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Animal spirits in slumdogs

Animal spirits in slumdogs
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First Published: Tue, Jun 09 2009. 09 39 PM IST
Updated: Tue, Jun 09 2009. 09 39 PM IST
A recent issue of The Economist had a black and white photograph from the days of the Great Depression in the US—a man is selling apples on a city sidewalk. The board next to his cart says he is unemployed.
This man clearly did not consider the act of selling apples on a street as a form of employment. It was more an act of desperation.
That’s not how it is seen in India. More than nine out of 10 workers here are doing some variant of selling apples; they are busy in low-productivity work that inevitably results in low levels of income. That is an important difference between a rich country and a poor country. In the former, the poor are inevitably unemployed. In the latter, the poor are often employed to dig ditches, collect garbage or work in dingy workshops.
These are the millions who are stuck halfway between farm and factory. They have abandoned villages where there is not enough land to either own or work on. But they have not yet landed in proper factory jobs where they can use machines and their output can be sold competitively in the global market.
Not all the people trapped in informal sector jobs are necessarily self-employed. Some are employed in small workshops and corner stores.
What does this mean? Two things, actually. On the positive side, it means Indians are a remarkably entrepreneurial people who would rather create than steal or beg. On the negative side, it means that regulations do not encourage businesses to grow by employing more workers.
Edward L. Glaeser, an economist at Harvard University and arguably the greatest urban economist of our times, was in Mumbai recently to research a book on cities.
“The defining characteristic of Mumbai is not crime or Bollywood, but entrepreneurship, even in the city’s slums,” he wrote in his blog on 26 May.
“One recent survey found that 43% of urban Indians who worked were self-employed. By contrast, there is no metropolitan area in the United States with a self-employment rate above 11%. Unfortunately, India’s high entrepreneurship rate is still something of a puzzle. I suspect that it reflects both good things about the country, like energy and intelligence, and bad things, like a maze of regulations that make it difficult to build large companies that follow the rules.”
The title of this Glaeser blogpost: Slumdog Entrepreneurs.
Glaeser quite rightly says that the people of Dharavi are not waiting for their big chance to win a million dollars in a TV game show. “It is a place of remarkable economic energy where poor people are managing to eke out a living as entrepreneurs,” he notes.
This is remarkably akin to what a US diplomat once told me. He said that he had seen slums around the world—in Africa, Latin America and even the US. Drugs, despair and gangs blighted these areas. Mumbai’s slums seemed to him like settled communities where children went to schools and people worked hard to change their circumstances.
These are issues which a government that keeps reminding us about its commitment to the aam aadmi needs to pay attention to. It is easy to announce welfare schemes and spend on subsidies if you can afford it. But these are not long-term solutions to the problem of mass poverty.
The big challenge is to help millions of small enterprises scale up and become more efficient. China created the so-called township and village enterprises in the 1980s, and they were one of the main growth engines in the first decade of its reforms. These enterprises were not private businesses, but were owned by local governments, since China does not have a system of property rights. The point is that these small ventures mployed millions moving off the farm and pushed growth.
Most small ventures in India do not grow, partly because they are smothered by a host of regulations and hobbled by poor infrastructure. Funding from banks, too, is hard to get. All these factors raise the cost of doing business. The inspector raj ensures that few small businessmen can grow their businesses.
The new government has a lot on its plate, both in terms of pushing through the next round of economic reforms as well as finding money for the social sector schemes promised in the Congress manifesto.
But more attention needs to be given to small entrepreneurs in the unorganized sector as they struggle in a maze of restrictions and regulations that smother them, just like the roadside hawker who gives up perhaps a tenth of his daily income to buy police protection or who can get finance only at sky-high rates of interest. He has perhaps escaped one low-productivity trap in his village only to walk into another in the city. Selling apples is not going to pull him out of poverty.
Your comments are welcome at cafeeconomics@livemint.com
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First Published: Tue, Jun 09 2009. 09 39 PM IST