cash cow investment

This is, oddly enough, not the first post that I have written about the economics of cows. In January 2012, I posted about “The Wisdom of Cows“. And recently, in my post about Exchange-Traded Funds, I explained how it makes sense that poor Indians would save their money by buying bovine*.
*sometimes, I look back on these posts, and I’m amazed at how willing I am to start off at a complete tangent.

Why Cows Are A Great Investment For The Poor

I’ve mentioned before that I’m a giant fan of the book “Poor Economics“. And what I realised reading it is that we really have no idea what it’s like to be poor.

  • The poor have no access to financial services – and even if they do, those financial services are prohibitively expensive relative to the amounts that they’d have to invest (paying R50 in bank charges when you don’t even have R50 in savings – not feasible).
  • The poor are surrounded by other people that are poor – meaning that any spare cash gets used almost immediately to help a family member or friend with medical costs, or food, or funerals, etc*.
    *it’s a magnificent example of informal insurance – if they help someone in need out, then they’ll get help when they’re in need.
  • And even if a poor person manages to squirrel away some money in a mattress, they’re going to continually face the temptation to go and spend it on tea bags or biscuits.

So when they’re looking at “investment” products, the poor have a bias in favour of quite specific investments:

The key common characteristic in both of those is that the cash is not easily accessible once the investment has been made. Obviously, in the case of livestock, you could sell it to get the money back. But you’re not exactly going to sell the cow’s left udder in order to buy a box of lemon creams…

The other excellent thing about cows (and any livestock, really) is that they are the poor man’s version of a productive asset. Cows produce milk, and grow, and can occasionally reproduce.

So even while they seem like a risky (and time-consuming) investment from this side of the poverty line, cows are actually a pretty solid bet.

And if I was to get a bit socially-anthopological, I’d say that this is exactly why many cultures have lobola based on cattle. And, in particular, why the man has to pay it (he, after all, is getting another income-producing asset – no offence intended).

The Trouble With Owing Cows

As investments go, cows can also be pretty expensive. They need to be herded. They need to be locked in at night. The list goes on.

And it gets pretty inefficient – because if you have a village of 50 families, each one owning a single cow, then there are going to be 50 small children being used as cowherds.

The Zimbabwean Solution

If you use GDP per capita as a measure of poverty (using the IMF’s data), Zimbabwe is the second poorest country in the world – second only to the Democratic Republic of Congo. Which, to be clear, means that Zimbabwe is poorer than many failed states (like Somalia), and countries locked in civil war (Syria).

So it’s not surprising that poor rural Zimbabwean farmers operate on a cattle currency-type system. And that they hold 80% of the national herd (around 3.3 million head of cattle).

It sounds like an opportunity – and now there is a new bank (as reported by the BBC).

The TN Livestock Trust does not have branches; instead, it has farms. Deposits are made for 2 years at a time – and in return, the depositers receive 10% interest and collateral certificates that they can use to obtain real loans (from regular banks).

For depositors, this means that they can “unlock the value of their cattle without necessarily selling them.”

For the bank/trust, this means:

  1. A large pool of breeding stock; and
  2. Economies of scale (instead of 50 cowherds for 50 cows, they can use 1 cowherd for a herd of 50).

I think it’s a pretty incredible example of entrepreneurship at such a base level of poverty.

Another Interesting Note

You might wonder why there is a need for collateral certificates over cattle. After all, didn’t the rural farmers receive land under the Land Reform Program?

Well, actually, the farmers didn’t receive that land. What they got were 99 year leases.

And here’s the interesting part:

  • Why didn’t the farmers receive title deeds? Surely leases make no sense if the whole point was land redistribution….
  • So let’s assume that the farmers did in fact receive title to their land. What would happen next?
  • The new farmers would need to go borrow some money in order to buy seed and fertilizer and irrigation equipment.
  • They’d go to the bank, and offer their land up as collateral, and borrow the money.
  • If a farmer then defaults, the bank would get the title deed to the farm.
  • The bank then puts the farm up for sale in order to recoup its losses.
  • Who buys it?
  • Well if it’s a white farmer (which is quite possible), then the land reform program will have reversed itself.

It’s ironic, really. The process began with a violation of property rights. Today, there are still no property rights – not even for the supposed beneficiaries of the reform process.

And it’s why the cows are so important.