Tuesday, May 31, 2011

Economic Reforms and Poverty Reduction

This was written in August 2003



Economic reforms aren’t poverty focussed. Multilateral and bi-lateral aid agencies therefore focus their efforts on “poverty” alleviation programmes. This would seem to imply that the national governments of countries in the developing world aren’t focussing on poverty reduction. So what’s a poverty focussed programme?


Poverty, using a calorific value definition, would imply that a person has no sustainable means of meeting his/her basic needs – food (lets ignore clothing, shelter, health care against basic diseases, etc). By this yardstick, the world’s poor must, in short time frames, have a 100% mortality rate. But apparently even without 2400 calories of food (and such other basic needs), the poor seem to live fairly longer than such a definition would suggest. Perhaps a wider definition of poverty would include food, clothing, shelter, health care and the means to access opportunities to improve one’s well being. This would imply that when a person generates some surplus above her basic needs, the person would have the ability to start accessing things needed to improve one’s well being. 

This doesn’t sound very different from suggesting that a person must be a profit making enterprise generating a surplus after meeting the costs of capital – basic needs of the human being. Looked at this way,  the building blocks of economic policy relating to helping enterprises thrive don’t need to be very different from the building blocks of a “poverty reduction” programme.

So what makes enterprise thrive. Principally the following:

The existence of an income earning opportunity. This opportunity comprises of a need and a willingness to pay. If the product / or service can be delivered within this price, there is an income earning opportunity. This holds true for all products and services – movies, sex, narcotics and education and is not dependent on the legal framework.

Access to inputs to exploit the opportunity. If you don’t have the money, you should be able to access it freely. The price of capital is a factor only relevant to the nature of the opportunity. So 15 years ago, enterprises in India borrowed at rates of nearly 18-20% and still ran profitable businesses. Indonesia’s economy grew rapidly during through the 1980s when interest rates were in the early 30s. In addition to capital, you must be able to bring together all the components that enable a product or service to be delivered – technology, people, raw materials etc

Predictability in the rules relating to the business. Some would use the expression rule of law. Entreprises thrive when they can with reasonable accuracy predict the costs of production and delivery and feel certain that they can collect revenues. Such certainty is provided with greater reliability by governments that can enforce the law. Such governments in many parts of the world include dictators and tyrants. In the absence of formal governments, informal governments run by warlords or gangsters provide this predictability. Here again, the scale of the profit opportunity  defines the costs that an enterprise can bear in assuring predictability. Hence, enterprises will bribe dictators or pay “protection money” to gangsters at levels that still render the business viable.

At this point, the “enterprise” oriented discussion will have to scale upwards to a larger economic environment. Economic policy is less concerned whether individual enterprises fail or not and more concerned with the aggregate result. Sustainability of an industry is enhanced when it is based on some specific competitive edge. Natural resources can be one such competitive edge. In other cases, the sustainability can be a function of successfully marketing concepts. Tourism is a classic case. There are thousands of spots around the world that can provide immense joy and relexation with views of verdant mountains,  beaches with clear marine life or just simply fantastic food and weather. However, some attract more traffic than others. There seems no reason why any country cannot replicate Thailand’s (or Goa’s) success as a tourist destination for international travellers.

Economic reforms that are oriented towards business and enterprise typically fight their largest battles on two fronts:

  • The cost of the predictable environment – where the cost of providing that becomes too high for business. The biggest enemy here is often the government (and its own institutions) through its myriad laws and opaque systems of functioning.
  • The predictable environment for business includes elimination of new competition. So those “in” and profiting will naturally fight to keep others “out”.

Governments seem to find it a lot easier to change rules that increase access to capital and inputs for business than to remove its own self as a high-cost or hindrance to a “predictable environment”. Business exists because the opportunity exists and which government does not have to spend time creating (even though they often seem to be). But real economic gains accrue when the cost of government hindrance is lowered and growth is allowed unfettered, not by protecting some.

But providing access to inputs and providing infrastructure does not create sustainable incomes. The fairly empty “technology” parks that have opened up in virtually every state capital that matters is testimony to this. Simply providing infrastructure and access can’t create an enterprise. The business opportunity must justify its creation.

The poor are deficient in capital and their ability to access other inputs. More importantly they are often victims of laws and rules that inhibit their ability to turn what they have into capital/inputs for a potentially sustainable business proposition. They have absolutely no ability to pay the high costs of government.

Envisage a scenario where a tribal community is permitted to bring in external investments to turns its forests into a tourism business. The biggest inhibitors would be laws that prevent them from chucking in their own forests as capital, a plethora of approval procedures (including environmental laws) that will prevent the forest from being used thus. Hence, while Kerala’s now growing tourism industry is based a lot in and around forest areas, tribal belts will not manage to do the same.

“Poverty focussed” programmes of government and development agencies often try to address the “inputs and capital” issue and some tinkering with the hindrance of government. I have spoken to countless development sector professionals who have described at length “income generation programmes” where along with some capital, training is imparted in carpentry or garment making etc. Most of these programmes fall apart, once the funding agency withdraws its support. . They almost completely ignore the issue of “sustainable income earning opportunity”.

The biggest problem for the world’s poor is their ability to identify and become part of an enterprise that has identified a sustainable opportunity. It is completely unreasonable to expect that just because you provide some capital  and training in one or two vocations, that a poor person will suddenly become an entrepreneur capable of generating surpluses to reinvest in himself.

Poverty focussed programmes must try to identify potentially sustainable business opportunities where the poor are and live; or at handshaking the poor into where such opportunities exist. The following examples are illustrative of each scenario:

The North Eastern states, despite their high literacy levels in many states, are short on economic growth. Cane and bamboo are abundantly grown here and a large market exists just across the border in China. Several laws, including those on free investment in these states prevent such an opportunity from being fully tested for sustainability. Concerns of “national security” are further used to suppress economic opportunity for the people of this region.

There are strong restriction on investments (and trade) in agriculture. Daily wage earners working on farms constitute a large section of the “poor” as we have broadly defined earlier in the note. Permitting enterprises to freely invest in agriculture will help identify where sustainable income generation opportunities lie. The tea and coffee plantation business over the past two decades in particular have become sustainable international businesses that don’t rely on development money and government subsidy to survive. The coffee industry has managed to alter the perception in global markets of Indian coffee – from one of poor quality relative to other countries to good quality coffee. 80% of Indian coffee is exported and more than 50% of tea produced. These industries employ an estimated 1 million people in a business where labour constitutes 60% of production costs, according to the industry’s own estimates. They have steadied incomes of farm workers who would otherwise be condemned to live as subsistence farmers or part time agricultural labour.

The building blocks of economic reform and poverty reduction programmes are the same. The emphasis and approach taken in the reform programme often creates an “anti-poor” perception. Much of the time and media space on the debate on economic reform centres around business, the institutions of government itself  and other vested interests. None of these constitute the poor. The emphasis on pro-poor reforms will have to be in a different area – removing needless costs of government to small enterprise and resource based enterprise and handshaking such small enterprise to business opportunities. This will create sustainable income opportunities.

How to identify ways of bringing opportunities to earn sustainable incomes to the poor will require innovative thinking and a different mind-set to the approaches currently practised. This note has touch upon a couple of such alternatives. Economic reforms that aim to reduce poverty and ignore the aspect of sustainable incomes in the context of the poor will always fail.

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