The poverty rate is an important focus of economic policy. We show, however, that in low- and middle-income countries, the poverty rate is often not what it seems. Poverty, as conventionally measured, is thought to be the proportion of households that are poor for the year, but we show that, under common data collection practices, the measure instead captures the average share of the year that households are poor. The resulting poverty rates are sensitive to the timing of household consumption, not just its total value. For policy, this means that, contrary to common assumptions, the de facto concept of national poverty in many countries is sensitive to households’ exposure to shocks and their ability to smooth consumption within the year. While created inadvertently, this de facto concept of poverty has appealing properties as a measure of well-being, and it raises new philosophical questions about the nature of deprivation. This transformation has happened without a change in the form of the poverty measures and without longitudinal data. Instead, the transformation follows from three common practices used when collecting household data: asking survey questions with short-term recall (often covering only the past week’s or month’s spending), stratifying on sub-periods (usually quarters), and surveying households only once during the year. We illustrate the implications with monthly panel data from rural India, showing that time-sensitivity in poverty measurement has quantitatively large impacts on measured poverty, improves predictions of health outcomes, and expands the scope of strategies to reduce global poverty.
Publications
Viewing all posts with tag: Staff Pick
Methodology and Process: An Introduction to the Small Firm Diaries
With this brief we have tried to document the most important elements of our research design so that people reading Small Firm Diaries reports, findings, and recommendations will have a clear view into how the study was conceived, how the sample population was selected, and how the data was collected and cleaned. In doing so we have shared some— though certainly not all—of the key decisions and challenges we faced along the way.
What Win-Win Lost: Rethinking Microfinance Subsidy in the Past and Designing for the Future
The modern microfinance industry was built on the idea that lenders could (and should) profit while serving poor and excluded customers. This idea—that lenders could “win” while customers would also “win” —inspired the broader field of social enterprise and opened possibilities for business-driven responses to social problems. However, in hindsight it is possible to see that not only was the idea flawed—important claims underpinning the core idea have failed to find empirical support—but the lingering belief that “win-win” was right continues to handicap not only financial inclusion and consumer protection policies, but the social investment and finance industry as a whole. The win-win formulation was driven by the assertion that customers would be indifferent to the level of interest rates on loans and that it was simply access to finance that mattered most to customers. The argument was used to justify charging the highest interest rates to the most operationally expensive customers, who turned out to not coincidentally be the poorest customers. However, studies show that customers are indeed sensitive to interest rates and that high interest rates discourage borrowers. Moreover, despite charging high rates, financial data show that most lenders failed to earn profit after fully accounting for the subsidies received from donors and social investors. Microfinance and the social investment industry it helped spawn remain important tools for addressing poverty and inequality, but both sectors are overdue for a transparent reckoning of the roles of subsidy (including its benefits) and greater recognition of the potential for exclusion caused by high prices and the drive for profitability or “sustainability”. Muddled thinking on subsidy and prices handicapped the past but does not need to handicap the future.
Lessons for Global Microfinance from . . . the United States?
The modern microfinance industry was built on the idea that lenders could (and should) profit while serving poor and excluded customers. This idea—that lenders could “win” while customers would also “win” —inspired the broader field of social enterprise and opened possibilities for business-driven responses to social problems. However, in hindsight it is possible to see that not only was the idea flawed—important claims underpinning the core idea have failed to find empirical support—but the lingering belief that “win-win” was right continues to handicap not only financial inclusion and consumer protection policies, but the social investment and finance industry as a whole. The win-win formulation was driven by the assertion that customers would be indifferent to the level of interest rates on loans and that it was simply access to finance that mattered most to customers. The argument was used to justify charging the highest interest rates to the most operationally expensive customers, who turned out to not coincidentally be the poorest customers. However, studies show that customers are indeed sensitive to interest rates and that high interest rates discourage borrowers. Moreover, despite charging high rates, financial data show that most lenders failed to earn profit after fully accounting for the subsidies received from donors and social investors. Microfinance and the social investment industry it helped spawn remain important tools for addressing poverty and inequality, but both sectors are overdue for a transparent reckoning of the roles of subsidy (including its benefits) and greater recognition of the potential for exclusion caused by high prices and the drive for profitability or “sustainability”. Muddled thinking on subsidy and prices handicapped the past but does not need to handicap the future.
Executive Summary: MFI Digitization in Central America’s Northern Triangle
Defying dire predictions from experts at the start of the pandemic, microfinance institutions in the Northern Triangle region of Central America showed great resilience through the challenges of the Covid-19 pandemic. Despite their relatively small scale—or perhaps because of it—the MFIs studied maintained stable profitability, have mostly grown since the pandemic, and have proven very adaptable to digital change.
Poverty at Higher Frequency
Poverty is typically measured as insufficient yearly income or consumption. In practice, however, poverty is marked by seasonality, economic instability, and illiquidity across months. To capture within-year variability, we extend traditional poverty measures to include a temporal dimension. Using panel data from rural India, we show how conventional poverty measures can distort understandings of poverty: exposure to poverty is wider and more common than typically measured, and poverty entry and exit are not sharp transitions. Accounting for within-year variability improves predictions of anthropometrics, and targeting transfers to challenging periods can reduce poverty most effectively by compensating for imperfect consumption smoothing.
