Why would flood-stricken Pakistanis risk their lives for a few goats? The question came up recently when a news story came on a waiting-room TV about the disaster taking place halfway across the world. It reminded me that the role livestock plays for many of the world’s households can be far removed from that of urbanites in industrialized countries.
In much of the world, goats and other livestock are not just a hobby, nor are they just food. Instead, they may be a savings account, a pension plan, a disability insurance policy or more. Because we have so many sophisticated ways of managing risk in modern economies, we forget how the rest of humanity did it for millennia.
Everyone knows animals can be food, but few people think about the economic functions of livestock.
The first and most common is as a “store of value.” This, along with “medium of exchange,” is one of the classic “functions of money” that all introductory economics students learn. But for money to serve as a “store of value,” it must have buying power. That is not true in many developing countries. If inflation is even 6 percent or 8 percent, let alone 60 percent or 80 percent, using money to store value for later purchases is a bad deal.
It is far better to put that value into livestock. Yes, animals can die. But money can be stolen or lost. And animals produce “interest” in the form of milk, eggs or wool that can be consumed while the initial value is still stored. They reproduce, increasing the amount of value owned. And nearly everywhere, livestock are highly liquid. That is, they are easy to convert to cash.
That is why livestock also serve as disaster and disability insurance policies for hundreds of millions of households. People are exposed to losses from earthquakes, fires, floods, droughts and other natural disasters wherever they live. They are similarly exposed to illnesses and accidents that may leave breadwinners unable to work temporarily or permanently.
Any of these events may leave a family worse off over the long run in any country. But for those in developed economies, insurance can cushion such blows. Where insurance is unavailable, livestock usually are the next best alternative. A disastrous event is still a blow, but having contingency funds on the hoof gives people options for adjustment and recovery that they would not otherwise have.
Indeed, the fact that animals can move on their own is an advantage in areas where natural disasters may force people to travel. One can take stored value with you, even if the banks are closed. The quick-rising floods in Pakistan that trapped people before they could move with their animals are an exception. But after many floods and droughts in particular, small or large herds represent a mobile cash fund and larder combined.
Livestock also help people save for retirement. They can accumulate animals during their working life and sell them off when they can no longer do hard physical work. Such animals are an alternative to real estate, another eons-old way to store value for one’s old age. Just as real estate can produce income in the form of rent, animals produce current income in the form of milk, eggs, wool and offspring.
But animals are superior to real estate in that they are less “lumpy” assets. They can be sold off one by one, drawing down “principal” in periodic installments just like an annuity from a pension plan. This contrasts with a house that one can either sell or not. And in developing countries with poor land title systems and high legal costs, it is extremely difficult to sell successive fractional tracts of land. So owning animals makes it easier to draw down value over time.
Thus, in traditional societies, people usually aspire to have animals as well as some land or buildings as a means to a comfortable retirement. Both are proof against inflation, exchange-rate fluctuations and other macroeconomic fluctuations.
In rural Minnesota, it is not unusual for farmers who have retired from crop farming and intensive livestock production to run a small herd of beef cows. A herd gives one a bit of satisfying, but undemanding, work most months of the year and interferes little with going to visit grandchildren. Moreover, if managed right, some of the sales revenue can come as lower-taxed capital gains rather than as ordinary income. Animals can be sold easily if the owner has a sudden adverse turn in health. In the meantime, it gives one an excuse to own a four-wheel-drive pickup and to get out of the house whenever expedient.
But while such semi-retired cattle raising is one option among many for a few people in our country, for millions of others, animals are the best or only way of short- or long-term saving and protecting themselves against illness, injury and natural or manmade disasters. Those of us who enjoy the options modern financial institutions afford us should not scorn actions taken by those who have no choice.
© 2010 Edward Lotterman
Chanarambie Consulting, Inc.