Friday, June 12, 2009
Straight Talk: different view on poverty alleviation
Awesome read
Why the Fight against Poverty Is Failing: A Contrarian View
Published: October 31, 2006 in India Knowledge@Wharton
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.
Why the Fight against Poverty Is Failing: A Contrarian View
Published: October 31, 2006 in India Knowledge@Wharton
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.
Thursday, June 11, 2009
Straight Talk: build communities not just houses
While the article is India-centric, there are points of resonance with local needs and activities. Gawad Kalinga comes to mind as the leading privately-led community-building charity in the country.
The article highlights the main reasons why forcible relocations by national, regional (read: MMDA) and local governments do not work, especially when the relocation is done in remote, inaccessible sites with poor or no basic services/utilities available.
Good read.
The article highlights the main reasons why forcible relocations by national, regional (read: MMDA) and local governments do not work, especially when the relocation is done in remote, inaccessible sites with poor or no basic services/utilities available.
Good read.
India's Rural Poor: Why Housing Isn't Enough to Create Sustainable Communities
Published: August 23, 2007 in India Knowledge@Wharton India's desire to become the world's next big economic power is as real as the enormous challenges it faces in raising the social and economic well being of its rural populations. According to Abraham George, founder of The George Foundation, an NGO focused on poverty alleviation in South India, "The issue of adequate housing is integral to poverty reduction and social justice" in India. In this opinion piece, George describes the living conditions of the rural poor and argues that government resettlement programs are inefficient and perpetuate caste-driven schisms. Instead of simply supplying shelter for the inhabitants of rural villages, he says, these programs need to work towards a larger goal of building "healthy and sustainable communities."
Mahatma Gandhi is often quoted as having said, "India lives in the villages." That statement is as true today as it was more than 60 years ago. Nearly 70% of India's 1.1 billion-plus population still lives in 600,000 or so villages. If India is to be truly understood, it is the lives of these people that really count.
Most "outsiders" or urbanites have a nostalgic view of rural India. They think of villages as peaceful havens where people live simple lives, where the air is pure and the land is green as far as the eye can see. Some of those images are indeed true, but the realities of day-to-day life for a great majority of rural people are nothing short of cruel. A living story of economic deprivation, social injustice and hopelessness has prevailed for centuries. The real story of rural India must be told with more than five hundred million characters who live on less than a dollar a day, most of them in terrible living conditions.
Statistics Mask Reality
Many of the rural poor work the fields in agriculture and are employed by the few landowners who reside in their villages. Several others pursue caste-associated occupations -- priests, carpenters, blacksmiths, barbers, weavers, potters, oil-pressers, leatherworkers, sweepers and so on. Lately, with increased economic activity in nearby towns, many commute outside their villages every day to work as drivers, construction laborers, packers and in other industrial jobs. Some migrate to cities for months, leaving their families behind. But despite the increasing demand in cities for labor met by rural migration, and the income generated by such employment, the living conditions for most rural people remain far from what can be called "acceptable."
According to the Indian government and the World Bank, less than 30% of the nation is poor, and 70% of the poor (225 million) live in the villages. These official statistics are based on a per capita consumption expenditure of Rs. 356 ($8.70) per month, or Rs. 11.70 ($0.28) per day. This low yardstick grossly undercounts the number of poor people in rural India, and certainly does not reflect the living conditions for most of them.
For example, The George Foundation's recent survey of nine villages in Hosur Taluk in Tamil Nadu state showed that more than 80% of the people live on a daily income of less than one dollar, the internationally accepted definition for poverty. Given the proximity of the surveyed villages to the rapidly growing city of Bangalore, this estimate reflects a more prosperous picture than what is true for most of rural India.
Development of countries is often judged by certain economic and social statistics compiled by national governments and major international agencies such as the World Bank and the United Nations. By these aggregate measures, India has made significant progress in recent years, especially since liberalization measures were introduced in 1991. For example, the GDP growth rate now stands at 9.4% per year, much better than the less than 4% experienced during the 1990s. Life expectancy at birth has now improved to 64 years from 56 years 20 years ago; infant mortality has fallen to 5.6% from 8.1%; primary school attendance has risen to 74% from 65%, and the adult literacy rate is 61% as compared to 50%, all during the same period.
