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Dollar a DayHow the world's poorest really spend their money.

By Tim Harford
Posted Saturday, March 31, 2007, at 8:33 AM ET

Guntur, southern India, is a city short of money but not of entrepreneurs. Stroll through the main thoroughfare of the largest slum at 9 in the morning, and outside every sixth house you will pass a woman sitting behind a kerosene stove, ready to prepare dosa—rice-and-bean pancakes—for passersby with a rupee to spare. An hour later, each woman will be onto her next job. One woman earns cash by sewing fancy beads onto cheap, plain saris. Others are laborers, rubbish collectors, or pickle-makers.

The scene is described by two MIT economics professors, Abhijit Banerjee and Esther Duflo, in their recent article, "The Economic Lives of the Poor." They set themselves the task of explaining how very poor people make money and how they spend it.

The "very poor" are those who live on less than $1 a day. That benchmark—a rare piece of brilliant marketing from the World Bank—is both more generous and more frugal than it seems. Generous, because the benchmark dates from 1985 and has since been adjusted to take account of inflation. But frugal because the dollar is adjusted for purchasing power. In other words, a Kenyan farmer might have 50 cents a day to spend but still not count as "very poor" because 50 cents in Kenya buys more than $1 would in the United States. However you look at it, a dollar a day is a tiny income.

Perhaps surprisingly, then, even the poorest find the resources to let their hair down. Duflo and Banerjee, looking at economic surveys of the very poor from 13 different countries, conclude that about one-third of household income is spent on stuff other than food. The alternatives to simply trying to consume more calories include shelter, of course, but even the poorest find some money to spend on things such as tobacco, alcohol, weddings, funerals, or religious festivals. Radios and televisions are also popular. Looking at food spending itself, although the very poor do focus on the cheapest grain—millet—they also spend on wheat, rice, and even sugar. This is expensive and offers little nutritional benefit, but it certainly makes lunch taste better.

The very poor even seem to have some consumer power. For example, in the countries where free public schools are especially bad, some parents scrape together the resources to send the children to private schools. The teachers may be largely unskilled themselves, but at least they show up.

The same is true for health care. A pair of World Bank economists, Jishnu Das and Jeffrey Hammer, examined the quality of public and private health care in Delhi, India. They found that while publicly employed doctors tended to be far better qualified than the private doctors, the private doctors tried much harder, spending more time, asking more questions, and examining patients more carefully. Competition works even for the poor.

It would work better yet if the poor were less destitute. One of the problems is that so much of this entrepreneurial activity is carried out on too tiny a scale to make much cash. Scaling up would be more efficient but requires capital equipment. That's hard to come by in a world where bank loans are scarce (this is why people, including the Norwegian Nobel committee, get so excited about microcredit), and cash savings are at risk from inflation and theft. It would be better, too, if it were easy to set up a legal business. According to the World Bank's "Doing Business" reports, the poorest countries often boast red tape that means it takes months and costs a small fortune to set up in business.

But do not despair entirely. In 1981, 40 percent of the world's people lived on less than $1 a day, according to Shaohua Chen and Martin Ravallion of the World Bank. The figure plummeted to 21 percent by 2001 and may be as low 15 percent by 2015. We can hope.

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Tim Harford is a columnist for the Financial Times. He is the author of The Undercover Economist, and his latest book is The Logic of Life.
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