The economic lives of the poor

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no.06-29

2006

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DEWEy

HB31

.M415

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Massachusetts

Institute

of

Technology

Department

of

Econonnics

Working

Paper

Series

THE

ECONOMIC

LIVES

OF

THE

POOR

Abhijit

V.

Banerjee

Esther

Duflo

Working

Paper

06-29

October

31,

2006

Room

E52-251

50

Memorial

Drive

Cambridge,

MA

021

42

This paper can be

downloaded

without charge from the

Social Science Research

Network

Paper Collection at

MASSACHUSETTS

INSTITUTE

OF

TECHNOLOGY

NOV

9 20Q6

The Economic

Lives

of

the

Poor

AbhijitV. Banerjee

and

EstherDuflo

October

2006

Abstract

This paper uses survey data

from

13 countries to

document

the

economic

lives ofthe poor (those living

on

less than $2 dollarper

day

per capita atpurchasing

power

parity ) or the extremely

poor

(those living

on

less than $1 dollar per day).

We

describe their

patterns of

consumption

and

income

generation as well as their access to markets

and

publicly provided

infrastructure.

The

paper concludes with a discussion

of

some

apparent

anomalous

choices. JEL:

010,015,016.

Keyword:

Poverty,

Development,

Consumption

Choices

AbhijitV. Banerjee

and

Esther

Duflo

areboth Professors

of

Economics and

Directors ofthe

Abdul

LatifJameel Poverty Action Lab, Massachusetts Instituteof

Technology,

Cambridge,

In

what

turned outto be arhetoricalmaster-move,the

1990

World

Development Report

from

the

World

Bank

definedthe "extremely poor" peopleofthe

world

as those

who

are

currentlyliving

on no

more

than $1 per

day

per person,

measured

atthe 1985 purchasing

power

parity (PPP)

exchange

rate.'

Even

thoughthere

have

always

been

poverty lines— indeed

one

dollarper

day

was

chosen

inpartbecause ofits proximitytothepovertylines used

by

many

poor

countries'—this particular

one

has

come

to

dominate

theconversations about

povertyin aparticularly stark

way.

But

how

actuallydoes one live

on

less than

one

dollarper

day?

Thisessay isabout the

economic

lives ofthe extremelypoor: thechoices they face, the constraintsthey grapple with,

and

thechallenges they meet.

The

availableevidence

on

the

economic

livesoftheextremely

poor

is incomplete in

many

important ways.

However,

a

number

ofrecent datasets

and

a

body

of

new

research

have

added

a lotto

what

we know

about theirlives,

and

takentogether thereis probably

enough

to

startbuilding an

image of

the

way

they live theirlives.

Our

discussion ofthe

economic

lives

of

theextremely

poor

builds

on

household

surveys

conducted

in 13 countries listed inTable 1:

Cote

d'lvoire,

Guatemala,

India, Indonesia,

Mexico,

Nicaragua, Pakistan,

Panama, Papua

New

Guinea, Peru, SouthAfrica, Tanzania,

and

Timor

Leste.

We

mainly

usethe Living Standard

Measurement

Surveys

(LSMS)

conducted

by

the

World

Bank

and

the

"Family

Life Surveys"conducted

by

the

Rand

Corporation, all of

which

are publiclyavailable. Inaddition,

we

also use

two

surveys that

we

conductedinIndia

with ourcollaborators.

The

first

was

carried out in

2002

and2003 in 100hamlets ofUdaipur

District,Rajasthan (Baneijee, Deaton, Duflo, 2004). Udaipuris one ofthepoorerdistrictsofIndia,

with a largetribal populationandanunusually high level offemaleilliteracy (atthe timeofthe

1991 census, only5 percent of

women

were

literate inrural Udaipur).

The

second(Banerjee, Duflo, Glermerster, 2006) surveyed2,000households in"slums" (orinformalneighborhoods) of

Hyderabad, the capital ofthestate of

Andhra

Pradesh and oneofthe

boom-towns

of

post-liberalization India.

We

chosethesecountries

and

surveysbecause theyprovidedetailed

information

on

extremely poor households

around

theworld,

from

AsiatoAfricato Latin

America,

including information

on what

they

consume,

where

theywork,

and

how

theysave

and

borrow.

To

flesh out our

main

themes

fiarther,

we

also

draw

freely

on

the existingresearch

literature.

From

each ofthese surveys

we

identifiedthe extremely

poor

asthose living in

households

where

the

consumption

percapita isless than $1.08 perpersonper day, aswell as

themerely "poor" definedas those

who

live under $2.16 a

day

usingthe

PPP

inyear 1993 as

benchmark.^

The

useof consumption,ratherthanincome, ismotivated

by

thebetterquality

of

the

consumption

data inthese surveys (Deaton,2004). Table 1 provides

some

background

infomiation

on

these surveys. It liststhecountries,

and

the sourceofthe surveydata. It also

liststhe

sample

sizes: the

numbers and

theproportions ofthe extremely

poor

and

thepoor in

' _In

1993, thepovertylinewasupdatedto$1.08perpersonperdayatthe 1993PPPexchangerate (thisistheline

we

usein thispaper).

^_{Forexample,the"All IndiaRural" povertylineusedbytheIndianPlanning Commission was Rs328perperson}

permonth,or$32in PPPdollarsin 1999/2000.

each survey.

The

fraction ofindividuals living under$1 dollarper

day

in the survey vary

from

2percent in

Panama

to

47

percentinUdaipur,

and

the fraction living under $2 per

day

varies

from

6 percentin

Panama

to 86 percentinUdaipur. All the

numbers

discussedin this paperare availablein theappendix.

There are

many

importantissues with ouridentification ofthe poor. First,purchasing

power

parity

exchange

rates,

which

are essential to

compute

a "uniform" povertyline,

have

been

criticized as inadequate, infrequentlyupdated,

and

inapplicableto the

consumption

ofthe

extremely

poor

(Deaton, 2004, 2006). Prices are typically higherinurbanthan inrural areas,

and even

inrural areas, the

poor

may

pay

differentprices than everyoneelse. Also, reporting periods varysignificantly

from

survey to survey

and

this, ithas

been shown,

systematically

affects

what

people report.

These problems

may

affectuslessbecause

we

arenotfocused

on

countingthe exact

number

ofpoor. In describing

what

their lives looklike,misclassifying a

number

of

households should not

change

anythingvery important abouttheaverages

we

observeinthe

data,unless the

number

affected areverylarge,

and

thoseartificially

moved

intooroutof

povertyareverydifferentthan theother poor. Itturns out that

most

of our conclusions

do

not

change

if

we

lookatthe

poor

ratherthanthe extremelypoor,

which

isof course reassuring.

Nevertheless

one

cannot obviously entirely ruleout thepossibility that ourresults

may

have

been

verydifferent

had

we

used

a differentpoverty line.

We

will also

assume

thatthepeople

we

are describing as the

poor

are thelong-term

poor

in the sensethattheir

permanent

income

isactually closeto theirobserved consumption.

