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I’d like to share an excerpt from my book, More Than Good Intentions, co-authored with Jacob Appel. We did not set out to write a technical expose on quantitative analysis and randomized trials–quite the opposite. As I hope the excerpt demonstrates, Jacob and I weave qualitative human interest stories together with results from, yes, randomized trials, in order to help bring to life the issues we all struggle with when designing and evaluating interventions.
This excerpt sets up the chapter on savings with a basic puzzle: when someone is engaged in a never-ending cycle of high interest rate debt, the question to ask is not why they borrow, but rather why they do not save. Paying down debt is, from a financial perspective, an act of savings. And when debt carries a high interest rate, paying it down early generates a risk-free and really high return on savings. So it tells a striking story when such high-return, risk-free savings options are not widely used. Why would they not?
Most people I know would jump at the opportunity to earn 30%-100%, or more, risk-free!
There may be family constraints. Or behavioral constraints. Or perhaps lack of understanding. Or fear of losing future borrowing options from the lender if they stop borrowing. From a policy perspective, if we could find a way to help individuals use savings rather than debt to make large expenditures, many would have more money for food, festivities, investment and mitigating risks in the long run. This is not to say that debt is bad. There is a time and place for debt. The key is to help figure out which is best for them. This is a key example of taking Dick Thaler and Cass Sunstein’s Nudge approach to household finance for low and medium income households. Although this excerpt is about a story from a developing country, these issues apply here in America too.
“Vijaya was beautiful, and she was surrounded by beautiful flowers. She sat in the shadow cast by the crumbling east façade of the Koyamedu Market in Chennai, India. When Jake met her she was sitting at her table making garlands. It was repetitive work. She reached in front of her to pick out a single white jasmine bud from a pile of thousands, then she looped a piece of white nylon cord around its tiny stem and cinched it into a knot, sliding it down to join hundreds of others already tied. It was a growing strand of ancient DNA, pairs of opposing buds spiraling around a central axis. The finished portion lay coiled on the table like a wonderful and gentle snake.
The whole place smelled of wet flower petals and sweet incense, but nothing else about it suggested a luxury spa. Nor were the great ropes of fresh flowers destined for opulent hotel lobbies or the dining tables of the rich and famous. They were to be bought and disposed of by common people, who laid them at the feet or hung them around the neck of a religious icon in any one of the thousands of Hindu temples around the city. It takes some getting used to, but it is a fact: You will see a man walking barefoot, wearing a ripped and threadbare lungi, face dirty with soot, and he will be carrying half a yard of fresh roses. He might have spent his last twenty rupees on them.
Vijaya and her neighbors, who sat at similar tables making similar garlands, were hardworking women. They had something to show for it. Hidden in the folds of their dusty saris were small wads of crumpled, sweaty bills. Ten rupees, fifty rupees. The rupees were usually not plentiful, but that made them all the more important.
Each morning Vijaya arrived at Koyamedu and bought three hundred rupees’ worth (about $6.50) of flowers from a wholesaler. She set her table upright, laid down her spool of white cord, and propped a wooden crate on its end for a stool. Then she dumped out the day’s flowers on the tabletop and got to work, tying them automatically and efficiently. As long as Jake watched her, she never missed a knot or broke a stem. She took a break only when a customer approached her table. He would point to one of the coiled garlands and she would measure out the length he requested against her forearm. Then she would cut it off with a razor blade, take his money in her right hand, and deposit it in the folds of her sari.
By the day’s end she might have sold four or five hundred rupees’ worth. Jake asked her what she did with the profit. As it turns out, most of it never made it out of the market. Each evening, after all the flowers were gone, Vijaya was visited by a man who had no interest in garlands. He was there to collect a daily loan payment. A few daily loan payments, actually.
Vijaya had three or four loans outstanding at once. She used them for almost everything: to buy flowers in the morning, for the monthly rent on her family’s house, for her children’s school fees and hospital bills. The loans varied in amount and duration, but they had one thing in common: interest. That meant Vijaya was paying extra—usually about 3 percent extra per month—for most of her family’s biggest expenses.
When Jake asked her roughly how much interest she paid in total on all the loans, she demurred: “Interest?” If it was a considerable burden, she didn’t let it show. “I give about one hundred or one-fifty each day to the man who comes. If I have extra, maybe I give some extra. If I need more money, I ask for it. That is the rotation.” She stressed that word, rotation. It suggested a smooth and continuous cycle, like the coming and going of the monsoon.
The system of borrowing for most big expenses was actually less like a monsoon and more like a leaky faucet. It meant rupees were constantly trickling out of Vijaya’s sari—and ultimately out of her family’s coffers—and spiraling down the moneylender’s drain in the form of interest. Ironically, losing money in this fashion, day after day, is no mean feat. That Vijaya was even able to keep up with her loans proves that she was making more than enough (the more being the interest amount) to cover her expenses.
Therein lies the puzzle.”
Also in this Series
Microfinance Should Have Started with Savings
Much of the world is in trouble today because of debt, too much borrowing, presumably not enough saving, by individuals, companies, countries and groups of countries.
Can Collecting Savings in Rural Areas Be Profitable?
The importance and role of savings with respect to the economic and social development of developing countries and of African countries in particular have long been recognized.
Comments
Deja vu : Vijaya’s situation
Deja vu : Vijaya’s situation is akin to that of a typical peasant in pre-independence India which has been aptly described by M. L. Darling in these words : a peasant is born in debt, lives in debt and dies in debt.
