Understanding poor people

I was going through a paper "Access to Financial Assets and Economic Opportunities for the poor" by Vijay Mahajan, BASIX, India yesterday and it made me thinking about the challenges poor people have to face in their lives. The image that comes in front of our eyes as soon as we hear the word "poor" is that of people having very less income,robbed of economic opportunity and living in huts in unhygienic environment. The capacity and capability of these people to choose their own way of life is very small. But have we ever thought that why do these people remain poor, why dont they make progress in their lives. Is it because they dont want to make progress? May be. To answer this first we have to understand economic life of a poor person.

The biggest challenge in front of a poor person is to first come out of vicious circle of poverty. Poor people are characterized by low income groups. The vicious circle starts with low investment. This results in low income which is inadequate to meet consumption needs. This results in low savings and low savings again lead to low investment. Thus this circle moves. Now a poor person if wants to break the shackles of poverty has to first break the vicious circle by increasing the level of investment. Additional income then leads to additional savings which again increases scope of more investment.

The primary asset of a poor person is his own body, which he uses to generate minimum means of living. This is followed by bodies of their family members. Every additional body can be a source of income- even as it has to be clothed and fed. This explains why fertility rates in poor are higher than the rich- because a poor human being becomes source of capital fairly soon, and without much investment in his/her human capital.

Now as I mentioned above to come out of poverty a poor person needs to invest. But invest in what? And what does he need to invest?

Lets first understand investment. Investment is spending which leads to formation of real capital/physical capital(Buildings, plant, machinery), Human capital(nutrition, health, education, skills),and social capital(Association, trust, clubs). However to create any of these above mentioned capital a poor person needs financial capital( Savings, credit etc). Here I am talking about capital in its broadest sense.(In classical economics, "capital" is a good which is used to produce goods which are used for consumption).

Since savings and credit availability to poor people is very less so they are unable to form any kind of real or human capital. However Social capital is quite prevalent among poor. This in the form of kinship groups, whether by family, clan, tribe, caste, neighborhood, religion. The poor invest a lot in maintaining their social capital because it serves as a safety net- a form of insurance in case adversity becomes more than normal. That is why one sees paradoxical situations where very poor households spend a fair amount of money, often taking a back breaking loan, for marriages and death feasts.

In the category of natural capital, land is a highly preferred asset. Livestock has similar place in the asset calculus of poor as human capital. It is the number of heads that matter, not how productive each one is, for sheeps, goats, cows are left free for grazing in field and whatever meat, dung and milk they produce is their net income.

It is Physical capital and financial capital that poor people tend to have very less of(which is actually required to break the vicious circle). In many cases if we calculate their net financial assets then taking into account their borrowings it comes out to be negative. Generally borrowing exceeds the amount of their net savings. Payment of high rate of interest on the borrowings add to the misery of these poor people. This is a classical debt trap. As long as poor people have natural capital in the form of land, livestock they can pay debt by liquidating these assets-though it may lead to distress. They also fall back on their social capital, using the extended family and other social networks to borrow, at least for consumption. In extreme cases bodies of family members and their own body becomes the only means of paying back debt. This leads to Bonded labor, child trafficking, prostitution.

Poor people also tend to have very less of Human capital(also a source of income) because of low literacy rate among them.

In such circumstances it is very essential to increase the net financial and human capital of poor people. Here comes the role of government. Government has to ensure easy availability of credit to poor people, build rural infrastructure, provide adequate education, give reservations to classes not adequately represented in social system, protect them from competition from the products of big industries etc. NREGA which is the flagship program of Congress party is sure to increase income of rural households and also create productive assets for rural people.(I am obviously assuming NREGA is efficient with minimum leakages although today it very inefficient with only 20p out of Re 1 reaching to poor). This year Finance Minister has sanctioned 39,100 crores for NREGA scheme. Also, debt waiver of 71,000 cr given to marginal farmers last year gave huge relief to them though it violated law of giving credit. This year huge impetus has been given to build rural infrastructure and increase literacy rate by focusing to reduce difference between "Bharat"(Rural India) and "India"(Urban India)in Union Budget 2009-2010. Apart from NREGA, allocation for Prime Minister Gram Sadak Yojna has been increased by 59%. It has been proposed to build rural mega clusters in West Bengal and Rajasthan. It has also been proposed to make India slum-free by 2012.

Thus we see that role of government is very important to raise income per capita of a country by redistributing income and also to lift people out of poverty.

Northern and Southern World

CUTS LRC on September 19^th launched its newest project called “Soho to Soweto”, a debate series designed to engage the British public with the development issues facing the world today. I have consolidated all debates and tried to focus on major issues faced by developing world today.

There are many issues of development that the world faces today. With development some problems disappear while others evolve making the development process more complicated. Though most of us are aware about the general problems faced by developing countries surely as - poverty, unemployment, there are other issues (like security, environment sustainability, form of government) as well that have led to important distinctions between the Northern and the Southern world.

Aid

Does Aid aid development?