If, instead, they

were

just transitingthrough poverty,

some

ofthe behaviorsthat

we

will

observe (suchas lackofsavings)

would

be lesspuzzling,

and

others (likethe lackofassets)

would

be

much

more

so.

We

feel thatthisis a reasonable

assumption

in

most

ofthe countries, since the fraction ofthe population

below

$2.16 a

day

isactually sizeable (40percent ofthe

population or

more

in the

median

country

and

more

than

70

percentinquite afew)

and

it is

unlikelythatthere are quite so

many

transients.'*

However,

for this reason, the

poor

in

Panama

(where

only6percentofthepopulation ispoor) or South Africa (where 19percent are)

may

notbe easily

compared

to the

poor

in

some

oftheother countries,

where

theyare

much

more

numerous.

The

Living

Arrangements

of the

Poor

The

typical extremely

poor

family tendsto

be

ratherlarge, atleast

by

the standards

of

today'srich countries.

The number

of

family

members

varies

between

about 6

and

about 12,

with a

median

value (across the differentcountries) of

between

7

and

8,

compared

to 2.5 in the

2000

U.S. census, forexample.

Unfortunatelynot all surveys reportfertilityrates,

which

would

have been

the ideal

way

to

check

how

much

of

thesehigh

numbers

comes

from

the fact that here are a lotof

children.

The

datadoes

however

giveus

some

broad

measures

oftheagestructure inthese

"*_The

extremely poorarelessnumerous, butas

we

observed above, our conclusionsare largelyindependentofthe

families (the

number

ofthose

below

13,

between

13

and

18,

above

51, etc.).

The

number

of

adults (i.e. those over 18) ranges

from

about 2.5 toabout 5, witha

median

of about 3,

which

suggests a family structure

where

it is

common

foradultsto live with people theyare not conjugally relatedto (parents, siblings,uncles, cousins, etc.). Thisis a

common

findingin the

literature

on

developingcountries,

and

hasoften

been

relatedto the fact that

when

every

penny

counts, ithelpsto spreadthefixed costs ofliving (likehousing) overa larger

number

of

people. Consistent withthis view,

we

do

see a fallinfamily size

when we

go

from

the

extremely

poor

to the entire

group

below $2

a day, ofthe order

of one

halfof

one

person or

more, though atleast

some

partofthis

comes

from

the fact thatthe extremely

poor

families

have

more

children living*&with them.

The

other fact isthat therearea large

number

ofchildreninthese families. Thisdoes

not necessarily

imply

high levelsoffertility,as families often

have

multiple adult

women.

When

we

lookatthe

number

ofchildren (ages to 18)per

woman

in thechild-bearing age

(ages21-50)

we

get

numbers between

2

and

4inboththerural

and

theurban sample,

though

the urbanratiostendto be slightlylower.

These

would

notbe especiallyhigh ifthey

were

actually fertilityrates,but they are

not—

forexample, a 51 year-old could

have

a child

who

is

now

36,but

we

onlyinclude those

who

are

below

18.

A

more

useful exercise withthis data is

to

compare

the

number

of

young

people (those

below

18) inthese families withthe

number

of

olderpeople (those

above

51).

The

ratiovaries

between

3

and

9 in the rural

sample

witha

median of

6,

and

between

2

and

11 inthe urban sample, with a

median

once again of

around

6.

The

corresponding

number

intheU.S. is around 1. This is avery

young

population.

One

reasonthe population is

young

is that thereare alot of

younger

people,

which

reflectshigh fertility ifnot

now,

atleast inthe recentpast.

A

second

reason isthat there are

actuallyvery

few

olderpeople.

The

ratio ofthe

number

olderpeople(overage 51)tothe

number

of people of "prime-age" (21-50) tendsto be

between

0.2

and

0.3 inboth the rural

and

theurban sample.

The

corresponding

number

in the U.S., forexample, isapproximately 0.6.

The

difference probably

owes

a lottothehighermortalityrates

among

those

who

areolder

and

poor

in

poor

countries,

though

itis possiblethatolderpeople are underrepresentedin our

sample because

they tendto be richer.

However

inthe lattercase,

we

might

have

expected to

find

more

oftheolderpeople

among

the

poor

(as

compared

to the extremely poor),

whereas

in

thedata thereis

no

clear pattern.

How

the

Poor

Spend

Their

Money

A

common

image

oftheextremely

poor

isthatthey

do

not get to

make

many

real

choices. Indeedthere

must

be

some

people

who

work

as hard astheycan

—

which

may

notbe

particularly hard, becausethey areunderfed

and

weak

—

and

earn barely

enough

to covertheir

basic needs

which

they

always

try to fulfill inthe leastexpensive

way.

Historically,poverty

lines in

many

countries

were

originallysettocapture exactlythis definitionof

poverty—

atthe

budget

needed

to

buy

a certain

amount

ofcalories, plus

some

other indispensable purchases

(such as housing).

A

"poor" person

was by

definition

someone

without

enough

toeat.

Yet

the averagepersonlivingatunderSl per

day

does not

seem

toputevery available

penny

into

buying

more

calories.

Among

our 13 countries, foodtypically represents

from 56

to78 percent

among

ruralhouseholds,

and

56 to

74

percentin urbanareas.

For

therural

poor

in

Mexico,

slightly lessthanhalfthebudget (49.6 percent) allocatedtopurchase food.^

Of

course they couldbe spending therest

of

the

money

on

other

commodities

which

they also greatly need.

Yet

among

the

non-food

items thatthe

poor

spend

significant

amounts

of

money

on, alcohol

and

tobacco

show

up

prominently.

The

extremely

poor

in rural areas spent4.1 percent

of

theirbudget

on

tobacco

and

alcohol in

Papua

New

Guinea, 5.0 percentin

Udaipur, India; 6.0percentin Indonesia

and

8.1 percentin

Mexico; though

in

Guatemala,

Nicaragua,

and

Peru,

no

more

than 1 percent ofthebudgetgets spent

on

these

goods

(possibly

becausethey prefer other intoxicants).

Perhaps

more

surprisingly, itisapparentthatspending

on

festivals is an importantpart

of

thebudget for

many

extremely

poor

households. InUdaipur, overthecourse ofthe previous

year,

more

than

99

percentofthe extremely

poor

householdsspent

money

on

a

wedding,

a

funeral, or areligious festival.

The

median household

spent 10 percentofitsarmual budget

on

festivals. In SouthAfrica,

90

percentofthe households living

under

$1 per

day

spent

money

on

festivals. InPakistan, Indonesia,

and Cote

d'lvoire,

more

than 50 percentdid likewise.

Only

in

some

Latin

American

countries inour

sample—

Panama,

Guatemala,

Nicaragua—

are festivals

not a notable partoftheyearlyexpenditure for asignificant fraction

of

thehouseholds.

However

in the

LSMS

surveys,unlike the

Udaipur

survey,peopleare notaskedtoaccount

separately forthe foodthatthey

bought

because there

was

afestival. Itis thereforeprobably

no

accident thatthe

Udaipur

number

is thehighest across the surveys,

and

there isreason to

suspectthat

LSMS

numbers

would

have

been

higher

had

thedata

been

directlycollected in

those surveys.

