On obstacles to poverty alleviation in India

Step foot (carefully) on the streets of the Delhi megalopolis and you’ll find an explosion of colour and a cacophony of all sorts of weird and wonderful noises. In some ways, it’s the archetypal developing city, with disorganised shops lying around in wide, bending alleyways that look almost as if they’re the fruits of a child’s imagination. In others, however, Delhi has its own unique aura, the quintessential, all-encompassing Indian tinge that has had foreigners from the Mughals to the British flocking like flies to its soil throughout history. Despite this, however, there is an elephant in the room, lying wearily beneath the glitz and glamour of a hugely unequal and somewhat segregated Indian society. You probably already know what it is: poverty. 2012 Indian government projections suggest that 21.9% of the Indian population are below its official poverty limit – to put that into context, it means that almost 1 in 4 Indians are affected by the scourge of poverty. Despite substantial amounts of aid being given to the Asian country to help solve the problem, it’s not even remotely close to going away at all. This is because of deep and wide-ranging problems in the framework of poverty alleviation projects in India, one of which is information failure in the microfinance sector leading to excessively high interest rate loans.

Primarily in Indian rural communities, a large problem with regards to supplying loans to low-income  households is that loans are advertised at lower interest rates than they are in reality. Given the relative lack of education in these areas, exploitative moneylenders can easily demand money unlawfully from families, citing a higher interest rate than the borrowing family had initially thought. Hence, this asymmetric information between lenders and borrowers, combined with the high operational costs of face-to-face lending to these communities in the first place, results in interest rates that frequently reach levels above 50%. To combat this, it’s logical that the government could introduce subsidies for microfinance institutions to reduce overall costs, thereby resulting in the pushing down of interest rates through the competition of the free market mechanism (the sheer numbers of microfinance institutions involved makes this method viable for application). Furthermore, the Indian government could make efforts to introduce a database of sorts for each rural community, spearheaded by a government-appointed official, detailing each microfinance institution and the details of the loans that they are providing to people in these communities, decreasing the potential for exploitation of borrowers. Given that corruption is such a prevalent problem within almost every Indian institution that exists, deterrents such as substantial jail sentences should be given to anyone exploiting the system, along with many avenues for which people to complain about unjustly high interest rates without fear. Obviously, this wouldn’t solve the problem entirely, but it would go a long way to decrease interest rates and therefore provide a more sustainable alternative revenue stream for families starting businesses on the back of this loan.

Moreover, while children going to school and sitting in classes matters, the end goal of all of this is for them to have an education, gaining transferable skills which they can take to work, boosting the standard of living for themselves, their families, and the wider community. In India, however, while the number of children going to school has been increasing, the number of people getting an education is a greatly different story. In 2009, India ranked 73rd out of 74 countries sampled with regards to the extent of the children’s knowledge regarding various subject matters, indicating that although children are going to school, they are actually not learning very much at all. This is in part because teachers believe that they can get away with not working as hard as possible to educate their students, due to no system of rewards or punishments being in place to provide either positive or negative incentives to teach. Therefore, what I propose is as follows: establish a more rigorous, practical system of testing for Indian children by an independent organisation to each class in schools, with positive incentives in the form of bonuses being paid to teachers whose class performs significantly well. Due to negative incentives promoting negativity and eventual apathy in the school environment, it would be unnecessary to include them with the same frequency as positive incentives, however if a teacher’s class has been doing badly for a sustained period of time, they should take a compulsory training class and be forced to accept a decrease in wages, or leave the school entirely. To make the whole system fair, classes should be allocated based on a test conducted to determine each student’s aptitude when they enter the school, making sure that the aptitude levels of each class are relatively similar. Whilst there is no suggestion here regarding how to make more children go to school, this is because it is already happening in India on a large scale, and so therefore we now must focus on how to maximise learning from going to school itself, in order to pull more and more families out of poverty.

Infrastructure has developed hugely in India since the pro-market reforms of 1991; nowadays in India, people have more opportunities than ever before due to more alternative routes to success. However, despite this, the lack of aspiration shown by some of the poorest people in India has continued on from previous years; they feel that high profile, white collar jobs that can pull their family out of poverty are out of their reach. This is because if the poor’s attempts to find a source of income do not work out, the loss that they could have faced both in time and monetary value could cripple them further than they already have been. While there is no silver bullet to fix this problem, the only way in which it could be somewhat ameliorated is through exposing the poor in these communities to people who have succeeded in the past. There is the potential that the effects of supplying information through media to these communities could have little to no effect, as the potential consequences of failing are so crippling. Hence, it is important to focus on other reforms so that people are more and more exposed to others who have succeeded, and the idea is that the allure of success would eventually drive some people to take risks, catapulting them out of the poverty trap. The most difficult thing about this process is the start; once we have a start, there will be a virtuous cycle, hence the burning need to focus on other ways in which to overcome the Indian obstacles to growth.

