What do we want our government to do for us?

I have had little or no interest in Indian politics of the past several decades. Regardless of the party in power, my focus has always been on policies and the nature of governance. I had hoped that India’s young democracy would gradually mature over time in the right direction, but sadly enough, what I see are several serious and disturbing fundamental problems that undermine the hope for a free, just and prosperous society.

The Hazare movement against corruption in government has elevated public concern about the corrosive nature of governance in the country. Unfortunately, even if this protest yields passage of legislation by the parliament to appoint a body to investigate serious corruption by politicians and government officials, it is unlikely to bring about the much needed reforms. However, in this age of street protests in many oppressive countries, it is refreshing to see that the Indian public is directly demanding some level of honesty and accountability on the part of powerful politicians and officials.

There is little hope, and history has vividly demonstrated, that governments are capable of reforming from within. This blog cannot do justice to describing adequately what would bring about the desired change. Instead, I would like to mention very briefly what we as citizens would probably like our governments to do for us.

There is no doubt that we want our government to serve all its citizens. Individuals and private organizations pursue their self-interest and are unlikely to concern themselves with our common interests. It is the shared interests of all people that we expect our government to look after.

In my opinion, the government’s role must be confined to assuring security and liberty, justice and equity, and providing basic public services and creating an environment for vibrant and fair economic activity. When governments extend themselves into other functions, such as running businesses and trying to direct markets, they also introduce unwanted regulations and licenses that give officials and politicians the power and opportunity to profit from misuse of public funds and to take bribes. Until the citizens of a country restrict their government to those desired functions described above, there will be only limited, if any, positive results from protests against corruption.

Let me briefly and broadly elaborate the rightful functions of government. Security and liberty relate to protecting against external threats, and preventing crimes and internal instability without compromising individual freedom and rights as offered by the constitution of the country. Justice, both legal and social, assure equality and opportunity regardless of gender, caste, religion and sexual orientation, and the ability to seek and obtain remedy against wrongful acts by individuals, organizations and governments. Equity is important in assuring fairness and human rights – the ability to avail basic services such as education, livable housing and healthcare, and protection from poverty.

Government may involve itself directly or indirectly in offering affordable public services such as roads, water supply and electricity. At times, the government may fund private initiatives, such as basic research, that could lead to innovation and comparative advantage for the country in certain sectors of the industry. Finally, monetary, fiscal and regulatory policies as well as international agreements must be designed to promote private business activities that conform to essential public considerations such as environmental safety, competitive business practices, and consumer protection.

Unfortunately, governments at both central and state levels in India play a much wider role with excessive powers. It has resulted in inefficiencies that hinder economic growth and prosperity, loss of freedoms and individual rights, corruption and injustice. Until such time government’s role is properly redefined and confined to what is essential to meet the collective needs of its people, the nation will not be able to achieve its dream of a fair, just and prosperous society.

Why do we need police in India?

Police in India execute several valuable functions to safeguard the powers of the state and its authorities. This law and order organ of the government serves fairly well the interests of those who are in power: police guard police stations and government buildings, including residences of senior officials and politicians; blocks roads and ensure the smooth travel of ministers and dignitaries; control crowds especially where politicians attend functions; and take part in state ceremonial occasions. I suppose all these are essential for the protection of those who rule its citizens.

How does police help ordinary citizens? They say police prevent crime and catch criminals. I do not have statistics on the number of criminals caught in the act of or before they could commit crime. But the idea that one could call police to investigate a crime is probably comforting. Even better, if one would indicate who is suspected and give the police sufficient money, they would probably catch the alleged criminal.

When I hear stories involving the police, I often wonder whether ordinary citizens can rely on the police for protection or to seek justice. My concern was raised recently when my lawyer told me very candidly that the police are only for the highest bidder. If one is prepared to pay bribes, the police will do anything for you, he said. Those who can afford to dish out sufficient money for the police can also have anyone, innocent or otherwise, charged of crime and put in jail. The converse is also true in most instances; with power and money, one can get any charge dismissed. It is not surprising that not many rich folks in India have any complaints against the police. After all, they have their own "private police," while maintaining "good" contacts with the public police.

Recently I was made aware of a situation involving the police. An employee of an organization was taken to the police station on charges of assaulting someone else – a false charge. This employee was told by the police inspector that he would be set free of all charges if he would bring certain amount of money allegedly borrowed by his brother-in-law. When the employee refused, the police filed charges for criminal assault of a money lender and for participating in cheating and fraud. No evidence was produced except for the complaint filed by the money lender. It was very obvious that the police were bought over by this money lender. FIR (First Investigative Report) was prepared by the police based on false charges and the employee was arrested and put in jail.

The family of the employee pleaded with the police inspector who responded with demand for a considerable sum of money for the release the employee – something the family could not afford.

The next morning, Saturday, the police were required by law to file the charge sheet with the magistrate in court. The family sought bail but the magistrate could not take up the matter until the defendant appeared in court – to be brought by the police. The inspector deliberately delayed bringing the defendant to court until 4.45 PM, just when the judge was getting ready to leave for home. The state prosecutor simply disappeared and the judge declined to hear the bail application at that late hour without the presence of the prosecutor. The employee was returned to jail for the next three nights and days.

The police had included a “non-bailable” charge against the employee for which only with the consent of the state prosecutor he could avail bail. The prosecutor demanded money for himself and for “others.” The family borrowed what was needed and delivered it before the hearing on Tuesday. The judge and the prosecutor both had no objection to releasing the employee on bail.

Outraged at the injustice and insult, the employee and his lawyer met with a senior police official overseeing the station that caused the arrest. The senior officer comforted the employee by admitting that injustice was done in this matter, but he would need several lakhs of rupees to remove his name from the charge sheet that was being prepared for the court. No promise was made to take any action against the police inspector.

Consider this situation. A private money lender who is essentially a loan shark bought over the police to arrest and detain an innocent person, and no one in authority was willing to consider the absence of any evidence. Now the police officer at the senior level demands money to remove the charge against this innocent person, knowing full well that his subordinates had unjustly arrested and jailed him.

The police inspector had warned this employee that serious harm would occur to him and his family if he took any action against anyone. I am sure the police are capable of delivering on this warning.

In summary, when the legal system is corrupt and justice is elusive, what rights and protection do ordinary citizens have? This incident could not have been an exception but the general practice. If the guardians of justice conduct themselves like criminals without fear of consequence, then there is no hope of justice for ordinary citizens.

