In a previous blog post, I had concluded based on the randomized control trials (RCTs) carried out by Abhijit Banerjee and Esther Duflo and others (and summarized in Banerjee and Duflo's Poor Economics (2011)) that the "trickle-down" effect is probably not valid when we look at the very poor and that some paternalistic interventionism might be justified.
Here, in this article, which can be construed as a continuation of the earlier one, I wish to discuss further why the trickle-down effect fails to work. To do this we need to bring in a legal dimension that Banerjee and Duflo's work lacks. This dimension is well brought out in Parth J Shah and Naveen Mandava's edited book Law, Liberty and Livelihood: Making a Living on the Street (2005).
Parth Shah is well known as the founder president of the Centre for Civil Society, a pro-free-market think tank, considered among the most influential ones in Asia. Naveen Mandava was a research associate in his group. The book focuses mainly on the urban poor in Delhi but can apply to other cities as well.
At the outset, the authors state: "Trickle down can only go so far. The truth is there has been hardly any liberalisation for the working poor. For them it has been all LPQ (Licences, Permits and Quotas) and little LPG (Liberalization, Privatization and Globalisation). The poor still suffer under the weight of regulations, restrictions and harassment by government and lack basic economic freedom in the areas of their livelihood."
The poor are poor not because of the exploitation of the rich but because of the regulatory burdens of government, opine the authors.
Consider the facts in India (remember, this is a 2005 book): "Entrepreneurs can expect to go through 11 steps to launch a business over 89 days on average, at a cost equal to 49.5 per cent of gross national income (GNI) per capita." Compare this with Australia: Only 2 steps are required to establish a business over 2 days and the associated cost (%GNI per capita) is only 2 per cent.
The above statistic just skims the surface. To know the underlying realities, consider the case of cycle rickshaw licensing. The authors write: "The Municipal Corporation of Delhi has mandated that cycle rickshaws have to be licensed and fixed a limit of 99,000 licences. They claim to have fixed the number of 99,000 by taking into account the demand for rickshaw services, road space, and traffic congestion problems. Less than 75,000 licenses have actually been given out. This makes more than 80 per cent of Delhi's cycle rickshaws illegal."
Furthermore the law says that one person can only own one cycle rickshaw. The owner should be the puller of the rickshaw. This allows no provision for expansion for the poor rickshaw puller. As the authors state: "He is condemned forever to live at the subsistence level on the revenue from one cycle rickshaw." Does this law really help the poor?
As with cycle rickshaw licences, so with hawker permits. With more than 600,000 street hawkers in Delhi, only 5 per cent have the tehbazari permit which legalizes the business. Similarly 80% of shops set up in Delhi are illegal.
Why should it be the prerogative of the Delhi Municipal Corporation how many hawkers or cycle rickshaws there are in Delhi? It should be left for the market forces to decide.
The licensing and regulation is done in the name of the poor. Actually it restricts the number of poor who can earn an honest living in the entry-level professions. The so-called illegal entrepreneurs are subject to harassment and extortion by the regulatory authorities. This leads to even lower quality of life and economic security for the entrepreneurs.
Resettlement of street vendors to more "appropriate areas" will not work since these roads and street corners and bus stops are natural markets for the rickshaws and hawkers. "Urban planners cannot arbitrarily decide where the hawkers should be allowed to operate," state the authors.
This urban planning still has many aficionados since it follows from certain general assumptions which do not usually stand up to closer scrutiny:
- "A group of intelligent men sitting in a chamber can take perfect and equitable decisions based on information collected though government channels and can frame general rules that can deal with all the different categories of problems and with the trade-offs necessary to address concerns of multiple stakeholders."
- "The government's spending of tax payer's money or utilization of resources truly reflects the best interests of the citizens."
- "Officials working in the government machinery always act in the public interest and put their self-interest on the back-burner."
- "We should not leave the poor to market forces, but opt for a middle of the road approach."
These misconceptions only result in further state intervention.
The authors come down heavily on all centralized planning and the Delhi Master Plan in particular. Indeed they say: "The Master Plan of every city should be rolled up into a bottle, corked, and thrown into the Indian Ocean. Corked, so that years later when the bottle is found, the absurdities of the Master Plan will become glaringly obvious when compared to the actual development of the city."
The book offers several free market alternatives to state intervention:
1. "Remove all licences, permits and quota across the board for entry-level professions."
2. "Test all existing and new rules and regulations for the impact on the freedom to earn an honest living."
3. "Decentralize government to ward committees."
4. A curb on all land acquisition by government and return all undeveloped land to the original owners.
The authors specify that Houston, USA has no zoning laws, yet it has turned into a vibrant, well-organized city. A similar result is possible elsewhere too.
The book goes to a great extent in describing the various laws that govern street vendors, cycle rickshaw pullers, shopkeepers etc. Some of the regulations border on the absurd. For instance, in Delhi, a shopkeeper for edible goods can get the licence from the Health Department of the Municipal Corporation, "only after he begins the trade and remains in the same for some time (illegally). This is because, as opposed to the convention usually followed - of granting the license before the launch of the trade - the [Municipal Corporation] issues the license only after the trade has actually begun. One of the requisite documents is the 'proof of establishment of the trade'. This means that in case the license is rejected, the government expects the entrepreneur to either withdraw his capital from the trade that he envisages to be a profitable one...or to continue illegally without the license, which in turn means that the government is actually creating room for illegality itself." (Italics in original).
The book covers a lot of ground and shows that corruption (which Banerjee and Duflo correctly identified as a "poverty trap") is an outcome not despite the government's best efforts but precisely because of them.
