Wednesday, December 06, 2006

"Start Small, Involve all'

TCS Daily publishes an interesting article on the ‘dead capital’ locked into
illiquidity in many developing countries among poor people who invest all their meagre savings in the shanty-town shacks they slowly construct with minute purchases of cement, wood and glass. The article is by Peter F. Schaefer, entitled ‘The Next Big Thing for Global Business’ (read it at:

I also came across today the article by Abhijit V. Banerjee and Esther Duflo (both at MIT), “The Economic Lives of the Poor”, October 2006, analyzing the lives of poor people living on less that $2 a day, which could be read along with the TCS article. (I apologise for not having further references for it, other than JEL 010,015,016, but I inadvertently ‘lost’ them this afternoon. I know, I know, butput it down as a 'senior moment'))

These link up neatly with current interest in micro-credit (Gameen Bank in Bangladesh) and provide a perspective on a problem noted by some economists about the misdirection of millions of dollars on ‘aid schemes’, also known a pensions for corrupt government ministers, which do not develop markets and therefore do not create wealth, and it is the absence of wealth creation that is the main contributor to poverty.

The TCS paper raises whether the ‘dead capital’ of (non) developing countries could be activated by removing government and bankers’ regulations that do not recognize the houses of the poor as collateral (as some evidence suggests has appeared in South African shanty towns from the housing shortage). The sums are small, though they represent the accumulated savings of poor household, which are themselves even smaller. It does not take much to get markets to work.

Create the conditions and markets will appear and people will move, albeit slowly, towards the long climb out of poverty. Smith showed this in Wealth of Nations.

The Banerjee and Duflo (MIT) paper shows the extent to which markets have penetrated even among the poorest people, as indicator from their spending patterns from their pittances, significantly in radio and tv set ownership and spending on ‘festivals’. This should only surprise those who have not appreciated the significance of Smith’s comparison of the poorest common day labourer in 18th-century Scotland with the living standards and property ownership of the ‘king’ of a tribe or North American ‘Indians’.

The question is whether development policy should start with appropriate polices among the poorest people and not focus so exclusively on grand infrastructure schemes. Of course the latter are needed, but markets develop best when they develop from the ground upwards, a point of view also associated with Wealth of Nations.


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