The Mirage of Middle Class Disillusionment

In a New York Times article of October 30, 2011 entitled Protests Awaken a Goliath in India, it is pointed out that recent anti-corruption protests have stirred India's middle class which has benefited most from growth, but remained disengaged from the political system. While this could be interpreted as a favorable development if indeed millions of them join the Hazare movement or take steps to protest against corruption at all levels.

The middle class often bribes government officials to get their needs met, whether it is for admission to a government college, obtain a license, or transact a real estate deal without heavy tax burden. They cannot, however, afford to pay big bribes as the rich and the companies do to win bids and get special favors. After all, politicians and senior government officials have raised their price for bribes from lakhs of rupees to crores, and even hundreds of crores.

Are the poor troubled by the deep rooted corruption in India? Most poor people cannot afford to pay bribes, and even if they somehow manage to do, it is usually for their small entitlements such as ration card or caste certificate. I suppose low level bureaucrats involved in corrupt practices are kinder not to demand more than a few hundred rupees. It appears that poor people are indifferent to corruption in India and are often fatalistic about it.

I recall reading a quote in a newspaper several years ago from a poor man on the street when he was asked to give his reaction to the arrest of a senior official for allegedly taking tens of lakhs of rupees in bribe and subsequently being caught. The poor man said, “He must have done something good in his last life to make so much money.” After all, everyone usually expected the government official to go free after a superficial investigation and filing of low level charges.

In India, what usually counts is the opinion and influence of the rich and the powerful. But now, it appears that the middle class is slowly waking up. The poor continues to sleep long.

The rich and the powerful also may not care much about corruption. They have the money to make money, even if that involves dishing out large sums in bribes. They are in an exclusive club, and there is no need for them to complain. Greed, arrogance and denial are matched only by self-interest and hypocrisy.

How many people in India are in the rich and middle classes? According to an April 2010 McKinsey Global Institute report, 30 million households, or around 150 million people in India belong to the middle class. By 2030, this number is expected to increase to 600 million, if economic growth continues at the present 6-9% rate.

The rich – those who can afford considerable luxuries such as good cars, modern apartments and vacations -- are presently estimated to be around 10-20 million people. This number could reach 50 million by 2030. The super rich are in the thousands.

India’s population of 1.2 billion is expected to cross 1.6 billion by 2030. That would then leave over 1 billion people in the poor to lower middle class category. If the past is any indication of future behavior, these masses can be expected to remain silent about corruption in India. As some of those presently in the middle-class move up, they too are likely to become part of the “silent class.”

So much for the anti-corruption movement in India! When we measure economic success in terms of GDP growth and the increasing size of the middle class, who cares about corruption and equitable progress?

Lessons from “Occupy Wall Street” movement for India

In the past three weeks or so, what started as a protest by few young people against abusive practices by financial institutions in the U.S. has grown into a large movement across many major cities. The Occupy Wall Street (OWS) movement is demanding social rights and justice for most Americans – 99% of the population – who they say are oppressed by the rich and the powerful 1%.

OWS movement points out the wide disparity in income and wealth between the few rich and the rest of the nation. They believe that it was the financial institutions in the U.S. that caused the global financial melt-down and the deep economic recession in the U.S. Yet these same institutions are using their political influence to prevent any regulatory legislation being enacted by the U.S. Congress that would curtail the practices they were engaged in . Further, they point out that those executives who were responsible for these financial institutions and their harmful practices have not been brought to justice.

If these allegations are true, then we are talking about corruption and unfair use of financial power by the corporate sector to influence policy and to continue practices that unfairly benefit them at the expense of the rest of the country. If recent opinion polls are correct, a majority of Americans agree with this assertion, and believe that these powerful companies who were beneficiaries of government bail-out with tax dollars should be held more accountable for their actions.

What is different about the OWS movement is that it is the first time the general public has risen up against the private sector. In most countries including India, widespread protests have always been against the government. The assumption in those cases is that it is the government officials who are corrupt, and the private sector simply plays to that for their own benefit.

In India, in the past few months, the Hazare movement gained strength from public discontent over corruption in government. Surprisingly, political leaders of the country tried to discredit the movement, arguing that the anti-corruption movement was demanding certain changes in government practices that only the parliament has the power to decide. True, it is the parliament that makes laws, but their members are not independent of the will and wishes of the people. A country that was born from the non-violent struggle led by Mahatma Gandhi for a just cause was told by its leaders that the peaceful protest against corruption was unconstitutional and hence, their leader Hazare was arrested.

It is hard to be truthful about corruption, but let us try. In India, corruption is at all levels of the society, and it has been in existence for a long time. What is different now from before is that corruption has increased dramatically over the years, and the money involved is far greater. For example, a State minister would, as a general practice, demand 10-20% of a public works project for road construction for Rs. 500 crores, and the private contractor would arrange to deliver it in “black” money – cash. I wonder how so much money, and often more, can be taken in cash and delivered to someone in person!

Are our political leaders and investigative agencies unaware of these common practices? Are the courts incapable of prosecuting such cases? The answers to both questions are a resounding “no.” Yet, very little is done to end these terrible practices.

Corruption in India is simply a reflection of how the society lives every day. Corruption is an accepted fact of life. The rich have very little incentive to end it, as they unfairly benefit from it. Their power of money can buy anything and everyone, including courts. Justice is the same as power.

Most politicians and bureaucrats are what they are because many citizens are what they are -- corrupt. The people have empowered their rulers to do what they want without accountability. As a result, the very rich – the 1% minority – is able to get richer unfairly at the expense of others.

For this system to continue, the rich have to appear as benevolent to the poor. Hence, many donate small amounts for social causes. Some start Corporate Social Responsibility departments in their companies while engaging in serious corruptive practices. This game is smartly played.

So, the lesson from OWS movement is this. Corruption will remain as long as the private sector, mainly large companies, is allowed to continue benefitting from it. Simply asking politicians and bureaucrats to be accountable and transparent might help a little, but they will find other ways to circumvent the new laws, if ever enacted, to reduce corruption. What is needed is a movement against those who cause corruption in the first place.

India must create strong, independent press free of religious leaders and politicians. Courts must be brought under scrutiny. All major private sector dealings with the government must be investigated without curtailing business activity.

