‘Makes sense’, what do you folks think, chime?
on a global scale, how much poverty interms of living standard is a NORM in the Muslim parts of the world and why is that so??
that is the first qs which comes to my mind.
dushi
Why the Fight against Poverty Is Failing: A Contrarian View
By Abraham George, TGFworld.org / http://www.tgfworld.org
Abraham George is the founder of The George Foundation, an NGO engaged in
humanitarian work in India, and the author of India Untouched: The Forgotten
Face of Rural Poverty. In this contrarian essay, he explores why the current
strategies that governments and development agencies are employing to reduce
poverty are not working the way they should. Among his arguments: Microcredit
programs, as they are now practiced in India, do little to help the poor.
By the World Bank’s broad definition of poverty ($2.00 or less a day per
person), there are more poor people in the world today than a quarter century
ago. Nearly half the world’s population, over three billion people, lives in
poverty. In India alone, two-thirds of its one billion-plus population is poor.
Yet, the strategy for alleviating poverty across practically every developing
nation has remained essentially the same for the past several decades.
There is plenty of talk about ways to increase income, reduce illiteracy and
ill-health, and empower women. The increased attention given to these issues
and pledges of additional financial assistance by world leaders are not matched
by new and effective national initiatives that can significantly reduce
poverty. So far, none of the poor countries has been able to achieve any of its
key developmental targets. The emphasis is still on more funding for programs
that have been in existence for many years. Yet these programs have had only
marginal effect, and have not kept up with population increases.
My personal experience on developmental projects is confined to India, but the
broader lessons learned there are applicable to most developing countries. What
follows explains what I consider are misconceptions in the current approaches,
and how the attack on global poverty can be far more successful.
International Development Assistance Hasn’t Worked
The UN Millennium project argues that it is the poverty trap of poor health,
poor education and poor infrastructure reinforcing each other rather than bad
planning, corruption, and ineffective execution that is hindering development
of poor countries. The idea is that underdeveloped nations can be saved through
more outside assistance and by expanding existing programs that are run mostly
by governments. Those who support this notion want the World Bank and other
international agencies and donors to make increased contributions to supplement
domestic government resources. But there is very little evidence that foreign
assistance has made much difference in overcoming the poverty trap in any
country.
As a consequence of the financial assistance received from international
agencies, national governments rely on strategies developed by planners at
organizations such as the World Bank and the United Nations. There is no
shortage of ideas, enthusiasm, and expectations at the planning level, but what
is lacking is good execution.
Planners have no responsibility for ensuring that funded projects meet their
goals in the field. Other than requiring periodic written reports and
demonstration of individual cases where success has been prearranged, there is
little feedback or accountability. Beneficiaries are not in a position to let
their views be known, nor do they understand what is expected in the longer
run.
Misuse of Funds
Governments, international agencies and donors have spent billions of dollars
to address poverty. For example, in rural India, the government spends
significant funds on subsidies (for electricity, fertilizer, fuels, etc.), food
rations, price supports, land allocation/distribution, job training and
financial assistance for initiatives in agriculture and small businesses. Loans
from the World Bank and other international agencies and bilateral aid
supplement domestic government resources. But who has benefited from all these
programs and assistance?
The beneficiaries are usually corrupt officials who manage and distribute
funds, and landlords and powerbrokers who directly or indirectly extract
benefits for themselves. In India, over 90% of the agricultural land is owned
and partly cultivated by less than 10% of the rural population who are termed
farmers; others are mostly laborers. Governments allocate land to the poor, but
they are unable to utilize it because of limited water resources, bad soil
conditions, and/or the inability to secure credit. Larger subsidies benefit
bigger farmers, but the poor do not gain much directly from any government
programs.
