Category Archives: Social Enterprise

The Convergence: America’s Long Arc of Development

The following is a four-part post about the phases of the economic development of nations – pre-industrial, industrial, post-industrial – and a discussion of the current state of affairs in the United States and the world.

Part I: How Countries Develop

For all of their differences, countries, and even civilizations, follow a similar path in their development. The timeline and specifics vary from nation to nation, but the general formula remains constant. On a high level, poor countries become rich through industrialization. The Renaissance in Europe, the Industrial Revolution in the United States, and the era of outsourcing – services in India, manufactured goods in China, and raw materials in Brazil – are all examples of the broad arc of economic development in once-poor nations. Mechanization produces efficiencies that make a country’s exports more competitive. When the value of exports exceed that of imports, it creates a trade surplus, also called a “favorable balance of trade”, as it brings more foreign currency into the country and generally makes the country richer.

As countries become richer and more industrialized, the economy shifts toward producing value-added goods. The wealth increase strengthens the currency of the country, and skilled – and unskilled – workers demand higher wages. As a result, labor-intensive industries become less competitive, leading rich countries to outsource these jobs to poorer countries. In the 1600’s, Colonial America traded cash crops and raw materials for finished goods from England – one of the factors leading up to the American Revolution. As the U.S. became richer post-WWII, it began outsourcing its labor-intensive industries to China and India. And today, these two countries are vying for influence and access to raw materials and cheap labor in a modern scramble for Africa.

Clark’s Sector model for US economy 1850 -2009.

When a country develops in this way, the spoils are more equitably shared, as millions of jobs are created in new industries. From the textile mills in Lowell, to the garment factories in Bangladesh, to the manufacturing facilities springing up in Ethiopia and South Africa, a generation of previously unemployed people starts to work, fueled by demand from wealthier countries for more finished goods. And those new additions to the workforce are introduced to one of the perks of earning a decent wage: paying your taxes.

In pre-industrial nations, income is highly stratified, with an ultra-wealthy elite wielding a disproportionate amount of both political and economic power. On the other extreme, a huge percentage of the population is impoverished, rarely sharing in the spoils of the natural resource contracts that enrich the elites. The only voices that matter are those with access to money and influence, and the poor are marginalized, resigned to the realities of corrupt politicians and unscrupulous businessmen stifling growth and progress in the country.

As a country industrializes, however, the inexpensive labor provided by the massive percentage of the population living below the poverty line enables those disenfranchised segments by creating a middle class. With greater disposable income, poorer families can invest in education, ensuring that their children will reap the benefits of development by ushering in the inevitable move toward value-added goods that immediately follows industrialization. And that middle class – which pays a percentage of its hard-earned money in taxes – starts to demand accountability from its political leaders. As the concentration of wealth shrinks, the broader population begins demanding greater freedoms. A free press develops to satisfy the new-found demand for information, and politicians are brought out of the shadows and into the light.

A more responsive government and an expanded treasury lead to investments in infrastructure, education, healthcare, and other institutions, laying the groundwork for the shift to post-industrialization. With the foundation in place, the country steadily moves up the ladder. The call center that once offered only customer service now offers accounting, IT, and financial services. The t-shirt manufacturer becomes a fashion house. And with each step, the country becomes richer.

A snapshot of a post-industrial economy. Sectors of the US Economy as percent of GDP 1947-2009.

And what happens to this newly-created middle class? As their income increases, the percentage spent on food, clothing, and housing decline. Their buying power increases, their lifespan becomes longer, and the shocks that once destroyed their lives – an illness left untreated, a drought that destroyed their crops, a civil war erupting out of desperation – decrease, enabling them to not only invest more money in themselves – in the form of better healthcare, better schools, better houses – but also free them from the debilitating stress generated by uncertainty. Not knowing where your next meal is coming from, or whether your daughter will be able to survive a bout of typhoid, or malaria, or tuberculosis, weighs on the poor, deeply affecting their decision-making. Short-term thinking becomes long-term planning, and the whole country is better off as a result.

At some point – when a country has reached this transcendental state of development – it begins a steady decline. Some thinkers for whom I have a tremendous amount of respect, like Fareed Zakaria, describe a “post-American world” marked not by the decline of the west, but the “rise of the rest”. For a time, I agreed with his conclusions. But lately I’m beginning to think that view is a shade too optimistic.

Part II: The Great Divergence

The Great Divergence: share of income by the top 10% of the population in the U.S.

It is hard to pinpoint the moment at which America turned the corner and began its march to peak decadence and subsequent decline. If you ascribe to what some economist call “The Great Divergence,” the trend began in the late 1970’s, as a number of convergent forces changed the economy of the United States. This is right around the time the U.S. began outsourcing its manufacturing sector in response to the increase in standard of living that I described above. James Surowiecki of the New Yorker explains the trend:

In 1960, the country’s biggest employer, General Motors, was also its most profitable company and one of its best-paying. It had high profit margins and real pricing power, even as it was paying its workers union wages. And it was not alone: firms like Ford, Standard Oil, and Bethlehem Steelemployed huge numbers of well-paid workers while earning big profits. Today, the country’s biggest employers are retailers and fast-food chains, almost all of which have built their businesses on low pay—they’ve striven to keep wages down and unions out—and low prices.

Incarcerated Americans as a percentage of the population, 1920-2008

Incarcerated Americans as a % of population, 1920-2008

Simultaneously, just as the middle class was starting to see its job prospects shipped overseas, the most influential conservative president of the last hundred years arrived to reshape the political system to systematically dismantle the welfare state, declare a war on drugs that crippled the socioeconomic development of a generation of African-Americans, and establish an approach to domestic economic policy – colloquially referred to as “Reaganomics” – that sought to restrain the power of the federal government and empower the free market through de-regulation, lower taxes, a tighter money supply and relentless opposition to anything might cause inflation.

President Clinton largely maintained the laissez-faire approach to the economy, presiding over a period of growth and prosperity that continued deep into the Bush years. Then, of course, the inevitable happened: the economy collapsed, having been fueled by a mythical belief that housing prices would never go down. The resulting collapse plunged the global economy into its greatest recession since 1929 – one which it is steadily climbing out of now.

