Month: February 2005

One of the greatest challenge that India faces is that of rural development. Successfully solving any problem requires a proper formulation of the problem. Fundamental questions arise when the matter of rural underdevelopment is considered in depth. Is rural development the development of rural areas, or is it about development of rural populations? They are not the same thing and require entirely different approaches. Is it possible that the antidote to rural under-development lies in urban development?

Those questions allows us to consider the possibility of addressing the problem of rural under-development by allowing a migration path for the rural populations to areas which have the same characteristics as urban areas. That is, we have 600 million people dispersed over 600,000 villages. Clearly, developing 600,000 locations to become urbanized is not feasible. Transferring the current rural populations into a much smaller number of larger aggregation of people – in effect, urbanizing them – must be the goal because urbanization is both a cause and consequence of development. The problem is then not of developing 600,000 small villages but rather catalyzing the growth of say 6,000 mini-towns of about 100,000 populations each. These mini-towns can then obtain the aggregation and scale economies normally associated with urban areas.

From Development of Areas to Development of People

The contention is that the focus has to change from the development of rural areas to the development of rural people. The development of rural people can be broadly considered as urbanizing them. Since migration of 600 million people into the present set of cities and towns is unfeasible, new aggregations have to be “seeded.” This is the primary role of the government because the seeding implies coordinating the building of infrastructure which will support the rural people.

The problem of rural under-development is then formulated as one which involves the development of urban areas[1]. In other words, for the development of rural people to occur, the focus has to shift from development of rural areas to the development of urban areas. The solution to the development of rural people then is not developed rural areas, but rather developed urban areas.

That is paradoxical at first glance. But the alternative of developing 600,000 villages is an impossibility, as evidenced by the fact that despite enormous resources, rural areas continue to be under-developed. Urban development is a well-understood process and is less costly to the public purse[2] than the alternative of rural development.

There is an instructive example in the development of the US. The US was largely an agricultural – and therefore rural – economy in the turn of the last century. Providing higher education to the children of the rural families was the need. So did they start very little colleges in the tens of thousands of little rural communities? No. They started large universities for the children of farmers to go to. The idea was that these trained people would then go back to the farms and increase the farm productivity. But what was the actual outcome? The children of the farmers got urbanized and did not want to go back to the rural areas. As luck would have it, technologies developed in urban areas were successful in raising farm productivity which meant that so many were not needed in the farms anyway. And who developed the technologies and labored in all those urban areas? Those children of rural farmers who went to the colleges were the people who supplied all the necessary bits that the rural farmers required.

The point is that it was not rural development that made the difference in the rural areas. It was what happened in the urban areas that changed the rural areas.

Role of the Government: Infrastructure Investment

The role of the government is critical in rural people development through urbanization. Public investment in infrastructure “crowds-in” private investment in infrastructure and other services. The government has to play the role of the “lead investor” that signals to the market that investment in the projects will be profitable.

Infrastructure services require high fixed costs and have long pay-back periods. The role of the government is then one of financing the infrastructure, and leaving their provisioning to the private sector.

NOTES:

1. RISC (Rural Infrastructure and Services Commons) is a model which achieves rural development through urbanization. In the RISC model we call it “in-situ” urbanization. Sure, these “urban centers” are located in the rural area. But it does not transform villages at all directly. It creates a mini-city. It is not kiosks in every village but rather villagers in cities that will transform the people. The focus is on the services available to the people rather than attempting to locate the services in villages.
2. It is less costly to the public purse because private sector firms would invest in the infrastructure to serve a dense concentration of people (as in any urban area) more readily than they would in sparsely populated rural areas.

Bringing the benefits of ICT to rural populations is
a commendable goal. The use of kiosks with connected
PCs for bringing services to villages is a model worth
considering among various means. The advantages of
kiosks are many. Primary advantage is that of proximity.
Villagers do not have to incur any travel cost to obtain
the services delivered. Next, the investment required
is relatively small and so a start can be made with
limited resources. Finally, rural entrepreneurship can
be motivated by giving over the management of the kiosk
to a person from the village itself.