There is no arguing that there has been improvement, but these statistics mask many realities that paint a far poorer picture of the country, especially in rural India. For example, consider the following: The rural economic growth rate has been stagnant -- at around 2% to 2.5% a year -- during the past decade, mainly because of the weak performance of the agricultural sector. This marginal expansion barely keeps up with the 1.75% annual increase in rural population, thus offering very little improvement in income and living standards for most people in the villages.
More than half of all children in the country under the age of four suffer from malnutrition; this statistic is far higher for rural children. The government has built a vast system of more than 170,000 primary health centers and sub-centers throughout the country, and more are added each year, yet most of them are either dysfunctional or do not regularly provide even the minimal level of basic health care.
Though primary school enrollment is exceptionally good, the education students receive in most rural schools is unacceptably bad, and less than 10% among them graduate from high school. While government statistics on national literacy have steadily improved for years, several independent studies have shown that less than 20% of the rural population can read or write beyond their own names, and an even smaller percentage can do simple arithmetic.
Our foundation's survey of 17 villages in Hosur Taluk showed that less than 15% of the "lower caste" people who comprise over 70% of the population could write the number corresponding to their age. Given these and other realities, one has to wonder what meaningful progress has been achieved in many important areas, especially among the rural population.
Rural Living Conditions
National indicators regularly published by governments and international agencies do not include any statistics on the living conditions as exemplified by the type of housing available. Nor are there any published statistics on the average space available -- or density -- for each person in a house.
Housing is one of the top priorities for most people, regardless of their income levels. In my interviews with many poor village women, practically everyone listed housing as their most important need -- above food, health care and education for their children. Without the security and comfort of a home, there is no escaping the difficulties resulting from poverty. Poor people do not have the financial means to buy or construct houses with their savings, and therefore they live in their ancestral huts, those rented from landlords (with ensuing obligations), or government-supplied houses.
Poverty levels measured by monetary expenditures toward food do not adequately capture the quality of life that is greatly affected by the type of available housing. Adequate housing is considered by many to be a fundamental human right regardless of income level -- a basic necessity for all that cannot be denied in a fair and equitable society. It is interrelated with other aspects of life such as health and education. For example, children cannot study in a poorly lit house. Respiratory disorders among rural population in India are often the result of unfavorable housing and poor living conditions. Asthma and bronchitis are caused by pollen grains, dust mites, animal waste and several environmental factors related to bad housing conditions. Poor sanitation and hygiene, inadequate ventilation and smoke inhalation are all associated aspects of poor housing that affect health and social development.
According to the National Family Health Survey, concluded in 2000 by the Indian government, only 19% of the rural population lives in pucca (strong) houses, while the remaining live in kaccha (weak) and semi-pucca houses with mud walls and thatched roofs. Eighty-seven percent of homes in the villages do not have toilet facilities. Cooking is usually done inside the house under inadequate ventilation with biomass such as dried cow-dung, fire wood, dry weeds or crop residue, exacerbating the risk of tuberculosis.
The 2001 Indian Census estimated that 40% of rural houses do not have separate kitchens. When cooking is done inside the house, it is usually on the floor in the corner of a room, sometimes separated by a half-wall. Smoke fills the entire house during cooking, but occupants usually prefer to remain inside. Coughing and spitting are the resulting outcome, symptomatic of what finally leads to chronic illnesses.
Profile of a Rural Village
A typical Indian village has a resident population of around one thousand. While the layout of one village is different from another, the following description might be representative of a vast majority.
Most villages are small and dense, with huts on either side of narrow lanes. Open drainage usually runs along those lanes, clogged and infested with mosquitoes. Except for those belonging to "upper castes," homes are usually placed close to each other -- four to five feet apart -- especially when the government builds housing for the poor.
