We live in an era of instant coffee and analysis. Even before something has happened, the analysis on why it has happened is ready. Given this, it leads to situations where we analyse using what we think is “common sense”. But common sense does not always work. The simplest answer is not always the right one. Life can get a little more complicated than that. Consider the story of a woman who the economists Abhijit V Banerjee and Esther Duflo met in the slums of Hyderabad. The economists recount this story in their book Poor Economics-Rethinking Poverty & the Ways to End It: “A woman we met in a slum in Hyderabad told us that she had borrowed Rs 10,000 from Spandana and immediately deposited the proceeds of the loan in a savings bank account. Thus, she was paying a 24 percent annual interest rate to Spandana, while earning about 4 percent on her savings account.” Spandana is a micro-finance institution. Common sense tells us that anyone in their right mind wouldn’t do anything like this. But the economists soon found out that there was a method to the madness, once they saw the context in which the woman was operating. As they write: “When we asked her why this made sense, she explained that her daughter, now 16, would need to get married in about two years. That Rs 10,000 was the beginning of her dowry. When we asked why she had not opted to simply put the money she was paying to Spandana for the loan into her savings bank account directly every week, she explained that it was simply not possible: other things would keep coming up…The point, as we eventually figured out, is that the obligation to pay what you owe to Spandana – which is well enforced -imposes a discipline that the borrowers might not manage on their own.” Once viewed in this context the story makes immense sense. The woman was borrowing at 24% and investing it at 4% in order to build a savings kitty for her daughter’s dowry. Of course, prima facie this wouldn’t have seemed obvious at all. As Nicholas Epley writes in Mindwise: How We Understand What Others Think, Believe, Feel, and Want “The mistakes we make when reasoning about the minds of others all have the same central outcome: underestimating their complexity, depth, detail, and richness. When we’re indifferent to others, it’s easy to overlook their minds altogether, treating such people as relatively mindless animals or objects than as fully mindful persons.” Epley gives a brilliant example of people who chose to stay back in in New Orleans when Hurricane Katrina hit the city in August 2005. The experts were at it with their instant analysis. As ABC News put it, “It’s hard to understand the mind-set of those who ignored evacuation orders.” Michael Chertoff, the Chief of Homeland Security said that those who stayed back made a “mistake on their part”. Psychiatrists suggested that there was a “certain amount of denial involved” on part of those who had chosen to stay back in New Orleans, given that they believed that they could handle the storm. All these explanations sound pretty convincing, “but it does not resonate as well with the actual experience of most who left and stayed, because the broader context is not quite as easy to see.” It is simple to come to the conclusion that anyone choosing to stay back and take on a category 5 hurricane was not right in the head. But anyone who came to that conclusion ignored the context in which the people who had chosen to stay back, were operating. As Epley writes “Compared to those who left, those who stayed were disproportionately poor, had geographically narrower social network, had larger families (both children and extended members), had less access to reliable news, and were considerably less likely to own a car.” And given this it was not easy for these people to just pack up and leave. “If you had money to pay for an extended hotel stay, relatively small family to move, a car to get all of you there, or had far-away friends to stay with, you could choose to leave. If you had no money for an extended hotel stay, no car to get you out, a large family to move and no long distance-friends to stay with, what choice did you have?” asks Epley. Of course, people who analysed the situation did not understand this broader context. Given this, before passing judgements it is important to understand the context in which people are operating. People who chose to stay back when Katrina hit New Orleans, did not need convincing to leave the city, what they needed was a bus. As Epley puts it “Many who stayed wanted to desperately to leave but couldn’t. They didn’t need convincing, they needed a bus.” And what about the woman who borrowed money at 24% and invested it at 4%? What it clearly tells us is that there is a need for a savings solution which allows the poor to save on a daily basis. If they can discipline themselves to pay back micro-finance institutions every week, they can easily discipline themselves to save small amounts on a daily basis. Of course, there are financial institutions which cater to this market, but most of them are of dubious nature. Hence, there is a clear market out there for anyone who is willing to take the risk.