On

the otherhand,the

under

$1 per

day

households

spend

very little

on

theforms of

entertainmentthat are

common

in richcountries, suchasmovies, theater, orvideo shows. Inall

13 ofthe countries in our sample,inthe

month

precedingthe survey theaverage extremely

poor household

spentless than 1 percent

on any

ofthese forms ofentertainment.

The

comparable

number

for theUnited States is 5 percent.

We

can only speculate aboutthe roots of

this difference:

Has

the importance giventofestivals

and

otherindigenous forms

of

Thefactthattheshare spenton food,whichisoftenseenasaphysiological necessity, varies somuchacross

countriesisitselfinteresting.Onepossibilityisthat thisrepresents the factthatthepoorhavemorechoiceinsome

countries thaninothers,becauseconsumption goodsarerelativelyarecheaperrelative tofoodinsomecountries.

For example, India,alarge economywithalonghistoryof beingrelativelyclosed,has evolvedalargemenuof low-costandlower-qualityconsumer goodsthatareproducedalmostexclusivelyforthedomestic market,

examplesinclude tooth-paste,cigarettes,andclothing.Othercountriesmustbuythesegoodsathigherpriceson

theglobalmarket. Ifthemanufacturedconsumer goodsthattheaverage personbuysin Indiatendtobe

inexpensiverelative to theirtraded counterparts, theratiobetweentheconsumption exchangerateatpurchasing

powerparityandtheofficialexchangerateoughttoberelativelylowinIndia. Moregenerally: thelowerthis ratio,thelowertheshareoftheconsumptionthatshould bemadeupoffood. Inourdata,itturnsoutthatthe

correlationbetweentheratioofthepurchasingpowerparityexchangerateforconsumptiontotheofficial

exchangerate in 1993andthe shareof expenditurespentonfoodis0.33amongthese 12 countries,althoughthis sampleisof coursetoosmallto supportdefiniteconclusion.

entertainment

crowded

outmovie-going, orit is lack ofaccess to

movie

theatres

and

such, that

gives festivals theplace thatthey

occupy

in theirlives.

The

propensity to

own

a radio or atelevision, a

widespread

form

of entertainment for

American

households varies considerablyacross countries. For example,

among

rural

households livingunder$1 per day,

ownership

ofaradio is 11 percentin the

Udaipur

survey,

almost

60

percent in

Nicaragua

and

Guatemala,

and

above 70

percentin South Africa

and

Peru.

Similarly,

no one

owns

a televisionin Udaipur, butin

Guatemala

nearly a quarterof

households do,

and

inNicaragua, thepercentage is closerto a half

These two

phenomena

appeartobe related. InUdaipur,

where

the share spent

on

festivals is the highest, radio

and

television

ownership

isvery low. InPakistan, the fraction

spent

on

festivals is 3.3 percent

and

only

30

percent

have

aradio.

By

contrast, in

Nicaragua

where

57percent ofthe rural poor households,respectively,

have

a radio

and

21 percent

and

19

percent

own

atelevision, very

few

householdsreport spending anything

on

festivals.^

One

wrinkle

on

this explanationis thatthe urban

poor

who

are

much

more

likely to

own

a television

thanthe rural

poor

(60 versus 33 percent in Indonesia, 61 versus 10 percentinPeru, 38 versus

17percent in SouthAfrica),

do

not

spend

less

on

festivals than theirruralcounterparts.

While

this observationisbased

on

onlya

few

datapoints, ithintsatthe possibility of an

unmet

demand

forentertainment

among

the rural

poor—

they

would

also like to

buy

atelevision, but

perhaps the television signaldoes notreach theirneighborhoods.

Ineither case,it ishardtoescapetheconclusionthatthe

poor do

see themselvesas

having asignificant

amount

ofchoice,

and

choose notto exercise itinthedirection ofspending

more

on

food—

the typical

poor

household

in

Udaipur

couldspend

up

to30 percent

more

on

food than itactuallydoes,justbased

on what

itspends

on

alcohol, tobacco,

and

festivals.

Indeed

in

most

ofthe surveysthe share spent

on

food isaboutthe

same

forthe

poor and

the

extremely poor, suggestingthatthe extremely

poor

do

notfeel an extra

compulsion

topurchase

more

calories.

This conclusion echoes anold findinginthe literature

on

nutrition:

Even

theextremely

poor

do

not

seem

tobe as

hungry

foradditional calories as one

might

expect.

Deaton and

Subramanian

(1996), using 1983 data

from

the Indian state of Maharashtra,

found

that

even

for

the poorest, a 1 percentincrease

on

overallexpendituretranslates intoabout atwo-thirdsofa

percent increase in thetotal food expenditure ofa

poor

family.

Remarkably,

the elasticity isnot

verydifferent forthepoorest individualsinthe

sample

and

the richest(although

nobody

is particularlyrich inthis sample).

The

Deaton and

Subramanian

estimate is

one

ofthe higher estimates. Strauss

and

Thomas

(1997)

found

an elasticityof

demand

for food withrespectto

expenditure percapitaof about aquarterforthepoorestBrazilians.

Theultimatesourceofvariation heremight be therelativepricesofradiosandtelevisions. Thereisastrong

correlationbetweentheratioofthepurchasingpower exchange rateforconsumptionandtheofficialexchange

rateandtheprobabilitythatahouseholdownsa radio(thecorrelationis0.36). Thelogicisprobablyquitesimilar

to theargumentpresentedearlier inthecontextof foodconsumption(vizfootnote ?footnote 11?!1).Radiosare

tradable (theyareallmadeinChina). Sinceamongmanufactures,non-tradablegoodsare

much

lesscostlyin

somecountriesthanothers,whiletradedgoodstendtobemore similarly priced,peopleatthesame expenditure

Another

way

to

make

the

same

point is to lookat

what

ediblestheextremely

poor

are

buying.

Deaton and Subramanian

(1996)note that

among

grains, in terms ofcaloriesperrupee,

themillets (jowar

and

bajra) are clearly the bestbuy.

Yet

in theirdata,only abouttwo-thirdsof

thetotal spending

on

grains is

on

these grains,while another

20

percentis

on

rice,

which

costs

more

than twice as

much

percalorie,

and

aftirther 10 percent or so is spent

on

wheat,

which

is

a

70

percent

more

expensive

way

to getcalories. In addition, the

poor spend

almost 7 percent

oftheirtotalbudget

on

sugar,

which

is both

more

expensive than grains as asourceofcalories

and

bereftof

any

othernutritionalvalue.

The same

affinity forsugaralso

shows up

in our

Udaipur

data:

The

poor

spend

almost 10 percentoftheirfood budget

on

thecategory "sugar,

salt

and

otherprocessed foods" (thisdoes not include

cooking

oil,

which

makes

up

another 6

percentoftheexpenditures

on

food).

Even

forthe extremelypoor, for every 1 percent increase

inthefoodexpenditure, abouthalfgoes intopurchasing

more

calories,

and

halfgoesinto

purchasing

more

expensive (and

presumably

better tasting) calories.