Every individual who holds important government or private position must be required by the revenue department to disclose his or her wealth, income, and sources of income . Their immediate family members should be required to do the same. They need to explain how their financial figures and sources have changed over each year. The investigative agencies need to monitor them without harassing anyone, and bring about accountability through just prosecution of illegal activities.

I am told by some of my friends that this article might offend the same constituency that I am seeking support from for Shanti Bhavan. I respect that observation, but I also feel that it is not a good enough reason for me not to speak out. After all, not every wealthy person or corporation is corrupt. I am sure those who see fairness will stand in the support of a just cause.

How to destroy a good private educational system

Everyone would agree that the secret to imparting good education is committed and qualified teachers who motivate children to learn well. Of the 120 million children attending schools in India, government schools have 73% of the total enrollment in 80% of all schools in the country. With much of the burden of the nation’s education on government schools, it is undoubtedly essential that these schools also have good teachers. But the question is how should the government attract, keep and motivate committed and qualified teachers.

Most rural schools currently have few teachers, often as low as two, for the five elementary classes, and many of them are periodically absent from school or are not motivated or qualified to teach. It is well-known that rural education is deplorable: only 15% of the children reach high school and barely 7% graduate. Even fewer children go on to study in colleges.

There are many reasons for the dismal performance of government schools, but lack of sufficient funding is not one of the main factors. In fact, governments have allotted considerable sums of money to infrastructure improvement, books and supplies, teachers and administrators. Much of that money is siphoned off by government officials and politicians for their personal enrichment. What is left is still a considerably large amount which can be put to good use.

Recognizing the need to attract teachers, governments have introduced several incentives: high salaries, benefits, retirement pensions, and job security. Even more attractive for teaching in government schools is the many holidays and long vacations that can be availed. Daily class sessions are fairly relaxed with little or no supervision, and frequent absence from school is tolerated. Government teachers usually conduct paid tuition classes during off-hours on most days, bringing in even further income for themselves.

With all these attractions, why should anyone want to teach in a private school? The answer is: there is no good reason unless the individual is motivated to work hard to benefit students. If one is looking for a good financial package and leisurely work environment, government school teaching is a far superior choice. Most private schools that charge reasonable fees which are affordable to middle and lower classes cannot compete with the tangibles and intangibles that go with government school teaching. Tax payers are generously taking care of government teachers while private schools that offer superior quality education are unable to afford similar packages for their teachers. Only elite international schools catering to the highly rich can offer superior compensation packages.

The result is a steady migration of good teachers from private schools to government schools. This transfer process will only accelerate in the years to come as state governments build and operate more government schools. Private schools are scrambling to hire teachers, mostly new graduates, and keep and train them for a few years until the government hires them away without advance notice in the middle of the academic year. Consequently, private schools depend greatly on inexperienced teachers and often do without sufficient number of teachers until the next recruitment period for new graduates starts.

I am reminded of the economic truism that says “taxation is one of the most efficient and accepted ways of transferring wealth from the most productive segment of the society (private individuals and entrepreneurs) to one of the least productive segments, namely government and its projects. Instead of training and recruiting large numbers of college graduates aspiring to enter the educational field, and offering them salaries and benefits comparable to the private sector, the government is currently embarked on destroying what has so far been the bright spot in education. In the longer run, there will be a lower proportion of good private schools – mostly those catering to the rich (and paying high compensation and benefits to teachers) -- and more government schools offering sub-standard education.

What a way to kill the goose that lays the golden egg!

The true face of corporate social responsibility

I have been critical of companies projecting themselves as socially concerned institutions by each creating a corporate social responsibility (CSR) department within their organization. Lately, CSR activities have received considerable publicity, helping companies to present themselves to the public as benevolent institutions concerned about social issues such as poverty alleviation, environmental protection and energy conservation.

In my several prior articles I have pointed out that CSR initiatives are simply marginal activities for a company, with little or no serious attention given to them by senior management. These activities take mainly two forms – funding NGOs for education, healthcare, arts and other social initiatives, and running their own projects that are being projected as contributing to social good.

The focus of CSR has mostly been on the positive publicity that could be obtained for the company and its top managers. The hypocrisy of the claims being made by many institutions is visible when these activities are carefully scrutinized for what they really are: who are the beneficiaries; how much of the co-funding is obtained from governments; what is the relative contribution toward CSR activities when compared to the company’s revenues and profits; and what are the real motivations for embarking on CSR projects.

Late Nobel Prize recipient in economics, Professor Milton Friedman, pointed out in an article in the New York Times magazine as early as 1970 that CSR functions are nothing more than “window dressing,” and companies can only be expected to make profits for their shareholders. Lately, two economists, Michael E. Porter and Mark R. Kramer, have been attempting to paint a different face to CSR through a concept they have defined by the word “shared-value.” They argue that companies may try to maximize their profits while opportunistically undertaking socially good ventures as part of their mainstream activities.

For example, GE is credited with helping consumers conserve energy by introducing products that require less electricity. Similarly, many major companies are credited with introducing consumer products such as toothpaste and soap at low prices that are affordable to some of the poor people.

By the same token, companies such as Wal-mart and Nike claim that they generate hundreds of thousands of new jobs, employing previously unskilled labor, in poor countries. New companies are springing up every other day offering technologies to harness solar and wind energy more efficiently, and to burn coal with less carbon pollution. All these industries offer products that serve social good, and yet their main focus is on generating revenues and profits. It is not difficult to argue that they all fit within the concept of shared-value.

Companies enter into business ventures with the goal of generating profits. If those ventures are addressing some of the pressing needs of the society, they are even better. However, even if a product is not recognized as having socially redeeming values, as it might be in the case of expensive cosmetics, it might still meet the needs and desires of some individuals. Further, companies engaged in creating and selling such products employ people, generating income for many families.

I am of the opinion that any discussion of social responsibility and shared values in the context of corporate goals is of very little practical use. Companies operate in areas of their competence and compete with each other to succeed financially to reward their investors. If there is a market opportunity to make profits in an area, whether it has direct social benefit or not, there will be investors and entrepreneurs who would want to exploit it. There is no need to set aside opportunities with superior risk-return tradeoff in favor of what might be called shared-value investments with lower probable returns and higher risks.