The article originally appeared in the Wealth Insight magazine August 2014
(Vivek Kaul is the author of Easy Money: Evolution of the Global Financial System to the Great Bubble Burst. He can be reached at [email protected])
Vivek Kaul It has become fashionable these days to criticise Nobel prize winning economist Amartya Sen. This writer has also been guilty of doing the same on at least one occasion. But there is nothing wrong with the points that Sen makes on the Indian education system and its weaknesses, in his new book An Uncertain Glory: India and its Contradictions, which he has co-authored with his long time collaborator Jean Drèze. Several surveys conducted over the years have clearly shown the low level of learning among a wide number of students that prevails across the length and breadth of India. Drèze and Sen cite a few such surveys in their book. The ASER Survey 2011, which was an all India representative survey of school children in rural areas found that only 58% of children enrolled in classes 3 to 5 could read Class – I text. Less than half (47%) were able to do simple two digit subtraction. And only half of the children in classes 5 to 8 could use a calendar. These were not difficult tasks by any stretch of imagination. Several such surveys with dismal levels of learning among children in rural areas keep coming out. But surprisingly even urban areas don’t seem to be doing any better. The WIPRO-EI Quality Education Study 2011, surveyed more than 20,000 students in 83 ‘top schools’ in five metro cities (Bangalore, Chennai, Delhi, Kolkata and Mumbai). And the results were surprising. “For example, only third of these ‘top school’ students in Class 4 knew who was the alive person in a list of four: Mahatma Gandhi, Indira Gandhi, Rajiv Gandhi and Sonia Gandhi ( a small number thought, interestingly enough, that it was Mahatma Gandhi who was still alive). About two-thirds of the students in Class 4 could not master the measurement of the length of the pencil with a ruler,” write Drèze and Sen. When compared to other countries, India comes in right at the bottom. In the PISA Plus survey conducted in 2009, the Indian performance in a list of 74 countries or economies that were a part of the survey was very bad. “And this is the case even though the two Indian states that participated in PISA Plus happened to be two of the better-schooled states, Tamil Nadu and Himachal Pradesh. In a comparison of overall reading ability of 15-year-old students in these 74 countries or economies, both Indian states figure among the bottom three (in company of Kyrgyzstan),” write the authors. The bureaucrats and politicians like to point to the fact that India has more schools now than ever before. The 8th All India Education Survey which was released earlier this year found that the number of schools in the country increased by 27% between 2002 and 2009. Shashi Tharoor, minister of state of Human Resource Development writes in a column in The Indian Express today “Take education, the subject of my own ministry. Literacy rates have risen to 74 per cent; more than 75,000 schools were opened and nearly a million teachers appointed in just the last three years.” But Tharoor doesn’t tell us anything about the learning process. Opening, more schools doesn’t really mean anything on its own. Despite this increase in the number of schools there seems to be a lot that is wrong with the way things are being taught in Indian schools. One reason often offered for the poor state of India’s education system is that the teachers are not paid enough and hence they lack the motivation to teach properly. Drèze and Sen prove this to be wrong. “Consider primary-school teacher salaries as a ratio of per capita GDP. In 2001 this ratio of teacher salary to the GDP per head was estimated to be around one in China, somewhere between one and two in most OECD countries, and a little higher in developing countries, but not higher than three for any of the countries (except India) for which data is available. More recent data suggest similar ratios of teacher salaries to GDP in 2005 and 2009. For instance, the OECD average hovered around 1.2 between 2002 and 2009. In India, however, it seems that the corresponding ratio was already around three before the Sixth Pay Commission scales came into effect (in 2009, with retrospective effect from 2006), and shot to around 5 or 6 after that,” write the authors. What it means that Indian teachers get paid five to six times the amount of money that an average Indian makes. In fact the ratio is higher in a few states when we compare the average teacher salary in that state with the average income in that state. In Uttar Pradesh, the ratio is at 15.4. In Bihar, it is even higher at 17.5. For the nine major states of India the ratio in 2012, stood at 4.9. This leads Drèze and Sen to conclude that “whatever may be the source of the problem of low teaching efficiency, the blame cannot be placed on any alleged lowness of salary of school teachers.” These high salaries have forced state governments to stop recruiting regular teachers and move onto contract teachers. As Drèze and Sen point out “Faced with the cost of escalation involved in these salary hikes, many states have stopped recruiting regular teachers and have increasingly come to rely on hiring ‘contract teachers’ to do the teaching. The salaries of contract teachers are typically a fraction (as low as one fifth or so, in many cases) of what the regular teachers earn.” A large proportion of these teachers are untrained or are trained through what the authors call en masse correspondence courses. In fact the irony is that the contract teachers despite their lack of training do no worse than regular teachers when it comes to teaching. This has led to a dualistic system where trained permanent teachers work side by side with teachers on contract who have been hired at a fraction of the former’s salary. A