Just Give People Money. But How and When?
As America imagines a 21st-century safety net—and the roles of governments, businesses and communities—some of the solutions will involve just giving money. The right amount of money at the right time can make a big difference for people, especially for working families without much financial slack. That requires beginning with the idea that in fact it’s not just about money. How and when matter too.
Rethinking Poverty, Household Finance, and Microfinance
High-frequency data show that the material condition of poverty is only partly captured by overall insufficiency of resources. Instead, life in poverty is often characterized by the interaction of insufficiency × instability × illiquidity, visible when measuring poverty in shorter time units than the year. In this context, reducing instability and/or illiquidity can reduce exposure to poverty even when average earning power (overall insufficiency) is unchanged. The high-frequency view shows the power of intra-year consumption smoothing, while also showing that consumption smoothing often requires the spiking of spending. The instability revealed by the high-frequency view creates a tension between flexibility and structure in the design of behavioral financial products. In practice, microfinance borrowing and saving are often used to address the ups and downs of household spending needs rather than business needs. High-frequency instability also explains why ex post moral hazard (“strategic default”) is a particular problem for lenders (rather than the textbook ex ante moral hazard depiction) and, in turn, why joint liability is difficult to sustain. The installment structure of typical microfinance loan contracts (i.e., high-frequency repayments) is similar to the structure of consumer lending products and contractual saving products, explaining how microfinance loans work naturally for purposes other than business investment, even when that departs from lenders’ nominal intentions. The high-frequency view helps to show why microfinance loans remain popular as financial tools despite modest measured impacts on average household income.
Narrowing the Gender Gap in Mobile Banking
Mobile banking and related digital financial technologies can make financial services cheaper and more widely accessible in low-income economies, but gender gaps persist. We present evidence from two connected field experiments in Bangladesh designed to encourage the adoption and use of mobile banking by poor, illiterate households. We show that training can dramatically increase adoption and usage by women. At the same time, women on average persist in using mobile banking at a lower rate than men. The study focuses on migrants and their families in Bangladesh. Despite large differences between female and male migrants in income and education, the first experiment shows that a training program led to a similarly large, positive impact on mobile banking usage by female and male migrants, increasing usage rates for both by about 45 percentage points. That led to increases in remittances sent to rural areas, reduced rural poverty, and increased rural consumption. Both female and male migrants in the treatment group, however, reported worse physical and emotional health, adding to health challenges reported by women across treatment and control groups. A second experiment explores whether the way that the technology was introduced and explained made an additional difference in narrowing gender gaps. Despite the lack of statistical power to detect small treatment impacts, we find suggestive evidence that the treatment increased mobile banking adoption by female migrants.
The Disruptive Power of RCTs
A chapter in the forthcoming edited volume, Randomized Control Trials in Development: the Gold Standard Revisited, by Florent Bédécarrats, Isabelle Guerin, and François Roubaud.
The use of RCTs in development economics has attracted a consistent drumbeat of criticism, but relatively little response from so-called randomistas (other than a steadily increasing number of practitioners and papers). Here I systematize the critiques and discuss the difficulty in responding directly to them. Then I apply prominent RCT critic Lant Pritchett’s PDIA framework to illustrate how the RCT movement has been responsive to the critiques if not to the critics through a steady evolution of practice. Finally, I assess the current state of the RCT movement in terms of impact and productivity.
US Financial Diaries Household Profile: Living Paycheck to Paycheck
Amy Cox is a white 34-year-old single mother of two. She lives with her children, Hailey, 9, and Andy, 8, near Cincinnati, OH. Amy is among the few people in the USFD study who lived paycheck-to-paycheck. During our year with her, she spent almost all of each week’s paycheck within 10 days. When she did have a little extra cash, she usually spent it on her children within a few weeks. As with many households in our study, Amy was caught between seeking financial stability and mobility. Despite Amy’s struggles, she was trying to better her situation. Amy’s major financial choices are difficult to evaluate without knowing what the outcomes ultimately were.
In and Out of Poverty: Episodic Poverty and Income Volatility in the U.S. Financial Diaries (Working Paper)
We use data from the U.S. Financial Diaries study to relate episodic poverty to intra-year income volatility and to the availability of government transfers. The U.S. Financial Diaries data track a continuous year’s worth of month-to-month income for 235 low- and moderate-income households, each with at least one employed member, in four regions in the United States. The data provide an unusually granular view of household financial transactions, allowing the documentation of episodic poverty, and the attribution of a large share of it to fluctuations in earnings within jobs. For households with annual income greater than 150 percent of the poverty line, smoothing within-job income variability reduces the incidence of episodic poverty by roughly half. We decompose how month-to-month income volatility responds to receipt of eight types of public or private transfers. The transfers assist households mainly by raising the mean of income rather than by dampening intra-year income variability.
By Jonathan Morduch and Julie Siwicki
The Wisdom of the Group: How Lessons from Savings Groups Can Guide Financial Product Innovation
In this note we focus on the savings group as a model for delivering products to address this market failure. Reviewing recent research, we extract the mechanisms that make savings groups effective. We then explore the potential to apply these factors to formal products that make sense for both providers and consumers.