Landlords have their ancestral homes consisting of several rooms, one of which is set aside for storing grain and supplies. Often, prominent families of the upper castes live next to a courtyard and a temple, which is usually set aside for those same upper castes. "Lower castes" worship at a separate temple, a small decorated room with an idol, in another section of the village or elsewhere. Most villages have an open well or a bore-well, and separate times are set for upper and lower castes to fetch water.
Most villages have both lower and upper castes living in separate sections. People belonging to Scheduled Castes (SC) and Scheduled Tribes (ST) are required to live in an area designated for them. Those belonging to "Most Backward Classes," "Backward Classes" and "Other Backward Classes" -- as they are officially categorized -- usually live in the same area where "Other Classes (Upper Castes)" live, but they do not mix with even lower castes.
When the government builds homes for lower castes, it ensures this caste separation. In many instances, the government sets up housing colonies exclusively for Scheduled Castes and Tribes, and hence, an entire new village might consist of families belonging to only those castes.
Larger villages might have a school, a panchayat (local governing body) office and a small gathering room for meetings. One or two huts might also serve as a shop-cum-residence, selling sweets and small household supplies. A somewhat leveled area might serve as a playground for children. There are no vegetable or flower gardens in the village, and farms are generally outside on adjacent land owned by landlords or a small number of people who might have been allocated government land for cultivation.
Paved or unpaved narrow roads connect one village to another, usually separated by a few kilometers. One paved road (often not well maintained) connects several villages to a rural town nearby where the government has set up a primary health center to serve 25,000 people or more. These towns have many shops that cater to the daily needs of people living in the villages nearby.
A Typical Rural House
The rural poor live in huts and government-supplied "houses" that are no more than 150-200 sq. ft. in floor area. Huts are usually constructed from mud blocks, roofs are thatched and the floors are covered with a mud and cow-dung paste that serves as a disinfectant.
Houses supplied by the government are constructed with cement blocks or bricks, the floor is cement, and the roof is made of concrete or asbestos. Usually there is only one room in the house, but in some cases a half-wall may be built to separate out the kitchen.
These houses do not have their own toilets, but common toilets are made available at some distance at one corner of the village for several families to share. More often than not, these toilets do not function nor are they maintained, doors are broken or absent, and there is limited or no access to water close by. Hence, most people prefer to go into a wooded section or elsewhere in the village or nearby field where there is privacy.
Our foundation recently completed a field survey of two panchayats consisting of nine villages in Hosur Taluk with 986 huts and houses for a total population of 4,850 residents. The average number of people per dwelling was 4.9. Huts are very small in size, often without windows, and a narrow opening serves as the entrance.
Government-supplied houses are around 190 sq. ft. in floor area which works out to 38 sq. ft. of floor space per person -- only slightly more space than a full-size bed. Every house has two small windows, but they are not sufficient to permit cross ventilation or cooking smoke to escape freely. Those who have domestic animals such as cows or goats usually keep them inside their houses during the night.
At least a third of all houses included in the survey required major repairs for leaky roofs, cracks in walls and damaged doors. None of the lower caste residents has the financial means to spend money on house repairs. While government-built houses are provided free of cost, residents are required to pay a small tax to the panchayat.
The Tamil Nadu government estimates that a typical house for the poor costs around Rs. 45,000 to build. The state allocates houses to families belonging to scheduled and depressed castes based on their economic status. However, anyone officially classified as "poor" is eligible for a government grant of up to Rs. 45,000 (about $1,125) toward construction, provided that the applicant owns suitable land for the house. The government offers different financial schemes through banks that permit families to borrow money at zero to low interest rates (10% to 12%) for purchasing or developing land, and for construction of the dwelling. It also offers grants of up to Rs. 10,000 ($250) for renovation of an existing house.
Most poor people do not have the ability to apply for these benefits without the assistance of middlemen or the direct intervention of government officials. Such intervention is expensive for the beneficiary because it invites kickbacks, commissions and bribes. Further, government-built houses are usually substandard because of poor workmanship and use of defective materials.
