Romesh Vaitilingam interviews Jonathan Morduch for Vox

August 2009

Transcription of an VoxEU audio interview [http://www.voxeu.org/index.php?q=node/4419]

Romesh Vaitilingam: Welcome to VoxTalks, a series of audio interviews with leading economists from around the world. My name is Romesh Vaitilingam, and today's interview is with Jonathan Morduch, who is a Professor of Public Policy and Economics at New York University.

We're meeting in August 2009, on a sweltering hot day in New York City, and we're going to talk about Jonathan's book co-authored with Daryl Collins, Stuart Rutherford and Orlando Ruthven. And the book is called Portfolios of the Poor: How the World's Poor Live on $2 a Day.

Jonathan, perhaps we can start off talking about the stories at the heart of the book, because it very much feels that that is what drives the whole thing, talking about the lives of poor people in Bangladesh and India and South Africa, and how they go about managing their money. Give us an introduction to how you went about gathering that material, that information, and why you did it.

Jonathan Morduch: The book came about through conversations with Stuart Rutherford and David Hume at Manchester about how to really capture what it is that poor households do to get by, to get through life. It was sense that we spend a lot of money and energy collecting large datasets, which are extremely useful, but which usually capture just a snapshot of a poor household's life and allow us to count the number of poor people in the world.

And we come up with these staggeringly large numbers. Two and a half billion people around the world living on under two dollars a day or about a billion living on under one dollar a day. But as economists, sociologists, political scientists, there's a lot of concern about doing something about the poor people of the world. But when it comes to it, there's very little sense of what poor people really are doing in their lives and how one might help them do what they're trying to do better.

And so what the studies really are about are just living with poor households, learning from them, visiting them every two weeks. There were two types of sites in each country, one rural, one urban, and collecting what came to be called financial diaries. It's a bit of misnomer, because no one was actually collecting or filling out diaries. Instead, the enumerators and survey collectors came along and filled in the diary information.

But the word diary does capture a kind of intimacy. The information that was being collected was on everything the households were doing, their expenses, their financial transactions. And not just things which were obvious, like a transaction with a bank, because many of the households we came to know had nothing to do with banks, but instead lending your best friend a few dollars or being a bit late on paying your rent or borrowing a little bit from the shopkeeper.

We really wanted a rich sense of households' financial lives, something that was completely absent from most of the surveys that we've been using and most of the economic profession has been using for years.

Romesh: So this does seem to feel like a different approach to economics. We have very much in the profession focused on large datasets and to go and do this kind of almost qualitative work, even with fairly substantial groups of people, is unusual. And you're saying it's only through this kind of mechanism that you can get into these peoples' financial lives and get a real understanding of them.

Jonathan: I think there are lots of different ways of kind of opening up one's mind and sort of going back to basics, and this is one particular way. I think one of the ways that I think about the power of this approach is to think of it as part of a theory generation process, rather than a theory testing process. If you want to test a theory, you really need big datasets, statistical significance, strong statistical power.

But if you really want to think about how pieces connect, how puzzles get solved by households, how they make choices, it seems like a very logical thing to do, but something we don't do enough of is just spend a lot of time with people, talking to them, asking them what they're thinking, but more importantly, really seeing what they do on a day-by-day basis.

Romesh: So one of the ideas you use as a fundamental of the book is this idea that poor people face something which you call the triple whammy. Can you explain what that idea is exactly?

Jonathan: The triple whammy is a really simple concept. Conversations about global poverty focus on the first part of what we call the triple whammy which is low incomes. There are two-and-a-half billion people living on under a dollar a day. But what we saw in peoples' lives, day-to-day and week-to-week was that that low average was only one part of the challenge. And the second leg was ups and downs, a lot of vulnerability.

So incomes would go up and down, and expenses would often kind of pop out unexpectedly, and households had to deal with them. Health crises are really a good example. And so the first part is low incomes, the second part is vulnerability, and the third is a lack of financial tools. So a different kind of poverty, maybe an institutional poverty.

And that lack of financial tools is really a key for us, because the financial tools are the tools that we in rich countries use to deal with ups and downs and also to invest. If you don't have the tools it's very hard to deal with the other two problems. But also the tools are potentially from a policy perspective one solution that can help these households do much better.

So even if you can't create new jobs and raise incomes immediately, one can think about creating better financial tools that allow households to do more with what they have, to address their vulnerability and to do better that way.

Romesh: Jonathan, what do you see as the most surprising findings that are coming out of this research?

Jonathan: I think the most fundamental, the biggest surprise, was how active peoples' financial lives are. Before we started this research, people would say, "How are you studying the financial lives of the poor? This is going to be the thinnest book ever." But in fact what we found was the opposite, that when you start to pay attention to peoples' transactions, there were a lot of small transactions which were happening constantly.