The presumption that with more money, corrupt and inefficient governments and
bureaucratic institutions will utilize funds efficiently and improve the
deplorable conditions of the poor is an illusion. There are too many
impediments to poverty reduction: bribery, political influence in the
allocation of land and/or credit, diffused focus and priorities, poor
execution, a shortage of rural infrastructure, and social inequality, among
other factors. Supporters of the “more money” approach should be reminded of
what the late Indian Prime Minister Rajiv Gandhi once admitted: Less than 15
cents of each dollar in assistance intended for the poor finally gets to them.
That is not to say that assistance should not be increased. But the real focus
should be on ensuring that the allocated resources reach the poor.
Corruption and misallocation of development funds are ultimately the result of
failed governance. Why bad governance? Unethical and illegal practices flourish
in countries without free and independent press to investigate wrongful
practices. Where the press is not sufficiently strong, there is little chance
of preventing the “opportunistic behavior” of individuals, businesses and
officials. Corruption can be reduced by assuring press freedom and
strengthening private social institutions (such as advocacy groups) that stay
independent. (Surprisingly, a democracy like India does not permit private
radio stations to broadcast daily news!)
If citizens cannot rely on an impartial judicial system, there is little hope
for a just and fair society. Societies that do not protect property and persone
from predators cannot expect to create sufficient wealth for everyone. It is
the erosion of press independence and the weakness of legal system that are
most troubling.
The Limited Role of NGOs
There are several participants in the developmental arena: national and foreign
governments, international agencies, private companies and non-governmental
organizations (NGOs). The role of NGOs has gained attention in recent years as
they focus on micro-issues and provide grass-roots assistance. Many have taken
up projects to improve the quality of education and healthcare, while focusing
on specific critical areas such as HIV/AIDS, illiteracy and women’s
empowerment.
NGOs have been advocates for the poor, pointing out issues of concern and
presenting ideas for improvement, often figuring out how to press through the
corrupt and self-serving regulations faced by their beneficiaries. Several are
involved in income generation activities, offering microcredit or assisting
with water resource management and use of indigenous technology. Some private
companies have formed NGOs to attract grants from their governments and
international agencies. These efforts usually complement those of governments
in the implementation process.
Despite positive contributions, NGOs have not been involved in major
developmental undertakings intended to create large employment and wide income
generation through sustainable businesses. This is attributable to their
lacking good managerial skills and organizational structure to take up business
ventures. Further, donor funds are usually restricted to narrowly defined
projects. Consequently, the role that NGOs are best suited to play is in
support of projects funded by governments and international agencies, or those
limited initiatives approved by private donors.
Unfortunately, those NGOs that actually carry out developmental work in the
field are stuck within programs specified by planners in developmental agencies
and donor institutions. New ideas that deviate from those already specified by
planners seldom qualify for any funding. Thus, project proposals are prepared
to reflect the requirements set by these planners in terms of methodology and
outcomes. There is little initiative from the ground up, and no real feedback.
Demonstrating compliance on paper ends up more important than actually getting
the job done effectively. As a result, recipients of developmental funds spend
significant time preparing reports for the planners to qualify for continued
funding, and less time worrying about what benefits the poor.
Microfinance Is Not a Panacea
The expression “social entrepreneurship” was coined to reflect corporate
benevolence toward the poor. Muhammad Yunus, who founded the Grameen Bank in
Bangladesh in 1976, intended exactly that when he started giving poor people
credit and assisting them in their local business ventures. Subsequently, many
NGOs around the world started offering small loans to women who could otherwise
not obtain credit from commercial banks. As different microcredit programs
sprang up in poor countries, governments, international agencies and private
donors joined in with necessary capital. Several experts in these institutions
termed microcredit a revolutionary concept, and there is growing belief among
many that it might be the way to solve poverty.
Today, some for-profit funds and supposedly not-for-profit organizations market
microcredit lending in developing countries, and even offer advertised returns
on investment. One such microcredit intermediary in India recently publicized
that it has been charging 36% interest until recently, when it dropped the rate
to 26% for some borrowers by making the lending process more efficient. After
all, it argued, credit card companies charge as high as 28% interest for
credit-risk customers.