After all, investors haven’t asked their top managers to spend time or money on social projects that are unlikely to add value to the financial goals of the company. When investors and employees personally make money, they can decide for themselves what they want to contribute, and how they want those contributions to be best utilized. That is the model followed by true benefactors like Bill Gates and Ted Turner who first earned money for themselves, and then decided to spend a great part of it for social good. Companies that are privately held by few individuals also fall within this model.

Companies must recognize that it is in their long term interest to win the support of 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 customers are powerful factors in motivating good behavior on the part of corporations.

These and other issues can be addressed through effective enforcement of laws and regulations concerning minimum wages, worker safety and benefits, prevention of non-competitive practices, and environmental protection. Governments must play their rightful role to promote responsible action on the part of companies, and leave the rest to market forces. Companies, on the other hand, should be expected to focus on rewarding their investors while operating in an ethically and legally correct fashion.

Let investors first make money fairly and then decide what their individual preferences are toward social contributions. This individual responsibility toward society cannot be delegated to faceless corporate entities.

Straight talk about microfinance

In recent months, some truthful information on how micro-lending is impacting recipients of loans have appeared in several published sources including the New York Times. Now it is reported that many borrowers in the State of Andhra Pradesh in India are refusing to repay their previous borrowings, mainly as a result of the high interest charged and their inability to meet the obligations. There are reports of threatening tactics used by lenders to collect on outstanding loans, and of suicides by a number of borrowers.

For the past seven years, I have been writing about the working of microfinance, and pointing out, contrary to claims by micro-lenders and the general perception on the part of donors, that such lending has not been benefitting the poor (see my previous blogs herein, my articles in professional journals, and my book, India Untouched: The Forgotten Face of Rural Poverty). Let me further answer the central question as follows.

Proponents of microfinance have been claiming that micro-lending is helping the poor get out of poverty. Who are the recipients of microloans, and are they truly benefitting?

According to the World Bank narrow definition for poverty, those earning less than $1.20 per day are considered poor. For a family of 4, this implies a family income of $4.80 per day, or $144 per month. This works out to Rs. 6,400 per month in India. Once again, interpolating World Bank statistics for 2008, there are no less than 60% of the families (around 700 million people in India alone) living below this income level. Most of them are either illiterate, or with very little education or skills to start and run a business. Great majorities of the poor people live and work in rural areas and rural towns as laborers and unskilled employees in farms, factories and small businesses. At best, some of them can be expected to engage in family-run activities such as maintaining one or two cows, few hen or goats, provided they receive sufficient capital to start such activity.

Take the case of a poor family trying to maintain 50 hens to support themselves. It would require no less than Rs. 25,000 ($550) in initial capital to build the necessary infrastructure to keep the hens safely from predators and thieves, and to feed the chicks during the initial 6 months until they are mature enough to lay eggs. This size of capital, if borrowed, would place substantial financial burden on the borrower, especially if the interest is 24-36% annual rate as commonly charged by micro-lenders in India (note: usually microloans are for much smaller amounts).

What would this small poultry farm bring in financial return? At today’s price for eggs, and assuming that the hen are of good breed laying 200 eggs a year, the average annual revenue would be Rs. 40,000 (around $850). After deducting the cost of feed and vaccinations to prevent diseases, the annual profit could be around Rs. 28,000 ($600), not including the wages forgone by the family. This works out to Rs. 2,300 ($50) per month. At monthly interest of 2.5% on Rs. 25,000 initial loan, interest payment alone would be Rs. 625 ($14) per month. 12 monthly repayment of principal would be Rs. 2,083 ($46). These financing costs leave the family with negative cash-flow. This business is not financially feasible as structured.

By engaging in such businesses with no personal capital and high interest loans, and by losing income from gainful employment elsewhere, the borrower gets into deeper financial trouble. I have pointed out in earlier articles of this situation for practically every poor family that ventures into business. Unless the starting capital and some initial months of financial support are provided free, the family cannot engage in even small businesses.

Recognizing the above reality, micro-lenders prefer to lend to those with incomes above the poverty level and those already engaged in businesses. These people are not poor as claimed by microfinance firms.

Small businesses run by lower income people cannot usually obtain conventional loans, and they could be helped with micro-loans. However, even they would find it very hard to repay loans at the high interest rates currently charged by microfinance firms. The concept of micro-lending might be meaningful to small businesses if the cost of borrowing can be brought down substantially. But it is no poverty alleviation activity.

The author of this blog runs several social projects in South India.

Finally the word is getting out about what microfinance is all about?

For the past 7 years or more, I have been speaking out and writing a number of articles and blogs on the misleading impression being created by microfinance firms on their alleged contributions to poverty reduction (see my December 2006 blog entitled “Social Entrepreneurship as Poverty Solution”). I have pointed out that microfinance loans are rarely made to the poor (those falling below $2 per day – the broader World Bank definition for poverty), the interest rate charged is often exorbitant, only a small proportion of poor borrowers with other support mechanisms are able to start and sustain any new business with such loans, the collection practices are unethical, if not illegal, and often these loans cause recipients to fall into greater indebtedness. I have been discouraged by my inability to convince others on my observations, as more and more powerful institutions including the World Bank, the United Nations, and hedge fund/private equity firms joined forces with many of the micro-lending institutions. Recently, one Indian microfinance firm executed an IPO yielding tens of millions of dollars to its founders and one of its financial backers.

However, in the past few months, we are seeing some truth trickling out about microfinance. One such article by Milford Bateman on the Andhra Pradesh Microfinance Crisis in South India dated November 8, 2010 appeared in the online service www.Indiamicrofinance.com. To quote the opening paragraph of the article: “What is happening in AP today is an economic, social and humanitarian disaster. Mounting individual indebtedness in the poorest communities (largely thanks to the ease in obtaining multiple loans), artificially inflated and distorted local economies (many inflated into nothing more than giant bazaars and permanent street sales), spectacular levels of profiteering by the CEOs and key private investors attached to the main MFIs, increasingly aggressive loan recovery techniques, and growing numbers of reports claiming multiple cases of suicide that apparently directly followed on from such aggressive loan recovery techniques (see Microfinance Focus Serp Report ).” I don’t need to explain this further.

MFIs have succeeded in convincing many investors and donors that they are social entrepreneurs helping to reduce poverty. By redefining the “bottom of the pyramid” to include those earning up to $10 per day (almost 90% of India’s population), loans made to small business in the middle income range are classified as loans to the poor. Many small businesses are unable to obtain bank loans, and hence, they are desperate enough to pay 24% or higher interest rates from MFIs. It appears that MFIs are able to lend at far higher interest rates than those charged by commercial banks – double the rate or more --, and use pressure tactics to accomplish loan repayment rates of 99% that they claim.