Give you an example. Stuart Rutherford met a household run by a man name Hamad and his wife Kadija. Hamad's a reserve rickshaw driver, so he's the backup driver. His wife takes in a little bit of sewing. They have a son, and she looks after the son. They live in one of the poorest slums in Dhaka, the capital of one of the poorest countries on the planet.

They are very actively maintaining a financial life though, despite the fact that their income is roughly two dollars a day on average. But that's just an average. It goes up and down, because sometimes Hamad doesn't get any jobs and you might get a lot on one day and very little for a week. So between them they have a microfinance savings account, microfinance loan. They actually had a life insurance product for a while.

So they're engaged in the formal sector or semiformal sector to some degree. But in addition to that, they're lending a little bit of money out to neighbors. They are asking neighbors to hold money for them, using a device we call a money guard. They're borrowing from a shopkeeper. They've got some rent arrears. They're sending remittances back to their village.

We saw 13 different activities that Hammed [sp] and Kotija [sp] were juggling. This really poor household, semi-literate, they're not writing any of this down, and we asked, "How do you keep track of all this? This is pretty complicated." You know, most of us just have an ATM and a single bank account. And they said, "This is really what keeps us up at night. This is what we're very focused on, and we keep it all in our heads." And that was a very common response as the researchers talked to the households.

Romesh: So is there in some way we might say that these poor people in the bottom billion are in some way more sophisticated in their financial understanding than perhaps many people in the West who don't need to worry so much about their day-to-day finances and they don't need to carry in their heads all their different insurance policies and their savings and their pension plans?

Jonathan: I wouldn't say that they're more sophisticated, but I would say that we met households who are as sophisticated as much richer households because they have to. Because when you mess up, when you fall down, the consequences can be very dire. And that really sharpens focus.

But we also saw lots of households that were making mistakes and doing things which were very costly and needless. And I think, like everybody, there are people who are disciplined and there are people who are not disciplined. And it didn't seem very correlated to their wealth.

Romesh: Perhaps we can talk about a couple of things that surprised me and I think will probably surprise a lot of readers not particularly acquainted with the developing world and the lives of poor people. The first one was this thing of having to pay to save.

We think if we put money in a savings account, it increases because we get interest paid [laughs] on it every month, every year, or whatever. And you talk about people having to pay to save.

Jonathan: Yeah, it's a great example of the ingenuity of a lot of these mechanisms. When you are poor and your income's bouncing up and down and you don't know what your needs are, being able to build up assets--even over a short term--is extremely valuable. Being able to do that in a safe, regular, disciplined way.

Some of the lessons from behavioral economics just show how hard it is to save. And so we found a lot of households who were, in one way or another, paying to save. And it could be as explicit as paying someone whose job is to be a deposit collector, who will come around to your house every day or every week as the situation is and will take a given amount, and at the end of a period will give you back your money.

Or it could be that you get together with a group of friends. There's a woman Daryl Collins got to know in South Africa, Numpsa. She's 77 years old. She's earning a government grant of about $120 a month, and from that grant she's saving about $40. She's looking after her grandchildren. She's got a lot of needs, and she's doing that.

But she does it by forming a group of friends. They get together. One of the clubs, the so-called "savings clubs, " involves the friends putting in nine dollars a month. By Christmas time they've accumulated $99, and then they split it out.

So in this case they're not actually paying to save, but they're not earning interest. And they're very happy to do this because having that what Stuart Rutherford calls a "usefully large sum" is an extremely valuable thing when you're living on a dollar a day.

Romesh: I want to hear more about this whole savings thing. What struck me particularly was in a way imagining myself in the position of some of these people and thinking, "What would I do?"

The thing that would worry me about it the most is kind of an insecurity issue, thinking about is the money going to be stolen from me when I take my pay home and try to keep it somewhere secure, under the mattress maybe?

But then if I think about lending it to somebody, about the security about getting it back--even when the fee [laughs] is taken off. That whole area of security seems really, really painful. And it's like how can financial products evolve to give people that feeling of trust?

Jonathan: Yeah, it's huge and it's difficult. Some of the most tragic cases we saw, specifically in South Africa, were situations where a savings club had formed and someone stole the money. Just stole it because it's there under the mattress--literally sometimes under the mattress. In Bangladesh we often see people hiding money at home, which might be a little bit more secure, or putting it on their bodies.

But unreliability is perhaps the foremost problem in the informal sector. Some people have been romanticizing the informal sector and the ingenuity of some of these products. We see that, too. But at the end of the day, even though there are a lot of very clever things people do together, there is a lot of risk involved. And that's where we start to think about policy implications and scope for innovation.

If a formal sector bank, which brings that kind of reliability, can learn from some of the key features of what poor households themselves are doing--for example, like creating structures where people deposit in a fixed amount every week or every month--that has a potential for being a product that households can use, that it's potentially viable commercially. And it can make a big difference in people's lives.