Finally, tothe extent that

we

cantell, thetrend

seems

to

be

to

spend

even

less

money

on

food. InIndia, for

example

it

went from 70

percentin 1983 to 62 percent in 1999-2000,

and

the share ofmillet inthe food budget

dropped

tovirtuallyzero (Deaton,2005).

Not

surprisingly, the

poor

arealso

consuming

fewercalories over time

(Meenakshi and

Vishwanathan,

2003),

though

it ispossible that this

change

reflectsthe fact their

work

involves

lessphysical effort(Jha,2004).

The Ownership of

Assets

While

all the surveys

have

some

information aboutassets, thelistofassets varies.

To

obtaina relatively coherent listacross countries,

we

focus

on

radios, televisions,

and

bicycles.

The

share of people

who own

theseparticular assets varies significantly across countries.

As

we

already discussed,

ownership

ofradio

and

television varies a lot

from

countryto

country,butis

low

in severalofthose countries.

One

reason

may

be

thelack ofsignal.

The

other

may

be thatitis noteasyto

buy

a television if

you

are extremelypoor: It isan expensive

and

lumpy

transactionthat

one

hasto save

up

forif

one

is

bom

poor.

We

do

see a fairly steep

income

gradient inthe

ownership

ofradio

and

television: Inall countries,the share ofrural

households

owning

a television is substantially larger forthose

who

live

on

less than $2 a

day

thanthoseliving

on

less than $1 a day. For example, the share

owning

a television increases

from

14percent forthoseliving

on

$1 a

day

to

45

percent forthose living

on

less than$2 a

dollara

day

in

Cote

d'lvoire;

from

7 to 17 percent in SouthAfrica;

and

from

10 to 21 percent

inPeru. Thispatternhas

been

observed inothercontexts(Filmer

and

Pritchett,2001),

and

has

been

the basisforusingthe lack of durable

goods

as a

marker

forpoverty.

Our

datasuggests

that this

proxy

canbe appropriatewithina country, but itcouldeasily

be

misleadingtouse this

measure

ina cross-country comparison.

Among

productive assets,landis the

one

that

many

peopleintheruralsurveys

seem

to

own

though

there are

enormous

country-to-countryvariation.

Only

4 percent ofthose living

under

$1 a

day

own

land in

Mexico,

1.4percent in SouthAfrica;

30

percent inPakistan,

37

percentinGuatemala, 50 percent in

Nicaragua

and

Indonesia, 63 percent in

Cote

d'lvoire; 65

percentinPeru;

and

85 percent in

Panama.

In the

Udaipur

sample,

99

percent ofthe

households

below

$1 a

day

own

some

landin additionto theland

on

which

their

house

isbuilt,

when

theextremely

poor

do

own

land, the plots tend tobe quite small.

The

median

landholding

among

the poor

who

own

land is

one

hectare orless in Udaipur, Indonesia,

Guatemala and

Timor,

between

1

and

2 hectares in Peru,Tanzania, Pakistan,

and

between

2

and

3 hectaresin

Nicaragua, Coted'lvoire,

and

Panama.

Apart

from

land, extremely

poor

households inrural areas tendto

own

very little

by

way

of

durablegoods, including productiveassets:

34

percent

own

abicycle in

Cote

d'lvoire,

but less than 14 percent inUdaipur, Nicaragua,

Panama,

Papua

New

Guinea, Peru,

and

East

Timor. InUdaipur,

where

we

have

detailedasset data,

we

findthat

most

extremely

poor

households

have

a

bed

ora cotbutonlyabout 10 percent

have

a chair or a stool

and

5 percent

have

atable.

About

half

have

aclockor awatch. Less than 1 percent hasan electric fan,a

sewing

machine,abullockcart, amotorized cycleof

any

kind, oratractor.

No

one

has a

phone.

As

we

willseebelow,this isnotbecause

most

ofthesehouseholdsare

employees and

therefore

have

no

usefor such assets:

On

the contrary,

many

ofthe extremely

poor

households

operate their

own

businesses,but

do

sowith almost

no

productiveassets.

The

Pursuit

of

Health

and

Well-being

Should

we

woiry

aboutthefact that the

poor

are

buying

less food than they could?

According

to

Deaton and

Subramanian

(1996),the poorestpeople

—

the ones in the

bottom

decileinterms of percapitaexpenditure

—

consume

on

averageslightly lessthan

1400

calories a day. Thisis about halfof

what

theIndian

government

recommends

fora

man

with

moderate

activity, ora

woman

with

heavy

physical activity.^

The

shortfall

seems enormous,

though

one

could question

whether

theinitial

recommendation

was

appropriate.

However,

the

Udaipur

data,

which

has other healthindicators, suggeststhathealth isdefinitely reason forconcern.

Among

the extremelypoor inUdaipur, only 57 percentreport thatthe

members

oftheir

household

had

enough

to eat throughouttheyear.

Among

the

poor

adults inUdaipur, the

average

"body mass

index" (thatis, weight inkilograms divided

by

thesquare oftheheight in

meters) is 17.8. Sixty-fivepercentofadult

men

and

40

percentofadult

women

have

a

body

mass

index

below

18.5, the standardcutoffforbeing

underweight

(WHO

expert consultation,

2004).

Moreover,

55 percent ofthe

poor

adults in

Udaipur

areanemic,

which

means

they

have

an insufficient

number

ofred

blood

cells.

The

poorare frequently sick orweak. InUdaipur, 72

percentreportat leastone

symptom

ofdisease

and

46

percent report an illness

which

has left

them

bedriddenornecessitated a visitto the doctoroverthe lastmonth. Forty-threepercentof

the adults

and 34

percent ofthe adults

aged

under 50reporthaving difficultywith carrying out

atleast

one

oftheir"activities ofdaily hving", such as

working

inthe field,walking, or

drawing

water

from

awell. Diarrhea isextremely frequent

among

children.

About

one-seventh ofthe

poor have

vision problems,

which

may

alsobe

due

tonutritional deficits (caused

by

either

poor

nutrition, or thediseases thatafflictthem, or acombination

of

the two).

Detailed information

on

health is not availablein allthe surveys

we

have, but

most

reporthealth episodes thatleft ahousehold

member

bedridden fora

day

ormore, or required

them

to see a doctor.

While

this datais less thanperfect, giventhatthepoor

may

be

lessprone

'_{See htlp:''.'ww'.v.t'ao.org/dociimeni:s/show cdr.asiy^irl rile~''DOCREP/xfl}

to recall

and

reportsuch sicknesses than therich, the general pattern is ofa

remarkably

high

level ofmorbidity.

Among

therural

poor

living

under

$1 a

day

inPeru, SouthAfrica, East

Timor,

Panama, and

Tanzania,

between

11

and

15 percent of households report havinga

member

eitherbeing bedridden for at least a

day

orrequiringa doctor.

The

number

is

between

21

and 28

percentin Pakistan, Indonesia,

and

Coted'lvoire,

and

between

35

and

46

percent in

Nicaragua, Udaipur,

and Mexico.

