers. What is of grave concern is the poor quality of health care, mainly due to unqualified healthcare workers. The paper talks about a survey which highlights that treatments from such unqualified healthcare providers are slightly more likely to cause more harm than good.

Education

Most kids go to school but the quality of education they get in free/public schools is quite abysmal.

How they earn money

Most are entrepreneurs - i.e they raise small amounts of capital, carry out investment and claim earnings. Because of limited skills, its easier for them to run their own business than take up a job.

Many hold multiple "jobs" and there is a notable lack of specialization. It appears they may be spreading risk by staying diversified. They also can't raise sufficient capital to create a business that would occupy all their time. The paper gives the example of women in the Indian town of Guntur. They run eateries where they cook dosas in the morning, they then move on to do other things like collect trash, manual labor etc. The businesses are also not very efficient - for instance there is a lot of waiting time in dosa making.

[Is it really diversification? Sorry to sound harsh but it does sound simplistic logic, coming from the academia! What if customers don't want dosas all day? What if they simply want more money and can't make much just on making dosas? It could get sunny in Guntur... how can they stand in the sun all day making dosas?]

There is a lot of temporary migration (less than 1 month) for work, but the paper cites the need to stay close to a social network as a reason for them to not migrate too far away or for a longer period of time.

Debt and Savings

Debt levels vary from 11% (East Timor) to 93% (Pakistan). However, they get credit mostly from informal sources, not banks or other formal lending institutions. They end up paying almost 4% per month in interest. This premium is NOT due to default rate, rather its due to the high cost of capital for the informal lending sources which gets passed to the poor consumer and also due to the perceived cost of enforcement.

No formal savings. There's a great deal of temptation to spend, especially because some of their wants are things many of us take for granted. Saving money at home is not easy: there's a danger of theft or a family member (spouse or son) stealing or taking the money away.

[No surprises.]

They respond well to micro-credit because it gives them a way to buy something and then pay it off in a disciplined manner. Checkout my friend Renuka's article in the Hindustan Times on micro-credit and women.