Romesh: Let's talk a bit more about this policy implication. How much of the new emergence of microfinance is sort of emerging bottom up, if you like, coming out of the idea that people are making at village level, community level? And how much is top down, coming from banks in the formal sector or governments proposing solutions and new financial products for the poor?

Jonathan: Yeah, it's an interesting mix, and I really came up from the bottom in many ways. But of course to make something big and global you need to have players that are big and global. So increasingly, it's come from the top down more recently.

But in the end where the user experience is--where the customers are--the products are going to work or they're not. People are going to take them up or not, and you can't have a bad product and build a revolution out of it. So I think microfinance is a great example of a powerful set of fairly decentralized innovations. There are some very different things going on in Latin America or Eastern Europe than going on in South Asia.

But one of the things that the book does is to show that there's a risk of getting boxed in by a very powerful story--a narrative around microfinance. Specifically the idea that the most desired financial product that poor households want is a loan to run a small business.

That's the story we associate with Muhammad Yunus. He's told that story to audiences around the world a million times, and it's very powerful. And it's compelling to us in the West who are looking for new innovations to help poor households.

But we did something interesting, or Stuart Rutherford did something interesting, which was to go out and do another set of financial diaries in Bangladesh, a second set, with a group of Grameen Bank borrowers. And he found that about half of the money that was being lent out in this admittedly small sample was being lent out for consumption purposes.

And if you counted in terms of households, more than half the households were using their loans for consumption purposes mostly. And it helped us see that while the rhetoric looks one way, in fact reality can look very different.

This wasn't people, I don't know, buying fancy goods or squandering it on alcohol or tobacco. Mostly it was people paying for school fees, people dealing with health problems, people trying to put food on the table, people doing sensible things with the money and thinking hard about what the best purpose was.

And I really think that's one of the most valuable things about portfolios of the poor in this book. We're trying to give a sense of what poor households themselves are doing, what they're putting at the center of their lives, how they're thinking about their economic conditions and putting that up against the rhetoric that's coming from on high.

Romesh: Yes, because I guess the discussion is often about the poor having stuff done to them. [laughs] They're the victims at the bottom of the pile, and they're the ones that are facing the incredibly high interest rates so that they might have to pay for borrowing. They're the ones that are dependent on people coming in and trying to help them. You're very much push arguing for a view in which they can take control of their lives.

Jonathan: Yeah. What we see is people doing all sorts of things because they have to. They're acting with agency. They are making good choices often, but we don't believe that at the end of the day that better financial tools are going to solve everything. Ultimately, most of the people we met want to have better jobs, and that's not going to happen through a million hundred-dollar loans.

But as part of this equation and trying to think about the needs of the world's poor, it became clear to us that some basic financial tools can make a huge difference in addressing health issues and addressing education issues and also the ups and downs of poverty.

You know, as economists we're trained to think about utility maximization rather than, say, poverty reduction. And in some way what the book is saying is let's go back to think about utility maximization because that's the way that the poor households themselves are thinking about it.

They're thinking about risk. They're thinking about insecurity. They're not thinking about some poverty line that they may or may not be above. That's some fiction that we created, this poverty line. We see people well below the poverty line who are doing a lot of saving. In many ways, that poverty line gets in the way of our really understanding the lives of poor households. We see a poverty line that's so low, we could imagine that people living underneath that line must be so poor they can only live hand-to-mouth.

But, none of the households we met were living hand-to-mouth, in a general way. Even at a dollar a day, they were putting money aside. They were intermediating in various ways. And that was a big surprise. But, it's consistent with what we see in lots of other places.

I'm not saying that there aren't people around the world who are living hand-to-mouth because they certainly are. But if you think about the great mass of people living under a dollar a day, or two dollars a day, it is not the norm to be living hand-to-mouth. And that's a really important thing to take hold of. Because certainly, the images we see in the newspaper, you know, really do suggest that when we are thinking about Africa, we're thinking about the poor parts of Asia, it's a situation of pure destitution. And I think that gets us in the way of actually seeing some very constructive ways to engage, and think about innovations, and give people better tools to do what they're currently trying to do.

Romesh: How far do you think this micro-finance movement has gone? Do you think - You say 10 years ago, we wouldn't be having this conversation at all. And yet, it's clearly there's been a lot of publicity, Nobel Prize awarded for - to Yunus and the Grameen Bank. But at the say time, you talk about just kind of the race to be the first universal service for financial products, and the race to provide that - perhaps beating the race to provide education for people, basic health care for people. Where have we got to in that race? And how close are you? Where are we making a big difference?

