Despite tremendous economic growth around the world in the last 30 years, the number of people living in poverty has gone up. For years, many have taken the view that if we liberalise the economy and produce economic growth, wealth will somehow trickle down to the poor. But the evidence has shown that in large swathes of the planet, that has not happened.
So what should we be doing to reduce poverty?
According to Aneel Karnani, associate professor of strategy at the Ross Business School, University of Michigan, the primary emphasis must be on creating employment opportunities for the poor, and increasing their productive capacities by ensuring basic public services.
Karnani, who researches poverty reduction and the appropriate roles for the private sector, the state and civil society, says the market will not solve the poverty problem.
“Market-driven approaches don’t work. Even at a micro level, the market does not help the poor,” Karnani told NUS Business School.
For instance, he does not support microfinance as a strategy for alleviating poverty.
“The view was to give poor people a small loan and they will start a business and they bootstrap themselves out of poverty. Well, it is very difficult for the poor to bootstrap themselves out of poverty because they don’t have boots in the first place.”
Since the market-driven, trickle-down approach has failed, Karnani says, the best hope for the future lies in creating jobs for the poor and providing them with public services. These strategies, he says, will help the poor more quickly and more effectively.
According to Karnani, in the overwhelming majority of cases the poor do not want capital to create their own businesses. Rather, they want jobs.
“The poor are not so much entrepreneurs. They would like to get a job,” he said. “They are no different from the rich in this sense. If you look at a rich country, 90 per cent of the workforce works for a salary. They don’t choose to be self-employed. The poor are no different.”
Karnani says governments have a role in facilitating the creation of new jobs. They should provide the infrastructure, financial institutions and training facilities to employ their citizens. He believes that it is particularly important for governments to focus their efforts on small- and medium-sized enterprises. SMEs are the real engines of job creation, he says, but many governments tend to overlook their role.
Taking India as an example, Karnani points out that it is fairly easy to get a loan of a few million dollars if you are a big company, or a few hundred dollars if you are a microcredit customer. But if you’re in the SME sector and you want to get a loan of $100,000, that is very difficult. SMEs, he says, are the “forgotten sector.”
In addition, Karnani says that governments must do more to provide the poor with the simple foundations needed to lift themselves out poverty – basic public services, such as drinking water, sanitation, education, public healthcare and security.
It is very difficult for the poor to bootstrap themselves out of poverty because they don’t have boots in the first place
While job creation is important, jobs will not help unless people are able to live healthy, secure lives, he says.
Asked what governments should do to help the poor at a time when their budgets are under pressure because of the global financial crisis, Karnani cautioned against rushing to what he says are apparently easy conclusions.
“I’m not so sure that we should so easily agree that their resources are so constrained,” he said. “In many of these poor countries, the governments spend less on health and education as a percentage of their GDP than the rich countries do. So I think maybe they should expand.”
Karnani says that civil society has a major role to play as well – both as watchdog and to expose injustices carried out towards the poor.
“The civil sector doesn’t have the resources to substitute for the government or for business, but can ensure that (the government) do their jobs properly.”
Professor Aneel Karnani delivered a lecture at the Dean’s Speaker Series at NUS Business School on “Fighting Poverty Together”