Thanks
Dear Prof Dean Karlan
Dear Prof Dean Karlan
I would like to share some of my provoked thoughts on reading your interesting post
1.Theoretical insights
Any approach or strategy which attempts helping to solve global poverty, demands a kind of analysis which focuses more on the unique behavior of the target human beings. In the context of prevailing incentive based economic rationale in the materialistic real world , be it new or old economics what is conspicuously missing is the absence of application of ethical rationale in human behavioral analysis which alone can effectively address the challenges in the battle against poverty. Even the history of economic thought reveals that the ‘economics’ which was seen as something like a branch of ‘ethics’ for many years in the past , has become the main subject without needed linkages with ethical considerations. Consequently, the contemporary development models be it for general development or poverty eradication or gender development tend to focus more on creating logistics (material) for human living which are by and large ‘means’ only without much contribution to achievement of sustainable ‘end’ with equity and justice.. Consequently there may be inclusive growth but no inclusive development . So to say the inclusiveness is not inclusive enough for challenging the poverty issues. Therefore it appears that positive economics (engineering based origin) over rules the normative economics (ethical related origin) in the given political environ resulting eventualities such as economic inequity, social upheavals and political unrests. While searching the etymology of the above state of affairs, two quotes from Prof Amartya sen merit attention (‘On ethics and economics’ Oxford India paper pack 1998)
“ Ethical; consideration in any deep sense are not given much role in the analysis of human behavior.”
“Another surprising feature is the contrast between the self consciously ‘non ethical character of modern economics largely as an off shoot of ethics’
In the absence of ethical consideration in any deep sense in the analysis of human behavior on one hand and attachment to materialistic conception of life on the other, justice and equity that foster both individual and collective well being would remain elusive goal. As a corollary, this fact holds good for achievement of our millennium development goals also aiming global poverty salvation.
2. Relevance to Microfinance arena
2.1. Coming to Microfinance functioning as a tool in the battle against poverty, here the role of ethical considerations assumes significance both from supply side and demand front as well.
Microfinance is a package of pro poor financial services such as micro savings, micro credit, micro insurance , money transfer services etc., which are all essentially needed but holistically for ushering in sustainable poverty reduction. In the real world, the researcher need to probe what is happening in pactice? Most of the MFIs prefer money lending services confining to micro credit services only as if it is ‘silver bullet’ for the said goal. The recent crisis in MF arena witnessed in many part of the globe, has taught enough sordid lessons to recognize the unethical behavior of both the supplier of micro credit ( ‘one size fit for all’ formula, polluted multiple lending without credit discipline , high interest rate without transparency, coercive recovery practices, over peer pressure, high profitability etc,)and the micro borrower ( multiple borrowing , misutilization of credit , willful default, conspicuous consumption, liquor and gambling ,, etc., ) becoming causative factors for such a crisis in micro financial industry and prevalence of stalemate in poverty situation without expected further progress in reduction at least if not abolition. It is irony that despite the above fact and warning signals, the MF game is allowed to continue without contributing much for the ultimate goal.
2.2. MF-SHG . The Self Help Group approach has been identified as potential medium for effective outreach of MF in rural poor in Asian countries. This approach when introduced was aimed to nurture the poor women members with many ethical values such as , collective action for mutual benefit, equity , sharing, self esteem, moral behavior, repayment ethics, credit discipline, gender equity and empowerment , social security to the poorest etc. But of late this group system has been used by and large as conduit for micro credit only and eventually has been politically corrupted, socially polluted, and unethically commercialized . The attrition rate among the group members(mostly the poorest/weak members in SHG reported in many groups in India ( 42% of groups with 8% rate per group- Microfinance India-State of the sector report 2008. N.Srinivasan) is a great ethical concern still remain neglected in the industry.
3. Case study of Vijaya
3.1.Here too one could find lack of ethical considerations in lending and borrowing activities. In the case of Vijaya , the flower vendor with a potential market environ near metro Politian bus station (Koyembedu in Chennai) for her product, is not bothered about the cost of credit (interest) so long she enjoys ‘the rotation’ of money from the money lender for continuance of her livelihood activity. At the same time the lender is providing loans varied in amount and duration so long he enjoys risk free higher return from the customer like Vijaya .Applying behavior theory in this case, it could be observed that prevailing atavistic behavior of lender and borrower with the unabated financial activities in the unethical competitive market reflect the happening of a kind of positive economic phenomenon which may not help solve poverty abolition sustainably. Again the ‘rotation’ the key factor, appears to indicate ‘ more than good intention’ of both the lender and the borrower and at the same time is motivating them to slip normative principles of living human society without further substantial progress. Perhaps that is why in India there is a saying ‘Indian farmer is born in debt, live in debt, dies in debt and bequeaths debt’ .On similar ground, the French proverb says “ Credit supports the farmers as hangman’s rope supports the hanged.” Why should they get tempted to go for debt (rotation)continuously and what made them to adopt debt as a way of life’ and can’t they lead prudential living without debt ? Is it justifiable to witness some of reported suicides of MF clients in AP crisis in India? Where does the shoe pinch in their behavioral pattern?
3.2. Prof Dean Karlan I have a doubt in the case study. In a study dealing with poverty and micro finance, does this case study revolving round Vijaya in metro Politian city with assured market environ for her flower business reasonably ensured with a decent profit ( assumingly not les than 2 $ a day) represent typical poor compared with rest of poor in the universe?
In fine, the need of the hour- The need to probe in the world wide research more on the influence of behavioral economics in the real world where in the role played by the factors such as motivation, self interest, preference, collective well being, morality, equity, justice, probity, assumes importance .This would make a beginning at least towards synthesized approach combing the values of both positive and normative economics for making a sustainable dent in poverty canvas in particular .
Thanks and welcome comments for further learning
Rengarajan
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