$50 Billion to End Poverty in Sri Lanka and Uganda. Shyenne Horras. Dr. Jessica Lin ECON 351H. 13 May 2015

Transcription

1 $50 Billion to End Poverty in Sri Lanka and Uganda Shyenne Horras Dr. Jessica Lin ECON 351H 13 May 2015

2 Horras 2 While the idea of fighting global poverty may seem overwhelming at first glance, it becomes much more manageable when approached at the individual country level. Rather than focusing on massive scale projects that affect countries differently, it is imperative to focus on the local problems causing poverty and the culture of the country before attempting to implement a solution. The effectiveness of this type of approach can be demonstrated through my poverty solutions for two vastly differently countries: Sri Lanka and Uganda. If I were given $50 billion to each country to end poverty there, I would utilize the individual country approach to implement microfinance institutions in Sri Lanka and resource auctions with oversight in Uganda. In order to appreciate the reasoning behind these solutions, one must first have a basic understanding of the unique situations facing each country. To begin, Sri Lanka is a small island nation in Southeast Asia whose main resource is rice (Lin). Despite having such an abundance of rice, however, the country still has a high malnutrition prevalence rate of 19.2 ( World Data Bank. ). This means that almost 20% of children under the age of 5 are malnourished, based on their height, demonstrating the stark impact of poverty in Sri Lanka. One of the largest issues facing the country involves the conflicts over ethnicity and religion. Over 70% of the country is Buddhist and considered Sinhalese, meaning they speak Sinhala and are a part of the majority group running the government ("The World Factbook Sri Lanka."). However, there is a large minority of Tamil people who generally follow the Hindu religion and speak the Tamil language ("The World Factbook Sri Lanka."). From 1983 till around 2009, an intense civil war continued between these two groups, causing a great deal of damage to the country s infrastructure and ethnic relations ("The World Factbook Sri Lanka.").

3 Horras 3 While the civil war is technically over, much of the poverty in Sri Lanka persists because of poor ethnic relations. Since the government is run by the Sinhalese majority, government assistance to the poor is often provided only to those who match the local official s ethnicity ("The World Factbook Sri Lanka."). This causes the poor to severely distrust the government, increasing racial tensions further. Racial tensions also play a large economic role in the country, as many patrons refuse to purchase from businesses run by the opposing ethnic group. This is especially problematic considering that imports and exports average only around 27% of Sri Lanka s GDP ("The World Factbook Sri Lanka"). Basically, this means that over 70% of the country s GDP comes from business interactions within the country. With such a large percentage of the economy relying on internal business interaction, it is imperative that individuals be able to work with different ethnic groups to grow their businesses. Despite all the issues with malnourishment and ethnic relations, Sri Lanka has high life expectancy and education rates. The average life expectancy at birth is 74 years, and the mean years of schooling is 10.8 ( Sri Lanka ). This high level of education is especially important for fighting poverty in Sri Lanka, as it provides an opportunity for those in poverty to utilize their education to find unique business opportunities. Since the over half the population works in service industries, there is an opportunity for business owners to find niche markets to serve in order to escape poverty ("The World Factbook Sri Lanka"). These opportunities, however, will only be available if the poor in Sri Lanka have access to the money needed to fund new projects. Microfinance is the solution for poor Sri Lankans to finance their business ventures and work their way out of poverty. Microfinance is the idea of lending small amounts of money to the poor, which is generally considered risky due to high default rates and small interest payments. However, Muhammed Yunus created a model for lending to the poor through the

