India's Economic Path and What It Could Mean for MF

“But it is to the side of the expressways in the glaring billboards advertising mobile phones, iPods and holiday villas and in the shiny gas stations with their air-conditioned mini-supermarkets, that India’s schizophrenic economy reveals itself. Behind them, around them and beyond them is the unending vista of rural India, of yoked bullocks ploughing the fields in the same manner they have for the last three thousand years and the primitive brick kilns that dot the endless patchwork of fields of rice, wheat, pulses and oilseed.”

The above quote comes from Edward Luce’s incisive and cogent book on contemporary India titled “In Spite of the Gods.” Luce was the Financial Times bureau chief for South India from 2001 to 2005, and has the wonderful ability to express about India what most foreigners feel and experience but do not have the words for (this very much includes myself).

This quote about India’s “schizophrenic” economy comes from the chapter “Global and Medieval” in which Luce, through an assortment of statistics and anecdotes, discusses the nature of India’s peculiar economy. Luce sees China’s rise as a typical story, “In spite of much breast beating in the west, China is developing in the same sequence as most western economies have done: it began with agricultural reform, moved to low-cost manufacturing, is now climbing up the value-added chain and probably… will break into internationally tradable services on a larger scale.” India represents a contrast in that “Its service sector accounted for significantly more than half its economy in 2006. This resembles how an economy at the middle-income stage of its development, such as Greece or Portugal, should look. But Greece and Portugal do not have to worry about a vast army of 470 million labourers in their hinterlands.” This last sentence represents why Luce and others, including Manhoman Singh, see India’s unusual development path as a serious problem. This “vast army of labourers” is living in a country where the growth is not labour intensive, which means a severe lack of job opportunities for the low and semi-skilled. In the end, the poor are not reaping the benefits of growth in the same way that they are in other rapidly growing economies like China and Vietnam.

Luce delves into the historical circumstances that may have led to the capital intensive, services sector driven growth of India. The author sees the current state of the Indian economy as in many ways a result of the economic vision of Jawaharlal Nehru. Luce writes, “By the time of independence, Nehru had already helped to forge a consensus in which the country would aim for complete economic self-sufficiency and the state would lead the effort by building up heavy industry...” When India needed “rural land reform” and “local irrigation projects” it got “heavily loss making” aluminum smelters and steel plants.

Along the same lines, Luce’s perceives that another faulty aspect of Nehru’s development strategy was the large amounts of money that were poured into the excellent English-medium schools like the IITs and public hospitals in the cities, when it would have been more equitable to spend that money on improving basic primary education and the resources of rural health centres. “India’s scientific and technical capacity is ranked third in the world… However, India’s literacy rate is only 65 percent whereas China’s is almost 90 percent.”

Lastly, Luce blames the rigid labour laws that do not allow employers to easily lay off workers when fired as another major reason the poor have few opportunities in the current Indian marketplace. This means that even in the good times, employers are reticent to make new hires considering it is a decision they can not easily go back on when things go sour.

So the equation is: focus on rapid industrialization + large spending on higher education and urban health + labour laws that are anything but dynamic = a technological elite and underserved masses. Thus Luce writes, “India finds itself higher on the [value-added] ladder than one would perhaps expect it to be. It is just that most of its population are still standing at the bottom.”

Working for CMF, I can’t help but look at Luce’s description of this country’s economy through the lens of what this means for Indian microfinance. Perhaps microfinance has an unusually important role to play in India that it would not in a country that has large industries demanding low-skilled labor. Critics of microfinance have, I think rightfully, suggested that microlending is not a powerful tool in increasing the speed of economic development. Yet it may be that taking a loan out to invest in improving your agricultural productivity, starting a small shop or investing in your children’s education, so that they might take part in the knowledge economy, is the best of a bad set of options for the Indian poor.

Another possible ramification of India’s development path is that microsavings may be comparatively less important than lending here than elsewhere. In a country where people have dependable monthly incomes from working in manufacturing, the ability to save that money in a safe, accessible interest bearing account may be more important than in India where the poor have a lesser ability to build wealth through savings.

Luce’s account also made me reconsider whether I am wrong in thinking that Indian MF’s rural focus is misplaced. It may be that with poor opportunities for wage labour in the cities, there will not be the rapid mass migration to the cities that has happened in other countries. Luce mentions that “India’s rate of urbanization has actually slowed while its economic growth has accelerated.”

