Thursday, November 23, 2006

Jobs, not microcredit, is the solution

Aneel Karnani, Professor at Ross School of Business, University of Michigan writes in today's Business Standard that rather than hyping microcredit, India should focus on job creation through "labour-intensive, low-skill sectors such as light manufacturing, garments and tourism." Some excerpts from his article:
The Economist magazine concluded that while “heart-warming case studies abound, rigorous empirical analyses are rare”. A few studies have even found that micro-credit has a negative impact on poverty; poor households simply become poorer through the additional burden of debt.

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The United Nations’ declaration that microentrepreneurs use loans to grow thriving businesses leading to flourishing economies is hype.

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In an insightful survey on the economic lives of the poor, Abhijit Banerjee writes that the self-employed poor usually have no specialised skills and often practise multiple occupations. Many of these businesses operate at too small a scale. Banerjee points out that the median business operated by the poor has no paid staff; most of these businesses have very few assets as well. With low skills, little capital and no scale economies, these businesses operate in arenas with low entry barriers and too much competition; they have low productivity and lead to meagre earnings that cannot lift their owners out of poverty.

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Even in developed countries with high levels of education and infrastructure, about 90 per cent of the labour force are employees rather than entrepreneurs.

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Rather than lending $200 to 500 women so that each can buy a sowing machine and set up a microenterprise manufacturing garments, it is much better to lend $100,000 to an entrepreneur with managerial capabilities and business acumen and help her to set up a garment-manufacturing business employing 500 people.
My comments:

It is understandable that a lot of people are upset about the extraordinary hype surrounding microcredit. I would agree with Karnani's statement that "The United Nations’ declaration that microentrepreneurs use loans to grow thriving businesses leading to flourishing economies is hype" at the present stage.

It is also regrettable that some Governments now look at abdicating their responsibility in job creation and poverty alleviation by simply encouraging nationalised banks or private bankers to offer microcredits and hoping that somehow microcredits will solve the problem of poverty and grow the economy.

Not all microcredit banks have succeeded yet. It is however an experiment worth continuing, even if it has only partial results, as long as no one becomes worse off than before because of taking microcredit.

Karnani argues that rather than offering microcredit of $200 to 500 people, offer larger loans ($100,000) to an entrepreneur who can create 500 jobs. In a country like India, one does not have to look at "either/or". Those who are capable of setting up $100,000 enterprises continue to do so. But such enterprises cannot be set up in rural areas, because of lack of transportation, quality power and other facilities. The microcredit and SHGs operate predominantly in rural and semi-urban areas. So these two models are mutually exclusive.

In rural India, most people are employed in agriculture as low daily wage earners. They all have jobs but very uncertain jobs paying very little. The Indian Government has just introduced a National Rural Employment Guarantee Act (NREGA), which assures a certain days of manual labour (of mostly unproductive and useless work, in my opinion), for which the workers will be paid minimum wages (of about Rs. 75-100 a day, I think). This money could simply have been given to the rural poor as dole. This will still leave them in poverty and the government has no idea of creating large scale jobs anyway.

I can't see very many entrepreneurs rushing to the rural areas to start enterprises that can give jobs to 500 people - or even 100 people - since the opportunities available in urban centres are more.

In this scenario microcredit in rural areas can at least help in one person micro-enterprises which can help in poverty alleviation. There are plenty of micro-enterprises possible in rural India, just like in rural Bangladesh. However, under extreme stress, a lot of micro-debtors use the money they get for consumption rather than investing that in their enterprise. This is, as Karnani says, a major problem. But this problem cannot be solved by microcredit institutions on their own. While the government works to ensure that there is at least enough money given to the poor people to find their food, the microcredit can then help in lifting them from their poverty.

In Bangladesh, the government is incapable of feeding the poor directly. But in India, if the government has the will, it can certainly provide the poor with food. Microcredit can then take these people to the next level.

Micro-entrepreneurs need not necessary have to have huge skills. Nor is their productivity or profits affected by competition. There is still a huge market for handicrafts (both utilitarian and decorative products), hand woven fancy fabrics, embroidery works and other traditional products. Each micro-entrepreneur learns these skills quickly and easily. Nor are they working towards wiping out the competition. You can see tens of women in most such villages engaged in much the same work (of say weaving a bamboo basket). They are merely looking to earn a little cash that can help in getting better nutrition for the family, the much coveted education for the children, some decent clothes, slightly better housing etc.

Microcredit doesn't need too much hype, but not this kind of onslaught either.

2 comments:

kuffir said...

'The Indian Government has just introduced a National Rural Employment Guarantee Act (NREGA), which assures a certain days of manual labour (of mostly unproductive and useless work, in my opinion), for which the workers will be paid minimum wages (of about Rs. 75-100 a day, I think). This money could simply have been given to the rural poor as dole.'

my views exactly.. a direct transfer from delhi to the doorsteps of individual villagers works more effectively than elaborate schemes to create non-work and non-assets using non-tools..
i also second your views, despite many negative reports on micro-finaciers etc., and the ineffectiveness of small loans in creating sustainable, growing businesses i think we still need micro-credit... because the number of people who need support is so huge.
i take a slghtly different view from you on jobs - it's easier to impart skills than to create jobs.. govts should look at making education 1000% accessible to every child and this means the centre and the states need to spend more than twice the resources they allocate to education every year( from 3 percent now to 6% or so of gdp or...from 86000 crores this year to 1,90000 crores or so ...as suggested by the kothari commission in 1968). the govt/s still have a lot to do in the area of education...it'd be better if they started doing that instead of selling people the dream that they can 'alleviate' poverty.. i consider illiteracy is a major factor behind poverty.
very interesting post.

kannan said...

http://www.newyorker.com/fact/content/articles/061030fa_fact1