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1.2 Finance and individual livelihoods


In the past, people trying to understand the problem of poverty used to think mainly in terms of income and consumption. Poverty was measured by a lack of income or food, which could be resolved by raising their income through getting better jobs, or through increasing the amount of food available. While this idea of poverty is not exactly wrong, it does not capture the much more complex reality of the lives of poor people. Efforts to help people out of poverty have to take this complexity into account, otherwise they risk failing to address their underlying problems.

The idea of a livelihood, which comes from an old English word meaning 'a means of keeping alive' captures the complex reality of poor peoples' lives more than just a job, or an income. For example, in reality, many people, and most poor people, do not make a living through a single source of income - or 'livelihood strategy'. They may produce some of their own food or other things that they consume, and they almost always rely on multiple sources of income at any one time. The reasons why the poor are poor, and why they stay poor, are much more complicated than a lack of jobs. We need to understand the constraints they face in getting and keep jobs or other sources of income. We also need to understand issues of vulnerability; poverty is not just about lack of income, it is about unpredictability of income and lack of assets (both material and social) to fall back on.

The idea of sustainable livelihoods was developed in the early 1990s in an effort to capture all of this complexity, and is now widely used in understanding and formulating responses to poverty in developing countries. We talk about sustainable livelihoods to capture the importance of a livelihood being one that can sustain itself in the long term, even in the face of shocks, and that does not compromise the access of others in the world, or of future generations to the resources they will need to survive.

This comprehensive definition of a sustainable livelihood was developed in a seminal paper on the subject:

'A livelihood comprises the capabilities, assets (stores, resources, claims and access) and activities required for a means of living: a livelihood is sustainable which can cope with and recover from stress and shocks, maintain or enhance its capabilities and assets, and provide sustainable livelihoods opportunities for the next generation; and which contributes net benefits to other livelihoods at the local and global levels and in the short and long term'

Source: Chambers and Conway (1991) p. 6.

Livelihood vulnerability and financial services

Many better-off 'modern' people have only one means of living. This is their job, or a business that they own and manage. It is fairly unusual for one person to have more than one significant livelihood.

Think about yourself, for instance; do you earn significant amounts of money, or other benefits, from more than one source? Do you intend in the future to do so, to diversify your sources of income, or do you envisage that you will progress from one job to another, within the same institution or in different ones, and that increases in your total income will come from higher earnings from your principal activity, or livelihood?

Now think about the household to which you belong. Do all its members depend on one earner, perhaps you, for their livelihoods, or do different members of the household have different livelihoods, whose earnings or other benefits are (partially or fully) pooled for their common good?

Using the table below, make a note of your household's approximate total annual income, insofar as you know it. Include income in cash or in kind (such as the value of free or low-cost housing, or health benefits, or other non-cash remuneration). How many different sources are there which account for 10% or more of the total? If there is more than one income in the household, make a separate column for each of them.

Income source Approximate annual income Vulnerability H/M/L Probability per cent of reduction/loss Net value

Look again at the figures and rank them high (H), medium (M) or low (L) in the 'vulnerability' column according to their vulnerability. By this we mean how secure are the various incomes? How likely is each income stream to disappear or to be substantially reduced?

Make a very rough estimate in per cent of the likelihood of each income source being eliminated (50% meaning there is a 50:50 chance of it being lost in a given year, 10% meaning that there is a one in ten chance, and so on), and multiply this by the income to get the corrected income in the last column.

View the completed example after you have used or estimated your own figures.

Income source Approximate annual income Vulnerability H/M/L Probability per cent of reduction/loss Net value
Salary from employment $12000 Low 10% $10800
Salary from employment $4000 Medium 20% $3200
Rent received for land in village $1000 Medium 40% $600
Total $17000 $14600
Check your answer

Now consider what sources of 'fallback' funds you or the main breadwinner have. This means where you could raise cash if you need it unexpectedly; say if someone in your family got sick, a storm damaged the roof of your house, or your car was damaged in an accident. Fallback funds might also be needed for happier reasons; your daughter might announce that she has met her ideal partner and wants you to pay for her impending wedding. So think about ways in which you can pay for such things. Do you have insurance? Items you could sell to raise money? Pension funds? Support from other family members?

Use the table below to enter the main sources of fallback funds. Make approximate estimates of their 'true' value and an estimate of their 'rapid realisable value'. By this we mean what the value of those funds would be if they had to be used at short notice. That is, how much could be raised from this source if the money was needed immediately, in say one week or less, which is the 'realisable value'. It is often less than the value of those funds if they could be used at the best time, rather than in an emergency.

'Back-up' source 'True' value Rapid realisable value
Pension fund
Savings deposit
Sell village land
Borrow from relative

For example, the value of a fixed deposit or insurance policy or pension fund will be greatest if the fund is allowed to mature fully. If you take out the money early, you will not get as good a return on it. Banks and others managing such funds usually charge penalties for early withdrawal, as they prefer that the funds are left in for the full term so that they can make long-term investments. If you make a claim to an insurance company, you may find that your premiums will rise in the future, or will not decline as much as they would have if you had not made a claim. Some insurance companies reduce the deductible you have to pay on a claim for each year you make no claim. Even if you take a loan from a relative, she will be able to give the largest loan when she has just been paid, or has just received a windfall from somewhere. Add up the total fallback available.

View the completed example after you have used or estimated your own figures.

'Back-up' source 'True' value Rapid realisable value
Insurance $500 $400
Pension fund $40000 $20000
Savings deposit $5000 $4600
Sell village land $10000 $5000
Borrow from relative $20000 $15000
Total $75500 $45000
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What have you learned from this exercise about the ways in which financial services can help us manage our livelihoods?

We all need access to financial services at different times in our lives. Even those of us who have relatively secure sources of income cannot be entirely sure that they will last into the future, and unexpected expenses, or 'shocks', can happen to anyone. Financial services are absolutely key to enabling us to manage uncertainties and shocks, even if we sometimes have to compromise on the value of the funds we have available.

Check your answer

It is important to note that people in most rich countries have some form of state provided insurance to fall back on in times of trouble, such as unemployment benefit, or free or reduced cost health care for those with lower incomes. By contrast, although poor people typically have greater problems than richer people in managing their finances, and face serious challenges in ensuring that they can cope with shocks, state-provided safety nets only exist in a few poor countries.