Friday, September 27, 2013

Why the poor invest in money losing livestock

Because they don't have better ways to save - or at least that's what this study suggests (ChrisBlattman):

Evidence suggests that the poor are often willing to earn negative interest in order to access reliable saving services… If livestock ownership is seen as a form of savings, the observed negative returns to cows and buffalo provide additional evidence of the high demand for savings, and perhaps specifically for illiquid savings in order to avoid temptation spending.

The question then turns to the supply side of savings: what are the constraints on the supply side that make cows and buffalos better savings alternatives than what banks offer? With technological innovations such as mobile money, the transaction costs are plummeting for offering deposit accounts to consumers in developing countries, even in highly rural areas. Thus this is an area where improvements in ability to store cash outside of the home may lead to more efficient allocation of capital, away from risky or low return home investments.

…If indeed, as we find, owning cows yields low or negative returns, this is of critical importance for NGO and government programs that promote investment in cows with an aim of poverty alleviation. In particular, the results here are critical for programs that engage in livestock grants to help households start or expand income generating activity from raising livestock (this is common amongst “graduation” programs, cited earlier, as well as many NGOs, such as Heifer International or other livestock grant programs)

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