The assumption is that poor people can be rescued quickly and easily with a
modicum of money. (Microcredit is intended mainly for starting or expanding
small businesses run by borrowers.) The claim is that microcredit (loans of
around $100) has lifted tens of millions out of poverty in the developing
world. However, assertions that more than 90% of the people who receive
microcredit are poor, that most of them succeed in businesses started with
these loans, and that they repay the loans at 24% annual interest or higher, go
unchallenged.
So far, there has not been any outcry on the high rate of interest. The poor do
not have any voice in, or understanding of, financial markets. They are happy
to get loans to meet personal emergencies (such as expenses toward surgery,
marriage or dowry) or to pay off financial obligations to local money lenders
who charge even higher rates. Microcredit intermediaries claim that this is
social entrepreneurship, and not living on the backs of the poor.
In my personal experience in rural India, I have observed that a small number
of people, mostly village leaders and their family members, operate the few
shops and businesses. They are the only ones who have the support mechanisms,
knowledge, and skills to make a business succeed. A great majority of the poor
rural populations do not have the ability or experience to start or run
businesses, with or without access to credit. To expect them to succeed in
business is unrealistic. They are uneducated and labor for landowners and for
the few nearby businesses. At best, they might benefit from the trickle down
effect if landlords and small businesses prosper.
The George Foundation is engaged in poverty alleviation projects in rural Tamil
Nadu, India, focusing on income generation activities, education, healthcare
and community development. The foundation has studied some 17 villages and over
50 microcredit programs in South India. Data show that less than 5% of those
receiving micro-loans start any business of their own. One preferred activity
is buying and selling sheep, hopefully at a profit equal to the wages foregone.
These types of activities are unsustainable in the long run. Consequently, less
than 2% continue beyond the first three years, and very few succeed in any such
“business” with small amounts of money and little or no support, training, or
skills.
Microcredit lenders are not concerned about what the borrowers do with their
loans. Loans are usually made to individuals, but guaranteed by groups that can
demonstrate their capacity to repay. Most borrowers of microcredit repay loans
from income received at regular jobs, or from grants provided by governments
for self-help programs. Not surprisingly, it is the intermediaries –
commercial banks and loan facilitators – that gain the most from the spread
between the cost of funds for the intermediaries and the loan interest charged
by them. Commercial banks in India, for example, receive funds for microcredit
programs from the government-run NABARD bank at 5% to 6%. They then lend at 10%
to12% to a microcredit intermediary which, in turn, lends at 24% to 36% to the
final borrower.
The assurance of loan repayment makes microcredit popular among lenders, in
addition to the high interest charged. Borrowers are motivated to repay loans
because of an expectation of future monetary benefits. If one borrows and
repays twice (no need to start any business, but maintain good paperwork), then
he/she becomes eligible for a grant for $100 or more from a separate government
program (each state offers its own variation of this facility). The free money
from the government can be used to repay the third micro-loan made to that
beneficiary. The government is short the amount of the grant, but the borrower
is debt free, and the microcredit middle man is assured of capital and high
returns.
Why this round about way to offer free money when there are several direct
means to reduce the debt burden of the poor? The answer probably lies in the
fact that this form of “hand-out” is invisible within “social
entrepreneurships”. Moreover, major financial institutions have become
embroiled in this commercial activity. A new breed of educated and well-trained
loan sharks, with bank support, is now in the microcredit business in India.
Microcredit has become a trendy cure-all. If poverty alleviation were a matter
of lending, the world could eradicate poverty easily. It would cost about $300
billion at $100 per person – a small sum in comparison to the trillions of
dollars already expended over the past half a century. The present form of
microcredit, as practiced in India, results in little or no sustainable
development benefit for the poor.