I have purposefully glossed over the last 20 years because the actual events leading up to the collapse – liberal lending policies by the Federal Reserve, de-regulation of the financial sector, the repeal of Glass-Steagall, and other causes – are irrelevant. The financial collapse was a correction back to economy’s original state. It is simply the mechanism by which the truth was exposed. What is more interesting to me now is the current state of affairs. In a nutshell, the economic development trend is not only slowing, or even plateauing. Rather, it is actually happening in reverse.

Part III: The Current State of the Union

The share of income by the top 10% and 1%, respectively

Income inequality – which decreased during the era of industrialization – is on the rise again. As money and power become more concentrated, fewer individuals enjoy the spoils of prosperity. Wealth concentration in isolated communities exacerbate already appalling disparities in our education system. In a 2012 study, the OECD (Organization for Economic Co-Operation and Development) quantified the relative performance of students in the 33 high- and middle-income countries. Among 16-24 year olds, the United States ranks dead last in proficiency in numeracy. In other words, rather than investing in creating a highly-skilled workforce that will enable the country to thrive in that post-industrial economy, it allows any advantage it once had to slip away, damaging the prospects of future generations.

And what about on a microeconomic level? Remember how the poor in pre-industrial nations spend a disproportionate amount of their income on food, clothing, and housing, leaving them vulnerable to financial shocks? Well, that is happening again too. Derek Thomson of The Atlantic provides a sobering analysis of the realities from the Bureau of Labor Statistics:

For the poor, food, clothes, and housing account for more than 60 percent of all spending. The rich have more left over for leisure, insurance, and savings.

The term consumption takes on a more literal meaning when you see the difference between rich and poor spending. Cash-hungry families consume more of their income immediately, spending two in three dollars on absolute essentials like food and shirts. The rich are more predisposed to spend toward the future, with eight-times more of their income going toward insurance and even more going toward savings (although the bottom 20 percent includes lots of retirees on Social Security, the next quintile doesn’t see much in the way of savings either).

There has been a good amount of research recently about how being poor changes your thinking about everything. “If you have very little, you often behave in such a way so that you’ll have little in the future,” Sendhil Mullainathan recently told Harold Pollack in Wonkblog. The poor don’t plan as much for the coming years, because they can’t afford to.

Thinking about the future is a form of luxury.

The percentage of income spent by category.

Why is this important? Aren’t we living in an era of unprecedented prosperity? Yes and no. If you are one of the 2.4 billion people living on less than $2 a day, life is hopefully going to get better for you. You will benefit from the broader trend of globalization and general connectedness of the modern world, by which information and goods flow more freely, regardless of borders. But if you are lower middle class, or, even worse, already poor in America, life is about to get a lot worse.

That is because this trend will continue. The concentration of wealth will only become more pronounced. The Citizens United decision, coupled with the recent Supreme Court decision to strike down the overall political donation cap, will only reinforce the increasingly disproportionate power the wealthy have over the American political system. This sad turn of events brings us one step closer to that pre-industrial political landscape, where the ultra-elite control the government.

Each of these developments bring us closer and closer to our origins as a pre-industrial country.

Part IV: The Future

This long arc of our historical development lead us to one inevitable truth, articulated nicely by the Nobel prize-winning economist, Joseph Stiglitz:

Nowadays, these numbers show that the American dream is a myth. There is less equality of opportunity in the United States today than there is in Europe – or, indeed, in any advanced industrial country for which there are data.

This is one of the reasons that America has the highest level of inequality of any of the advanced countries – and its gap with the rest has been widening. In the “recovery” of 2009-2010, the top 1% of US income earners captured 93% of the income growth. Other inequality indicators – like wealth, health, and life expectancy – are as bad or even worse. The clear trend is one of concentration of income and wealth at the top, the hollowing out of the middle, and increasing poverty at the bottom.

At the end of his article, Stiglitz says that it is not too late for the American dream to be restored. To that point, I believe it is important that we collectively remember our roots – not as individuals, but as a country, and even a civilization. Remember that we all started from humble beginnings and invested in ourselves to ensure that we provided future generations the resources and skills to thrive in a changing world. Because not only will that ensure that we as a country are caring for one another the way that a country should, but also, from a more realpolitik standpoint, income inequality leads to greater economic instability, and a higher risk that we tumble down the chasm yet again.

There is another alternative: that we do nothing, and the trend continues, expanding the gap between what the creator of the show, The Wire, David Simon calls the “Two Americas.” In a speech given at the Festival of Dangerous Ideas in 2013, Simon explains ones manifestation of these two options:

So how does it get better? In 1932, it got better because they dealt the cards again and there was a communal logic that said nobody’s going to get left behind. We’re going to figure this out. We’re going to get the banks open. From the depths of that depression a social compact was made between worker, between labour and capital that actually allowed people to have some hope.

We’re either going to do that in some practical way when things get bad enough or we’re going to keep going the way we’re going, at which point there’s going to be enough people standing on the outside of this mess that somebody’s going to pick up a brick, because you know when people get to the end there’s always the brick. I hope we go for the first option but I’m losing faith.

Like David Simon, I’m losing faith. I hope that we as a society can stand up and recognize this broader trend. In the opening song of the seminal Dead Prez album Let’s Get Free, “Wolves”, the narrator uses an interesting parable to explain how African-Americans in inner cities have been systematically disenfranchised and sabotaged by crack cocaine, the police state, and the prison-industrial complex:

I’m not a hunter but I am told, that, uh, in places like in the arctic, where indigenous people sometimes might, might, hunt a wolf, they’ll take a double edged blade, and they’ll put blood on the blade, and they’ll melt the ice and stick the handle in the ice, so that only the blade is protruding, and that a wolf will smell the blood and wants to eat, and it will come and lick the blade trying to eat, and what happens is when the wolf licks the blade, of course, he cuts his tongue, and he bleeds, and he thinks he’s really having a good thing, and he drinks and he licks and he licks, and of course he is drinking his own blood and he kills himself.

Paul Ryan, a disciple of Ayn Rand, who believed that faith is detrimental to human life, speaking at the Value Voters summit.

I would argue that that is what is happening to everyone. People are tricked to vote against their own self-interest after being whipped up into a frenzy about gay marriage, abortion, and other inconsequential issues. “Look over over there,” while I reach into your pocket and steal your wallet. The party of Christianity and family values is the same party that votes against expanding healthcare, that votes against supporting the poor, that votes for the corporation that pollutes its rivers and destroys its communities. In the Dead Prez analogy, “social issues” are the blood, and economics are the blade.

