Growth, entrepreneurship, savings clubs

Savings clubs got a mention by a favorite economist recently. Abhijit Banerjee discussed economic growth and entrepreneurship (PQRS and the Mechanics of Growth); here are a couple of points that came out:

1. Lots of poor countries have people working for themselves, but that isn't the same as productive entrepreneurialism. Working for yourself in those contexts, in Banerjee's words, is like "buying a job and not a particularly good job."
   
2. The poor could spare small luxuries, save more money, avoid large interest and increase daily income, but what is the point? At the end of the day, the extra income is very small, they're still poor, life's not so different. Lot of discipline, little gain.
   

Here's some detail about #2:

Dean Karlan and Sendhil Mullainathan, in a recent paper, put this point rather starkly. They study fruit vendors in Chennai, India, who make about two to three dollars a day by buying fruit in the morning on credit and paying it back at night. It turns out that the interest rate they pay is 5% per day and at that rate, saving the ten cents they spend on tea for just one day would allow them to pay back their entire loan in six months (the power of compound interest) and add a dollar a day to their earnings. Yet most of them seem to be permanently stuck in their business model.

My point here is not to suggest that there is something egregiously irrational about the poor. Looking at it from their point of view, it seems clear that what they are missing out on is not really an opportunity to transform their lives: we are talking about a few more cups of tea or a few more meat dinners, in return for a few months of discipline. They would remain poor, indeed very poor.

When offered something that would make a significant difference to their lives—say the opportunity to join a ROSCA or a savings club that would help them buy a television—the poor seem to be happy to make the sacrifices. It is more that business-wise they do not see themselves being able to do anything very different. And most of them are probably right.

Banerjee's article focuses on PQRS: differentiated PRODUCT, better QUALITY, reputed RELIABILITY, and SCALE of operations. That's how an entrepreneur establishes real economic growth for herself.

My interest, of course, is that he mentioned savings clubs and significant differences in people's lives. And the difference is more than buying televisions, though that is also significant. The fact is that for the very poor, a savings club may be the difference maker that unlocks the potential for real entrepreneurialism, real community investment, and real lifestyle change. I also like the point that for that kind of change, the poor are happy to make the sacrifice and save. That is a development litmus test, to me: do the poor want this development enough to be happy to make sacrifices to pursue it?