The above three ideas are only passing thoughts of the impressionable reader and certainly not conclusions. But they are examples of how the arguments in “In Spite of the Gods” serve as a healthy reminder that in terms of development, not all countries are alike and the role of microfinance must cater to these differences. “In Spite of the Gods,” though not a piece of hard economics, has happily made me rethink, and want to further research, some of my more closely held beliefs about the role of microfinance in contemporary India.

*Thanks to Emmerich Davies for recommending the book

Exhausted Earth

Interesting Environmental Blog. The post on the tragedy of the commons is especially good.

Reviewing The Economic Lives of the Poor

In their paper, “The Economic Lives of the Poor,” Esther Duflo and Abhijit Banerjee take on the exceptionally difficult and delicate task of profiling the financial situations of those in the world with the lowest incomes. Because the methodology used is surprisingly simple, the paper makes for an accessible and illuminating read.

Attempting to describe the “economic lives of the poor” is an undertaking that lends itself to methodological criticism. The authors clearly understand this and discuss the limitations of the data cited often and almost all data used is laid out in appendices. The authors use household survey data from 13 countries. For 9 countries, the data utilized is from the Living Standard Measurement Surveys (LSMS) which out put together by the World Bank. For 3 other countries, the data comes from RAND’s Family Life Surveys. The last, but not least, country is India, for which Duflo and Banerjee choose to use their own data, collected with the Poverty Action Lab (PAL) for previous studies. Comparing that data from different survey instruments is clearly problematic, and even comparing LSMS surveys across countries is fraught with unknowns (were all questions understood in the same manner in every country? Are there cultural differences that make people more or less likely to exaggerate their incomes or consumption?). If anyone has any thoughts on the consistency of LSMS across countries, I would love to hear them.

The professors choose to define the extremely poor as “those living in households where the consumption per capita is less than $1.08 per person per day,” and the poor as “those who live under $2.16 a day using the PPP [purchasing power parity] in 1993 as benchmark.”

Phew, so now that all the caveats are out of the way, lets get back to the purpose of this post, which was to point out the conclusions that I found most surprising and/or worthy of further consideration:

- In the section titled “How the Poor Spend Their Money,” the authors point out that “spending on festivals is an important part of the budget for many poor households.” The numbers vary greatly across countries. The data from a survey conducted by Duflo and Banerjee in Udaipur, shows that for the extremely poor “the median household spent 10 percent of its annual budgets on festivals.” In only 3 of the 13 countries did festivals not make up a substantial portion of expenditures.

- Prior to discussing spending on festivals, the authors exhibit data on food consumption, “Among our thirteen countries, food typically represents from 56 to 78 percent [of consumption] among rural households and 56 to 74 percent in urban areas.” The authors see this number as quite low considering the low body mass index of the extremely poor and the likely need for more calories. Duflo and Banerjee go on to assert that poor households “do see themselves as having a significant amount of choices and choose not to exercise it in the direction of food.” They cite spending on alcohol, tobacco and festivals as money that could be spent on food. I am not sure I agree with the authors here. From personal observation, it seems like their might be a great deal of social pressure on households in rural settings to spend money on festivals, and to reciptocate the spending of their neighbors. Tobacco and alcohol are both addictive and people may be conditioned into spending money on that type of consumption. Certainly people have choices, but they are probably tougher choices than the professors make them out to be.

- The data presented that I personally find most fascinating is that on reported stress by the extremely poor. The authors reveal that while “self-reported happiness or self-reported health levels are not particularly low” it is a different story for stress. In a paper by Case and Deaton (2005), the authors “find that the answers of poor South Africans and poor Indians about stress look very similar, while reported levels of stress are very much lower in the United States.” Duflo and Banerjee go on to mention that “Cutting meals is also strongly correlated with unhappiness.” The argument is that it is the lack of safety nets (i.e. government programs, insurance, savings) that causes stress, not simply the fact of being poor. This is a concept certainly worth considering as more financial products are developed for the poor.

- In the section “The Market for Insurance and the Poor,” the professors use data from Udaipur to show that informal insurance through social networks is insufficient and that when the “the poor come under economic stress, their form of insurance is often eating less or taking their children out of school.” It is also sadly pointed out that in drought years, “the gap in mortality of girls relative to boys is much larger” than usual.”

There is a great deal more I would like to cite, but if you have gotten this far in the post, you will probably take a look at the paper itself.

Social MFIs??