good system would have been something in between. As Drèze and Sen write “It would have been nice to see some sort of a middle path emerging from this dualism: new terms and conditions for the teaching profession, with decent salaries, good qualifications and some security of employment, but not unconditional, permanent plum jobs that undermine work incentives and ruin the integrity of the profession.” The system as it has evolved is neither here nor there. A good education system cannot be built on the back of teachers whose contracts are always running out. The Right to Education Act which came into force as on April 1, 2010, prescribes a pupil teacher ratio of not more than 30:1. This has become very difficult for state governments to fulfil given that following the Sixth Pay Commission pay scales is a very expensive proposition for a large number of states. “On the other hand, meeting them (i.e. the conditions under Right to Education) by hiring untrained contract teachers would become, strictly speaking, illegal,” write the authors. Also, the bigger trouble is that the Right to Education allows automatic promotion from one class to the next. Board examinations are not allowed till Class 8. Imagine the consequences of a student who is not picking up things in a certain class being promoted to the next class. As Drèze and Sen put it “If a large proportion of children learn virtually nothing for years on end in a particular school, it is important to know it,well before they are sent for slaughter in the Board Examination (if indeed they reach the end of Class 8 without dropping out).” Economist Abhijit Banerjee, who is also the co-author of Poor Economics, explained this scenario very well while speaking at a literature festival in Mumbai late last year. He said “Think of all the class IV children who cant read. They are learning social studies and all kinds of other wonderful things except they can’t read. They are learning nothing. They are sitting in a class watching some movie in some foreign language without subtitles…The dropout rates are high. And I am always shocked that why does anybody comes to school at all? You are sitting there in class and you can’t read, you can’t write, why are you even there? What is going on?” Now imagine what will happen to students who will keep getting promoted without any exams. The only people who gain through no exams are the teachers, especially in a system where learning is so low and there is very little supervision of what is really going on. As Banerjee put it “ The public education education is a system for the teachers, by the teachers and in the interest of the teachers. This is a system which essentially does not want any metric of performance. The excuse they give is that we don’t want children to be tested because children feel bad if they don’t do well. Its true that children feel bad if you tell them in public that they have done badly. But there is no reason that testing means public declaration of results. In Massachusetts(in the United States) where I live, test scores are only revealed at the grade level. So, for example, all fourth graders may have done badly at some school, but I don’t have to know if someone did well or badly.” The Right to Education is thus creating more problems. The trouble is that like all such big Acts which try to address everything, it has ended up addressing nothing. The basic thing that any Act on education should be addressing is the lack of learning among students in schools. But that is clearly not happening. Small experiments have been carried out around this problem. And they seem to suggest that addressing the lack of learning is neither very difficult nor very expensive. As Banerjee put it late last year “We did one experiment in Bihar which was with government school teachers. This was in summer around two years ago. The teachers were asked that instead of teaching like you usually teach, your job for the next six weeks is to get the children to learn some basic skills. If they can’t read, teach them to read. If they can’t do math, teach them to do math. At the end of six weeks, these teachers were given a small stipend. They had also been given a couple of days of training. At the end of six weeks, the children had closed half the gap between the best performing children and the worst performing children. They had really improved enormously.” What changed suddenly? Why did the government school teachers do so much better? “The reason was they were asked to do a job that actually made sense. They were asked to teach the children what they don’t know. The usual jobs teachers are asked to do is teach the syllabus – which is very different. Under the Right to Education Act, every year you are supposed to cover the syllabus,” said Banerjee. The solution to the problem is very simple. For the first few years of school the children need to be taught the basics like being able to read, write and do simple Math. Such a system is likely to lead to better results. As Banerjee put it “One thing that we forget is that the perfect is the enemy of the good. We are trying to have an education system that is perfect and that every child should come out with wisdom at the end of it and as a result they learn nothing.” The trouble is that small simple solutions do not seem to have enough vote grabbing potential. The article originally appeared on www.firstpost.com on July 23, 2013 (Vivek Kaul is a writer. He tweets @kaul_vivek)
Abhijit Vinayak Banerjee is currently the Ford Foundation International Professor of Economics at MIT. He was educated at the University of Calcutta, Jawaharlal Nehru University, and Harvard University. Together with Esther Duflo and Sendhil Mullainathan of Harvard University, he founded the Abdul Latif Jameel Poverty Action Lab in 2003. He is also the author of the bestselling Poor Economics – A Radical Rethinking of the Way to Fight Global Poverty.