The

poor

generally

do

not

complain

abouttheirhealth

—

butthen theyalso

do

not

complain

aboutlifein general either.

While

the

poor

certainly/ee/ poor, their levels ofself-reported

happinessor self-reported healthlevels are notparticularly

low

(Banerjee, Duflo,

and

Deaton,

2004).

On

theotherhand, the

poor

do

reportthatthey are

under

a greatdeal ofstress, both

financial

and

psychological. InUdaipur, about 12 percent saythat therehas

been

aperiodof

one

month

or

more

inthe lastyearin

which

they

were

so "worried, tense, oranxious"that it

interferedwith

normal

activities like sleeping,working,

and

eating.

Case

and

Deaton

(2005)

compare

data

from

South Africatothedata

from

Udaipur

and

data

from

theUnited States.

They

findthatthe answers of

poor

South Africans

and poor

Indians about stress lookvery

similar, whilereported levelsofstress arevery

much

lowerin theUnited States.

The

most

frequentlycitedreason forsuch tensions ishealth

problems

(cited

by 29

percent of

respondents), withlackof food

and

death

coming

next(13 percenteach).

Over

thelastyear, in

45 percent ofthe extremely

poor

households in

Udiapur

(and 35 percent ofthoseliving under

$2 a day)adults

had

to cutthesize oftheir

meal

at

some

pointduringtheyear

and

in 12

percent

of

them, children

had

tocut the sizeoftheirmeals. In the extremely

poor

households

under

$1 perday,

37

percent report that,at

some

pointin thepast year, the adults inthe

household

went

withouta

meal

for an entireday. Cutting

meals

is also strongly correlatedwith unhappiness.

Carrying

enough

savingsto

make

sure thattheynever

have

tocutmeals,shouldnotbe

too hard forthesehouseholds since,as noted above, they

have

substantial slack in theirbudgets

and

cutting

meals

isnot that

common.

It

would

also

make

iteasierfor

them

todealwith

healthcare emergencies.

As

such,saving abit

more would seem

likea relatively inexpensive

way

toreducestress.

InvestmentinEducation

The

extremely

poor

spend

very little

on

education.

The

expenditure

on

education

generallyhovers

around

2percent of

household

budgets: higherinPakistan(3 percent),

Indonesia(6 percent)

and Cote

d'lvoire (6percent), but

much

lowerin

Guatemala

(0.

1

percent),

and

SouthAfrica (0.8percent).

The

fractiondoes notreally

change

very

much when

we

go from

the

poor

to theextremelypoor, or

from

rural areastourbanareas,

though

ina

few

countrieslike Pakistan,urbanfamilies

spend

substantially

more

thanrural families. This

low

level of expenditure

on

educationis notbecause the childrenareoutofschool. In 12 ofthe 13 countriesinour sample, withthe exception of

Cote

d'lvoire, atleast50 percent

of

both

boys

and

girls

aged

7to 12 in extremely

poor

households are in school. Inabout half the countries,

theproportion enrolled is greaterthan 75 percent

among

girls,

and

more

than 80 percent

among

boys.

The

reason spending is

low

is thatchildrenin

poor

households typicallyattend public

more

on

education, itis typically because

government

schools

have

fees (as inIndonesia

and

Cote

d'lvoire).

What

they aredoing

might

therefore beperfectly sensible, given thatthis is the

reason

why

public educationexists.

The

one

concern

comes

from

the

mounting

evidence,

reported below,thatpublic schools are often dysfunctional: Thiscould

be

thereason

why

even

very poorparents in Pakistanare pullingtheirchildren out ofpublic schools

and

spending

money

tosend

them

to private schools.

How

the

Poor

Earn

Their

Money

Walking

down

the

main

street ofthe biggest

slum

in the

medium

sized Southern Indian

city of

Guntur

atninein themorning, thefirstthing

one

notices are the eateries: In front

of

every sixth

house

that directly faced the road,

by

ourcount, there

was

a

woman

sittingbehinda

littlekerosene stovewith a

round

cast-iron griddleroasting on it.

Every few

minutes

someone

would

walk up

toher

and

ordera dosa, the riceand beans pancakes thatalmost everyone eats forbreakfast in SouthIndia.

She

would

throw

a cupful ofthe batter

on

the griddle, swirl it

around

to coveralmosttheentiresurface

and

drizzle

some

oil

around

theedges.

A

minute

or

two

later, she

would

slide an off-white

pock-marked pancake

off the griddle,

douse

it in

some

sauce, folditina

newspaper

ora

banana

leaf

and

hand

itto her client, inreturn for arupee

(roughly 15 cents, atPPP).

When

we

walked back

down

that

same

street an

hour

later, the

women

were

gone.

We

found

one insideherhouse, fillingher daughter's platewith lunch thatshe

had

cooked

while

making

the dosas.

She

toldus that laterthatday, she

was

goingout to

vend

hersaris, the long

piece ofdecorative cloth thatIndian

women

drape

around

themselves.

She

getsplainnylon

saris

from

the

shop

and

stitchesbeads and small shiny pieces

on

them,

and once

a

week,

she takes

them from house

tohouse,

hoping

that

women

would

buy

them

to

wear on

special occasions.

And

they

do

buy

them, she said confidently. All the other

dosa

women

we

met

that

day had

a similarstory:

once

they are

done

frying dosas, they

do something

else.

Some

collect trash; others

make

picklesto sell; others

work

as laborers.

Entrepreneurship

and

Multiple

Occupations

Among

the

Poor

Allovertheworld, a substantialfraction ofthe

poor

actas entrepreneursin thesense of

raisingthe capital, carryingout the investment, and beingthe fiill residualclaimants forthe

earnings. InPeru,

69

percentofthehouseholds

who

live

under

$2 a

day

inurbanareas operate

a non-agricultural business. InIndonesia, Pakistan,

and

Nicaragua, the

numbers

are

between 47

and

52percent.

A

large fraction ofthe rural

poor

operate afarm (exceptin

Mexico

and

South

Africa,

between

25 percent and 98 percentofthe households

who

earn less than adollara

day

reportbeingself

employed

in agriculture).^

Moreover,

many

ofthe rural

poor

(from 7 percent

in

Udaipur up

to 36 percentin

Panama)

alsooperate anonagricultural business.

The lowlevelofagricultureamongtheextremely poorinSouthAfricaiseasily explained. Theblackpopulation,

whichcontainsalmostalloftheextremelypoorpeople,werehistoricallyunderthe apartheidregimenotallowed

toown landoutside the"homelands,"andmostofthe landinthehomelandswasnotworthcultivating.

Many

poor

households

have

multipleoccupations. Like the

dosa

women

of Guntur, 21

percentofthehouseholds livingunder

$2

a

day

in

Hyderabad

who

have

a business actually

have

more

than one, while another 13 percent

have

bothabusiness

and

a laborer's job.This

multiplicity of occupationsinurbanareasis

found

in

many

other countries aswell, though not

everywhere.