Can we reverse this trend? I don’t know. I would like to hope that this is not the new world order. But, unfortunately, very little as of late has given me reason to think otherwise.

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The Ethical Obligations of Writing About Poverty and Conflict

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The district Kailahun, where the crisis in Sierra Leone began. (Credit: Caroline Thomas)

I. A Long Way Gone

The other day I finished reading “A Long Way Gone”, the autobiography of Ishmael Beah, a child soldier during the country’s civil in the 1990’s. After his village was attacked by the rebel army known as the RUF (Revolutionary United Front), Beah remained in a small town called Mattru Jong, before fleeing another attack. Eventually, he made his way across the country to a village controlled by the national army, where he becomes a drug-addicted soldier who murders and tortures people who are unfortunate enough to find themselves in his path. After two years as a soldier, he was rescued by UNICEF, brought to the capitol city of Freetown, and rehabilitated. But the rebels soon invaded the capital, and Beah fled to the U.S., where he was taken in by a woman he’d met while speaking at the UN a year earlier.

The story is raw and violent. The book became a hit, selling well over a million copies and launching a career for Ishmael Beah as an advocate for child soldiers around the world. He has spoken before the UN and other international bodies, started an charity group called Children Affected by War (CAW), and become the most famous advocate for child soldiers in the world.

Yet, as it turns out, his story may not actually be true. In 2008 – a year after the book was published – an Australian newspaper published a 4,000 word expose claiming that the attack on Mattru Jong, which kicked off a chain of events leading to him becoming a soldier, occurred in 1995, not 1993 as he had claimed. This would mean that he was only a soldier for a few months, rather than the two years he discusses in the book. Beah and his publisher denied the accusations, and the two groups have been trading barbs back and forth ever since.

The specifics of the chronology are not that important. There are plenty of explanations, not least of which is that a 13 year-old addicted to drugs and brainwashed to kill might be granted a little leeway in ability to recall specific memories. But it did get me thinking about the role of narrative in shining a light on things that might otherwise go unseen.

II. Nicholas Kristof and the “Bridge Character”

This is a topic I have written about extensively in the past. At the time, I watched international development experts criticize Nicholas Kristof for writing stories that oversimplified complex conflicts and using “bridge characters” to widen the story’s appeal. Kristof would distill the war in the DRC to a fight over natural resources, leaving out the messier parts about the oppression by the Belgians during the colonial era, or the assassination of Patrice Lumumba and the installation of pro-Western dictator, Mobutu Sese Seko, who drove the country into ruin, or, most recently, the fact that much of current conflict might be traced back to the Rwandans, who, up until a few months ago, were the darling of the international development community. If he took the time to explain the Byzantine web of cause and effect, people would simply tune out and go back to not being able to point out the DRC on a map, much less empathize for its people.

For writers like Kristof, good intentions justify the means. If you have 750 words every week through which you need to convince an audience of millions to care about something they don’t have the patience to really understand, then you do everything you can to pull at the heartstrings of your readers and draw them in not with discussions about the roots of the conflict, but about the young, usually white, recent college graduate who started a clinic serving victims of the war. Through their story, people begin to pay attention.

In an interview with Outside magazine, he explains how he decided to frame his stories the way he does:

So I turned to the field of social psychology, trying to understand how I could craft my writing so that it would generate a response rather than a turned page. Over the past 20 years, there have been many studies that shed light on this question, and, increasingly, I’ve come to believe that those of us who care about human rights and global poverty can do a far better job in our messaging. Like Pepsi, humanitarian causes need savvy marketing. Indeed, they need it far more than a soft-drink company.

Good people engaging in good causes sometimes feel too pure and sanctified to sink to something as manipulative as marketing, but the result has been that women have been raped when it could have been avoided and children have died of pneumonia unnecessarily—because those stories haven’t resonated with the public. So for God’s sake, let’s learn how we can connect people to important causes and galvanize a robust public reaction.

I think he has a good point. The cause du jour is often not always the one the demands the most immediate attention.

People demonstrate violently in the street in Bangui, demanding that President Djotodia steps down following the murder of a magistrate shot dead the night before. 30 minutes later, the Séléka arrived and fired into the crowd, killing two men and wounded one. (Credit: William Daniels)

Everyone, for example, knows about the civil war in Syria, which does not even have significant advocates. But very few people, I would guess, know that the Central African Republic, a small country in a conflict-ridden region of Africa, is about to explode into civil war, prompting fears of genocide and mass murder. This report is from the Guardian newspaper last week:

A massacre of the innocents is taking place in the heart of Africa as the world looks the other way.

One man describes how his four-year-old son’s throat was slit, and how he saw a snake swallowing a baby. A woman explains that she is caring for a young girl because her mother went searching for medicine and was bludgeoned to death with Kalashnikov rifles. A young man tells how he was bound and thrown to the crocodiles, but managed to swim to safety.

This is the world of horrors that the Central African Republic (CAR) has become. Thousands of people are dying at the hands of soldiers and militia gangs or from untreated diseases such as malaria. Boys and girls as young as eight are pressganged into fighting between Christians and Muslims. There are reports of beheadings and public execution-style killings. Villages are razed to the ground.

Never much more than a phantom state, the CAR has sucked in thousands of mercenaries from neighbouring countries and, France warned on Thursday, now stands “on the verge of genocide“. Yet many would struggle to find the country on a map, despite the clue in its afterthought name.

If you count yourself among the few people who knew this story, consider yourself among the most informed in the world. But, as I will explain in the next section, graphic descriptions of conflicts can sometimes become controversial as well.

III. The Fog of War in the DRC

A friend of mine, Laura Heaton, wrote an article for Foreign Policy magazine a year ago called “What Happened in Luvingi?” It is about her trip to a rural village in the DRC that had been attacked by a rebel group, which allegedly raped 387 women over the course of the four-day attack. The conflict in the Kivu region of the Eastern DRC was notable for its violence, yet even by these standards, this was exceptinally brutal. Even worse, there was a group of UN Peacekeepers stationed nearby that failed to protect the village.

The village of Luvungi in the Democratic Republic of Congo

The event galvanized a massive response from the interational community. In many ways, it was a bellwether moment in the conflict, drawing the spotlight to rape as a devastating tool of war. It highlighted the ineffectiveness of the UN and its Peacekeeper program, and brought huge attention to the conflict as a whole.