Importance of Private Sector Participation
In developing countries, the government bears the primary responsibility for
delivering basic services for the poor. It has traditionally been the agent for
healthcare, education and job training, especially due to the inability of
rural populations to pay for basic services. A significant portion of the costs
associated with public services will continue to be borne by the state until
rural incomes rise and/or until the private sector finds it attractive to be
involved in such efforts.
Government-run institutions have, for the most part, failed to offer quality
services because they are unable to motivate those who carry out the tasks in
the field. Those who can afford to pay for quality services rely on private
providers. Even those who work for government go to private clinics for their
healthcare needs, and send their children to private schools. Quality will
never improve unless service providers have the incentive to serve the poor.
Until then, the “haves” have markets to choose from, while the “have-nots” have
bureaucrats to dictate to them.
But, lack of affordability should not prohibit private sector participation.
With NGOs as project facilitators, opportunities exist for public-private
partnership. Private institutions can deliver services at reduced prices, but
at a profit, within a competitive and independently monitored system where the
costs are subsidized or even fully paid for by the government.
In developing countries there is no serious effort to involve private
companies, though most rural areas are, in fact, ideally suited for industries
in herbal products, alternate fuels, cement and tile, lumber and pulp, meat,
dairy and poultry. These private industries should function in a free market
with sufficient checks and balances to ensure that they operate in a socially
and environmentally responsible manner. By offering job opportunities in
villages, they would alleviate migration to cities for employment.
Financial incentives like low-interest loans and tax breaks, and physical
infrastructure improvements will motivate private companies to build factories
in rural areas. Elimination of controls on the sale of agricultural products,
and assistance in finding new markets will attract many businesses. These
measures will in turn improve the demand for produce and boost commodity prices
to levels that can financially sustain rural families. Further, international
agencies and donors must consider equity participation in companies instead of
simply channeling funds through governments or offering grants. They should
provide loans at low interest rates directly to local entrepreneurs who can
demonstrate an ability to run successful businesses. In short, some of the
available developmental funds must be used to support commercial activities in
deprived communities. With more economic activity, the poor labor class can
gain employment at better wages.
Government’s role ought to be that of a catalyst. There should be no room for
bribes. The focus should be to provide incentives for private (and community)
participation. When private individuals and institutions find it worthwhile to
take risks and invest in economically depressed areas, there will be
sustainable development and poverty reduction. As incomes rise, there will be
less need for government involvement in the delivery of many services currently
provided.
It is not money alone but integrity and ideas that will make the real
difference. A noted economist once asked me how I would go about improving the
productivity of rural laborers on our farms. Creative thinking was my thought!
We have instituted a program of de-worming drugs every six months, and daily
iron tablets and protein-rich nutritional supplements prepared from locally
available grains and nuts. Our workers wear wide hats protecting them from
direct sunlight. These are simple, low cost measures, but they have contributed
to a healthier and more productive labor force on our farms. For less than $10
per person a year, we have doubled their productivity!
A New Model for Corporate Philanthropy
Contrary to the recognized activities of NGOs, our foundation has embarked on a
path similar to those of private organizations: We build institutions, develop
human resources and managerial skills, and undertake major commercial projects
– for humanitarian reasons. One project currently underway is a 250-acre
banana farm, the second largest in South India. My life-long experience in
business, my convictions about free and open markets and the need to encourage
an entrepreneurial spirit in the individual have helped me not to rely on donor
funds alone. Instead, our foundation has invested in sustainable projects that
generate “profits” as well as steady income for the poor.
Our decision to confine business activities to farming results from the fact
that the rural adult population in India is generally illiterate and lacks
industrial skills. It is farming that gives them opportunities to better their
lives; it is what villagers have a natural affinity for; and it is an industry
where large numbers can be employed.