Let me conclude by pointing out that there is no easy way to reduce poverty. There are no shortcuts. It is simply unrealistic to expect uneducated poor women to start and sustain business with $100-$200. Interest rates over 24%, and in some cases close to 100%, charged by MFIs make it simply impossible for anyone to repay without falling into greater indebtedness.

The problem of poverty is complicated and solutions are mostly longer term and multi-dimensional. Micro-lending as practiced today does not contribute to poverty reduction.

Dr. Abraham George is the Founder of Shanti Bhavan School (www.shantibhavanonline.org), a world-class institution for children from socially and economically deprived families, and the Indian Institute of Journalism & New Media, in India.

Why is India’s Educational System Failing to Bring about Economic Equity?

While India continues to churn out millions of graduates from high schools and colleges each year, only a small fraction of these students receive a high-quality education and graduate equipped with the necessary skills to be employed in well-paying jobs. India’s educational system which remains under considerable government control and essentially closed off from global competition caters to few students who attend good institutions, while all others attend mediocre, sub-standard schools and colleges. It is under these circumstances that India’s economic inequity and caste barriers thrive, and the country loses an opportunity to provide its students the innovative, high-quality education needed to compete in a global market.

For decades missionaries have run several high-quality schools in India charging reasonable fees, now supplemented by hundreds of elite international schools for those who can afford them. These schools feed India’s few top colleges, such as the Indian Institutes of Technology, the Indian Institutes of Management, and other reputable technical institutions. The great majority of high school graduates, especially those from the deplorable rural schools, attend sub-standard colleges run or financially supported by the government, or other private institutions that offer low-quality education.

Unlike the industrial sector, which has been greatly privatized and has opened up to global competition, the educational sector remains under considerable government control. While a number of colleges are run by private individuals and organizations and, in many cases by politicians and influential individuals, most treat this activity as a highly profitable business. On the other hand, government-run or aided colleges offer low-quality education resulting in graduates who lack the knowledge-base or skills required for obtaining more responsible jobs.

Instead of opening up the educational sector to improve its quality, the government constantly attempts to control it for political gain by appearing as the provider of essential services. However, those who have the power and influence to circumvent the rules are able to run private institutions that may not adhere to government regulations. Students from “low caste” communities are not provided the opportunity to go to quality schools, and hence cannot get admission to good colleges on merit. Some of them are given admission to higher-quality colleges based on quotas set by the government in the name of “social justice.” Despite their inability to improve the quality of education in government colleges that charge low fees and offer subsidies for students from poor families, official regulatory agencies attempt to implement rigid standards and requirements on private colleges to ensure uniformity in the educational system. These restrictions in turn hinder the ability of private colleges to offer progressive and innovative programs in keeping with the evolving needs of a global economy.

For example, consider the work of the government agency All India Council for Technical Education (AICTE), which approves the operation of all technical and management colleges in India. AICTE sets rigid guidelines on everything from land requirement for college campus, classroom size, number of students allowed, size of physical library and requirements for computer facilities to the amount of money that must be set aside in the name of AICTE, with interest earned on such deposits to be credited to the Council. Accreditation by AICTE is required within the initial two years of operation, after which the college must abide by government-approved curriculum and operational requirements. Under the pretext of protecting the interests of students, AICTE imposes bureaucratic and outdated academic requirements that do not permit sufficient flexibility for the institution to offer quality programs.

AICTE operates under the assumption that it knows best what is needed in every field of study, and that, unless it micro-manages the entire process, no academic institution will do a good job in meeting the required standard. It appears that the quality of education that it attempts to ensure across all colleges is nothing more than mediocre. This perspective fails to appreciate the evolving techniques in teaching, research, and learning, such as: virtual instead of or in addition to physical libraries that provide a wealth of current information on developments in every field; instant search and access to proprietary databases and archives, remote learning and live on-line interactive classes; video conferencing with experts and guest lecturers; virtual computer rooms with the use of Wi-Fi communications and notebooks; practical experience achieved through internships at companies and research laboratories; collaborative learning through academic social networks, and exchange programs with foreign colleges; video participation in complex tasks such as medical surgeries; field work through community services; and many more. The government forces every academic institution to adhere to conventional ways of teaching and learning, which in turn limits the progress of higher education in India.

A proposed bill on the entry of foreign academic institutions into India is presently (July 2010) being debated in the Indian parliament. According to the ministry responsible for crafting the bill, it is designed to “prevent exploitation of Indian students by foreign colleges.” In its present form, the bill calls for an increase in corpus funds to be set aside by the foreign university from Rs. 5 crores ($1.10 million) presently to Rs. 50 crores ($11 million) when the bill becomes law. Repatriation of profits will not be permitted, and the college must meet AICTE regulations. These rules prohibit foreign institutions from entering India, thereby protecting inferior-quality institutions in the country from foreign competition.

Unfortunately, this and similar interventions by the government create serious obstacles to improving the quality of education for India’s student population. The country doesn’t seem to have learnt the important lesson of openness when it comes to education: only through competition and innovation will the educational system improve. In that event, employers would choose colleges to recruit from that offer graduates who can meet their job needs; most students would join only those colleges that are able to market them when they graduate. In other words, a competitive marketplace will demand better-trained students, and consequently, colleges will be forced to compete on quality.

Instead of acting as a catalyst in advancing the quality of education at all levels, and financially assisting economically disadvantaged students, the government’s current policies protect inferior-quality institutions and establish mediocrity as a leveler for all others. At a time when India shows great promise from its recent economic progress, the direction of its education policies does not favor much benefit to the poor and fails to keep pace with the growing needs of the country in a competitive global economy.

Dr. Abraham George is the Founder of Shanti Bhavan School (www.shantibhavanonline.org), a world-class institution for children from socially and economically deprived families, and the Indian Institute of Journalism & New Media, in India.

When will the truth about microloans be known?

Finally, in the April 13, 2010 New York Times article entitled Banks Making Big Profits From Tiny Loans, micro-loan lending practices in several South American countries were revealed to the dismay of many believers. With the World Bank and several well-known donor organizations supporting micro-loan lenders, the general perception has been that it is one of the most effective ways of making capital available to the poor to start businesses and come out of poverty. So much has been written about the virtues of micro-credit that the general public is led to believe that it might be the long-sought panacea for poverty alleviation.