Banerjee was recently speaking at a literature festival in Mumbai on why most people don’t understand what it means to be poor and how the decisions made by the poor might be irrational to us but are very rational decisions given the situation they are in. The UPA has been unveiling many schemes for the poor, the latest being the direct cash transfers scheme. The critical questions are: will they work, and how well will they be implemented. Here are few excerpts from what he said. This is the second and concluding part. (Read the first part here) On whether the cash transfers scheme will work
There are two concerns with the cash transfer scheme. One is will we screw it up like everything else. That is the first order concern. In this case there is more thought that has gone into design than usual. That is thanks to Nandan Nilekani (Chairman of the Unique ID Authority of India). There is an interest in implementation. The second issue is that it could really degenerate to the bottom. It is very easy to give money away and every government will try to give away more of it once the system is in place. And at some point it will mean that we won’t have any money left for anything else. I think it is important to commit not to spend more than a certain amount. Other than that, the poorest of our poor are so poor that it is unconscionable that we don’t offer them something. This is something that will make their lives better. Whether they spend the money on beer orkaala channa I really don’t know. Kaala channa is supposed to be the most healthy food. What are critical to cash transfers An important part of the cash transfer is who do you give it to and in what form do you give it? Targeting, for example, the woman in the family, who will directly spend it on food, is a good idea. Also, putting it into a bank account rather than handing over cash, is a better idea. If I give people something in the bank account they may not spend it immediately. Hence the design of the programme is very important. As I said, we could do it well or badly. If we do it well it could be very good. Banks don’t like the poor
In general in India, the poor are not given bank accounts because banks don’t like them. If a poor person walks into a bank and he says he is going to put Rs 100 in it, the bank usually sends him away and never opens an account. Hence, the poor do all kinds of creative things to save. One thing they do is they build houses brick by brick. Once you move slightly out of the city centre, in most towns in India you see hundreds of thousands of unfinished houses. Houses with poles sticking up. A few bricks on one side. Some plaster on the other side. Nothing finished. That’s how they save. Whenever they get some money, they come and buy a few more bricks and they stick it on. So the money isn’t spent. It is put into bricks. And we call it saving brick by brick. It’s not that these people like unfinished houses and that is why there are so many unfinished houses. It is the only way to accumulate assets. We create all this perverse behaviour because we really don’t provide bank accounts to the poor. Therefore, they have to find a way to solve this. Why the poor borrow at 24 percent and put it in a 4 percent savings account We were very struck when we heard about this woman who borrowed from a microfinance institution at 24 percent and put it in a savings bank account at 4 percent. The first lesson, as I have said, is that you should listen to what people are saying. So when we asked the woman what did you do with your microfinance loan, she said I put it in a bank. You got to be kidding. You are paying 24 percent on this and you are getting 4 percent in the bank, we told her. Why borrow to put the money in the bank, we asked her? Otherwise how do you think I am going to get that money? she replied. Her argument was that if I keep putting Rs 100 aside every month at home, somebody will want it, something will happen and that money will get spent. Now, if I borrow Rs 10,000, and I have to pay Rs 100 back every month, if I don’t payback, the loan collector is going to come after me. The microfinance lender will come after me. So I have to pay up. She was very clear that this discipline that the microfinance loan would provide her was valuable to her and she would never have managed to save the money otherwise. Poor people spend a lot of money on health. Health is a very, very good example where we have always imagined the problem as being exactly wrong. For most poor people we think that they don’t have good health because they can’t afford it. In fact, most poor people spend lots of money on health. They spend a higher proportion of their income on health than we do. In other words, it’s not that because they have to feed their children there is no money to go to the doctor. This particular area that we where working in – i.e. Southern Rajasthan – the common belief among people is that to get really good treatment you have to get an injectable. And even better get a drip. What drips do they get? Glucose or saline. Ten years ago they were paying Rs 120 for a glucose drip which gives a sugar high for about half an hour. Why the poor don’t like government health centres There are many reasons not to like government health centres, but the one fundamental reason they don’t like it is because they say you don’t get the right medicines. What they mean is that they don’t give you injectables. In the government health system, unless and until you are a doctor you are not allowed to give an injectable. So basically, the nurse who is the first line of care in every village has no power to give an injectable. And so everybody likes to go to a private doctor. An average village actually has seven doctors and a number of bhopas who are basically faith healers. All of these people provide healthcare and all these people charge money. The government health system is supposed to be free but they also charge money. The private healthcare system also charges money. Hence, everybody is spending money. The poorest people make 60 percent of their healthcare visits to private doctors, 20 percent to faith healers and 20 percent to government doctors. They are making their choices all the time and mostly the wrong choice. Healthcare is one area where you have to