While growth continues in India at a breakneck pace, the most important thing now for the country is to increase the quality of living of the poorest within society. That can only be done through overcoming inherent obstacles; maybe, just maybe, once we’ve beaten these, growth and prosperity will increase like never before.

What do you think? Please leave a comment below with your thoughts, whether you’ve been attracted or repulsed by my propositions.

Traffic jams: An economic perspective

You know the feeling.

The skies are grey, and fat drops of rain batter your windscreen: it’s almost as if the sky’s crying for you. You’re stuck in a sandwich of motorised vehicles – progress only comes a few inches at a time, slowly but not always surely. You curse as the faint hope you had of speeding ahead is dashed, falling away like droplets from the sky.

But then, after long hours of waiting, it happens. One car edges ahead, then another, then another. Finally, it’s your turn; your car moves forward, breaking the seemingly endless deadlock. It’s emotional catharsis the likes of which you can only experience after hours of frustration. Finally, you’re home, free from the scourge of traffic (until next morning, at least).

When the adrenaline rush wears off, though, you realise that you just wasted precious hours of your life that you’ll never get back. You could have spent that time watching television, playing chess, or even working more if you had to. In addition to the emotional outrage faced by many drivers across the planet, this congestion also has severe economic consequences for car-owning households. According to The Economist, traffic jams cost Los Angeles $23 billion a year, and that isn’t even when we take into account environmental impact. But why exactly do traffic jams happen, and what exactly can we do about them?

Well, part of the blame for traffic jams lies squarely on the shoulders of the people themselves. Public transport in the form of predominantly buses is a “key mode of public transport for those on low incomes”, according to Transport for London. As incomes go up, naturally the proportion of people using public transport in a particular country will decline. Don’t believe me? Hear me out. Public transport is an inferior service, which essentially means that demand for it decreases as consumer incomes go up. This is natural, as cars are inherently more prestigious than buses or trains; they grant you a degree of privacy and exclusivity, and they almost always look better. Therefore, you’d expect that as people become more affluent, more of them will ride in cars and other private forms of transport. Still don’t believe me? Look at the UK. According to the BBC, the number of cars on the streets of Britain rose by almost 600,000 in one year, with the average weekly wages in the United Kingdom also steadily rising. In this case, the correlation implies a heavy degree of causation. What can be done about this? In truth, not much; people’s opinions are not going to radically change. We could, however, simultaneously create more low-skilled jobs in the cleaning sector and clean up our public transport, which appears to be surprisingly dirty. Cleaning up and renovating some of our aged public transport, thereby making it somewhat more prestigious, could go some way to dampening the tradeoff between consumer income and public transport use, although, admittedly, the effect probably won’t be too drastic. It would help though, so why not try it?

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Improving the quality of public transport could diminish the correlation between income and car use. PHOTO CREDITS: Route 79

It’s also important to consider that as of right now, roads are mostly free at the point of use across the world. Therefore, many people see the use of roads as a given: something for which there is no cost. Hence, the number of cars on the road are surging, as the only thing people actually have to pay for is the payments associated with the car itself and fuel. If governments around the world could somehow introduce a system whereby people are charged for the duration of time that they spend on the roads, demand for cars would fall due to increased price leading to a decrease in quantity demanded, as per the demand curve. This is because an increase in the cost of driving means that for more and more people, the marginal utility gained by using a car is offset by its substantial total cost (in layman’s terms, it costs more than it’s worth). Although this would lead to potential job losses in the auto manufacturing industry, it is necessary to carry out to offset both the economic loss of productivity and the severe environmental damage on air quality caused by traffic jams. In short, while painful for one industry, we need to do this for the greater economic and environmental good.

While campaigns encouraging walking, cycling and use of public transport are almost ubiquitous in today’s world, and have no doubt had their effects, more still needs to be done in order for the prevalence of cars on the roads to decrease dramatically. The difficulty of cycling is one factor why for many, the utility gained in terms of exercise and fitness is less than the cost, in terms of their commute becoming drastically longer and also the safety risk that it entails. What I am proposing to solve this is to build more cycle lanes next to roads, thereby increasing their supply. The increased ease by which many can now find an easy way to cycle to the workplace would decrease the costs of cycling, thereby making the utility/cost tradeoff more favourable, hence spurring demand for bicycles with which to cycle to work, potentially helping the cycling industry also. Given that these cycle lanes take up considerably less space than new roads would, they are both a quicker and more effective solution to the problem of traffic congestion (the increased supply of roads would simply spur demand for cars in the same way as demand for bicycles is spurred above).

Applying economics to the problem of traffic congestion may seem unorthodox at first, but I am convinced that inherently, many of the world’s problems are economic. After applying economics to this situation, it’s entirely possible that you may just spend less time stuck on the roads.

Agree? Disagree? Please leave a comment below, whether you’ve been attracted or repulsed by my ideas.