I do not want to sound very skeptical about the whole Micro-finance revolution for, they actually reach the populations, no one ever tried before. Though MFIs are very lucky too as there are no regulations (leave the word 'strict') to guide them still.
So, my hypothesis today is, if most of the MFI heads are sophisticated businessmen. I know most of you will right away say "yes" and now I want to counter you, but I am sorry even I say yes. This blog entry is essentially for those who believe in using new jargons like "social entrepreneurs" etc even when they understand these people are just doing business. I discuss below why it is wrong to attach the word "social" with MFIs. There by proving the above hypothesis.

MFI do not provide any service free of cost, includes even the cost of, say 5 Rs meeting register, under documentation cost or some other innovative head. They provide insurance, so that their loan is covered. If client is getting some money out of a mis-happening and is unable to pay further installments, do you think the MFI will leave the client jlt when they can leverage on the fact that it is because of them the client has insurance. And this is for the cases when the insurance is for clients. I am sure some of the MFIs will be having this loan insurance product too, where their loan amount is secure, they will add it to some other flashy scheme and sell it to clients.
If you are social, give the insurance premium from your pocket, you know the premiums range from 2 to 4 % of loan amount only at maxx. If you want better schemes, please lobby! (you have all my support).

Other reason, for Mf being a typical business is the multiple loan issue. Since people get a lot sentimental over this issue, let me tell I am not against multiple loans - not at all. But then I also do not attach a huge social value to Mf either. It is like a person having more than one mobile sims, It is their perspective completely to have just one or more than one. I will be enticed if Airtel and Reliance come to me with new connections and ask very little identification. I will certainly add those two to my existing BSNL connection. My financial burden will obviously increase though. But neither Airtel nor Reliance will be bothered, they just got one more customer.
If you are social, don't give credit to those who already have two loans. There is something called credit absorption capacity you know, which poor people from urban and rural areas do not know.

There is nothing wrong with being profit oriented, with the amount of private money now coming in (you need to return money with profits higher than other industry). I know it will be very insane if I talk about the high interest rates here. But I will be very happy to learn about an MFI, which created, funds for its clients or which shared some of the profits with existing clients or an MFI, which has this education program for its client's kids.
If MFIs are doing the above things, that'll be very good. I know they'll be doing this very soon as it will surely help in client retention and new client attraction - both very important in the light of competition.

So, when do I call you social?
Have you ever thought of calling TATA's social because of their CSR activities?

I can call you social entrepreneur for sure, for sometime, if you can come up with models that are suitable to places like Southern MP, models that help solving debt traps, models that prevent suicides!

NB -
1. please feel free to counter/support argument. If you are hurt I express my deep apologies.
2. I remember using jlt somewhere. jlt - just like that
3. I am actually very serious about the issue I just discussed, though there are few statements where you'd probably smile. Its like taking salt with a pinch of sugar
4. The reason for too many NBs is that writings look very stylish with more no. of these, like footnotes/endnotes in word documents.

CMF interviews 4 experts on the debt waiver policy

During his speach in the Union Budget session of 2007-08, the Finance Minister, P. Chidambaram announced that the government would write off loans that small and marginal farmers had taken from formal financial institutions. The total amount to be written off was estimated to be Rs. 60,000 (the government later modified its estimate to Rs. 72,000 crore).

The policy evoked a huge debate in policy circles and the development sector. Amid a flurry of speculation about the efficacy of the policy, CMF spoke with 4 experts, M S Swaminathan, Vijay Mahajan, Supriya Sule, and Malcolm Harper, in order to help readers examine the policy from various angles.

The interviews were originally published in Eye on Micro Finance, CMF's newsletter. You can read interviews (html version) from the following links or download the pdf version from here.

M S Swaminathan
Vijay Mahajan
Supriya Sule
Malcolm Harper

Username : Blah, Password:blahblah...

Notes from the conference in Mumbai by FINO and Intellecap
Technology and Financial Inclusion : What works?
Speakers: Vijay Mahajan, BASIX
Rajesh Dongre, Vodafone India
Ashok Jhunjunwala, IIT Chennai
Manish Khera, FINO

I have summarized the talk regarding one of the very important technological aspect that could help revolutionize the Financial Inclusion space : Mobile phones.

Mobile phones have a wide reach in India with around 300mn customers and also growing at a rate of 8mn new customers a month. This is phenomenal growth and it is tough to expect any other product/service to expand so rapidly. Why is such a rapidly growing technology not used as much in the financial inclusion space?

There are various reasons to this. A technology used for financial inclusion should address the following three issues largely: Transaction costs, risk assessment and assessment of use of finance for productive aspects. Currently, the mobile phones seem to be capable of addressing the aspect of lower transactional costs only. Since 70% of the clients have a pre-paid service only, the risk assessment of an individual who uses a mobile phone is not possible. Also, mobile phones do not seem to be finding ways to assess the use of credit.