When my friend went to the village three years later to investigate, she spoke to the village elders, who told her much of what she already knew, but refused to let her speak to any of the women. That night, her translator spoke to one of the women who had allegedly been raped and discovered something startling. It turns out, much of what was claimed never actually happened.

In reality, there were probably a few instances of rape, though it was probably closer to 10 than the 400 that was claimed. But by inflating the numbers, the notoriety generated by the event generated a tremendous amount of support for the community, in the form of money, healthcare, and supplies. If the true story came out, it would mean an end to all that.

This is an example of the slippery slope of hyperbole. Undoubtedly, the horrific nature of these crimes drew the world’s attention toward a problem that, up until that point, it had been able to ignore. The sheer scope of these mass rapes meant that people had to start watching and caring. But, at the same time, this particular village drew resources away from other affected areas that may have needed them more. The same ethical question remains: is exaggeration in the name of raising awareness justified?

IV. The Current State of the Debate

These three anecdotes highlight the complexities of the awareness debate. Does Ishmael Beah risk doing more harm than good to a cause if he exaggerates his experience? Does hyperbolizing an event risk diverting attention away from other, more pressing issues, or does it provoke outrage from people who would never have tuned in in the first place? Does the disproportionate attention given to particularly egregious events, like rape and crimes against children, create perverse incentives from groups in desperate need of support from the international community? These are complex and difficult questions to answer.

In the era of social media – of Twitter, Facebook, and the fast, fleeting, viral stories that circulate – you see general feel-good awareness-raising more and more. The website Upworthy shows feel-good videos of people doing the right thing in the face of adversity, allowing people to feel better and perhaps more informed about certain social issues. The story of Batkid in San Francisco, where 20,000 people helped turn San Francisco into Gotham City to make a five year-old’s wish come true, is another example. These are human issue stories that draw attention to a larger cause, but also, by their very nature, provide a narrow lens through which to view it. Childhood leukemia is something terrible that we should work hard to solve. But perhaps there are other more treatable ailments that are overshadowed by the story.

The marketing of causes by Upworthy.

I think that, on-balance, simplifying issues to give them a wider appeal and increase the likelihood that action will be taken is a good thing. I don’t think that technocrats will base their policy recommendations on the writings of Nicholas Kristof, Bono, and other cause advocates. Instead, I think these advocates provide cover to policy-makers who face an electorate that needs a reason to care about these issues. Similarly, feel-good stories shared on Facebook and Twitter help to make people generally more compassionate. They expose them to real stories that allow them to experience empathy when thinking about controversial issues like gay marriage and immigration reform, where the basic rights of historically-marginalized groups are debated. The threat of being labeled a bigot carries more weight when the threat of your bigotry going viral on Facebook is real.

So, in conclusion, while I would love for the journalism of Jeffrey Gettleman and the research of Esther Duflo to have mainstream appeal, I know that will never be the case. In the meantime, if sharing Upworthy videos on Facebook makes people more compassionate, and Nicholas Kristof and Ishmael Beah inform people about injustices they would never have known otherwise, that is just fine with me.

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Develop Economies is On Hold

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Given that it has been almost two months since my last post, I owe my loyal readers an explanation for my conspicuous absence and the dearth of posts since the summer. I am currently in graduate school, pursuing a master’s degree, and have had to put down the Develop Economies quill and pick up the calculator. With the first semester finished and the second gearing up, I hope to write a few posts over the coming months. Happy New Year!

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Technology Sea Changes: Re:Char and Kiva Zip

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Product design is all the rage in poverty alleviation, and has been for the past few years. By applying the principles of lean manufacturing and waste minimization to the challenge of designing products for people living on less than a dollar a day, we can now create stripped-down products at a fraction of the cost. But product design is only one small component of the process. The two other challenges in bringing these products to market – financing and distribution – are just as critical to solve.

Meeting with an NWTF client who purchased a solar lantern

There are plenty of companies and organizations that are trying to develop great products at a very low cost. Cookstove companies are racing to the bottom, trying to engineer alternatives to inefficient clay stoves at the lowest possible price. The Engines and Energy Conversion Laboratory at Colorado State University partnered with Envirofit, a manufacturer of clean cookstoves, to design the most efficient-burning stove possible. Dozens of solar companies offer lanterns, water heaters, radios, and mobile phone charging stations. These off-grid energy products provide an energy source to the billions of people living without access to electricity. In just about every industry, from sanitation to transportation, companies are redefining low-cost manufacturing.

Unfortunately, building the products is only part of the solution. Actually getting those products out to the customers, many of whom live in remote rural areas, can be a challenge. Similarly, creating a viable financing solution that allows for payment in installments is going to be more difficult when most customers do not have a bank account, let alone a credit card. Fortunately, technology is changing the game in a fundamental way, bringing solutions to these problems that most people never dreamed could be possible. And one company, in particular, represents a great example of how companies are leveraging the technology boom in low-infrastructure countries (H/T to Jon Evans for the term).

Re:Char is a company based in Western Kenya that sells “climate kilns” to convert biomass to biochar. To deal with the financing problem, it is using crowdsourced, peer-to-peer lending via mobile money to provide a source of credit to its customers. And to solve the distribution problem, the company built a “shop-in-a-box” – essentially a 20-foot shipping container with a laser cutter and 3-D printing apparatus – to bring the manufacturing process close to home.

When I was living in Nairobi, I met some folks from Kiva who were piloting a super-secret initiative called “Kiva Zip.” They were experimenting with the possibility of allowing lending directly to borrowers (as opposed to through microfinance institutions, which is how most business is conducted). The ubiquity of M-PESA, the mobile money platform in Kenya, made it possible to send money to people in the most remote parts of the country for a small fee per transaction. Kiva Zip needed partners on the ground that could pre-vet certain borrowers and provide a steady stream of investments. These partners ultimately became known as “trustees,” and Re:Char became one of the first organizations to sign up.

Re:Char staff and customers on Kiva Zip

Today you can go online and lend $25 to a Re:Char customer. In this loan, Helen of Makokha Farm lives in Bulimbo, Kenya. She needs $100 to buy a biochar kiln and additional inputs. Four Kiva members each lent $25 to Helen to fulfill the loan. Those four individuals used PayPal, an online payment platform, to transfer the money to Kiva. Kiva then transferred the money to a bank account in Nairobi, where it was then added to an M-PESA (mobile money) account. The $100 was then transferred to Helen’s M-PESA account. She received an update on her phone telling her that the money had arrived, and she went to the local M-PESA agent to withdraw the funds. She (likely) then used those funds to buy biochar kiln from Re:Char. And, today, she is in the process of paying them back over the course of the next year.