Among

thoseearning lessthan $2 aday,

47

percent oftheurban householdsin

Cote

d'lvoire

and

Indonesia get their

income from

more

than

one

source;

36

percentin

Pakistan; 20.5 percentin Peru;

and

24

percentin

Mexico.

However,

inurban South Africa

and

Panama,

almost

no one

has

more

than

one

occupation

and

only 9 percent

do

soin

Nicaragua

and

Timor

Leste.^ '

Thispattern

of

multiple occupations is strongerin rural areas. In

Udaipur

district, as

we

discussedearlier, almost

everybody

owns some

land

and

almost

everybody

doesatleast

some

agriculture.

Yet

only 19 percentofthehouseholdsdescribe self-employmentin agriculture as

the

main

sourceoftheir income.

Working

on

someone

else's landis

even

rarer, with only 1

percentreportingthis astheir

main

sourceof income. Inotherwords, the

poor

cultivate the

landthey

own, no

less

and

usually,

no

more. Yet, agriculture isnot the mainstay of

most of

these households.

The

most

common

occupation forthe

poor

in

Udaipur

is

working

as a daily

laborer: 98 percentof households living

under

$1 per

day

inruralareas reportdoingthis

and 74

percentclaim itis their

main

source

of

earnings.

Thispatternis confirmed

by

data

from

asmallersurvey of

27

villages

randomly

sampled from

eightdistrictsin

West

Bengal

(Banerjee, 2006). Inthis survey,

even

households

that claim to

be

the operators for a plot ofland,

spend

only

40

percent oftheirtime in

agricultural activities

on

their

own

land.

The

fraction isnot verydifferent for

men

and

women

—

women

do

less direct agricultural

work

but

more

animal rearing,along with

growing

fruits

and

vegetables. Theirotheractivities include teaching,

sewing

and

embroidery,

unpaid

household

work,

and

gathering fuel. Strikingly, almost 10percent

of

thetime

of

the average

household

is spent

on

gathering fuel, eitherforuse at

home

orfor sale.

The

median

familyin

this survey has three

working

members

and

seven occupations.

In

most

oftheLiving Standard

Measurement

Surveys,households arenotaskedtheir

main

sourceofearnings,butthe patternofdiversification

among

ruralhouseholds is apparent

nevertheless. In

Guatemala,

65 percent oftherural extremely

poor

say theyget

some

income

from

self-employmentinagriculture, 86 percent

work

as laborers outsideagriculture,

and

24

percentare self-employedoutside agriculture. In Indonesia, 34 percent

of

the rural extremely

poor

households

work

as laborers outsideofagriculture,

and

37 percent earn

income from

self

employment

outsideofagriculture. In Pakistan, 51 percentoftheruralextremely

poor

earn

income from

laboroutside ofagriculture,

and

35 percent

from

abusiness outside ofagriculture.

Overall, the fractionofthe ruralextremely

poor

households

who

reportthatthey conduct

more

than

one

type ofactivity toearna living is 50 percent inIndonesia, 72 percent in

Cote

d'lvoire,

84 percent inGuatemala,

and

94

percent in Udaipur. It issmaller,butnot negligible

—between

10

and

20

percent

—

in Nicaragua,

Panama,

Timor

Teste,

and Mexico.

Once

again, an

exception to thisgeneral pattern is SouthAfrica,

where

less than 1 percent oftherural pooror

extremely

poor

reportmultiple occupations.

This

may

howeverbeadataproblem; AnthropologistsdoclaimthattheyobservemultipleoccupationsinSouth African households(FrancieLund,verbalcommunicationtoAngusDeaton).

Temporaiy

Migration to

Work

Where

do

ruralhouseholds,

which

areoften a

walk

ofa half-hour or

more

from

the nearest road, findallthisnon-agricultural

work?

The

answer

turns outtobe theobvious one:

they migrate.

Temporary

migration israrely

documented

insurveys, butinthe

Udaipur

survey,

which

had

questionsaboutthisactivity,

60

percent ofthe pooresthouseholdsreport that

someone

from

theirfamily

had

lived outside forapartoftheyearin orderto obtainwork. For 58 percent ofthe families, the

head

ofthehousehold

had

migrated.

The

migrants typicallycomplete

multipletrips in a year.

However,

people

do

not leaveforverylong:

The

median

lengthofa

completed

migration is

one

month,

and

only 10 percentof migration episodes exceedthree

months.

Nor

do

most

ofthemigrants travelvery far: 28 percentstay inthe districtof Udaipur,

and

only

42

percent leave the stateofRajasthan.

In contrast,

permanent

migrationfor

work

reasons israre, although

many

women

move

when

they get married.

Even

if

we

lookathouseholds currently livinginurbanareas,

where

theinflow

of immigrants

is

presumably

higherthanin rural areas,the share of extremely

poor

households

who

had one

member

that

was

bom

elsewhere and

had

migrated for

work

reasons

was

just

4

percent in Pakistan, 6 percentin

Cote

d'lvoire, 6 percent inNicaragua,

and

almost

10 percent in Peru.

The

1991

Census

ofIndia reports that only 14.7percent

of

the

male

population lives

somewhere

otherthan

where

they

were

bom.

Indonesiais theonly country in

ourdata

where

theproportionishigher: 41 percentofthe urban households

came

from

elsewhere. Indonesia isalsothe only countiyin this

sample where

migration

was

explicitly

subsidized.

Lack

_of

Specialization

A

pattern

seems

to emerge.

Poor

families

do

seekout

economic

opportunities, but they

tendnotto get too specialized.

They

do

some

agriculture,but nottothepoint

where

it

would

afford

them

afull living (for

example by

buying/renting/sharecropping

more

land).

They

also

work

outside, butonly inshortbursts—they

do

not

move

pemianently

to theirplace of

occupation.

This lack ofspecializationhas its costs.

Many

ofthese

poor

householdsreceive

most

of

their

eamings from

theseoutside jobs, despiteonlybeing

away

for 18

weeks

oftheyear

on

average(in the caseof Udaipur).

As

short-term migrants,they

have

little chance oflearning

theirjobsbetter orending

up

in ajobthat suits their specific talents orbeing promoted.

Even

thenon-agriculturalbusinessesthatthe

poor

operatetypically requirerelatively

little specificskills.

For

example, thebusinesses in

Hyerabad

include 11 percenttailors, 8

percentfruit

and

vegetable sellers, 17 percent small general stores, 6.6percent telephone

booths,4.3 percent auto owners,

and

6.3 percentmilk sellers.

Except

for tailoring,

none

of

thesejobsrequire thehigh levelsofspecialized

competence

that take alongtimeto acquire,

and

thereforeareassociatedwith higher eamings. In severalways, the

poor

aretrading off opportunitiesto

have

higherincomes.

The

Problem

of Small

Scale

The

businesses ofthe

poor

typicallyoperate ata

remarkably

small scale.

As

we

saw,

the average landholding forthose

who own

landisusually quite tiny,

and

renting land is

infrequent. Furthermore,

most

ofthis landisnotirrigated

and

cannot

be used

allyear round.