4 Horras 4 Grameen Bank, which utilized social pressure to reduce default rates (Banerjee & Duflo 166). Basically, borrowers would be placed into groups to make payments back at consistent intervals. If one member of the group defaulted, the entire group would be banned from borrowing from the Grameen Bank again. This encouraged the members to keep one another accountable, rather than the bank having to enforce collection. This reduced both the costs of issuing small loans as well as the default rates, making lending to the poor a reasonable business venture. Since their creation, microfinance institutions have served over 150 million clients, demonstrating how necessary small loans are to those facing poverty (Banerjee & Duflo 168). Since the Grameen Bank was initially started in India, a country with similar cultural considerations as Sri Lanka, it is safe to assume that a microfinance institution would be culturally accepted in Sri Lanka. However, unlike the Grameen Bank, my proposed microfinance institution would focus on profits as well as social causes. One microfinance institution in Mexico, called Compartamos, instituted similar regulations as the Grameen Bank, but focused on making profits for the company as well (Banerjee & Duflo 166). While some argue that a company focused on helping the poor should not make profits, it is a way to ensure that the institution can continue without charitable donations. In order for microfinance to work, it must have a consistent stream of cash to lend, and relying on charitable donations for said cash could lead to inconsistencies in loan availability. Beyond this, providing profit incentives for the company to loan would help combat ethnic discrimination. If a company s goal is to make money, they will have an incentive to lend to as many people as possible, regardless of the borrowers ethnicity. If the microfinance institution was purely a charity, on-the-ground lenders would have no incentives to provide loans across ethnic and religious boundaries.

5 Horras 5 This microfinance institution would be a non-government organization, since there is so much distrust and ethnic corruption in existing government programs. In addition to providing loans, the microfinance institution would provide business consultations to clients free-of-charge. Since the country has a relatively high level of education, business consultations could be more effective than in a country with little to no education. Clients could better take advantage of existing business opportunities in the country leading to increased personal wealth, GDP, and company profits. This is especially crucial considering that, as previously mentioned, over half of the country works in service industries and the country s main resource is rice, a low profit margin crop. If the country is to make any economic headway, it must come from internal businesses finding niche service markets to serve other customers and businesses within the island nation. Despite its high potential for success, my plan for microfinance does face possible roadblocks. The most prevalent issue facing this plan is the same issue facing the country: ethnic discrimination. While the profit incentive will attempt to dissuade ethnic discrimination, there is no guarantee that deeply rooted sentiments will not thwart the opportunities available to the minority ethnic group. Even if many ethnic groups receive microcredit, there is the possibility that opposing ethnic groups will not purchase from the establishment. This will cause loan defaults, making the original problem worse. Additionally, it is possible that the government will attempt to disrupt or remove the microfinance company. Since the government often competes directly with microfinance institutions, it is possible that the Sri Lankan government would oppose such a company. For example, in the Andhra Pradesh District in India, government officials propagated the idea that the local microfinance company would go out of business, causing its clients to stop loan

6 Horras 6 repayments almost immediately (Banerjee & Duflo 175). Still, the potential benefits of a plan that could help the poor in Sri Lanka, especially those in the ethnic minority, would be worth the initial investment. While microfinance would address many of the issues facing Sri Lanka, a completely different approach is necessary in Uganda. Unlike Sri Lanka, Uganda is completely landlocked, meaning it has a number of potential trade partners. In addition, its main resources are gold and timber, which are much more lucrative than the rice that is plentiful in Sri Lanka (Lin). Uganda also has much lower education levels and life expectancy than Sri Lanka, with mean years of schooling at 5.36 and average life expectancy at years ( Uganda ). This low level of schooling means that Ugandans would not likely have the minimum education levels necessary to utilize microfinance loans on intelligent business decisions, meaning a distinctly different approach to solving poverty is necessary in this country. Despite the gold available in Uganda, the country has virtually no way of accessing this lucrative resource. In the few cases when foreign firms can successful help Ugandans extract and sell their resources, the only people who profit are a few high ranking officials or existing wealthy, contributing to the high inequality shown by a GINI index of 44.3 ( Uganda ). Unfortunately, this inequality extends towards women as well. In Uganda, boys are favored over girls for attending school, and 48% of women have experienced physical violence from a partner, demonstrating women s current role as second class citizens ( Where We Work Uganda ). Additionally, the rate of child labor is extremely high, with 36.7% of children ages 7 to 14 working ( World Data Bank ). Beyond these problems with inequality, health and education are also major concerns for Uganda. The country has a high aids prevalence at 7.4% of the population, coupled with low life