With the goal of empowering poor women and elevating their income-generating
capacity, The George Foundation set up Baldev Farms, a “learn while you earn”
program. The farm uses precision agricultural tools, organic fertilizers and
superior technology in drip irrigation to conserve water. Apart from the farm
workers’ daily wages, we set a portion of the profits generated from the sale
of produce in a savings account to be used at the end of five years for the
purchase of one third to one half acre of land for each family. Families will
then cultivate their newly purchased land, sharing resources, such as wells and
tractors. The foundation will remain a support organization to help address
concerns and difficulties, while also offering know-how and access to markets.
Within three years of starting Baldev Farms, more than 150 villagers, mostly
women, have found labor and supervisory employment in the field; hundreds of
others have benefited indirectly. Most have already come out of poverty, paid
off their debt and freed themselves from bonded labor status. As the foundation
expands its farming activity in high-value fruits and vegetables, it will soon
generate sufficient cash flow to finance other humanitarian initiatives.
Though the final chapter on this program is not yet written, the concept of
offering each poor family a piece of the land to cultivate profitable crops is
proving to be sound. With the profit sharing plan in place, everyone in our
farm is highly motivated, takes initiatives and works hard. It is becoming
increasingly clear to us that good management and a dedicated work force are
assuring profitability to empower the poor.
Admittedly, our “corporate” approach to philanthropy cannot be replicated by
most NGOs. Only private for-profit companies have skill bases and resources to
undertake such business ventures. But they must recognize that market
opportunities can be tapped only when the purchasing power of consumers rises.
Hence, for the foreseeable future, investment in the rural sector ought to be
toward production as opposed to selling to the “bottom of the pyramid.” In the
longer run, it is competitive markets and involvement of the community in
sustainable development projects that will solve poverty.
As long as significant poverty exists around the world, and the disparity
between the rich and the poor widens, private companies in developing countries
need to make a contribution to solving the problem. A dialogue must begin
between and among business leaders on devising rules for business conduct in
deprived communities. The model must consider how poor people can be brought
into the mainstream of consumers with sufficient purchasing power within a
reasonable time period. Those who work must earn enough to be able to come out
of poverty. Minimum wages and benefits must be adequate to meet at least basic
human needs, and farmers must be able to sell their crops at prices that assure
a fair net gain. Economic success and social justice must go hand in hand.
There is serious concern in many circles, and rightly so, about whether the
private sector can be trusted to operate fairly in communities that are poor.
The fear is that free markets mean exploitation, citing what they call the
“Wal-Mart Syndrome” of forcing suppliers, especially those from poor countries,
to offer products at prices that leave little gain for workers.
Troubling issues like this one will always exist. But they can be addressed
through effective enforcement of laws and regulations concerning minimum wages,
worker safety and benefits, non-competitive practices and environmental
protection. Private companies must resist the temptation to extract government
funds for their business activities in the name of social entrepreneurship.
They must recognize that it is in their long-term interest to win the support
of the communities where they operate. Repressive local norms in compensation
and treatment of labor must be replaced with fair practices that assist the
poor in adequately caring for their families. Market forces of supply and
demand and competition for gaining a dedicated labor force and loyal consumers
are powerful factors in motivating good behavior on the part of corporations.
There are no easy answers. Poverty, in large part, can be solved if the poor
gain new skills and if more jobs become available in the rural sector. For
some, the solution lies in ownership of a permanent income generating asset:
land. The poor need to have the opportunity to own and develop land, and grow
profitable crops that can be sold in a competitive market.
More money is not a prerequisite for success; proper use of available funds is.
There is no substitute for good planning, effective organization and execution
with accountability. Only those who bear financial risk can be expected to
perform effectively.
Handouts will not solve poverty; neither will it be solved by grand government
projects, or by piecemeal interventions of NGOs. Instead, poverty will be
solved with vibrant economic activity driven mostly by the private sector. The
hundreds of millions of new jobs that are needed each year will come mainly
from corporate business ventures in rural areas. The developmental strategy to
address poverty must embrace this reality.
A market-based approach to poverty reduction will result in income and wealth
creation, and lay the groundwork for the next generation to avail of a wider
range of opportunities with enhanced resources.