The

scale

of

non-agriculturalbusinessesrun

by

the pooralsotendsto be pretty small. In the 13 countries inour sample, the

median

business operated

by

peopleliving

under

$2 dollars

a

day

either in a rural oran urban location has

no

paidstaff,

and

the average

number

of paid

employees

range

between

0.14 inrural

Nicaragua

to 0.53 in urban

Panama.

Businessesare

operated

on

average

by

1.38 (inPeru) to 2.59 (in

Cote

d'lvoire) people

—

most

of

them

being

family

members.

Most

ofthesebusinesses

have

very

few

assets aswell. In

Hyderabad,

only

20

percent

of

thebusinesses operate outofaseparateroom. InPakistan, about

40

percentofthe

businesses ofthoselivingunder $1 or

$2

dollara

day have

a vehicle, butonly 4 percent

have

a

motorizedvehicle

and

none have any

machinery. In other countries,

even

non-motorized

vehicles arerare. In

Hyderabad,

where

we

have

an exhaustive listof business assets, the

most

common

assets aretables, scales,

and

pushcarts.

Many

of

thesebusinesses areprobably operating attoo small a scalefor efficiency.

The

women

making

dosas

spend

alotof time waiting: having fewer

dosa-makers

who

do

less

waiting

would

be

more

efficient. In fact, it

might

make

sense in efficiency terms forthe

dosa-makers

to

work

in pairs:

One

to

make

thedosas

and one

to

wrap

them

and

make

change.

Markets

and

the

Economic Environment

of the

Poor

The

economic

choicesofthe

poor

are constrained

by

their

market

environment.

The

amount

theysave, forexample, should vary withtheiraccesstoa safeplacetoputtheir

savings. Otherconstraints result

from

a lackof shared infrastructure.

When

the goverrmient

builds awaterline to

your

neighborhood, for example,

you no

longer

need your

own

well.

This section focuses

on

markets.

The

next takes

up

the issueofinfrastructure.

The

Market

for Credit

and

the

Poor

The

datafi-om our 13 countries suggests thatthefractionofruralextremely

poor

households having an outstanding debtvaries

between

countries,

from

1 1 percentin rural East

Timor

to93 percent in Pakistan.

But

what

isconsistent across the surveys isthat very

few of

the

poor

households getloans

from

a formal lending source.

In the

Udaipur

sample, abouttwo-thirdsofthe

poor

had

aloan at thetimeofthe interview.

Of

these,23 percent are

from

arelative, 18percent

from

a

money

lender,

37

percent

from

a shopkeeper,

and

only 6.4percent

from

aformal source like a

commercial bank

or a

cooperative. Lest

one

suspectthatthe

low

shareof

bank

creditis

due

tothelackofphysical access tobanks, a similar patternoccurs in urban

Hyderabad,

where

householdsliving

below

$2 a

day

primarily

borrow from moneylenders

(52 percent), friends orneighbors (24percent),

and

family

members

(13 percent),

and

only 5 percentofthe loans are with

commercial

banks.

The

one countiy

where

a substantial shareoftheloans tothe

poor

are formal innature is Indonesia,

where

thanks to efforts

by

the

Bank

Rakyat

Indonesia, one-thirdofthe rural

poor

households

borrow from

a bank. Inall theother countries, relatives,shopkeepers, andother

villagers foiTn,

by

far,the

overwhelming

sourceof

borrowed

funds.

Credit

from

informal sources tends tobe expensive. In the

Udaipur

survey,

where

we

have

data

on

interestrates not available inothersurveys, those living

on

less than $1 a

day pay

on

average 3.84 percent per

month

for the credittheyreceive

from

informal sources.

Those

who

consume

between

$1 and $2 dollar a

day

per capita

pay

a little less: 3.13percent per

month. Thisis in partbecausetheyrely less

on

informal sourcesofcredit

and

more

on

the

formal sources than theextremely poor,

and

the formal sources are cheaper;

and

inpartit

reflectsthe fact thatinformal interest rates arelowerforthosewith

more

land

—

the interest rate

from

informal sources drops

by

0.40 percent per

month

foreach additionalhectare ofland

owned.

The

monthly

interest rate

we

see inthe

Hyderabad sample

is

even

higher: 3.94percent per

month

forthoseliving

under

$2 dollars a day. Thisreflects the fact that

few

oftheseurban

poor

households

have any

landthattheycan use as collateral.

These

highinterestrates

seem

to occurnot directlybecause of highratesofdefault,but asaresultofthehigh costsofcontract enforcement.

While

delay in

repayment

of informal

loans isfrequent, defauhis actuallyrare (Banerjee

and

Duflo, 2005). For example,a

"Summary

Report

on

Informal Credit

Markets

inIndia" reports thatacross four case studiesof

money-lenders

inrural India,defaultexplainsonly 23 percent ofthe interest ratecharged

(Dasgupta, 1989).

A

well

known

studyofrural

money-lenders

in Pakistan

by

Aleem

(1990),

findthatthe

median

rate ofdefault across

money

lenders isjust2 percent.

These

low

defaultratesare

however

anything butautomatic: Contractenforcement in

developingcountries isoftendifficult,

and

inparticular,it isnoteasytoget courts topunish

recalcitrantborrowers.

As

aresult, lenders often

spend

importantresources

making

sure that their loans getrepaid,

which

is

what

drives

up

the interestrates.

The

factthat lending

depends

so

much

on

effective screening

and

monitoringalso

means

that lendingto the

poor

is especially

difficult:

The

problem, atleast in part, is thatthe

poor

have

very little

by

way

ofcollateral to

secure the loan

and

therefore lendershesitate totrust

them

with a lot of

money. Given

thatthe loan

amount

will in

any

case be small, it isnot always clearthat theprofits

from

thetransaction

will

be

large

enough

to coverthe costofmonitoring/screening.

As

aresult, alotoflenders are

reluctant to lend to thepoor.

Moreover

and

forthe

same

reason, informal lenders located close

totheborrowers

may

be the only ones

who

are willingto lendto the

poor

—

since

monitoring/screening isrelatively

cheap

forthem.

The

trouble is thatthese infonnal lenders

have

to

pay

more

for their deposits than the

more

formal institutions, sincethey are less

capitalized

and

less regulated

and do

not

have any government

guarantees. Thishigher cost of

deposits getspassed

on

to poorer borrowers.

The

gap

can

be

considerable

—

inthe study

by

Aleem,

the cost ofcapital forthe

money-lenders

was

32.5 percentinayear

when

banks

were

only

paying

10 percent for their deposits.

The

Market

for Savings

and

the

Poor

A

main

challengeforthe

poor

who

try to saveisto find safety

and

a reasonablereturn.

Stashing cash inside

your

pilloworelsewhere at

home

is neither safenorparticularly

well-protected

from

inflation. In addition,recentresearch

by

Ashraf, Karlan,

and

Yin

(2005) inthe

Philippines

and

Duflo,

Kremer, and Robinson

in

Kenya

(2006) suggeststhatthe poor,

Hke

everyone else,

have

problems

resistingthe temptationof spending

money

thatthey

have

at

hand.