7 Horras 7 expectancy and low literacy rates ( World Data Bank ). Although this data creates a dim picture of Uganda, the natural resources available within the country provide the opportunity for economic growth if they are extracted properly. My solution would follow a similar model to what has been proposed by Paul Collier, in which auctions are utilized to ensure the most income for the country and restrictions on power are created to promote long-term growth. In his TED Talk, Collier discusses how just one county received 50 billion dollars each year in oil revenue, dwarfing all aid to all the bottom billion people across the world at only 34 billion ( The Bottom Billion ). This demonstrates that the potential growth from commodity sales significantly outweigh the minimal impacts of international aid efforts. As for how to encourage as much revenue as possible for the country, auctions would be utilized to determine the true market value of commodity land in Uganda. Around a quarter of my 50 billion dollars would go towards setting up certified auctions for the lucrative land with resources in Uganda. This would prevent corrupt local government officials from making deals with companies who bribe them, ensuring that the majority of the profit goes to the original landowner. Also, these auctions would allow the federal government to make the most money on the land, since taxes on the larger sale would be greater, satisfying both parties. While the increased revenue for the country would be beneficial, my plan would also aid in decreasing the inequality and education problems within the country. Any foreign or internal firms who purchase the land for commodity extraction would be required to follow certain rules. Among these would be to utilize no child labor, hire at least 35% women, pay equal wages regardless of gender or ethnicity, and allow UN or other certified non-governmental agency representatives to survey facilities randomly and unannounced. Should a representative find that

8 Horras 8 the facility is not following these rules, the facility would be confiscated and re-sold at a new auction to another company. All of these items would be spelled out in detail in the contracts during the auction. The restrictions on child labor would encourage more young people to go to school, and the female hiring quotas would help encourage young women to become educated as well as aid in improving women s rights. Since there are currently so few educated women, the quota would start at 35%, with the hope of increasing over time as more women become educated. In order to properly survey facilities, the other three quarters of my money would go towards training and hiring investigators to visit facilities to ensure that these rules are being followed. With the threat of losing the business over violations, there is a much greater incentive to follow the rules and continue making profits. Ideally, this system would keep corruption in check; however, there is always the possibility of companies attempting to bribe the facility inspectors or lie about their operations. Additionally, the government may not accept this type of auctioning, despite the increased revenues for the county and the government. Another concern is the chance that these rules would not be accepted, as they go against cultural norms, causing the project to fail. While both the plans for Uganda and Sri Lanka have potential roadblocks, their implementation would profoundly improve the lives of the poor living in these countries. Whether it is microfinance or extraction with regulations, hope exists for those living in poverty in Sri Lanka and Uganda. Although these are only two examples of how to alleviate poverty, they demonstrate that a solution can be found for even the most different of countries. When one takes the time to examine the individual challenges facing each country, the issue of global poverty can be tackled one country at a time.

9 Horras 9 Works Cited Banerjee, Abhijit V., and Duflo, Ester. Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. New York: PublicAffairs, Print. Collier, Paul. "The Bottom Billion." Online video clip. TED, March Web. 10 May Lin, Jessica. RESOURCES Microsoft PowerPoint File. Sri Lanka. United Nations Development Programme, n.d. Web. 10 May "The World Factbook Sri Lanka." Central Intelligence Agency, 24 April Web. 10 May "The World Factbook Uganda." Central Intelligence Agency, 24 April Web. 10 May Where We Work Uganda. Womankind Worldwide, n.d. Web. 10 May World Data Bank. The World Bank, Web. 10 May Uganda. United Nations Development Programme, n.d. Web. 10 May 2014.