make the right choice. On self-declared doctors I have this guy on film who said, “I passed out of school I could not find a job so I took this job of a doctor.” He made himself a doctor. Most doctors all over India are doctors like that. They are self-declared doctors. There are compounders who have become doctors. Many of them are hereditary doctors. There grandfather was a doctor, they have become a doctor as a result of that. There are all kinds of wonderful ways of being a doctor. One thing that you can do is pay rent to a qualified MBBS doctor and put up a sign bearing his name and sit under it as his assistant. One of the core problems in the healthcare is that it is completely unregulated. The only reason I know where to get healthcare is not because I am more intelligent or I have better judgement, it is because I live in a country (ie, the United States) where if you did what happens in India, you would be in jail. The fundamental fact about healthcare is that none of us are capable of understanding healthcare. The reason why healthcare works for some people is because some regulatory system determines who can practise healthcare. But in India anyone can go in and prescribe saline drips for Rs 120 to anyone they want to. You have people giving steroids right and left to whoever they want to with no explanation of what it is, and no explanation on the consequences. One of the reasons you see premature aging in India is because of the indiscriminate use of steroids. Willingness to believe in everything For me the reason I why believe in a particular form of healthcare has nothing to do with my understanding of it. I know there is a regulatory system that works reasonably well and I trust it. In India, where the regulatory system frequently fails, I wouldn’t believe in the system. Most people who go the bhopa also go to the private doctor or the government doctor. They also go to the temple. They go to every possible course of action. Given that you have no specific reason to believe in anything – you believe in everything. Unqualified doctors are a tad better at identifying heart attacks than government doctors Another reason that people go to unqualified private doctors is highlighted through a nice study carried out by one of my ex-students Jishnu Das. It shows that an unqualified doctor spends four minutes looking at you and the qualified government doctor spends one minute looking at you. As a result, on an average the unqualified private doctor doesn’t do worse than the government doctor. The way he tested this was that he sent an actor who pretended to have a heart attack. The actor walks in, says my chest is hurting, my left arm is hurting, etc. The government doctors miss the heart attack 75 percent of the time, but 25 percent of the time they find it. The unqualified private doctor does slightly better because he pays a little bit more attention. He is a bit more worried about this guy. The first thing to think about on healthcare is that if I am poor, I have no idea what to do. I am bewildered. This is a classic place where the government is supposed to provide regulation. They are supposed to say this is the right thing for you to do and because we have never managed to convey such a feeling, we get such bad healthcare. The travails of primary education
Primary education in India is doing miserably. That is true. If you look at the average child in class IV, 40 percent of them can read a paragraph. 60 percent cannot read a paragraph. And 30 percent can do simple divisions, 21 divided by 7, that is. People have been claiming for a very long time that is this because the teachers aren’t being paid enough. In fact, teachers in India get paid a huge amount. Government school teachers are paid – somebody estimated this but maybe its an exaggeration – seven times of what they would get paid if they did not get that job. They are paid Rs 20,000. If you look at private school teachers, they are paid Rs 3,000. So the lack of learning is not because teachers are not paid enough. What is the real problem?Where is the hope? We did one experiment in Bihar which was with government school teachers. This was in summer around two years ago. The teachers were asked that instead of teaching like you usually teach, your job for the next six weeks is to get the children to learn some basic skills. If they can’t read, teach them to read. If they can’t do math, teach them to do math. At the end of six weeks, these teachers were given a small stipend. They had also been given a couple of days of training. At the end of six weeks, the children had closed half the gap between the best performing children and the worst performing children. They had really improved enormously. What happened? Why did the government school teachers do so much better? The reason was they were asked to do a job that actually made sense. They were asked to teach the children what they don’t know. The usual jobs teachers are asked to do is teach the syllabus – which is very different. Under the Right to Education Act, every year you are supposed to cover the syllabus. It doesn’t matter whether the children understand anything. Think of all the class IV children who can’t read. They are learning social studies and all kinds of other wonderful things – except they can’t read. They are learning nothing. They are sitting in a class watching some movie in some foreign language without subtitles. Hence, the dropout rates are high. And I am shocked why anybody comes to school at all. The solution is simple
The problem of education has a perfectly good solution. In the first four years, we should prioritise the learning of basic skills – forget about learning the history of the country, etc. You don’t have to know who Gandhiji was for the first four years. Let’s just concentrate on students being able to read and do simple math, I think that system would deliver a much better outcome. One thing we forget is that the perfect is the enemy of the good. We are trying to have an education system that is perfect and that every child would come out with wisdom at the end of it. As a result they learn nothing. The article originally appeared on www.firstpost.com on December 15, 2012 Vivek Kaul is a writer. He can be reached at [email protected]