A Failing Housing Program
Despite the allocation of considerable funds by central and state governments, the housing program for the poor is failing for a number of reasons. The plan is ill-conceived, focusing on offering shelter as opposed to improving living conditions, and executed without sufficient thought about many inter-related considerations.
While the government is the main promoter of housing schemes, several non-governmental organizations (NGOs) and social entrepreneurship ventures have also entered the arena. For the most part, NGOs have to rely on donor funds that are hard to come by, and therefore their contribution has not been significant. Social entrepreneurs who expect a certain return on their investment are focusing on lower-middle-class customers who are able to repay a mortgage or pay adequate rental; these investors have not found a suitable financial arrangement to offer housing to those who cannot pay the high interest rates (ranging from 18% to 36%) that are usually charged.
Currently, the total supply of new housing is far short of the 100 million units that are needed at the very least, if the goal is to offer adequate housing for every poor family. Bad construction and poor maintenance are causing the breakdown of houses that were built some time ago, adding to the need for substantial home improvement.
Further, many homes were built without considering the size of the family or its likely new members, and consequently, they are simply too dense or congested. The average floor space of 38 sq. ft per individual, not including the space taken by cattle, creates a very unhealthy and uncomfortable indoor environment.
The focus on offering houses as "shelters" has motivated the government to look for cheap construction without offering even basic necessities. Without a small separate kitchen and adequate cross ventilation, for example, the entire house is turned into a smoke stack not suited for human habitation. The absence of an adjacent toilet with each house is inconsistent with any reasonable concept of meeting minimum human needs. Unless existing houses are extended to include a separate kitchen with proper ventilation and a small toilet, they cannot be considered "livable" dwellings.
Additionally, government housing perpetuates the centuries-old practice of separation of residences based on caste. Instead of trying to break down this discriminatory practice, houses being built by the government for the "scheduled castes" ensure this separation. Further, the government has created a number of identical structures in new areas, effectively creating "scheduled caste colonies." It is hard to reconcile the government's official position concerning discrimination and human rights, and what it actually practices.
Focus on Community
The housing program as currently implemented will hardly improve the living standards of the poor, nor will it contribute to social justice. Before more funds are expended toward public housing, the government is well advised to reconsider its approach to the problem. In arriving at a new strategy for housing, planners must not lose sight of other, interrelated goals such as offering basic amenities, preventing diseases and assuring social integration. The approach must shift from the current focus on offering shelter to developing healthy and integrated communities. That might imply a departure from a caste-based approach to assistance based on income levels.
While a great majority of the poor belong to lower castes at the present time, and therefore would be eligible for assistance under this approach, those belonging to higher castes should not be denied assistance if they deserve it for reasons of low income. Only then would it be possible to bring about social integration between different castes. This will also permit upward mobility for lower caste families who are able to afford better and bigger homes. Mixed-income housing programs have been successfully implemented in countries like the U.S. to bring about integration across race and class, and India should not shy away from taking similar approaches to achieving social equality among all its citizens.
Instead of replacing huts with cemented houses at the same location, a better strategy might be to develop new communities at another location close by. That would offer considerable flexibility in properly laying out the entire housing complex. These new developments may incorporate facilities for sharing water, sewage processing and bio-gas production, as well as fruit and vegetable gardens and small shops. When resources are shared instead of wasted, and everyone lives in healthy conditions, overall productivity will increase considerably.
Community development will certainly call for larger initial investment than what is required for building shelters. However, the long-term benefits associated with creating healthy and sustainable communities are likely to be far greater than the short term savings from building low-cost housing.
It is possible to recover some of the additional costs associated with community development through innovative financing schemes that require extended repayments by beneficiaries commensurate with their increasing income levels. An appropriate partnership between government, donors, investors and financial institutions can pave the way for financial solutions that make it possible for beneficiaries to carry some of the burden.
The issue of adequate housing is integral to poverty reduction and social justice. It must not be viewed in isolation, but as part of an effort to develop harmonious and healthy communities. In all these issues, the real solution lies in good public governance, building strong human foundations through education and health care, creating economic opportunity, and ensuring social justice for all.