Probably, mobiles may not be used for the later mentioned two processes. For mobile phones to be useful in reducing transaction costs also, there is a revolution that will help it drastically : the use of voice for transaction.

The use of voice would drastically bring down the transaction costs and also help in the comfort factor in the rural areas. There is a lot of work going in this area. The issues that we have to deal with in this front then are : How to get away from somebody mimicking the voice or somebody using a recorder voice and other stuff and surely there are ways that are currently present to overcome them. We just need to make these things cheaper so that M-banking is an integral part of financial inclusion

The Disease Must Be Understood Before it Can Be Prevented

I am a man in love with analogies, and I could not resist one that involved the two issues most central to my professional life; the fight against malaria and the study of the coping mechanism used by financially distressed families.

In a recent post I rambled on incoherently about the relationship between last resort finance (short term loans from moneylenders, pawn shops, check cashing, pay day lending, etc.) and social networks. I suggested that the need for expensive, quickly accessible sources of financing was perhaps caused by a lack of social contacts (friends and family) one could borrow from.

Whether or not you believe moneylenders, check cashers, etc. are exploitative actors preying on the poor or helpful financial resources to those in need, I think we can all agree that it would be a better world if these borrowing sources faced extinction because of a lack of demand. Thus, perhaps preventative medicine could be a more effective tool against the evils of high interest rate short-term borrowing (and the debt cycles they often lead to) than trying to actually regulate the behavior of lenders.

Malaria is one of the world’s oldest diseases. It has likely been around since even before man. Yet the cause of the affliction was not known until the late 1870’s, and not truly understood until the very end of the 19th century. The idea that malaria was caused by a parasite, a tiny living organism that attacks blood cells, that came into the body through the saliva of a mosquito would have seemed insane to Ben Franklin* or Emperor Akbar. It was only after the process by which human being become infected by the malaria parasite that humans were able to attempt to prevent the disease. It has been a long and often discouraging battle, but through various preventative measures (including improved sanitation, DDT spray, the use of bed nets, and economic development) the burden of malaria in the world has been greatly reduced in the last century. Malaria does remain endemic to many parts of the world, but there are reasons to be optimistic about the future.

Curative medicine has and does still play an important role in the fight against malaria. Effective treatment is necessary for the unlucky, and as long as malaria exists, there will be a need to develop new and more effective medicines. But the majority of focus absolutely should lie in preventing the sickness, not in treating it.

It is now virtually entirely understood why people get malaria, and the public health world has come a long way in understanding the ways to prevent it. This leads me to think that if we better understand why some people find taking on high interest short-term loans, we might also be able to better prevent that malady as well.

Much of why people need to use high interest short term loans is known. One of the primary reasons people take out these types of loans are unexpected shocks. A common and obvious example would be the need to pay health expenditures. Another cause could be crop failure or another unexpected loss of income. If the people who encountered these shocks had a nest egg of savings, it might allow them to lessen the effect of the unanticipated events negative effects. Yet sadly it is exactly these people who often face a lack of available, liquid, easy to access savings facilities. Besides savings, there is of course insurance, another financial service that can be used to save people from the high interest rates and cycles of debt caused by last resort finance, but insurance programs for the poor and illiterate are notoriously difficult to implement.

Yet much of why people use high interest short term loans is not understood. CMF is currently part of an ongoing study that seeks to understand why some entrepreneurs are in perpetual debt. The study seeks to improve our understanding of why some entrepreneurs spend substantial portions of their income paying off the debt incurred from daily loans rather than building up working capital. It is exactly studies like these that may help us prevent seemingly wealth-diluting behaviors.

Does financial training cause people to save more and take on less short term high interest loans? Can microfinance institutions effectively distribute health or crop insurance to prevent their clients from having to go to moneylenders in dire circumstances? Does the formation of SHGs promote informal insurance within communities?

It truly is not all that different from fighting a disease. Only through research and innovation that leads to increased knowledge for the reasons people take on high interest short term loans will there come any chance of preventing it.

*Happy American Independence Day

Eye on Microfinance No. 7

Less than a week ago, CMF released a special newsletter focusing on the governments farm loan waiver policy. The newsletter contains detailed interviews with 4 experts on rural Indian finance. I work for CMF, but can say objectively that the interviews make for interesting reads. Besides myself, at least one writer at the Economist must have also found the interviews useful as a quote from the newsletter was used in the magazines current print issue.