Vivek Kaul Abhijit Vinayak Banerjee is currently the Ford Foundation International Professor of Economics at MIT. He was educated at the University of Calcutta, Jawaharlal Nehru University, and Harvard University. Together with Esther Duflo and Sendhil Mullainathan of Harvard University, he founded the Abdul Latif Jameel Poverty Action Lab in 2003. He is also the author of the bestselling Poor Economics – A Radical Rethinking of the Way to Fight Global Poverty. Banerjee was recently speaking at a literature festival in Mumbai on why most people don’t understand what it exactly means to be poor and how the decisions made by the poor might be irrational to us but are very rational decisions given the situation they are in. Here are few excerpts from what he said. This is the first part. The poor man from Morocco A part of the point of writing this book was to say that the poor make lots of choices. They are very active participants in their own lives. They are like all of us excited about making choices. And they make choices that are often sort of not intelligible to us, which is different from saying that they are making irresponsible choices. Let me give you an example. We were in a village in Mexico talking to a guy who was standing in front of his house. He was telling us about his life and to get the conversation going we asked suppose you had some small amount of money what would you do with it? And he said I am going to buy some food. And then we asked him what would he do if he had some more money? He said I will buy more food. So we were very persuaded that this was a hungry man. We walk into his house and see that he had a television, a parabolic antenna and a DVD player. So we asked him what is this? He said, entirely without missing a step, television is more important than food. An evening in a village When you first hear it, you say, that can’t be right. But I think the mistake we make we don’t think about what he is trying to say. One advantage of being a development economist is that you get to spend a lot of evenings in random villages. One thing that is uniform across the world is that an evening in a village is very boring. There are no movie theatres. No music halls. No place to go. There is one tea shop. You can go there. You have been there before. All the other people have been there for years. They have talked to each other for years and they say the same things more or less. Somebody says something, other says, oh yeah, and then they are silent. So what does this tell us? What that is telling us is that evenings in a village are very boring. And that person in the village in Morocco really felt life would be unbearable without a television. He explained that he had three friends and they typically did not have anything to talk to each other. And that happens because there is almost nothing coming in from the outside. Television gives them something to talk about. This is why I empathise. In any decision we make there is a space for pleasure. A space that recognises we are human beings and the domain of pleasure is an essential driver for us. The poor are thinking that I could either grab healthy calories or buy a tv. If I grab calories then maybe I will become a little bit healthier and my resistance will go up, maybe I will go from being extremely poor to slightly extremely poor. On the other hand if I forego calories I can watch television right now. The typical way we think is that these guys who buy television and don’t eat nutritious food are somehow damaged or irrational or are somehow different, and we can’t help them because they are not helping themselves. I think they are helping themselves. We should understand what they are doing. The right to food The principle behind the right to food if we give poor people subsidised food there nutrition will improve. I am a part of the Poverty Action Lab where we run large scale field experiments. We do these experiments to figure out what works? One of the things that we are trying to figure out is that whether the policy of giving people cheap subsidised food to improve nutrition, really works? We carried out a nice experiment on this in China. What we did was that we gave some people a voucher to buy cheap rice. Instead of buying rice lets say for ten rupees, they could buy it for two rupees, using the vouchers. The presumption was that this would improve nutrition. This was done as an experiment and hence some people were randomly given vouchers and others were not given vouchers. When people went back and looked at it, they were astounded. People who had got the vouchers there nutrition had become worse. They felt that now that I have these vouchers I am rich. I no longer need to eat rice. I could eat pork. I could eat shrimps. They went and bought pork and shrimps and as a result their net calories went down. This is perfectly rational. These people were waiting for pleasure. Pleasure is something very important not just for us to live a day but also in terms of being able to control of our destiny. You think the rest of my life will be drab, and it becomes very difficult to live. In that particular sense they had a little opportunity and they knew that this wouldn’t last forever. They could improve their nutrition or for the next ten days they could also eat a little bit better. I think fun is something that we forget about. The answer surprised everybody because we thought about it as what we would have done if we were in a similar situation. The auto-rickshaw drivers of Chennai I think when you look at many poor people the first thing you notice is that they are not doing what you think they should be doing. As I said before that is partly because you have it wrong and partly also because its hard to be poor. Sometimes you just want relief. Let me give you an example of the auto-rickshaw drivers in Chennai, where one of my students did a survey. The survey found that 40% of the income of the drivers goes into drinking. If you were to ask why they are doing that? The answer is that my body hurts and I want something to stop it hurting. You are in an auto-rickshaw twelve hours a day. Your body is bouncing. Your bones are hitting against each other. At that point you want something. I understand that alcohol is not the best possible relief. But whenever we want to be