Few

poor

households

have

savings accounts.

Except

in

Cote

d'lvoire,

where 79

percent

ofthe extremely

poor

households under$1 a

day have

a savings account, thefractionis

below

14 percent inthe other countriesin ourdata. In

Panama

and

Peru, lessthan 1 percent

of

such

households

have

a savings account. In

most

countries, the share of households withasaving

account issimilar in rural

and urban

areas,

and

similarforthose

under

$2 a

day and

those

under

$1 a day.

Here

India appearsto be an exception, since only6percent

of

theextremely

poor

households in rural

Udaipur have

asavings account, while25 percent of

them

do

inthe city

of

Hyderabad.

A

lackofaccess to reliablesavings accountsappears

common

to the

poor

everywhere,

as

documented

in StuartRutherford's (2000) fascinating book,

The

Poor

and

their

Monev

.

Rutherford describes the

many

strategies the

poor

use to deal withthisproblem:

They

form

savings "clubs,"

where

eachperson

makes

surethattheothers

do

theirsavings. Self-help

Groups (SHGs),

popularinpartsofIndia,

and

presentinIndonesiaas well, aresavingclubs

which

alsogive loans to its

members

outofthe

accumulated

savings (theyarealso

some

times

linked to

bank which

offer

them

banks). In Africa, Rotating Savings

and

Credit Associations

(ROSCAs)

allowpeopleto lendtheir savingsto each other

on

a rotatingbasis. Others

pay

deposit collectorsto collect theirdeposits

and

put

them

in abank.

Yet

othersdeposit their

savingswith local money-lenders, with creditunions (whichare essentially larger

and

much

more

formally organized Self-Help

Groups)

orinan accountatthe localpost office.

And

the

reason

why

many

ofthe

poor

respondso well to micro-credit, isnot necessarilybecause it

offers

them

credit, butbecause

once

you

take a loan

and

buy

something

withit,

you have

a disciplined

way

to save

—

namely,

by

paying

down

theloan.

However

even

participationin semi-formal savings institutions(such as Self-help

Groups,

ROSCAs

and

Microfmance

Institutions), isnot nearly as

common

among

the

poor

as

one might have

expected.

Even

inIndia, despite the highvisibility especially of

SHGs,

less

than 10 percent ofthe

poor

in our

Udaipur and

Hyderabad

surveys are part of an

SHG

ora

ROSCA.

The

majorityofthehouseholds

who

have

any

savings simply

have

itatthebank.

The

Market

for Insurance

and

the

Poor

The

poor

have

verylittleaccessto formal insurance. In

many

surveys, questions about

insuranceare not

even

asked. In the six ofthe sevencountries

where

thereis data

on

this, less

than 6 percentoftheextremely

poor

are covered

by

health insurance of

any

kind.

The

exceptionis

Mexico

where

abouthalfof

them have

coverage.

The

numbers

arenot

much

higherinurban areas. Lifeinsurance is abit

more

common

inIndia (andis, essentially, a

form

of

savings).

Four

percentoftheextremely

poor

in

Udaipur and

10 percentin

Hyderabad have

life insurance.

Surprisingly,weather insuranceisalsoessentiallyabsenteverywheretheworld over(Morduch,2005),

althoughitwould seemstraightforwardtoprovideinsurance against obser%'edweatherpatterns.

Inprinciple, informal insurance canalsobe

had

through socialnetworks. For example,

Udry

(1990)

shows

that

poor

villagers inNigeria live a lifethatis shaped

by

a dense

network

of

loan exchange:

Over

the course ofone year, 75 percentofthe households had

made

loans,

65

percent had

borrowed money,

and 50percent

had been

both borrowers

and

lenders.

Almost

all

of

these loanstook place

between

neighbors

and

relatives.

Both

the

repayment

schedule

and

the

amount

repaid

were

affected

by

boththe lender's andthe borrower's current

economic

conditions,underlining the role ofthese informal loans inprovidinginsurance.

Rosenzweig

and

Munshi

(2005), arguethat the

same

process

happens

inIndiathroughthejatior sub-caste

networks.

Yet

these infonnal netv^'orks

have

onlya limitedability toprotectthe households

againstrisk.

The

consumption

of

poor

householdsis strongly affected

by

variations intheir

incomes, as has

been

shown

by Deaton

(1997) in

Cote

d'lvoire,

Rosenzweig and

Munshi

(2005) in India,

Fafchamps and

Lund

(2003) inthe Philippines,

and

Townsend

(1995) in

Thailand.

Poor

households also bear

most

health-carerisks (bothexpenditures

and

foregone

earnings) directly. For example, Gertler

and

Gruber

(2002) findthat inIndonesiaa declinein

the health index ofthe

head

ofthe householdis associated witha declineinnon-medical

expenditures. In Udaipur, large expenditures

on

health (S70

and

higher, at

PPP)

arecovered

by

borrowing

ordissa\ing.

Only

2percent ofthese expenses

were

paidfor

by someone

else,

and

none

came

from

the self-help groups.

Twenty-four

percentofthehouseholds in

Hyderabad had

to

borrow

to

pay

forhealth expensesin the lastyear.

When

the

poor

come

under

economic

stress, their

form

of "insurance"is often eating

less or taking theirchildren out ofschool. For example, Jacoby

and

Skoufias (1997) find that

poor

children leave school in

bad

years.

Rose

(1999) finds thatthe

gap

inmortality' ofgirls

relative to

boys

is

much

largerin droughtyears (but onlyforthe landless households,w^ho are

notable to sellland or

borrow

to weatherthecrisis).

They

alsoare lesslikely to getmedical

treatment for

themsehes

ortheirchildren: Inthe

Udaipur

sample, those

who

were

sickinthe

last

months and

didnotseektreatment

(more

than half) cite lackof

money

more

oftenthan

any

otherreason(34 percent

of

thetimes).

The

lackof insurancealsoleads the

poor

to under-invest

inrisky, butprofitable,technologies, such as

new

seeds

(Morduch,

1991).

The

weaknesses of

informal insurance should notreallybe a surprise. Ultimately,

informal insurancerelies

on

the willingness ofthe fortunateto take care ofthose less favored,

which

limits the

amount

ofinsurance provided.

Moreover,

informal social

networks

areoften

notwell-diversified.

They

tendto spreadrisk over households

who

li\'e nearby

and have

similar

incomes and

occupations, as

Gubert and Fafchamps

(2006)

show

forthe Philippines.

Unfortunately

govermnents

inthese countries are notveryeffective atproviding

insurance either. For example, in

most

countries, the

government

is

supposed

to providefree

health careto thepoor.Yet, health care israrelyIree.

Govemm.ent

health-careproviders often

illegally chargefor their

own

services

and

formedicines inreality. Also, as

we

will see,the

quality'ofcare in thepublic systemis so

low

thatthe

poor

often

end

up

visitingprivate

providers.

A

number

of

governments

provide a

form

of

income

insurance through safety-net"food

for

work"

programs.

Under

theseprograms,

everyone

is entitledto a certain

number

of days of