By aid we refer to the economic aid given by developed countries to the developing countries. Aid treats only the symptoms of poverty rather than the disease (poverty) itself. Whatever aid is provided by the foreign governments does not reach the targeted people. As a remedy a proper Public Distribution System (PDS) is needed to minimise leakages/interfaces in between. Moreover, aid must be accompanied by strong political will if it is to further development. Many Northern world countries have realised this and during G8 summit, June 2007, Aid was put as top of the agenda and many aid schemes for Africa were launched.

There is a great importance of the involvement of NGOs and the private sector in aid disbursal and its use. Since the NGOs and private sector interact with people directly they identify their problems well and can work more effectively to raise funds and make effective development schemes to help poor people.

Trade

Are supermarkets responsible superpowers?

A supermarket is a grocery store that offers wide variety of food and household products. About 75% of all spending on food items in UK is on supermarket. Supermarkets usually offer products at low prices by reducing their economic margins. Most of the products come from developing countries and it may be possible that in a bid to offer lower prices these supermarkets do not pay producers in developing countries adequately. Although this is good for consumers, producers suffer resulting in low product standards, casualisation of employment, poor working conditions ultimately rupturing long term trading relationship.

Consumers in developed countries must be more aware of the products they are consuming. There must also be a regulator made which regulates the supermarkets and sets minimum standards. Fairtrade organisations are definitely helping the producers in developing countries receive fair and stable prices for their products covering cost of production.

Public concern about climate change and carbon emission has been growing rapidly in these recent months. A group of consumers has emerged who would not probably want to consume products imported by air because of higher carbon associated footprints. However debate around this issue could severely damage opportunities for sustainable forms of export agriculture to contribute to the economic and social development of poor countries.

Security

Does war on poverty = War on terror?

Security has very important implications for productivity. Uncertainty regarding security might depress GDP growth.

Developed countries such as UK and USA must become more consistent in challenging war crimes, regional and cultural conflicts and should fulfill their responsibility of protecting civilians threatened by abuses not only in their country but also in the Southern countries. For example in Sierra Leone, thousands of people had been killed or mutilated in the country’s brutal civil war in 2000. Many became refugees in Guinea and Liberia. UK with the help of the UN peacekeeping forces deployed troops in Sierra Leone and brought the situation back to normal by December, 2005. On the other hand in Rwanda millions of people died due to the genocide of 1994. About half a million lives could have been saved if troops with robust peace enforcement capabilities had been sent to Rwanda. But UK had suggested that UN peacekeeping forces not be sent citing disaster in Somalia in 1993 as the reason.

An opinion was voiced that governments of developed countries which have committed to spend 0.7% of their national income on international aid must fulfil their commitment.

Conflicts in developing countries is largely to cultural diversity and the innate propensity among people from different culture to fight each other for domination or autonomy. E.g. Tutsis and Hutus in Burundi/Rwanda. Also, these cultural differences are accentuated by political and social events.

Environment

Must development cost the earth?

Whenever we think about economic development and environment the question which always comes to mind is whether economic development is environmentally sustainable. The answer is not very simple. If a country has to develop then it has to build more industries and it seems that pollution will necessarily increase. A general historical trend shows that economic development and environmental degradation are directly proportional.

The efforts of advanced countries in controlling emission have been inadequate. Carbon trading has also not yielded the desired results as some firms simply buy credits from those firms which cause zero or very little pollution. Even if emission rates in 2020 was 25-40% below 1990 levels these would be associated with adverse ramifications. Acting now would be cheaper than acting later, costing 1% of GDP in 2008 in contrast to 10% of GDP in 2050. Around $ 200 billion would be needed to control emissions now and most of that would have to come from the private sector.

Democracy

Democracy and development: Friend or foe

By development we mean general well being of people at large including some basic political and civil freedom given to the citizens. A democratic regime which ensures more freedom, well being and provides basic fundamental rights to its subjects is conducive to development than a non-democratic regime. The debate was on whether democracy leads to development in reality.

There are examples of countries where democracy had not led to development. For example in Gaza people had chosen Hamas democratically to power in Jan 2006 but Hamas had not cared for development. Gaza depends on Israel for electricity, fuel and water but Hamas is determined to enter into conflict with Israel. Again in Zimbabwe which has been boiling in civil war for long, in the run-off elections of 2008 Robert Mugabe polled 85.3% votes while his opponent managed only 9.3%. The opponent had pulled out of the election because of widespread violence consisting of murder, beating, rape etc. Such forms of democracy where voters are forced to vote for a particular leader must be condemned.

The North has always tried to impose Western liberal democracy on the Southern countries. For example, in China a number of pro democracy organisations were formed by overseas Chinese student activists and there was considerable sympathy for the movement among the westerners who also formed China Support Network (CSN), a US based organisation promoting democracy for mainland China. Even in Venezuela, George W Bush gave $ 53,000 to Maria Cornis Machado, Director of Sumate organisation to promote election education. Now Maria faces criminal charges for accepting US government funds. One of the panellists, Sylvie Aboa- Bradwell made a very interesting remark that different countries may need different kinds of democracy and that imposed democracy was tantamount to slavery. Northern countries must also not force the countries of the Southern world to adopt democracy models but should be free to choose their own form of democracy.