The present Modi government is claimed to be ushering in a quiet revolution in the legal system by removing defunct laws. Maybe someone should write an article as to how the burden of regulation on the poor has been lessened by these changes. Maybe Parth Shah himself can write one.
Here, in this article, which can be construed as a continuation of the earlier one, I wish to discuss further why the trickle-down effect fails to work. To do this we need to bring in a legal dimension that Banerjee and Duflo's work lacks. This dimension is well brought out in Parth J Shah and Naveen Mandava's edited book Law, Liberty and Livelihood: Making a Living on the Street (2005).
Parth Shah is well known as the founder president of the Centre for Civil Society, a pro-free-market think tank, considered among the most influential ones in Asia. Naveen Mandava was a research associate in his group. The book focuses mainly on the urban poor in Delhi but can apply to other cities as well.
At the outset, the authors state: "Trickle down can only go so far. The truth is there has been hardly any liberalisation for the working poor. For them it has been all LPQ (Licences, Permits and Quotas) and little LPG (Liberalization, Privatization and Globalisation). The poor still suffer under the weight of regulations, restrictions and harassment by government and lack basic economic freedom in the areas of their livelihood."
The poor are poor not because of the exploitation of the rich but because of the regulatory burdens of government, opine the authors.
Consider the facts in India (remember, this is a 2005 book): "Entrepreneurs can expect to go through 11 steps to launch a business over 89 days on average, at a cost equal to 49.5 per cent of gross national income (GNI) per capita." Compare this with Australia: Only 2 steps are required to establish a business over 2 days and the associated cost (%GNI per capita) is only 2 per cent.
The above statistic just skims the surface. To know the underlying realities, consider the case of cycle rickshaw licensing. The authors write: "The Municipal Corporation of Delhi has mandated that cycle rickshaws have to be licensed and fixed a limit of 99,000 licences. They claim to have fixed the number of 99,000 by taking into account the demand for rickshaw services, road space, and traffic congestion problems. Less than 75,000 licenses have actually been given out. This makes more than 80 per cent of Delhi's cycle rickshaws illegal."
Furthermore the law says that one person can only own one cycle rickshaw. The owner should be the puller of the rickshaw. This allows no provision for expansion for the poor rickshaw puller. As the authors state: "He is condemned forever to live at the subsistence level on the revenue from one cycle rickshaw." Does this law really help the poor?
As with cycle rickshaw licences, so with hawker permits. With more than 600,000 street hawkers in Delhi, only 5 per cent have the tehbazari permit which legalizes the business. Similarly 80% of shops set up in Delhi are illegal.
Why should it be the prerogative of the Delhi Municipal Corporation how many hawkers or cycle rickshaws there are in Delhi? It should be left for the market forces to decide.
The licensing and regulation is done in the name of the poor. Actually it restricts the number of poor who can earn an honest living in the entry-level professions. The so-called illegal entrepreneurs are subject to harassment and extortion by the regulatory authorities. This leads to even lower quality of life and economic security for the entrepreneurs.
Resettlement of street vendors to more "appropriate areas" will not work since these roads and street corners and bus stops are natural markets for the rickshaws and hawkers. "Urban planners cannot arbitrarily decide where the hawkers should be allowed to operate," state the authors.
This urban planning still has many aficionados since it follows from certain general assumptions which do not usually stand up to closer scrutiny:
- "A group of intelligent men sitting in a chamber can take perfect and equitable decisions based on information collected though government channels and can frame general rules that can deal with all the different categories of problems and with the trade-offs necessary to address concerns of multiple stakeholders."
- "The government's spending of tax payer's money or utilization of resources truly reflects the best interests of the citizens."
- "Officials working in the government machinery always act in the public interest and put their self-interest on the back-burner."
- "We should not leave the poor to market forces, but opt for a middle of the road approach."
These misconceptions only result in further state intervention.
The authors come down heavily on all centralized planning and the Delhi Master Plan in particular. Indeed they say: "The Master Plan of every city should be rolled up into a bottle, corked, and thrown into the Indian Ocean. Corked, so that years later when the bottle is found, the absurdities of the Master Plan will become glaringly obvious when compared to the actual development of the city."
The book offers several free market alternatives to state intervention:
1. "Remove all licences, permits and quota across the board for entry-level professions."
2. "Test all existing and new rules and regulations for the impact on the freedom to earn an honest living."
3. "Decentralize government to ward committees."
4. A curb on all land acquisition by government and return all undeveloped land to the original owners.
The authors specify that Houston, USA has no zoning laws, yet it has turned into a vibrant, well-organized city. A similar result is possible elsewhere too.
The book goes to a great extent in describing the various laws that govern street vendors, cycle rickshaw pullers, shopkeepers etc. Some of the regulations border on the absurd. For instance, in Delhi, a shopkeeper for edible goods can get the licence from the Health Department of the Municipal Corporation, "only after he begins the trade and remains in the same for some time (illegally). This is because, as opposed to the convention usually followed - of granting the license before the launch of the trade - the [Municipal Corporation] issues the license only after the trade has actually begun. One of the requisite documents is the 'proof of establishment of the trade'. This means that in case the license is rejected, the government expects the entrepreneur to either withdraw his capital from the trade that he envisages to be a profitable one...or to continue illegally without the license, which in turn means that the government is actually creating room for illegality itself." (Italics in original).
The book covers a lot of ground and shows that corruption (which Banerjee and Duflo correctly identified as a "poverty trap") is an outcome not despite the government's best efforts but precisely because of them.
The present Modi government is claimed to be ushering in a quiet revolution in the legal system by removing defunct laws. Maybe someone should write an article as to how the burden of regulation on the poor has been lessened by these changes. Maybe Parth Shah himself can write one.
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