Straight Talk: the downsides of home ownership
This works opposite to what we have been raised to believe (throw in the car and the perfect lawn).
So You Think Owning a Home Will Make You Happy? Don't Be Too Sure
Published: June 10, 2009 in Knowledge@Wharton For generations, owning a home has been viewed as the cornerstone of the American Dream, the foundation for a happy family life and long-term financial security. Now, a new research paper challenges that conventional wisdom. Wharton's Grace Wong Bucchianeri, a professor of real estate, says her research shows that while homeowners do experience significant joy, they also face more aggravation, spend less time with friends and are even heavier than renters living in comparable homes.
Past research into the mood of homeowners showed that people felt a sense of pride and comfort in having their name on a deed. Bucchianeri argues that her research shows, however, that once the data are controlled for a range of variables, owning a home appears to deliver no more happiness than signing a monthly rent check.
In a working paper titled, "The American Dream or The American Delusion? The Private and External Benefits of Homeownership," Bucchianeri examines survey data from some 600 women in Ohio and weighs it across tax records and census data to study how homeownership affects the moods and feelings of individuals as well as their social interactions. "Homeowners report more positive results, but if you control for basic characteristics such as income, how nice the home is and health status, those results go away," explains Bucchianeri. "This suggests that our perception that homeowners are better off than renters might be fueled only by casual observations. The conventional wisdom might not hold up so well when you look at the data carefully."
Misery and Subprime Mortgages
Bucchianeri's research seems particularly relevant today because the bursting of the housing bubble has led to a good deal of stress -- both financial and psychological. As a result of the subprime mortgage crisis, she says her findings may help potential homebuyers take a deeper look at their motives for owning a home. They should not pursue homeownership because it is perceived to be a key ingredient in a meaningful and successful life. Renters may lack some freedom and flexibility in their lives and there are some financial risks to long-term renting. "Still, there are financial risks we are now seeing connected with homeownership," she adds.
Interestingly, Bucchianeri's research is based on 2005 data collected before the housing crash. Even in a period of optimism about housing as a financial investment, she found that homeownership does not necessarily represent the fulfillment of a dream. "Overall, I found little evidence that homeowners are happier by any of the following definitions: life satisfaction, overall mood, overall feeling, general moment-to-moment emotions and affect at home," Bucchianeri writes. "The average homeowner, however, consistently derives more pain (but no more joy) from a house and home."
A homeowner herself since 2005, Bucchianeri says, "I know there are aspects of homeownership that are not so enjoyable. My thought is homeownership might not be financially -- or emotionally -- for everyone."
Bucchianeri says her research may be helpful in counteracting the widely accepted belief that homeownership carries with it many personal and social benefits. She notes that in a 2003 survey conducted by Fannie Mae, 74% of the respondents said they believe "owning something of your very own" is a reason to buy a home. Bucchianeri notes that without more careful analysis, important public policy matters, such as preserving the mortgage interest tax deduction or other support for housing programs, may be impacted by incomplete, or misleading, information. "This romantic view of homeownership alludes to important private and external benefits of homeownership, separate from the benefits of housing consumption on its own," the paper states.
Bucchianeri explored both subjective and objective measures to determine the private benefits of homeownership and civic engagement. The basis of much of her research is a survey of well-being, demographics and time use reported by women in Franklin County, Ohio, which includes Columbus, the state's largest city. The survey respondents logged their activities in various time periods, or episodes, each day. They then reported the intensity of 10 feelings during each time segment: Impatient, Competent/Confident, Tense/Stressed, Happy, Depressed/Blue, Interested/Focused, Affectionate/Friendly, Calm/Relaxed, Irritated/Angry. Bucchianeri ran that data against other survey data and objective measures such as property tax records to gauge the quality of the home to control for differences in the quality of the housing.
