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Marco Circosta
Dan Cushing
Taylor Nelson
Bryant Secl
Shoko Ueno
Overcoming Barriers to Saving for the World’s Poorest
Saving is essential for the future, but hard to do. Even though the poor need to save more
than the rich, it is harder for them because of particular barriers. Chapter 8 of Poor Economics,
“Saving Brick by Brick,” identifies some these barriers as well as the ingenious and unorthodox
means by which the poor manage to get ahead. The world looks at the poor and believes that
they can’t save money because they have no money to save. The chapter debunks this myth,
saying that “the poor should save because they, like everybody else, have a present and a future.
According to this chapter however, it seems that poor families take improper steps in their
financial future and focus primarily on the financial present. Undoubtedly, the poor face
systemic barriers related to things like the cost of banking and the need for emergency cash. We
will explore these systemic barriers in the first section. These systemic barriers, because of the
frustration they cause and for other reasons, lead to psychological barriers that we will discuss in
the second section. Finally, we will list some of the programs and institutions that the poor
themselves have engineered, as well as governments and NGOs, in order to transcend those
systemic and psychological barriers.
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Systemic Barriers
The poverty trap persists because the systems in place ensure that the rich get richer and
the poor get poorer. The S-curve of wealth accumulation, shown in the book, illustrates patterns
of spending and saving as one ascends through ranks of wealth. People who begin to the left of
the first curve become stuck in the poverty trap, whereas people to the right are able to save more
than they spend and thus have the opportunity for upward social mobility.
The bank exists for saving some money, but the human and operating costs are passed
onto the customer in the form of processing or withdrawal fees. Moreover, banks prefer to deal
with only large amounts of money and can be a ten mile walk or farther. On top of withdrawal
and other fees, many accounts pay zero interest for such small balances, rendering them
impractical. Because of time and expense associated with banking, poor people don’t usually
have access to these banks. Besides strictly banking, poor people are also excluded from other
financial security mechanisms. For example, people who receive paychecks pay automatically
into social security whereas poor farmers and merchants do not have such access. In the New
York Times article, “The World’s Unbanked Poor”, Motoko Rich includes statements from
Leora Klapper, a lead economist in the finance and private sector of the World Bank. This quote
from an email is particularly important for the argument that access to banks is necessary for
fixing the problem: “‘Formal accounts and savings may help poor people smooth their
consumption and weather unexpected events such as unemployment, accidents, illnesses and
deaths without necessarily resorting to expensive debt,’ Ms. Klapper wrote in an e-mail.
‘Financial inclusion enables poor people to save and to responsibly borrow — allowing them to
build their assets, to invest in education and entrepreneurial ventures — and to improve their
livelihoods.’” This quote is also does a great job answering the question of why it’s important the
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poor have access to banks. Saving is one way to get them out of the poverty trap, and banks
allow them to save more efficiently.
The need for emergency cash is another barrier to savings. People who are poor find it
very difficult to not have their money directly on them just in case something comes up. This
tends to be the theme throughout the chapter that things “come up” a lot for the poor and for
some, getting to their savings account may be too far out of reach for them. However if they are
able to “hide” the money from themselves, either through an investment like fertilizer or an
enforced repayment program, they are less likely to use that emergency cash for frivolous
expenditures. By not having the money on hand to feed a guest, for example, they feel less bad
about saying no and are thus more able to save. We will explore similar psychological
phenomena more in the next section.
Psychological Barriers
These systems leave people with limited options, a problem that’s compounded by
human psychology present in both rich and poor people. One reason why people don’t save is
because they excuse not saving today by assuming they will begin saving tomorrow. This reality
underscores the human impulse to differentiate between the present self and the future self.
Self-control is a main factor into why people buy what they buy even though they
technically can’t afford it. Unlike rich people, who have already met their visceral desires, poor
people dwindle away their meager earnings for immediate gratification. People realize this and in
order to avoid it, they will buy items that they are less willing to resell for a loss. Some examples
are home-building supplies (such as bricks), which act like home equity, or fertilizer, which acts
an investment because it will yield a greater harvest the following year. Another interesting trick
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people use to combat their psychological impulse not to save is to take expensive loans and then
put the balance in savings. While they incur a loss on interest, the enforced repayment forces
them to be disciplined about what they buy.