The New York Times article made it known that most micro-loans in South America charge annual interest rates in excess of 75%, with the global average rate around 37%. Even well-known micro-loan donors like Kiva has been funding loans that charge over 80%. Yet, they all make claims that borrowers are mostly poor people, and they succeed in starting and sustaining businesses. Further, they assert that poor people are highly credit worthy and over 99% of the borrowers repay the loans in full. Gaining support from financial institutions, international agencies and even major donors, the for-profit microcredit industry has built up a fairly large business in billions of dollars on the backs of those just above the poverty level and very small businesses. Even major media organizations such as the New York Times have been touting the virtue of micro-loans in their editorials as well as with examples of spectacular success stories among a small number of recipients of micro-loans.

Even those claiming more reasonable interest rates – say, around 2% per month – are not telling the truth. It is common practice in India to make micro-credit available at a monthly charge of 2-3% on the original principal, without making any adjustment for declining balances. For example, a borrower of $100 in equivalent rupees is given $88 initially at the start of the loan, deducting $10 toward initial principal repayment and $2 in interest. In each successive month for the next 9 months, repayment of $12 is required -- $10 toward principal and $2 toward interest. This micro-loan is usually described as a 2% interest loan for 10 months, or at an annual rate of 24%, when in fact the effective rate is 51.30%.

For the past seven years or more, I have been writing articles and blogs (http://www.abrahamgeorge.blogspot.com/) pointing out that micro-loans are not what they are made out to be. In this brief note, let me simply restate three observations I have repeatedly made in the past:

a) Most micro-loans are made to those above the internationally defined poverty level of $2 per day.

b) Most micro-loans to small businesses and individuals charge exorbitantly high interest rates, and these loans do not result it sustainable businesses. In a majority of cases, these loans end up forcing the borrower to seek even higher interest loans from local money lenders to make repayments.

c) Many micro-credit lenders use unethical and illegal practices to pressurize borrowers to make repayments.

In conclusion, micro-credit as practiced today does not directly address poverty, and in many cases, results in creating greater indebtedness on the part of borrowers.

I have written extensively on the above observations and conclusions in my previously published papers, and hence, I end this one without further elaboration.

Please visit us at www.shantibhavanonline.org and www.tgfworld.org

A Better Way to Achieve Equity in Education

With well over 700 million people living in rural areas of India, a great majority of the nation’s children are enrolled in government schools. So much has been written about the deplorable quality of education offered by most of these schools attended primarily by children from poor families. Over 75% of the population in India earn less than $2 per day, and their children do not have the financial means to attend better quality private schools. Consequently, there is now a two-tier system of education in India – better quality education for those who can afford private schools, and poor quality education for all others.

During the past several decades, Central and State governments had launched many initiatives to improve their rural schools. These programs have increased enrolments to well over 90% at primary and secondary levels, and more girls attend schools. Literacy rates have risen significantly. But there is very little improvement in the quality of education offered. Only a small percentage of the children attending governments schools are well prepared to pursue higher education in colleges that offer quality programs. A great majority of high school graduates who seek higher education enroll in government colleges that do not offer good instruction. The result is that most students graduating from schools and colleges in India are not prepared to meet the employment needs of industries for today’s global marketplace.

Instead of trying to improve the quality of education offered by government schools and colleges, the authorities seem to be more interested in leveling the playing field through mediocrity, if not substandard quality. In the name of social justice and equity, government regulations and practices make operation of private schools difficult. If some of the proposed rules go into effect, even those private schools that do not receive government assistance will be required to admit students who have not demonstrated satisfactory academic performance to be able to keep up with the higher academic standard of those institutions. Further, without the ability to charge sufficient fees for study, these private schools cannot afford good teachers and offer a good program. The net result is that private schools will also lower their standard.

The injustice of the achievement gap between the children of the poor and the rich must be closed. The question is how? Nothing is gained by enacting rules that would de facto result in lowering the quality of education offered by private schools. Instead, the focus must entirely be on improving government schools where children from poor families attend.

I believe deeply in social justice and equity. It must be achieved by sensible and positive measures. In this case, the government should be the catalyst in improving all schools. It must play direct and indirect roles in achieving such an outcome.

Of course, there are many factors that influence student learning and achievement. Of all those factors, the most important one is teachers. I know from my personal experience running Shanti Bhavan that effective teachers – those who not only have the highest expectations of their students, but also have the desire and the ability to help them achieve those expectations – are the most important ingredient in this undertaking.

Until such time the nation finds a way to adequately train and motivate teachers and hold them accountable, the education gap will remain. I pray that the government will be wise enough not to attempt to close that gap by lowering achievement among the few who can afford to join quality institutions. By improving the quality of education offered by all schools and colleges, both private and government-run, there will be millions more young adults each year having the required educational background to seek skilled jobs. There is no superior strategy than this to achieve higher productivity from the workforce to create far greater national wealth.

Written by Dr. Abraham M. George

Please visit us at www.shantibhavanonline.org and www.tgfworld.org

India’s Bureaucratic Albatross

I am glad to see today (February 22, 2010) a blog by Tavleen Singh entitled India’s bureaucratic albatross in which he describes his frustrations and observations in his dealings with the bureaucracy in government departments in Delhi. As one who returned to India in 1995 after 30 years in the U.S. , and now having dealt with both rural and urban government officials at the state level, you can imagine what I have been going through to accomplish anything that needs government approval or assistance. I have described my experiences in India Untouched: The Forgotten Face of Rural Poverty and subsequent blogs. It is my conviction that the root of poverty in India is set in bad governance – inefficiency, bad planning, terrible procedures and systems, corruption and favoritism. Use of modern technology might speed up some work, but unless bad attitude, lack of accountability and arrogance of power can be offset by the power of the people, there is no hope. When senior officials and politicians are only interested in maintaining their power at any cost, and are able to do so, nothing good will happen.

I started a journalism college – the best in India today (see www.iijnm.org) – to train young people to investigate and write about these and other ills in India. Unfortunately, editors, senior managers, and owners are unwilling to write about government practices beyond superficial reporting on some scandal that is of political interest. The media is also part of the problem – their reluctance to reveal the truth about ourselves.