Kiva Zip is an experimental program and there is certainly no guarantee that it will be successful. Of the seven $100 loans Re:Char has endorsed, only one is currently paying on-time. This is the danger of doing direct lending without a physical presence on the ground to ensure timely payment. But, to me, this is less significant than the broad implications something like Kiva Zip has for the financing of small purchases around the world. If the Kiva Zip pilot fails, Kiva will learn and adapt. But the rubicon of direct-lending through the Internet and mobile money has been crossed. This is a great example of utilizing technology to solve the problem of financing.

In the next post, I will talk about Re:Char’s “shop in a box” and the implications it has for manufacturing and distribution in low-infrastructure countries.

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The Promise of Social Impact Bonds

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Over the past few weeks, social impact bonds have received a lot of attention. That is because New York City has partnered with Goldman Sachs to run a pilot program aimed at reducing recidivism among inmates at Rikers Island prison. But first, a little background on social impact bonds.

There are many social problems for which there is no clear-cut solution. Homelessness, foster care, inmate recidivism, and other issues are often expensive to control. Programs designed to address them are often part of large bureaucracies and susceptible to the same inefficiencies and perverse incentives endemic in other government agencies. And, despite best efforts to fix the problems, they will only get worse as social programs move closer to the chopping block.

Non-profits supplement government efforts by addressing specific problems. Halfway houses, community health clinics, shelters, low-income housing developments, and soup kitchens are all examples of non-governmental organizations serving the homeless. Many have developed innovative approaches that are effective in achieving specific goals – i.e. placing homeless in low-income housing, job-training, etc. – but are constrained by a lack of capital. Without access to greater resources, non-profits will never be able achieve scale.

So the government has lots of money, but not enough dynamic programs to fund. In contrast, non-profits run effective programs on a small scale, but lack the money to expand. This is where social impact bonds come in.

In a social impact bond, the government contracts an intermediary to put together a social impact bond to address a specific social problem. The intermediary then identifies non-profits with promising potential and connects them with investors. The investors provide multi-year funding to the non-profit, allowing them to scale their intervention. In return, the investor is reimbursed by the government based to the program’s success. A monitoring-and-evaluation firm is brought in to assess the impact, which is based on a pre-determined set of metrics. If the intervention achieves the targets, the investor makes a return on the bond. If not, it takes a loss.

The best way to explain the mechanics of a social impact bond is to provide a real-world example. In the case of New York City and Goldman Sachs, the city government wants to reduce the number of repeat offenders, which cost taxpayers money in the form of prison costs, increased law enforcement, and lost productivity. Here is how it works:

The Goldman money will be used to pay MDRC, a social services provider, to design and oversee the program. If the program reduces recidivism by 10 percent, Goldman would be repaid the full $9.6 million; if recidivism drops more, Goldman could make as much as $2.1 million in profit; if recidivism does not drop by at least 10 percent, Goldman would lose as much as $2.4 million.

It seems like a win-win situation, if investors see social impact bonds as a viable means of earning a financial return. I am mostly in favor of any programs that place greater emphasis on “outcomes over outputs.” But this emphasis is hardly new in the international development community, which has seen a surge in rigorous testing for interventions after economists like Dean Karlan, Esther Duflo, and Abhijit Banerjee popularized the use of randomized controlled trials (RCTs) to determine the efficacy of different approaches. And I have the same concerns about social impact bonds that I do about RCTs.

Tying financial returns to outcomes creates two potential problems. First, it risks incentivizing the wrong things, a la “teaching to the test.” Often, these problems are extraordinarily complex and difficult to address, and rarely lend themselves to a timeline that works with an investment. In microfinance, for example, most RCTs occur over 2-3 years, and have shown little improvement in the well-being of recipients. I would argue it takes much longer than 2-3 years to realize the fruits of microfinance. If that is the case, which timeline will be used for the social impact bond – the one that shows progress, or the one that doesn’t?

For some issues, this is not a concern. Recidivism, for example, is cut-and-dry. Chronic homelessness, however, is not. For social impact bonds to be successful, they will require metrics that truly reflect the success of the program.

The second problem is that the interconnectedness of institutions can mask success. Mark Rosenman of Caring to Change explains both of these problems (h/t Democracy in America):

Where does a nonprofit get the funding to provide the services from which they are to later show a monetized gain to government? How far out in time does the performance metric need to go before quantifiable economic value can be shown and the charity repaid its expenditures? What happens when a nonprofit is providing superb and highly effective services to individuals, but other institutions and variables deteriorate and affect its outcomes?

These are very real concerns that the international development community has been forced to confront (or avoid) in its work.

I am not as pessimistic as Mr. Rosenman or Mr. Steinglass. I think that social impact bonds are a pragmatic and innovative solution to a very real problem. In addition to capital, investors will bring human resources and technology to bear on the problem, which will infuse the sector with new ideas and perspectives. Social impact bonds are still in their nascent stages, but, if they can figure out a way to effectively capture success rates and avoid the pitfalls of “juking the stats,” I see no reason why they can’t be a game-changer in the fight to address social problems.

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The Top Three Social Enterprises in the World

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A year ago, I was sitting at the iHub in Kenya, analyzing thousands of payments made by parents of students at Bridge International Academies, trying to identify potential leading indicators of withdrawal, when Kentaro Toyama, the founder and director of Microsoft Research India, stopped in to give a lecture titled “ICT or Development: Why it’s so hard to get rich and help the poor simultaneously.” His thesis – that it is actually very, very difficult to be both financial and socially sucessful – aimed to check some of the fervor around the concept of social enterprise, which is at the forefront of a new market-led, private sector approach to international development.

I took umbrage with his premise at the time, since I was working with a social enterprise, Bridge International Academies, that had secured the backing of prominent investors and managed to scale across Kenya, with plans to move international within a year. But, more importantly, I felt the narrow definition of social enterprise offered by practitioners, academics, and Toyama himself, made it impossible for companies that fit the bill to every be successful by these standards. After the talk, I asked Toyama why he didn’t consider Celtel, the telecom company founded by the Sudanese-British Mo Ibrahim, to be a counterexample. After all, Celtel created the African telecom sector – one of the fastest growing industries in the world – out of nothing, at a time when nobody – including the father of social enterprise, CK Prahalad – thought it could be done. “Celtel is only focused on making money, so they are not truly a social enterprise,” he responded.