Ignoring these urges sounds like a simplistic thought, but it has much more neurological
complexity behind it. It turns out that willpower is like a muscle and it gets tired after being used
repeatedly. This is because when people deny their visceral urges, they build up cortisol, a
neurological phenomenon that thwarts poor people but that rich people don’t have to worry
about. On top of that, poverty puts people in a condition where the future feels too far away and
bleak. Essentially, people have a psychological voice that tells them they will never afford
expensive products with high utility, such as a refrigerator. Compounded, these things make it
exceptionally hard to save.
The emotional connection to people’s circumstances and their outlook on life factor into
this psychology as well. For example, people will want to save more if they feel their future is
bright as opposed to if their future is bleak. When the future looks bleak, people don’t want to
think about it, and therefore don’t want to plan for it either. These psychological barriers
compound the existing systemic barriers, leading hardworking and rational people to make worse
decisions than they would otherwise.
Transcending the Barriers
Based on an increasingly sophisticated understanding of the interplay of the barriers
described above, multiple actors have intervened in order to address the problem of poverty.
Programs and institutions have made saving easier by removing fees and creating more places to
save. First, we will give due credit to the poor individuals who have pieced together savings
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programs despite the barriers. It must be clear that it isn’t that these people’s cleverness or grit
were the sole ladders out of poverty, but these qualities must acknowledged.
One way poor people are able to carry out savings is through informal system of personal
finance referred to by Banerjee and Duflo as self-help groups (SHGs). One example of such
SHGs is the rotating savings and credit associations (ROSCAs), common in Africa, in which
everyone pays into a pot and one person gets the pot on a rotating basis. Another method to
avoid the prohibitive costs of banking is the M-PESA program in Kenya. This cell-phone based
banking system allows users to deposit money at a grocery shop or other M-PESA correspondent
and then text an amount to a recipient who can in turn show the text to a correspondent and make
a withdrawal. This system shared the community aspect of the ROSCAs, allowing people to
yield their deposit to someone else in the group. In the M-PESA program, this could be a family
member in a distant town. This also ameliorates some of the problems of banks being a long way
away from poor villages, and enables SHGs to empower a single member to make a large
deposit.
Governments are another actor trying to remove barriers to saving. For example, the
Banking Correspondent Act in India allows banks to accept deposits from shopkeepers under
certain requirements. This circumvents the problem of having to pay bank tellers to process the
hefty paperwork (and passing those fees onto the customer), and additionally it makes banking
more local for poor people who cannot afford the time or expense of traveling to cities.
Finally, non-governmental organizations (NGOs) have implemented programs to provide
alternative and more accessible avenues to savings. One example is the Savings and Fertilizer
Initiative (SAFI) which entitles farmers to a fertilizer voucher at the next sowing time. This
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brought a 50% increase in amount of farmers using fertilizer in underdeveloped nations. The
chapter points out that Bill and Melinda Gates have tried to increase the access to savings
accounts for the poor and notes that “Microsavings is likely to become the next microfinance
revolution” (190). NGOs that create microsavings programs seem to be intervening in the most
useful way, but whether their programs are wanted in local communities and cultures often
different from their own is a moral question that must be explored further.
Conclusion
In terms of saving towards a goal, poor people tend to have goals that seem further from
their present situation than rich people, which diminishes their incentive to save. Therefore,
“Moving the goalposts closer may be just what the poor need to start running toward them” (204)
Doing so requires a thorough understanding of the barriers to savings and a coordinated
intervention that respects the dignity of those whom are intended to be helped.
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Bibliography
Lohr, Steve. "Gates Foundation Seeks to Spur Savings by the Poor." New York Times. N.p., 13
Jan. 2010. Web. 30 Oct. 2012. <http://bits.blogs.nytimes.com/2010/01/13/gatesfoundation-seeks-to-spur-savings-by-the-poor/>.
Rich, Motoko. "The World’s Unbanked Poor." Economix Blog. The New York Times, 30 Apr.
2012. Web. 31 Oct. 2012. <http://economix.blogs.nytimes.com/2012/04/30/the-worldsunbanked-poor/>.
PETER KIRAGU. “Kenya: State Hopes to Set Up Fertilizer Factory in Two Years.” allafrica, 26
Oct. 2012. Web. 29 Oct. 2012
<http://allafrica.com/stories/201210270110.html/>.