judgemental of the poor, and whenever we don’t want to trust their judgement, the question for us is to ask first what is it that makes them make that choice? Unless we ask that question we are often tempted impose our own conditions on their lives. It never occurred to me that driving an auto-rickshaw for 12 hours a day is so painful. It didn’t strike me. I thought of many things but not that. And then I realised that we being in an auto-rickshaw for five minutes is painful, and think of 12 hours a day, bouncing on Chennai’s streets, your bones hurt. I don’t doubt that their wives are not happy about it. I am sure if we could find a way to get them to drink less it would be good for all of us. But the first one thing that one has to do is to start by trusting that they have a reason. Why immunisation rates are low? One of the facts about the world is that immunisation is a life saver. A lot of blindness in India is caused by the fact that a lot of woman are not immunised when they are pregnant with a child. They get rubella, which causes a cataract which makes people blind. So lots of people are curably blind because of their mothers not being immunised. So immunisation is seen by people as an obvious thing to do. Given that why are the poor not immunised? We tend to think that it must be because that they are poor. But that is almost truly the wrong answer if you take it at a face value. You realise its the wrong answer because immunisation is free. It is something that the system is supposed to provide. But the next answer is that it must be because the government is failing to provide it. There is some truth to that answer. We did a large scale field experiment in villages in the Udaipur district in Rajasthan. In sixty of these villages the NGO Seva Mandir went and communicated that every third Monday we will come to your village and immunise. So immunisation was guaranteed. It was done reliably. And that raised the immunisation rate from about 5% to about 17%. What raised the immunisation rates? What got it up there was that in 30 out of the 60 villages we said that every time you come for immunisation you get a kilo of dal. That’s it. That got it up to 40% in those thirty villages. The first reaction that when the life of children is at a stake why are you trading it off for a kilo of dal? Why does a kilo of dal make such a difference? The second thing is you think about what does immunisation mean? For my children I have no idea of how many times they have been immunised. You get a shot for this, a shot for that and so on. And you are supposed to keep track of all this. Make sure that your child gets this one at the right time and that one at the right time. And remember. My children grew up in the US. In the US and in the most other western countries that is externally imposed. So there is a piece of paper at the hospital which helps keep track. You don’t have to actually remember any of this. What does the dal do? It reminds you that it is important to get your child immunised. Otherwise there is no external pressure. For me I knew that my child could not go to school unless he was immunised. I was under external pressure. Of all things about Western Capitalism the thing I really loved was cold clean water all the time One mistake that we make is we assume that we are in control of our lives and we are making all sorts of choices and poor people are in not in control of their lives. In fact, I think it’s a reverse issue. For me, my immunisation was guaranteed by the fact that I did not have a choice. I had to get my child immunised to get him into school. The same is true about my pension. It is deducted from my salary. And somebody will give it to me when I retire. I know there is some money and haven’t checked actually how much. I have no choice. The water I drink, comes out of a tap and I pour it into a glass and I drink it. I don’t think about whether its a good water or bad. It is always good water. The first thing I loved when I went to the US was that there was cold water everywhere that was fit to drink. Of all things about Western Capitalism the thing I really loved was cold clean water all the time. You could get water and you did not have to worry about whether this water is clean or not. Think about a poor person and when we ask why don’t you boil your water? Think about every time you drink it, you have to boil the water, you have to put in chlorine and wait for one hour before the chlorine vapours go out and then drink it. It’s a challenge to live your life well as a poor person by our standards. You have to make sure that the water is clean. You have to make sure that you are putting away money for your future because there is no automatic deductions of your savings. You have to make sure that your children get immunised. It is difficult to be poor We need to understand is that how difficult it is to be poor. That is the first fact to keep in mind. Every poor person every day is much more in control of their lives than I am of mine. I am totally not in control of our life. I don’t know how much my salary is. I don’t how much my pension is. I don’t know where my water comes from. I have automatic health insurance. I don’t have to choose health insurance it comes automatically. I don’t have a choice. Most of my choices have been taken out of my life. In fact, wait, I don’t want those choices. Those are hideous choices. I would rather want to choose whether I want to eat meat today or fish? That is a much more pleasurable choice to make. I could choose my pleasures because my needs are taken care of. The article originally appeared on www.firstpost.com on December 14, 2012 (Vivek Kaul is a writer. He can be reached at [email protected])