This is where I think he and the other critics of social enterprises are wrong. The most successful social enterprises might not have a social motive at all. Mo Ibrahim famously said “Africa is a wonderful place to make money.” in the spirit of that statement, I will take a crack at identifying the most influential social enterprises in the world.

1. Celtel

Celtel, as I explained, is the first telecom company to identify Africa as a growth market. What followed their proof of concept was a flood of competitors, which created one of the fastest-growing and most competitive markets in the world. Vodafone, Airtel, Glo, Tigo, and other companies began offering lower and lower voice and text plans, while Nokia led (and still dominates) the market for low-cost mobile handsets. It is not uncommon for people in the rural areas and slums to have a cell phone, but no running water or electricity. Mobile penetration has increased exponentially over the last 10 years. Today, it is currently 65% and growing.

The resulting increase in communication capabilities has significantly reduced the asymmetry of information that led to widespread inefficiency. It allowed families to remain connected more easily, facilitating internal migration and loosening up the labor markets. Countless companies have leveraged the mobile platform to communicate more with customers. In a world without ATM machines or credit cards, mobile money has enabled consumers to pay bills and transfer money without having to pay exorbitant fees to pawn shops or money wire services.

Celtel started the mobile revolution in Africa. And it make a killing in the process.

2. Google

Google’s organization and digitization of information has increased information access to people across the developing world. In areas where the ratio of people to libraries is a fraction of corresponding number in the U.S. and Europe, eliminating the monopoly physical references – books, newspapers, and magazines, for example – have on knowledge has enabled people to make more informed decisions about just about everything. With Google’s search functionality, autocratic and repressive leaders that inhibit economic growth and development can no longer control the information their people receive, enabling citizens to make informed decisions based on facts, rather than propaganda. You can challenge your previous place of work’s decision with an Employment Lawyer.

Google’s democratization of information has had a huge impact on development around the world. They too have made a killing the process.

3. Twitter / Facebook

Twitter’s role in catalyzing the Arab Spring and enabling it to spread like wildfire will have profound impacts on the development of countries in North Africa and the Middle East. It is only a matter of time before the same network effects and distributed communication enabled by social networks like Twitter and Facebook enable the same sorts of reforms in sub-Saharan Africa, in countries like Zimbabwe, where discussion of the Arab Spring is outlawed. On Fareed Zakaria’s blog, an article titled “Four ways social media could transform conflict in Africa” explains this effect:

Social media could make African states more sensitive to audience costs (that is, the benefits and drawbacks that it could accrue from lying or telling the truth), since citizens can now interact with their governments and with others in civil society in ways that they couldn’t before. An example of this trend has been the recent #SudanRevolts social movement on Twitter, in which Sudanese and global supporters have launched an unprecedented movement calling for an Arab Spring-like end to the rule of strongman Omar al-Bashir. Previously, in early 2011, other African leaders were confronted with small-scale conflicts organized via social media, including in Cameroon and Angola. Indeed, the massive uptick in cell phone users across the continent has led many to predict that the next long-term revolutions in African leadership will be launched via cell phone.

Social networks will continue to have game-changing impacts on repressed states.

Here are some honorable mentions:

Coca-Cola

It is said that you can get a Coke anywhere in the world. I have been to two dozen countries around the world and visited some of the most remote places, and have never not been able to get a Coke. The number of people who are employed at every level along the value chain is huge, and Coca-Cola deserves credit for creating such an efficient supply chain.

Wal-Mart

Wal-Mart and other big box retailers that source local produce from farmers and establish a highly-efficient storage facilities and cold chains enable significant improvements in the agriculture sector of a company. BusinessWeek discussed the impact Wal-Mart’s entrance into the Indian market could have had had politicians allowed it:

The global chains were likely to invest in trucking and distribution systems in India, where government estimates show 40 percent of fruit and vegetables rot before being sold because of the lack of cold-storage facilities and poor transport infrastructure. Farmers will have “assured business” if foreign companies were allowed to invest in multibrand retail, said Pratichee Kapoor, associate director for retail at Technopak Advisors Pvt.

These are just a few social enterprises that have had outsized social impacts.

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What Do I Think of Social Enterprise?

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In the last five posts, I have described in detail how Bridge International Academies has created a scalable model that can profitably serve the poorest segments of the population. They use data to make decisions, processes to ensure quality, and technology to streamline systems. In other words, they act like a business.

This is how every social enterprise should work. In fact, this is how every company should work. Pilot, test, measure, implement, and repeat. But this is not how social enterprises typically operate. There are a few that pushing the bar and doing some really exciting work. Nairobi happens to be a mecca for innovative social enterprises. Sanergy, for example, was started by three MIT Sloan graduates. They are manufacturing toilets, selling them to entrepreneurs in the slums, and collecting the waste to convert to biofuel and fertilizer. Mobius Motors is building a car for Africa – a cheap, durable, stripped-down beast that looks like a Hummer and is specifically designed for the rough roads in the rural areas of Sub-Saharan Africa. Healthcare companies like Penda Health, a chain of primary-care clinics, and energy companies like One-Degree Solar and Nuru Energy, understand the importance of profitability above all else.

There are other companies outside of Africa that are doing great work as well. Aravind Eyecare in India trains healthcare professionals to perform one procedure – removal of cataracts – and have managed to lower the cost to a fraction of a percent of the normal cost of the surgery. And Hapinoy, the chain of sari-sari stores in the Philippines, uses a hub-and-spoke franchise model to drive down operating costs for the small general stores that are so common among the poor in the country.

These social enterprises are the exception, rather than the rule. That is largely because the term “social enterprise” is somewhat silly in my opinion. An organization is either for-profit – focused on the bottom line – or not-for-profit – focused on the social mission. It is true that hybrid models exist. Good examples are Samasource, One-Acre Fund, and many microfinance institutions, which are partially subsidized, but perhaps moving toward financial sustainability. But being firmly in one camp or the other is what separates the wheat from the chaff in this world.