By Dr. Abraham George. Please visit us at www.shantibhavanonline.org and www.tgfworld.org

Shanti Bhavan to accept Haitian orphans

As you all know, the people of Haiti are now suffering terribly as a result of the earthquake just three days ago. Many countries, organizations and individuals are trying to help these desperate people in different ways. We too must do what we can at this critical juncture.

Shanti Bhavan was founded 15 years ago on the simple principle of universal humanity - that we are all part of one large family - and we must come to the aid of others in times of need. It is only consistent with the teachings of some of India's great figures such as Ashoka the Great as early as 250 BC, Rabindranath Tagore, Swami Vivekananta and Mahatma Gandhi, as well as numerous Western philosophers.

Shanti Bhavan has considerable experience in caring for orphans and children of single parent families who have been victims of social and economic disadvantage. We know the importance of a loving home, personal attention and quality education to realize the full potential of each child. Our commitment is not constrained by race, gender, social background or nationality.

After consulting with some of you, Shanti Bhavan has decided to open its doors to the children of Haiti who have been orphaned as a result of destruction and deaths. We are offering free admission to 12 Haitian children between the ages of 4 and 6 as soon as we can obtain the necessary permission from relatives and governments. While this would only be a small gesture, I hope it would motivate other institutions to do the same to save many more precious lives.

I realize the difficulties we will face to make this happen due to governmental regulations. We will need the consent and approval of relatives and governments. I am hopeful that we can persuade all parties that what we are striving to do is in the best interest of the children. We will commit to bringing up the children without government financial support all through school and college until they are in a position to seek employment.

I am reaching out to those of you who can help us accomplish this difficult task of facilitating the transfer of 12 orphan children from Haiti to Shanti Bhavan in India. There are many steps to this process which require influential contacts with governments and coordination with relief agencies. Shanti Bhavan does not have the institutional capability to accomplish that. If you are in a position to contribute to this noble effort, please email us at shantibhavanchildren@gmail.com describing how you can be helpful; we will try to put those organizations and individuals together, where appropriate.

This is an important moment in our history. We owe our fellow humanity all our support and help at this time of great anguish and sorrow. Please help Shanti Bhavan help the children of Haiti.

Please visit us at www.shantibhavanonline.org and www.tgfworld.org

Half- truths, Lies and Poverty

Since the Millennium Development Goals (MDG) were first set by the United Nations in the year 2000, much attention has been given to those pursuing the issue of poverty. Mohammed Yunis was awarded the Nobel Peace Prize in 2006 for his novel work through Grameen Bank, and Jeffrey Sachs, an influential academic at the Earth Institute in Columbia University, New York, appeared on the cover pages of major magazines describing what he considers as an effective strategy to end poverty. Even Bono, a highly acclaimed pop artist, entered the scene along with former president Bill Clinton to raise substantial money from governments for poverty programs.

Undoubtedly, these and other well-known individuals and institutions must be credited for their efforts in tackling the world’s largest and most pressing problem – poverty. But when they make assertions and projections that are either incorrect or unrealistic, the credibility and confidence of all efforts are affected. For example, Jeffrey Sachs wrote and promoted his program claiming that poverty can be brought to an end in a short period if just sufficient money can be raised to implement his ideas; Yunis asked his admirers to quickly look for a plot to bury poverty – a premature death as a result of microcredit programs worldwide. Since these pronouncements, the number of poor people in most developing countries (outside China) has in fact increased.

It is not just reputed individuals who are guilty of making these inaccurate or unrealistic claims and assertions to promote their own agenda and programs. For many years until 2008, the World Bank has been saying that poverty has steadily declined over the past two decades, implying that the programs supported by their extensive funding have contributed to this accomplishment. This claim is supported by the bank’s pre-2008 published statistics that showed a decline in poverty rate to 21.4 percent in 2005 from 25.9 percent in 1999 for all developing countries excluding China. But the bank failed to give sufficient importance to the fact that the number of people in poverty has in fact increased over the same period in most developing countries – a reflection of population increase proceeding at a faster pace than poverty decrease.

It was not just insufficient emphasis for a single statistic that was the mistake. Under pressure from many circles, the World Bank acknowledged in late 2008 higher levels of poverty than previously reported. The bank changed its view of poverty around the world by defining extreme poverty as living below $1.25 per day from $1.08 previously, adjusting for purchasing power parity. By this new yardstick, 1.4 billion people were seen to be living in extreme poverty — more than 28 percent of the population of all developing countries excluding China as of 2005. This reflects an upward revision by over 30 percent in the number of extremely poor people. Those living in extreme poverty as well as within the definition of $2 per day actually increased in India, South Asia and Sub-Sahara region between 1999 and 2005. This significant adjustment raises questions on the reliability of important statistics put out by the world’s leading poverty fighting institution.

Look at another example. For the past two decades, microfinance institutions have been claiming that they lend small amounts of money to the poor, especially women, who are able to start new businesses and come out financially successful as entrepreneurs. Many have described these for-profit ventures as the long-sought panacea to eliminate poverty. Microfinance companies have been able to attract substantial funds from philanthropic-minded investors and even major institutions such the United Nations and several developmental banks based on their claim that the loans are mostly to the poor and 99 percent of the borrowers are able to repay the loans. These assertions were not questioned adequately by even those who call themselves developmental experts, but now the truth is slowly coming out. It is increasingly clear that the recipients of loans are mostly those well above the $2 poverty level, and the high repayment rate is facilitated by their increased borrowing from local money lenders at exorbitantly high interest rates. There is very little evidence that these loans have made any noticeable impact on poverty.

In recent years, there has been considerable excitement among academicians and investors on the idea of social entrepreneurship to alleviate poverty. These institutions, many of them microfinance companies and small entrepreneurial ventures, argue that they directly serve the so-called “Bottom of the Pyramid” – those who belong to an untapped market segment wherein savvy businesses can earn attractive profit, while claiming to help the poor. Once again, as researchers started looking into these claims, it became clear that hardly any of these social enterprises directly serve people who are below $2 per day in income. Soon, the attempt to redefine the Bottom of the Pyramid started. The World Economic Forum restated this segment as those earning below $8 per day, while some others expanded the definition to include even those earning below $13 per day, yet still claiming that the poor are served. When nearly 75% of the population in countries like India and the entire sub-Saharan Africa earn less than $2 per day, these even broader definitions are including almost everyone within the poor category; only the affluent are excluded. Such misstatements and inappropriate definitions impede efforts to achieve poverty reduction.

