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Business Matter

A window into economic life of the poor

By Manish Shah

Our perception about the world’s poor — people living for less than $2 a day — is colored by a few pictures we see in the media. Abhijit Banerjee and Esther Duflo, professors of economics at MIT, provide a window into their lives in their paper, The Economic Lives of the Poor. For their study, they used survey data from 13 countries which included India, Indonesia, Pakistan and Mexico.

One of the common misconceptions is that the poor do not have money to spend on things other than food. But this study shows that the poor spend anywhere from 56 to 78 percent of their income on food. The major expenditure on non-food items is for tobacco and alcohol. The poor spend anywhere from 4 to 6 percent on these items. Another surprising fact is a median household spends about 10 percent of his or her income on festivals.

A majority of world’s poor are entrepreneurs and juggle multiple vocations in a day. In the surveyed countries, more that 50 percent operate a non-agriculture business. The median family has seven occupations between three members.

The access to banks for the world’s poor is very limited. They borrow money from an informal source such as a relative, friend, money lender or a shopkeeper. Indonesia is the only exception where over 33 percent of the poor borrow money from the banks, thanks to the efforts of Bank Raykat. Credit for the poor is shockingly expensive. A survey done in the city of Udaipur in India indicates that the poorest of the poor, people living on less than $1 a day, pay an interest of 3.84 percent a month on borrowed funds.

There are some interesting observations that arise out of this study. First and foremost is that the poor are generalists in that they do not specialize in one vocation. This is their way of reducing risk. Another reason for multiple vocations is lack of access to capital. The poor do not have the ability to borrow money and start a business that would occupy them for the whole day. Secondly, most of the poor tend to be entrepreneurs. Due to lack of access to capital and lack of skills, entrepreneurial vocation is their only choice. Thirdly, they do not think savings are that important. They are averse to saving money as they fear that it will get stolen.

While most of the poor are concerned about their health, they are not unhappy about life. Their biggest concern is their health followed by lack of food and death. As reported by the study, the poor have some slack in their budget, which could result in some savings. These savings could go a long way in alleviating their hunger.

A lot of high profile economists are studying poverty and suggesting remedies to alleviate it. The attention to this problem has reached a critical mass and the hope is that the world will make a major headway in solving this problem.

Manish Shah is the president of Mid-west Law Printing in Chicago. Prior to this, he worked at Intel, PwC and Motorola. He has an MBA from Kellogg Graduate School of Management, and an MS in Computer Science from Illinois Institute of Technology. He can be reached at manishshahus@ yahoo.com.