The key to success as a social enterprise is to offer a product or service that is inherently a social good, and make sure that the success of the company is tied to creating the best, most competitive product, and the highest-quality service. The reason that working for Bridge is so liberating is that there is never any question that what we are doing is a social good. We avoid the pitfalls of other “social enterprises” because of the very nature of our business model. As a low-cost school, we couldn’t move upmarket even if we tried, since comparatively wealthier families could easily afford better schools if they had the money to pay for it. We can’t compromise on quality in order to increase our already-low margins because, if we do our parents will pull their kids from school and the schools will no longer be profitable.

When the profit motive is inseparable from the social mission, a “social enterprise” is liberated from the concern of mission drift. And at that point, it ceases to become a social enterprise altogether. It is simply a company that happens to be making the world a better place.

Needless to say, I have tremendous optimism for what Bridge is doing. If this experiment succeeds, it will change education for the poor across the world. Aid agencies will continue to pour money into education systems that fail the poorest students, and continue to criticize private education institutions for co-opting the public system that should be providing them. But people are beginning to come around. Acumen Fund just launched its education portfolio, and made its first investment with Lok Capital, an Indian impact investor, in Hippocampus Learning Centers, a for-profit chain of education institutions. The tide is turning, and much of the credit belongs to the founders of Bridge International Academies and the hundreds of people who work in the operations, construction, research, IT, curriculum, and training teams to make the system work.

It was a difficult decision to head back to school when Bridge is on the cusp of something truly great. I will be watching it and cheering it on from the sidelines.

If you have questions, feel free to email me at josh@developeconomies.com.

Should You Pay a Bribe?

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Around the world, money talks. In some places, it speaks in a whisper; in others, it is like your humble correspondent at a party after one too many dark and stoney’s – loud and obnoxious. And in Kenya, many, if not all, businesses, will at some point find themselves deciding whether or makes financial sense to pay a bribe.

Corruption is not a third world vice. There are enough Swiss bank accounts and shell companies in the Cayman Islands to provide evidence for first-world malfeasance. This corruption, while destructive, is difficult to identify, because it is built into the infrastructure of the system. It is a tax code that makes no sense except to people who understand how to take advantage of it. But in some places – Kenya being one of them – corruption is in-your-face. At every turn, you might be asked for a bribe. Police set up roadblocks simply to collect “something small” from drivers. Ministers exact rent from anyone seeking to do business in their districts. From the lowest traffic cop to the highest levels of government, corruption is rife.

For companies, dealing with corruption is a very real part of doing business. The system – particularly within the government – moves slowly, and sometimes not at all. A work visa could take two weeks or two years to process, depending on who you know and, more importantly, who you pay. If you are a vendor trying to buy a storefront, obtaining a construction permit means putting 2,000 Kenyan shillings in an envelope to “expedite the process.” To be sure, greasing the gears of the system leads them to move more quickly.

But doing so exacerbates the problem, providing positive reinforcement to those collecting bribes. And once a company is identified as one that pays bribes, there is no end to the gravy train. Once they have paid a bribe somewhere, companies operating in multiple cities or provinces will have to pay the same tax everywhere. The question then becomes, is it worth paying a bribe to make doing business easier?

Transparency International's Corruption Perceptions Index.

There are some, including Develop Economies, who have made that claim in the past. Why not? After all, civil servants are underpaid. Their superiors extract money from them, and on up the chain. Not to mention, placing restrictions on American companies through the Foreign Corrupt Practices Act (FCPA) only puts the U.S. at a disadvantage when competing against companies from nations with no such regulations.

But that, unfortunately, is not the truth. Corruption is a parasite, feeding on society, preventing it from making forward progress. Businesses that are bled dry from corrupt entities will cease to make investments in growth and expansion, as they are increasingly less rewarded for risks. Roads and bridges that allow commerce are rarely built. When they are eventually constructed, they work is so shoddy that it falls apart during the next heavy rainfall. This, of course, is good for the contractor, who also happens to be the minister who commissioned the road to be built in the first place.

For multinational businesses, paying bribes is part of the expansion process. And with the BRIC countries – three of which (India, China, and Russia) happen to be among the most corrupt in the world – accounting for much of the growth in this post-Western global economy, gaining access to the billions of people in these fledgling economies means paying bribes. Among the guilty are some of the world’s largest corporations.

Wal-Mart, for example, just came under scrutiny for paying over $24 million in bribes to obtain construction permits in Mexico. The stock market responded to the company’s unscrupulous business practices, driving the stock price down 7.5% and causing $17 billion to evaporate into thin air. But Rana Faroohar of Time magazine explains the conundrum:

The scandal tells you that doing business in the world’s fastest-growing markets can be fraught with peril. Emerging markets now account for the bulk of the world’s economic growth, as well as about 30% to 60% of the revenues at many U.S. multinational firms. Indeed, one of the reasons that the stock market has done relatively well throughout the downturn is that it was buoyed by U.S. multinationals earning more and more of their money in these still relatively fast-growing economies. This is particularly true of packaged-goods and retail firms like Walmart.

Many of these markets are rife with corruption–but graft is not necessarily perceived as a serious crime in some places. It’s more a way of doing business. In Mexico, “the bulk of retailers pay bribes,” says one veteran Mexican fund manager for a large U.S. financial institution. Indeed, Mexican firms are the third most likely to have to pay bribes, right after Russian and Chinese ones, according to Transparency International, an anticorruption NGO.

If that is the case, then how can these multi-national firms enter these markets without playing (or not playing, depending on whose side you are on) by the rules? Dealing with governments where corruption is endemic pose a fundamental challenge to doing business in developing countries. But the truth is that buying into that system – stock price aside – will only make it worse. Once a company has established itself as one that is willing to play the game, there is no end. It is difficult, but abstaining and refusing to pay will be better for the business in the long-run.

There are ways around the system. The courts, as corrupt as they may be, can be an avenue for justice. But unfortunately, when time is money, patience can be a financial burden on the business. Still, paying a bribe will be only cause more problems for a business in the future.

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A Trip to Bridge International Academies

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A child in class at the Bridge International Academy in Embu, Kenya

After one year living in Kenya, my time here is fast approaching its end. In a few weeks, I finish work with Bridge International Academies. I am heading to Southeast Asia for a few weeks of rest and relaxation before moving to San Francisco to help my brother launch a start-up for the summer. After that, I am returning to school to pursue an MBA. And so ends my two and a half years on the road. This weekend, as I visited one of our schools, I was reminded about what a rewarding experience this has been.