I can go on with many more examples of assertions that are not sufficiently supported by evidence in the poverty alleviation arena. Let me conclude this critique with examples of recent projections being put out by two of the highly reputed institutions in the world. According to Global Fund and the United Nations, current efforts to reduce malaria deaths, and the billions of dollars being spent on it, will result in eliminating malaria in successive countries from 2015. This implies saving nearly 1 million lives each year –the current rate of deaths from malaria – over the coming decade or so.

But when you closely examine the available data, there is no clear evidence that the present program is eradicating malaria, though treatment programs have been more effective. In order to prevent malaria, there are only three possibilities: first, eliminate all malaria-carrying mosquitoes; second, avoid all mosquito bites; third, discover a vaccine that can protect against malaria. The other choice is to ensure effective treatment of all those who are infected so that death from malaria can be practically eliminated. The truth is that none of the above can be accomplished in the foreseeable future, let alone by 2020.

There is no initiative to eliminate all malaria carrying mosquitoes – an impossible task. The current effort, on the other hand, including those funded by the Gates Foundation, focuses mainly on offering mosquito nets for protected sleep, cost-effective treatment for those infected, and possibly finding a vaccine to prevent infection. But mosquito nets offer nothing more than a comfort time zone for a good night’s sleep, and do not have any relevance to mosquito bites inside and outside the home. Cost-effective treatment can be a big relief, but it does not reduce the incidence of malaria. As for the likely discovery of a vaccine by 2015 to protect against infection, it is far from certain that all the people in over 103 countries where malaria is prevalent can be vaccinated in five years, if not decades. In the face of these realities, it would be more prudent on the part of those combating malaria to express modest expectations.

Those are enough depressing facts. I will be remiss if I neglect to say that all these individuals and institutions that are probably guilty of not presenting accurate accounts are also the ones that are doing some of the best work toward poverty alleviation. However, it would be far more constructive if they avoided the pitfalls of half-truths and outright lies when promoting their ideas and programs.

The author is engaged in several social initiatives to alleviate poverty through The George Foundation in South India.

Please visit us at www.shantibhavanonline.org & www.tgfworld.org

Who can claim to be a social entrepreneur in poverty reduction?

Today, there are many ventures claiming to be social enterprises, some with the professed goal of poverty alleviation. In the frenzy of associating with social good, many such assertions do not face enough scrutiny. Further, there isn’t sufficient clarity on who is a social entrepreneur contributing to poverty reduction as its main goal.

Social entrepreneurship is the activity of a social entrepreneur. A social entrepreneur is one who recognizes a social problem and uses business principles to organize, create, and manage a venture to bring about social change. Social entrepreneurs are usually individuals with novel solutions to society’s pressing problems. Some social entrepreneurs often work through nonprofits and citizen groups, while most are now working in the private and governmental sectors.

Whereas a business entrepreneur measures performance in terms of profits and rates of return on investment, a social entrepreneur additionally includes the impact he has on society as well – the so-called double bottom line. The main aim of a social entrepreneurship is to further social and environmental goals for a good cause. In its purest form, social entrepreneurships are non-profits that reinvest the profits generated to further the social goal. Most social enterprises are built on business models that combine a revenue-generating objective with a social-value-generating structure or component. Social entrepreneurships redefine entrepreneurship as we know by adding a social component.

One well known contemporary social entrepreneur is Muhammad Yunus who founded the Grameen Bank in Bangladesh, and who was awarded a Nobel Peace Prize in 2006. His work was built initially on the concept of offering credit to those who were unable to obtain loan from conventional sources such as banks to undertake small business ventures. Subsequently, a new microcredit industry mushroomed in developing countries, most claiming that they are able to lend money profitably to the poor to enable them to start or run small businesses. However, there is some degree of skepticism about their motive, business practices, performance, and benefit offered to the poor.

I would like to offer some clarity to this field. Social entrepreneurship can be in many areas that offer products and services to improve consumer safety, environmentally friendly choices, poverty alleviation, and other worthwhile initiatives. There is no doubt that many of these ventures are valuable to the economy and the society in general. However, the problem arises when some of these initiatives claim that they are designed to alleviate poverty as their main goal. Such claims often attract public support and investment from the philanthropic community, but they do not necessarily meet the minimum criteria for claiming as a poverty alleviation enterprise.

In my opinion, for-profit ventures that claim to be social entrepreneurships to alleviate poverty must meet at least one of the following criteria:

• Employ and/or train proportionately significant number of poor people in its main business activity (e.g.: making mosquito nets, pottery, processing vegetables, etc.) instead of simply using them as cheap manual labor, such as sweepers, porters, etc.
• Produce/offer essential products and/or services (healthcare, education, housing, food, clean water, etc.) to poor people (those below income of $2 per day) at affordable prices.
• Make credit available to poor people at reasonable rates (no higher than twice the rate charged by banks to their credit worthy clients) for personal or business uses.
• Offer technical, material and/or financial assistance to the poor to enable them to engage in family-run businesses, with returns to investors generated in the form of products produced from those activities (milk production from cows and buffalos, tailoring of items such as designer quilts and cushions that may be sold at high prices to the affluent community, etc.).
  

In all these cases, the social entrepreneur employs the poor in the company’s main business activity at fair wages, makes possible for poor families to engage in small entrepreneurial ventures, and/or offer essential products and/or services at affordable prices/charges. The poor must benefit directly from the activities of such social entrepreneur. It is not sufficient to argue that the poor also benefits from the trickle down impact of a regular business run by or for the higher income population to qualify as a social entrepreneur serving the poor; otherwise, every corporate entity including Wal-Mart would fit the definition of a social entrepreneur serving the poor.

Further, the cost incurred by the beneficiary for the product/service obtained must be affordable and reasonable; not to place any such constraint to qualify as a social entrepreneur serving the poor would be to accept exploitation of and extortion from the poor in the name of social good, as is the case of local money lenders who charge exorbitantly high interest rates to those who badly need loans to meet emergencies.

Investors must differentiate between those for-profit business ventures that are set up in poor areas or employ low-wage labor from other activities that are clearly designed also to improve the lives of poor people at the true “bottom of the pyramid.” Without making such a distinction, every business that operates in deprived communities or sells products and services to the poor and the not-so-poor will be termed social entrepreneurships in poverty alleviation.