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.