How to cope with poverty

1. How to cope with poverty Private initiatives overcome public failures Barun Mitra Liberty Institute www.LibertyIndia.org September 2006

2. Outline • Introducing India • Prospect and problems • Causes of poverty • Grassroots entrepreneurs servicing the poor • Political provisions for informal economics • Success of people, failure of policies

3. India: the prospect • The largest democracy, huge potential but still poor • Slow reforms in the 1980s • Reforms gathered pace since 1991 • Tariff reductions • Regulatory reforms • Exchange rate decontrolled • Inflation under control • Broad political consensus on reforms agenda • Growth rate averaging 6% for over a decade • Growth of ICT, and service sectors • Become the 2nd largest economy by 2030

4. India: the problems • High fiscal deficit • High regulatory and procedural costs • Arbitrary and opaque government decision making • Tariff barriers still relatively high • Industrial policy obstructing growth of manufacturing sector • Labour laws affecting job creation • Education policy contributing to unemployable and underemployed workforce • Coalition politics, slowing policy reforms • Judiciary inefficient, huge backlog, conflicting and complex legal provisions

5. Country Share of World GDP in 2005 Share of World GDP in 2035 US 21% 15% China 11% 27% India 6% 15% India in the world Source: “Tri-Polar World” by Arvind Virmani, Working Paper, ICRIER, New Delhi, 2005

6. Understanding poverty • Low purchasing power, 25% living below $1 a day • Low skills, low productivity • Little or no education, difficult to train and upgrade skill • Lower ability to move to different sectors of the economy • Labour laws disincentive to hire • Lack of economic opportunities and employment

7. Immobility of labour • Labour force has grown from 140 mn in 1950 to 420 mn in 2005 • Organised sector employment has grown from 12 mn to 27 mn between 1950 and 2005 • Recognised unemployed 40 mn • 60% of workforce in agriculture • 30-35% of economy in the informal sector, engaging the bulk of non-agriculture workforce

8. Changing Economy, Unchanging Labour - India

9. Roots of Poverty • In 1950, agriculture contributed 55% of the GDP, and engaged over 70% of the workforce • In 2005, agriculture's contribution to GDP had fallen to 23%, but it still engaged nearly 60% of workforce • Poverty and agriculture have become synonymous in poor countries

10. Growing Economy, Moving People - USA

11. Challenges before Entrepreneurs • Lack of competition • Regulator policies • Tax and tariff policies • Labour policies • Judicial inefficiency • Access to investment and technology • High transaction cost of doing business in the formal sector

12. Category Bangladesh India Nepal Pakistan Sri Lanka Hong Kong Steps to launch Business 8 steps 11 steps 7 steps 11 steps 8 steps 5 steps Time need to start a Business 35 days 71 days 21 days 24 days 50 days 11 days Cost of setting up business (% GNI per capita) 81.4% 62.0% 69.9% 18.6% 10.4% 3.4% Cost of Doing Business Source: Doing Business Report, by World Bank

13. Adam Smith Every individual necessarily labors to render the annual revenue of society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it... He intends only his own gain, and he is, in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention… By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

14. Entrepreneurship as a discovery process • Identifying a supply and demand mismatch • Seeking to capitalise on this opportunity • Discovering ways to improve productivity, and competitiveness - Israel Kirzner

15. Grassroots Entrepreneurship • Moving the nation • Banking for the Poor • Enterprise of education • Delivering health care • People power • Ushering the information age • Free trade by any other name • Name a sector they are probably present

16. Road bumps before India • 60 million registered vehicles • Animal carts are mainstay of rural India • Transportation is among biggest component of health care costs • 25% of fuel is wasted in India due to congestion and poor roads • 40% of fruits and vegetables rot because of lack of storage, processing and transportation facilities

17. Entrepreneurs strike back

18. Keeping India Moving

19. Keeping India Moving Over 100 years after Henry Ford invented the assembly line, and made automobile accessible to the masses, in India, 25 years since the beginning of liberalisation in the automobile sector, home made and hand-made vehicles are out-competing the branded manufacturers.

20. Spirit of Informal Entrepreneurship • Abysmal failure of economic policies • Extraordinary spirit of enterprise among poor • Solving a problem, meeting a demand, satisfying customers • Overcoming obstacles, bending or bypassing rules

21. Enterprise of Education • 60% of literacy rate • 90% enrollment rate at primary level • Nearly 50% dropout rate at the primary level • Only 8% of 18-24 age group enroll in college

22. Informal school

23. Education for the poor

24. Enterprise of Education • About 50% of poor children in urban areas may be attending informal school • Many are enrolled at public school, for the pecuniary benefits like books, uniform, mid-day meal • Attend private informal schools or private tutorial for education • Teachers are held accountable by the parents, and competitors • Functional education for a price

25. Road side health care

26. Delivering health care • Only 30% population has access to modern medicines. • Heavy burden of both communicable and non-communicable diseases. • Governmental outlay for health care sector is mere 0.9% of GDP, private expenditure is nearly 4% of GDP • Only 43 doctors for every 10,000 people. • For every trained doctor, there are at least 5 quacks in Delhi itself • Spread of alternative / traditional systems of medicine • More diverse range of services in preventive or health maintenance from yoga to massages to gyms • Franchise model for clinics, pharmacies, pathological labs

27. People Power • 50% households don’t have electricity • 500,000 deaths due to indoor air pollution • Per capita energy consumption in India is 1/15th that of US • 25% - 40% of electricity in captive generation • Rich and poor alike are finding alternatives to electric grid

28. Information Age • 60% of the computers sold in India are assembled in the grey market • Problem of hardware – 1 million computers sold in a year • Success of software – USD 18 billion • Illiteracy and misguided policies has created the digital divide, where there is an increasing shortage of skilled manpower

29. Category Bangla- desh India Nepal Pakistan Sri Lanka Hong Kong State of Govt. 8.1 7.1 5.2 7.3 7.4 8.9 Legal structure 2.7 6.0 2.5 2.3 4.1 7.4 Sound money 6.9 7.0 6.8 6.8 6.6 9.2 Freedom to trade 5.5 6.4 5.7 5.8 6.9 9.7 Regula-tions 5.4 5.5 6.0 5.8 5.7 8.2 EFI Rank 96 66 112 98 76 1 HDR Index 139 127 137 135 93 22 Institutional BarriersEconomic Freedom Index Source: Economic Freedom of the World 2005, Human Development Report 2005

30. From potential to performance • Freedom of choice in economics and politics – Market is democratic • Informal economy contributes 35-40% of the economy, over 30% of the workforce • Tolerance of informal economy outside the law • Political cost of enforcing the law • Low cost of starting a business, but ruled out of benefits of formal structures • Deregulate to lower transaction cost of formal businesses

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