Jonathan: Yeah. I don't know anything about who's going to win a race or not. But, I know that micro finance is very compelling. The idea is very compelling to lots of people. And I do think that it's just going to continue to grow as it expands. And I think that expansion is going to move in the direction you're describing, which is toward thinking about providing people with general financial tools, and that's basic savings accounts, some basic insurance, and loans for general purposes, and not these kind of simple products like loans from micro enterprises.

As micro finance goes that way, the customer base gets a lot bigger. If you think about people living in cities around the world, many of them are very poor, but they don't particularly want to have a small business. Maybe a maid in a hospital, they still need financial tools. And opening things up - then just creates a much, much bigger market than you could imagine. And it reinforces these efforts, you know, to provide education and help people get better health.

These, you know, segments, like you're saying, are kind of walled-off. They're the health people. They're the education people. They're the micro finance people. But those are barriers that are really unhealthy. It's not the way that poor household, themselves, think. And, you know, the hardest thing about keeping your kid in school is that, you know, there are fees. There are events that are happening in the family that they have to address to. And, you know, they need to pull the kids out often to work. So, being able to create some stability, basic financial stability for poor households is a great complement to keeping kids in school, and with health also.

You know, health crises often are financial crises. And we see people often in the financial diaries, because we get to know them and spend so much time with them, who are putting of treatments, because they don't have the financing together. They're not buying the medicine. They're not going to the right doctors. That's - Thinking about the financial part, alongside the health part, makes a lot of sense. But, the way that we've created these silos is keeping us from doing that.

Romesh: Where did this whole research program that you've been involved in go next Jonathan. It's evolved alongside the evolution in the real world, the micro financing, the enthusiasm of the people that you talk about there. But, where do you see it going next? And, where do you see the kind of tools that you've developed going?

Jonathan: So, the research program, I think, goes in a number of different directions. One, I think that it pushes towards better theorizing, or richer theorizing. So, it compels us to go back and try to figure out how people are making cash flow decisions and how that relates to the - The new work in behavioural economics, for example, and whether this pushes beyond it. Why are people making so many small transactions so quickly? And why are they willing to pay such high prices for loans?

As you were saying, there's some really unresolved, big, theoretical questions which this work puts on the table. Research-wise, I'd love to see more work like this. And just, economist out there, who are very analytical, who have the ability to spend some time just getting to know communities, and, you know, much like ethnographers, and anthropologist, you know, then engage in the process of sense making after collecting the data.

I think it's a helpful complement. But there's no way that it replaces, really, the hard core, you know, mainstream empirical economics, which is collecting the big data sets, and testing the theories in an explicit way. I think what this work does is give us better theories to test, or alternative theories to test, and hopefully lead us to write better survey questions to really tap into what poor households lives are.

I think another thing which is very sobering here, is that we found that in Darryl Collins' work in South Africa, it took six conversations, six meetings, each two weeks apart, before she had a reasonable gauge on people's financial lives, within a six percent confidence interval. The first conversation was way off. She missed at 100 percent, really, in the big picture of what people where doing, because they just wouldn't open up about their financial lives. They didn't talk about a lot of things they were doing.

And frankly, I don't think I would either is some surveyor just came to my house one time and started asking me a battery of questions. But over time, as the researchers got to know households, and understand their choices, and that could prompt other conversations, the picture came into view. And that, irrespective of anything else going on here, the push toward better data quality and fuller data, I think is a very powerful and sobering exercise.

Romesh: Perhaps you could close just by talking a little bit about how the research program engages with policy makers or perhaps even individual decision makers. I mean, how does that have an impact on the world in terms of the kind of policy decisions that are being made in large organizations, whether in the public sector or private sector, the financial services providers and indeed, how do you feedback to the people that you've been talking to, the ground level as it were, in the countries that you're engaged in?

Jonathan: Yeah. I think there are three really important ways that this conversation is being shaped. One, we're showing the people can save. They do save. They want to save. And that is a very powerful input into a conversation which is growing to parallel with traditional micro-credit movement, but to say, let's help poor households get savings accounts. Well, a lot of people said that's a waste of time because people don't have any savings. We're showing that's not the case. And I think we're really helping, I hope, to spur that movement.

The second part is insurance. And again, we're showing that people - they're buying insurance. Kadija, described, Stewart Rutherford got to know in the slum of Dhaka. She had an insurance contract. It lapsed actually only when the agent stopped coming around. But, she was until then, making good on her contracts, and understood pretty well what the terms of that contract were.

The third bit is technology. There's great potential for mobile technologies, branchless banking, to become a force in un-banked areas. They're huge parts of the world. We estimate something over two billion adults who don't have access to formal sector banking. I think, convincing technology providers, cell phone operators, you know, from all the major players, Vodafone, AT&T, China Mobile, you know, there really is a market here and the people can seize the right tools is a powerful message. And I think the book goes some distance to show the potential for that.

Romesh: Thank you very much.

Jonathan: Thank you.