I have lived in three countries – the Philippines, Ghana, and Kenya – and traveled to many, many more. I have learned an incredible amount and experienced things I never imagined I would experience. Much of it is documented on this blog. But the most rewarding parts have been the work and the people. Being a part of organizations whose missions have been to make things better for others less fortunate has been a privilege. Working with the folks who commit themselves and their time to realize the vision has been rich and rewarding.

This weekend, I had a chance to go see the grand opening of our 65^th school in the town of Embu in the Central region of Kenya. I shared a taxi with a group of seven from the head office – members of the IT, research, government relations, training, and marketing departments were present. Embu is three hours from Nairobi and the scenery was pleasant. Once you leave Thika Road, the Chinese-built superhighway that is emblematic of the surge in investment in Africa from the East, and pass through Ruiru, the landscape becomes more rural and green. The rolling green hills felt more like Rwanda and Uganda, where flat ground is hard to find.

Rainfall – particularly during the rainy season in April – is high and the floodplains are ideal for growing rice. We passed the Del Monte pineapple farm, which made the farms I visited in Ghana look like the herb garden I had on my balcony in Boston. The lime-green rice paddies that followed reminded me of the rural areas on Negros Island in the Philippines, where I used to ride on the back of motorbikes and tricycles to visit borrowers. When we finally reached the school, everyone was excited to stretch their legs and get to work.

Construction on half the school continued as we helped with last minute preparations for the grand opening ceremony. Kids lined up to see the face painters, parents spoke to the teachers to learn more about the school, prospective children sat in class and went through lessons, and the community elders filed in to dedicate the school. It was great to be a part of such an important event.

Me with the newest teachers at Bridge International Academies

My days at work consist of sitting in an office, analyzing data, managing our longitudinal student testing, and generally sitting in front of my two computer screens, looking at Excel spreadsheets and word documents. When that is your job, it is easy to lose sight of what you are doing and why you are doing it. So visiting the school, watching the kids learning and seeing the excitement on the faces of the parents was important for me.

As I wind down my time here in Kenya, I am proud of the work Bridge International Academies is doing and the impact we are having on informal settlements and poor communities. Bridge has the potential to create a minimum standard of education for every child in the world that is much higher than it is today. Hands-down, it is the most innovative company in the education space at the base of the pyramid and has created a model that will be studied and replicated by organizations across the world. I will be sad to leave, but I am optimistic that the company will change the world. Loyal readers know that a cynic like me is hesitant to use that expression for anything. Mine has been an exciting and meaningful experience, and the trip yesterday really drove that point home.

Here are some of the photos of the trip:

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Non-Profit Career Advice: Urban Development

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Photo credit: Digital Slide Theater

This is the first post in an ongoing series offering advice to people interested in learning more about international development work. Mandy Goodgoll, a Masters Candidate in International Affairs at the New School, offers advice on urban development in developing countries and emerging markets.

First of all, let me say that urban development is a great field to get into. It can be analytical, creative, big, small, international, local… essentially, whatever you want it to be. Having said that, I would highly recommend narrowing the search a little. By that I mean, narrowing down to a sub-field you think you might want to try out.
Some examples:

Water (from infrastructure like sewage management, to conservation, to increasing access to potable water for the urban poor… I’m currently writing my thesis on water management)
Forestry (a variety of important issues in forestry like conservation… not something I know too much about)
Low-income housing (could be in an urban environment in a big city in the US, or it could be related to ‘slum upgrading’ in any developing city around the world).
Urban management (working with local governments to make service provision (like water works, or roads) more accessible or managed more sustainably
Urban farming (this is kind of a big deal as of recently, not only in cities like NYC. It’s also being written about in Argentina and Tanzania – reducing the footprint of cities and eating local)
Renewable energy (from solar panels in India to wind farms in Eastern Africa… it’s one of the hottest topics right now, and extremely relevant in the developing world)
Transportation (another really hot topic that mostly centers around public transportation, bike lanes, and other new forms of transportation – death to the car!)

So that’s a very brief rundown of topical areas you may want to delve into. I would recommend thinking about what kind of experience you want. Large and internationally recognized organizations may look great on the resume, but in actuality, you may not have such an exciting experience sitting in the head office of some organization doing research on the internet.

Here, I suggest – go local! There are a lot of opportunities to volunteer for 3-4 months at local NGOs, so that’s why narrowing it down to a sub-field you’re interested in will help in your hunt. Then I would recommend narrowing down on a region. South-East Asia? East Africa? South Africa? Central or South America? There are very unique issues in each of these areas, pertaining to urban issues and urbanization in general.

Latin America is heavily urbanized. Look at Bogota, Carracas, Santiago, Sao Paolo, Rio, Buenos Aires… mega urban cities with big divides between rich and poor – making urban issues very complicated to answer.

In Africa, urban development is much less advanced. You have the cities of South Africa, which present unique problems in respect to the rest of the continent; you have Lagos which is essentially a huge mess of poverty, bad-governance, zero infrastructure, and corruption (don’t go there); and Nairobi, which is this complicated urban metropolis that essentially makes no sense at all, from an urban perspective.

Kibera, the largest slum in Kenya

Then there’s Asia – which I don’t know as much about as my focus and experience has been Latin America/Africa. But in cities like Bangkok, you have crazy issues with water management, alternative forms of transportation, sustainability issues, green-building, and urban poverty overlapping to create a melange of a city that is really exciting.

I would highly recommend looking into NGOs in different places that get you working at the local level. It doesn’t necessarily have to be linked to the urban specifically, because any exposure you get to how the city works (or doesn’t work) from a local level will give you insights on how citizens (or non-citizens) are affected by the decision made in the city. How are people excluded from infrastructure? How do they view their urban environment? How do the flows in a city impact society, economies, the environment? I would recommend this avenue because it can give you more insight into the structure at the bottom, rather than the top – which will inform you in a different way in the future.

On the other hand, you can go dig wells in West Africa, or work with a Sanitation Activist Group in Cape Town… That would give you access to very specific topics, and would also allow you to work at the local level.

Regarding where to find such NGOs… you could look at organizations that have partnered with UNICEF or UN-Habitat in the past. Also, idealist.org has volunteer opportunities. One organization which comes to mind as a good hub of information is the African Center for Cities. It’s run out of the University of Cape Town, and is led by Edgar Pieterse – guru of African urban development in general. I like the work they do, and a lot of it is really on- trend: http://africancentreforcities.net/.

Okay, hope that helps.

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