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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.
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.
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.
Desafiando las dificultades en predicciones de los expertos al comienzo de la pandemia, las instituciones de microfinanzas en la región del Triángulo Norte de América Central mostraron una gran resiliencia ante los desafíos de la pandemia de Covid-19. A pesar de su escala relativamente pequeña, o quizás debido a esto, las IMF estudiadas mantuvieron una rentabilidad estable, en su mayoría han crecido desde la pandemia y han demostrado ser muy adaptables al cambio digital.
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.