Thursday, December 21, 2006

Poverty Alleviation Strategy:Three Fundamental Flaws

According to the World Bank, by the broader international definition of poverty ($2.00 or less per day per person), there are more poor people in the world today than there were a quarter century ago. Yet, during the same period, the strategy for alleviating poverty across practically every developing nation has remained essentially the same.

The assumptions that underlie the present approach to combating poverty are flawed on at least three counts. First, there is the idea that underdeveloped nations can be saved through more outside assistance and by expanding existing programs that are run mostly by governments. Accordingly, those who support this notion want the World Bank and other international agencies and donors to make increased contributions to supplement domestic government resources.

The presumption is that with more money, corrupt and inefficient governments and bureaucratic institutions will somehow deliver the goods. Supporters of this “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 the beneficiaries.

Corruption, political influence on credit, land allocations and other related decisions, diffused focus and priority, poor execution, shortage of rural infrastructure, social inequality and a host of other factors remain as impediments to poverty reduction. Sure, more money – even if it is only 15 cents on the dollar -- would help. But what is far more important is the national will to tackle these and other obstacles.

The second erroneous assumption is that governments are the best agents for delivering basic services, such as health care, education and job training, especially in rural areas (which is where the majority of the population in most developing nations lives). This misconception has arisen due to the inability of rural populations to pay for basic services. Until rural incomes rise, a significant portion of the costs associated with public services must be borne by the state. The private sector, on the other hand, has not yet found it financially attractive to be directly involved in such efforts.

But lack of affordability alone should not prohibit private sector participation. Opportunities exist for public-private partnership; private institutions could deliver services at reduced prices, still at a profit, within a competitive and independently monitored system. This would require that the costs be subsidized or even fully paid for by the government.

In most developing countries, poverty-eradication programs are also mainly government funded and managed initiatives. In rural areas, they take the form of land allocations, as well as subsidies and grants to farmers. But there is no serious effort to involve private companies; the rural sector is generally viewed as the bread basket for the country, with employment confined to farming and cheap labor for urban businesses.

Most rural areas are, in fact, ideally suited for industries such as herbal products, cement and tile, lumber and pulp, meat, dairy and poultry. Financial incentives, in the form of low-interest loans and tax breaks, and infrastructure improvements, can motivate private companies to build factories in rural areas. These businesses could offer job opportunities for people in villages who would otherwise migrate to cities for employment.

Government-run programs and handouts will not solve poverty. The government’s role ought to be that of a catalyst, rather than an implementer or manager of change. Only when private individuals and institutions find it worthwhile to take risks and invest in economically depressed areas will there be sustainable development and poverty reduction.

The third incorrect assumption is that every poor person can be rescued from poverty fairly quickly and easily with a modicum of money. For example, many make the claim that the micro-credit facility (loans of around $100 to each impoverished person) has elevated tens of millions of people out of poverty in the developing world. Moreover, assertions that more than 90 percent of the people who receive micro-credit are genuinely poor, that most of them succeed in businesses started with these loans, and that they repay the loans at 15 percent annual interest or higher, go essentially unchallenged.

In my social work in rural South India, I have witnessed how micro-credit can help reduce the debt burden faced by the poor at the hands of money lenders who charge exorbitant interest rates. But only a few among the poor can expect to succeed as entrepreneurs with such small amounts of money and with little other support, training, or skills.

The truth is that most beneficiaries of micro-credit repay the loan from income received from their regular jobs and from grants provided by governments for self-help programs. Not surprisingly, it is the intermediaries – commercial banks and loan facilitators – that stand to gain the most from the spread between the cost of funds and loan interest rates.

There are no easy answers. For the most part, poverty will be solved when the poor gain new skills and when more jobs become available in the rural sector. For many, the real solution lies in the ownership and use of a permanent income generating asset: land. The poor must be given the opportunity to own and develop land, and to grow profitable crops that can be sold in a competitive market. This will lay the groundwork for the next generation which, through enhanced resources and better education, will have access to a wider range of opportunities.

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