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More on the Movement of Capital at the Bottom of the Pyramid

September 13, 2007


In yesterday’s post [Movement of Capital at the Bottom of the Pyramid], I discussed how important remittances by expatriates are to many economies around the world. I quoted World Bank figures that noted some $276 billion was transferred by such workers in 2006 — that is a 184% increase in such remittances in just four years. Some areas have become so dependent on these remittances that the primary export from those areas is human capital. One such area, according to Jason DeParle, is the Indian state of Kerala [“Jobs Abroad Support ‘Model’ State in India,” New York Times, 7 September 2007]. DeParle writes:

“This verdant swath of southern Indian coastline is a famously good place to be poor. People in the state of Kerala live nearly as long as Americans do, on a sliver of the income. They read at nearly the same rates. With leftist governments here in the state capital spending heavily on health and schools, a generation of scholars has celebrated the ‘Kerala model’ as a humane alternative to market-driven development, a vision of social equality in an unequal capitalist world. But the Kerala model is under attack, one outbound worker at a time. Plagued by chronic unemployment, more Keralites than ever work abroad, often at sun-scorched jobs in the Persian Gulf that pay about $1 an hour and keep them from their families for years.”

In my last post, I concluded that the triangle of Foreign Direct Investment, Official Development Aid, and remittances provides a pool of resources that can be used to help emerging economies develop. It is not, however, a formula for long-term success. Most things in life require balance and this is certainly true when it comes to development. The goal of development is establish a growing and sustainable economy in areas now plagued by grinding poverty. Another way of looking at the goal is as an effort to create a balanced economy that no longer requires outside assistance to thrive. That means that reliance on ODA and remittances must be drastically reduced or altogether eliminated. FDI is not considered outside assistance because it is money that is attracted to opportunity rather than need. It is money invested in the economy that becomes a permanent part of it not just a crutch for it. Kerala is moving the wrong way along the development trail when it comes to strengthening its economy.

“The cash flowing home now helps support nearly one Kerala resident in three. That has some local scholars rewriting the Kerala story: far from escaping capitalism, they say, this celebrated corner of the developing world is painfully dependent on it. ‘Remittances from global capitalism are carrying the whole Kerala economy,’ said S. Irudaya Rajan, a demographer at the Center for Development Studies, a local research group. ‘There would have been starvation deaths in Kerala if there had been no migration. The Kerala model is good to read about but not practically applicable to any part of the world, including Kerala.’ Local lessons would matter less if this were a section of Mexico or Manila — places known for the hardships that make migrants flee. But Kerala’s standing as the other way — the benevolent path to development, a retort to globalization — makes the travails of its 1.8 million globalizing migrants especially resonant. The debate about Kerala is a debate about future strategies across the impoverished world.”

History seems to have a soft spot for people looking for a benevolent economic system that generates prosperity but doesn’t recognize differences in talent, intelligence, or motivation. No such system has ever emerged. Talent, intelligence, and drive are generally rewarded in any economic system; which is why capitalism has continued to rise to the top of the economic heap. Unfortunately, capitalism also rewards bullies and cheats, which is why regulations, rules, and standards are critical components of the global economic system. Enterra Solutions’ Development-in-a-Box™ is a practical and pragmatic approach to development that embraces capitalism but stresses standards. DeParle’s point is that Kerala’s leaders are eventually going to have to join the real world of capitalism if the labor drain is going to end and the local economy developed. Some of the pieces needed to make Kerala successful are already in place. For example, people there are healthy and educated.

“Kerala’s life expectancy is nearly 74 years — 11 years longer than the Indian average and approaching the American average of 77 years. Its literacy rate, 91 percent, compares to an Indian average of 65 percent, and an American rate the United Nations estimates at 99 percent. Those enviable outcomes, its supporters stress, are a result of policy choices: Kerala spends 36 percent more on education than the average Indian state and 46 percent more on health.”

What’s missing is jobs. A state filled with educated people who can’t find work worthy of their skills is a toxic formula. DeParle’s article stresses that what leaders have achieved in Kerala is, by any measure, remarkable, just not enough. Its leftist policies have made it more like Cuba than Singapore.

“The Communist Party came to power in 1957, a year after statehood, and has ruled on and off since. The state transferred land from the rich to the poor, set a minimum wage and invested heavily in clinics and schools. Though Kerala’s tax rates have been comparable to other Indian states’, its collection rates have been higher, and it has spent more on education and health. It also gained a reputation as a place hostile to business, with heavy regulation, militant unions and frequent strikes. There are fishing jobs but little industry and weak agriculture. Government is the largest employer; many people run tenuous businesses like tea shops or tiny stores.”

Not every state needs to aspire to become a Singapore or Dubai. On the other hand, good healthcare and education must be complemented by good jobs in order to create the quality of life that most people desire. Because jobs are lacking in Kerala, families have been separated because fathers have had to look elsewhere for work and, as a result, hardships have been endured.

“The number of overseas workers doubled in the 1980s, and then tripled in the 1990s. In a state of 32 million where unemployment approaches 20 percent, one Keralite worker in six now works overseas. The largest number work at taxing construction jobs, outdoors in the Arabian sun, though high literacy allows some Keralites to land office work.”

The biggest problem with the current situation in Kerala is that the good things (healthcare and education) cannot be sustained without the remittances being transferred by expatriates.

“Without migrant earnings, critics say, the state’s luster could not be sustained. The $5 billion that Keralite migrants send home augment the state’s economic output by nearly 25 percent. Migrants’ families are three times as likely as those of nonmigrants to live in superior housing, and about twice as likely to have telephones, refrigerators and cars. Men seeking wives place newspaper ads, describing themselves as ‘handsome, teetotaler, foreign-employed’ or ‘God-fearing and working in Dubai.'”

Expatriates form an important group for any region (or nation-state) looking to develop; especially if those expatriates succeed financially overseas. DeParle provides one example:

“At its best, migration produces stories like that of Benjamin Fernandez, 55, who moved to the United Arab Emirates 30 years ag
o as a secretary and now owns a construction firm there. He built a big house in India with a teak spiral staircase and educated his daughters in private schools. One is studying to be a doctor, and the other is applying to business school. ‘The U.A.E. built a life for us,’ he said.”

Such entrepreneurs, when they invest in their homelands, are critical in the job creation process. Eventually Kerala needs to break out of the vicious cycle in which it finds itself.

“With nearly a quarter of the money migrants send home being spent on education, some Keralites experience a painful cycle: migration buys education, which leads to more migration. Educated Keralites, more choosy about jobs, are more likely to be unemployed.”

The way out, as I noted above, is to create jobs at home.

“Kerala’s homegrown critics say such stories underscore the problems of a strategy that severs human development and economic growth. ‘Keralites are developing the gulf economy,’ Professor Rajan, the demographer, said. ‘They are not developing our economy.'”

With so many of the pieces needed for development already in place in Kerala, its leaders need to swallow a bit of their leftist pride and develop a strategic plan for developing the economy that takes advantage of human capital investments they have already made. If they can establish the business conditions necessary to create jobs not only will the expatriates return to their families the wealthy ones will invest in the local economy and strengthen it even more. I’ve seen this happen in Kurdistan. The public sector is going to have to create the conditions and the private sector is going to have to take advantage of them. Unfortunately, this seems like a long ways off for Kerala. This is surprising since many areas in India are booming (the economy is growing at a per annum rate of nearly 10% and many Indian corporations are becoming transnational and climbing the global economic ladder.

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