Disadvantages of Kiosks

The primary disadvantage of kioks is that they are
not economically viable. Economic viability is related
to economies of scale, both on the supply side and
the demand side. Scale economies depend on the quantity
of services supplied and demanded. Rural populations
have a low ability to pay for services. Given the average
village population of about 1,000, the aggregate demand
for services is low. The quantity of services that need
to be supplied is commensurately low. This makes the
average cost of per unit of any service delivered high
and the break-even price is therefore high. Sometimes
the price is sufficiently high that the service cannot
be provided at all at full cost.

The High Cost of Providing Services at the Village Level

Rural India is highly fragmented with around 600,000
villages with an aggregate 600 million people. The lack
of basic infrastructure such as power, roads, and
connectivity increase the cost of providing services
to villages. For instance, while the cost of a PC in
a village is the same as that in an urban area (around
Rs 20,000), the total cost of ownership of a PC in
rural areas is far higher compared to that in an urban
area because providing for uninterrupted power for the
PC is about Rs 30,000.

The essential point is that high technology sophisticated
equipment require deep back-end infrastructure and
creating this deep back-end infrastructure at the 600,000
villages is prohibitively expensive.

Subsidies are one way around the problem of pricing at
full cost. If a kiosk requires only a modest subsidy of
Rs 10,000 per year for it to be economically viable, the
aggregate annual subsidy required for kiosks in 600,000
villages is around Rs 6 billion (about US$ 136 million).
Clearly, this level of annual subsidy is not sustainable.

Obtaining Scale Economies

To bring down the average cost of delivering services,
and consequently reduce the full-cost price of the services,
economies of scale have to be obtained. That is, a much
smaller number — something of the order of 10,000 rather
than 600,000 — of significantly large-sized kiosks have
to be considered. Let’s call these “Super Kiosks”. If a
typical village-level kiosk has two PCs, a Super Kiosk would
have 10 PCs and deliver a much wider range of services and
to a greater aggregate population. Imagine that a Super
Kiosk (SK) is located in a largish village and serves the
populations of the neighboring 10 villages for an aggregate
population of about 10,000.

To fully saturate rural India, only 70,000 Super Kiosks would
be required instead of 600,000 kiosks. Further, it can be
argued that the economics of SKs will eliminate the need for
subsidies because of aggregation economies on the supply side
and the demand side.

Disadvantages of Super Kiosks

The primary disadvantage of a SK is that it is not available
at each village. The majority of the villages will not have
an SK. Some travel cost will have to be incurred by the majority
of villagers to obtain the services of an SK. However, this cost
is relatively minor because the average distance to an SK will
be about 2 kilometers which can be easily covered within a half
hour by foot.

Advantage of Super Kiosks

It can be argued that Super Kiosks have the advantage of scale
economies and that is why they are better than kiosks in
villages. But there is an even more fundamental reason for
them. Rural India is dispersed among 600,000 villages. No
economy can develop with such a large number of very small
aggregation of people. For India to develop, the dispersal
of rural populations has to reduce to something like 60,000
“Super Village” (SV) with an average of 10,000 population.
SV must be in the future of rural India in the medium term
of five to 10 years. I see the progression of rural India
from 600,000 villages of 1,000 population average, to
60,000 SV of 10,000 population, to 6,000 “Mini Towns” (MT) of
100,000 average population in the long term.

The transition of rural India from villages to SVs to MTs
has to be helped along. The introduction of SKs in specific
villages will be the first step. That is where the game
will be in the future and that is where we must aim to be.
(When asked what was the secret of his success, Wayne
Gretsky, the hockey legend said that he plays for not where
the puck is, but where the puck is going to be.)

RISC: Rural Infrastructure and Services Commons

I proposed a model for rural economic development which
some have described as a kiosk on steroids.
The concept paper for RISC (which is co-authored with
Vinod Khosla) is available
here. You can consider RISC to be a Mega Kiosk
and I hope that one of these days it will be implemented.

Like they say, one lives on hope and dies of despair.