Bucchianeri also examined the intensity of the emotions for each episode to create a net measure of mood for each respondent in the Ohio survey for the entire day. In addition to the episode data, survey respondents were asked broader questions about the level of general satisfaction in their lives. They were also asked about the amount of joy or pain they derive from various aspects of their lives including their neighborhood, house and home, children, family and community activities.
Joy versus Pain
In her analysis Bucchianeri focused on the individual responses and general satisfaction questions, particularly those most relative to her inquiry into homeownership, such as the amount of joy or pain derived from house and home. She used 2000 census data to factor in education, household income and average housing prices to add additional controls that would help her boil down the data to determine whether homeownership itself makes people happier and more satisfied with their lives.
At first glance, the findings reflect the conventional wisdom that homeowners on average tend to be more satisfied with their lives as well as their neighborhoods and homes. However, even on an unadjusted basis, it is clear that homeowners also derive as much pain from their home that is similar in magnitude and significance to the joy they gain from homeownership. Bucchianeri's research indicates that even after controls are applied for financial insecurity -- which is often cited in prior research as the main negative of homeownership -- homeowners report more pain associated with their home. The research also tends to rebut theories that homeowners are happier because they enjoy greater self-esteem and a greater sense of control in their lives.
The average homeowner tends to spend less time on active leisure or with friends, experiences more negative feelings during time spent with friends, derives less joy from love and relationships and is also less likely to enjoy being with people, according to the research paper. Bucchianeri notes that these results do not support the perception that homeowners are "gregarious" but they also do not paint homeowners as being overly burdened with housework. The average homeowner spends less time on leisure -- around three percentage points -- compared to the average respondent in the sample who spends 13.4% of her time awake on active leisure.
On top of all else, the average homeowner tended to be 12 pounds heavier, according to the research. The study found no significant differences in sleep quality, or the use of sleeping pills or depression medication.
Homeownership and Social Participation
In addition to investigating these private, or individual, benefits, Bucchianeri also examined civic aspects of homeownership. Again, she found that despite the conventional wisdom, homeowners are not significantly different in terms of civic participation or social connectedness than renters. The paper states that the most striking finding in regard to social interaction is that average homeowners spend 4% to 6% less time interacting with friends and neighbors and experience more negative feelings when they are with other people. At the same time, these homeowners spend a similar amount of time with their spouses as renters do and less time with their parents and relatives. "So far, my results are contrary to the intuition that homeownership fosters more involved or better family lives. Indeed, it points to less active and less enjoyable social lives," Bucchianeri writes.
When it comes to homeownership and civic participation and social connectedness, Bucchianeri compared indicators such as volunteer work, joy or pain experienced from activities in the community and pain from politics -- but she finds no significant differences by homeownership status. She also discovers little difference between homeowners and renters in participation in religion or satisfaction derived from it.
When Bucchianeri examines civic participation of homeowners against the rate of homeownership in the respondent's neighborhood, she finds evidence that higher ownership rates in the respondents' own demographic and household income groups leads to lower reported pain from the neighborhood. "I do find results that if you are surrounded by people who are homeowners like you, that makes you enjoy the neighborhood and contributes to a positive attitude," says Bucchianeri. She adds that these findings suggest that looking at homeowners versus renters in this context may be too narrow an approach. "It may be more fruitful to look at the mechanics to capture the interactions among homeowners."
Bucchianeri notes that despite the evidence that homeowners do not appear to be living as if they are in a dream, her results would actually tend toward an upward bias in well-being outcomes for homeowners. Homeownership may also open up new opportunities for pain that Bucchianeri can study in the future, including the joy or disappointment homeowners experience as a result of their relative housing position. She says it is difficult to pull out solid findings, "but I think that on average people like living in zip codes with a higher median housing value so they can live in reflected glory."
Bucchianeri cautions that her research should not be used as an argument against homeownership, just as the abstract notion of the American Dream should not be used as an across-the-board endorsement for buying a home. People should balance what they are hoping to get from homeownership itself," she says. "It's really difficult, but more thinking should go into this rather than just accepting the conventional wisdom and going into homeownership by default."
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