Abhijit V Banerjee and Esther Duflo in their book Poor Economics – Rethinking Poverty & the Ways to End It write a very interesting story about a woman they met in the slums of Hyderabad. This woman had borrowed Rs 10,000 from Spandana, a microfinance institution. As they write “A woman we met in a slum in Hyderabad told us that she had borrowed 10,000 rupees from Spandana and immediately deposited the proceeds of the loan in a savings bank account. Thus, she was paying a 24 percent annual interest rate to Spandana, while earning about 4 percent on her savings account”. The question of course was why would anyone in their right mind do something like this? Borrow at 24% and invest at 4%? But as the authors found out there was a clear method in the woman’s madness. “When we asked her why this made sense, she explained that her daughter, now sixteen, would need to get married in about two years. That 10,000 rupees was the beginning of her dowry. When we asked why she had not opted to simply put the money she was paying to Spandana for the loan into her savings bank account directly every week, she explained that it was simply not possible: other things would keep coming up…The point as we eventually figured out, is that the obligation to pay what you owe to Spandana – which is well enforced – imposes a discipline that the borrowers might not manage on their own.” The example brings out a basic point that those with low income find it very difficult to save money and in some cases they even go to the extent of taking a loan and repaying it, rather than saving regularly to build a corpus. This includes a lot of very small entrepreneurs and people who do odd jobs and make money on a daily basis. Such individuals have to meet their expenses on a daily basis and that leaves very little money to save at the end of the day. Also the chances of the little money they save, being spent are very high. As Abhijit Banerjee told me in an interview I did for the Economic Times “The broader issue is that savings is a huge problem. Cash doesn’t stay. Money in the pillow doesn’t work.” Hence, as the above example showed it is easier for people to build a savings nest by borrowing and then repaying that loan, rather than by saving regularly. Another way building a savings nest is by visiting a bank regularly and depositing that money almost on a daily basis. But that is easier said than done. In a number of cases, the small entrepreneur or the person doing odd jobs, figures out what he has made for the day, only by late evening. By the time the banks have closed for the day. The money saved can easily be spent between the evening and the next morning when the banks open. Also, in the morning the person will have to get back to whatever he does, and may not find time to visit the bank. Banks also do not encourage people depositing small amounts on a daily basis. It pushes up their cost of transacting business. But what if the bank or a financial institution comes to the person everyday late in the evening, once he is done with his business for the day and knows exactly what he has saved for the day. It also does not throw tantrums about taking on very low amounts. This is precisely what Subrata Roy’s Sahara group has been doing for years, through its parabankers who number anywhere from six lakh to a million. They go and collect money from homes or work places of people almost on a daily basis. The Sahara group fulfilled this basic financial need of having to save on a daily basis for those at the bottom of the pyramid (as the management guru CK Prahalad called them). The trouble of course was that there was very little transparency in where this money went. The group has had multiple interests ranging from real estate, films, television, and now even retail. A lot of these businesses are supposedly not doing well. Over the last few years, both the Reserve Bank of India (RBI) and Securities and Exchange Board of India(Sebi), have cracked down on the money raising schemes of the Sahara group. In a decision today, the Supreme Court of India has directed that the Sahara group refund more around Rs 17,700 crore that it raised through its two unlisted companies between 2008 and 2011. The money was raised from 2.2crore small investors through an instrument known as fully convertible debenture. The money has to be returned in three months. Sebi had ordered Sahara last year to refund this money with 15% interest. This was because the fund-raising process did not comply with the Sebi rules. Sahara had challenged this, but the Supreme Court upheld Sebi’ The question that arises here is that why has Sahara managed to raise money running into thousands of crores over the last few decades? The answer probably lies in our underdeveloped banking system. In a November 2011 presentation made by the India Brand Equity Foundation ( a trust established by the Ministry of Commerce with the Confederation of Indian Industry (CII) as its associate) throws up some very interesting facts. A few of them are listed below: – Despite healthy growth over the past few years, the Indian banking sector is relatively underpenetrated. – Limited banking penetration in India is also evident from low branch per 100,000 adults ratio – – Branch per 100,000 adults ratio in India stands at 747 compared to 1,065 for Brazil and 2,063 for Malaysia – Of the 600,000 village habitations in India only 5 per cent have a commercial bank branch – Only 40 per cent of the adult population has bank accounts What these facts tell us very clearly is that even if a person wants to save it is not very easy for him to save because chances are he does not have a bank account or there is no bank in the vicinity. This is where Sahara comes in. The parabanker comes to the individual on a regular basis and collects his money. As a Reuters story on Sahara points out “Investors in Sahara’s financial products tend to be from small towns and rural areas where banking penetration is low. “They see Sahara on television everyday as sponsor of the cricket team and that leads them to believe that this is the best company,” said a spokesman for the Investors and Consumers Guidance Cell, a consumer activist group.” Sahara has built trust over the years by being a highly visible brand. It sponsors the Indian cricket and hockey team. It has television channels and a newspaper as well. Hence people feel safe handing over their money to Sahara. The irony of this of course is that RBI which has been trying to shut down the money raising activities of Sahara is in a way responsible for its rise, given the low level of banking penetration in the country. (The article originally appeared on www.firstpost.com on August 31,2012. http://www.firstpost.com/business/why-the-poor-are-willing-to-hand-over-their-money-to-sahara-438276.html) (Vivek Kaul is a writer and can be reached at v[email protected])