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September 1, 2009

Reforming for the poor

“Woh garibi nahi, garibon ko hatana chahte hain” (They want to remove the poor, not poverty).

Everything that was happening was evidence of what Gangamma, a street vendor in local market in Delhi, said.
A swarm of police-men descending on street vendors in a raid that would make Genghis Khan look like a pen invader. Wares confiscated, carts upturned and weighing instruments usurped to strategically end any future sales. What lingers is the frustrated quizzical look on their faces. Is earning a honest livelihood a crime of such proportion? With no other jobs, their day’s income is lost.

But let not sympathy cloud our perception. What is also not easily observable is loyal and efficient policemen of the state clearing the streets to protect pedestrians’ and other road users’ rights. All of it for public interest. Don’t we complain when the streets are blocked? They have a legal mandate to safeguard the street from encroachments. The key question is how public policy should think about making the right choices here.

In city after city, the police and the poor fight these economic wars in the background—the enterprise of the poor versus the law upholding public interest. These enterprises could be street hawking, cycle-rickshaws and auto-rickshaws, other micro-enterprises like shops and even small “budget” schools. In each of them, we find that the law restricts their opportunities for economic livelihood. The state’s regulatory apparatus is geared to impoverish them and make them de-pendent on welfare schemes.

Often the laws are well intentioned but have negative consequences on ground. For example, regulations in Delhi state that a rickshaw can only be driven by an owner and an owner can have only one rickshaw. This means that the owner can never expand his business and will always be restricted to the subsistence revenue. Given the limited licenses, it means there is a high cost of obtaining that license. In reality, it is only the rich middle-men or thekedars who get these licences and give out rickshaws for hire. Instead of the poor getting richer, we have the rich getting richer.

When it comes to setting up enterprises, there are the usual licensing and high cost of running business issues. For example, if you have a meat shop, the slaughter of animals is licensed and capped. This basically means there is an informal high cost market for obtaining meat. When opening any school, regulations require a school to have a playground of 720 square feet which makes the whole enterprise prohibitive. The government has decided, on behalf of the poor, that if they are better off without a school if they cannot have one with a playground. They are restricted to government schools without any choice to go to better schools. In all these situations, we are not sure whether government actions ensure more access at lower cost and higher quality.

The government solutions focus, in principle, on precluding or restricting these kinds of economic activities or, on judicious allocation of resources like public space. Those in favour of the public interest can ask for more monitoring; more severity of punishment. Decisions like these are pondered everyday in government departments especially at the municipal level. Others in favour of entrepreneurship and economic livelihoods of the poor want them to be given more leeway since they are in favour of voluntary exchanges. But some of these have direct externalities like pedestrian space and street vendors. So decisions boil down to where they should be allowed and who can be allowed and suchlike.

Some of the private sector solutions for the poor have focused on providing credit to informal enterprises. Do we want our streets littered with informal enterprises high on credit? Is this the price of prosperity for the poor? Are these our only choices? Are our hearts and minds in the right place together?

What provides a ray of hope out of this problem is that this quality of life is not their choice as well. Most of them enter these professions due to lack of wage-jobs and do not wish to battle the police or be confined to selling on the street all their life. Much of their enterprise is borne more out of a need for survival rather than a pursuit of entrepreneurial value creation. If there were more wage-jobs around we would not see much of these micro-enterprises and then not be forced to make these choices. The question is, how do we alter the prices of micro-enterprisers’ behaviour so that we don’t face these difficult choices.

What is interesting is that when we look around the world, Small and Medium Enterprises (SMEs) drive employment and growth. Unlike the necessity-driven entrepreneurship of informal micro-enterprises, they have more of an opportunity entrepreneurship dimension. In other words, they set up small businesses because they want to, not because they have to. Growth of this kind of opportunity entrepreneurship requires economic freedom. Even successful credit provision to informal and micro-enterprises requires economic freedom. If economic freedom is improved through deregulation and sensible regulation, then a lot of necessary entrepreneurship will move to areas of higher return. Necessary regulation involves building institutions that elevate the quality of market like ratings, branding and certifications.

If we do this, then the size of the problem is reduced and we don’t have to deal with survival-based enterprises which inflict externalities on others, and hence provide difficult decisions for us. Our choices will then be neither that complicated nor that consequential.


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