Develop Economies is On Hold

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

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 Problem of Rural Education in the Philippines

Note: The following post is from March 2, 2010.  I posted it on my original blog, joshweinstein.wordpress.com, and is, for some reason, popular among people doing research on education in the Philippines.  In the hopes of directing some of that traffic toward this site, I am re-posting it here.

In this journal, I have discussed the relationship between education, poverty alleviation, and economic development. The link is critical and the three are self-reinforcing.  Education creates greater opportunities for the youth, who go on to work decent jobs in cities like Bacolod, Manila, and Cebu.  The children remit money back to the parents, who spend on home improvements and the tuition fees for the younger siblings.  College-educated individuals are much less likely to end up impoverished (about 1 in 44).  Trade schools also create opportunities, with only one in 10 people with post-secondary degrees living below the poverty line.  Unfortunately, the ratios drop precipitously after that.  One in three high school graduates and half of elementary school grads are impoverished.  Here are the sobering education statistics:

The long-term outlook for poverty reduction doesn’t look good either, unfortunately. We all know that there is a very strong link between education (or lack of education) and poverty—two-thirds of our poor families have household heads whose highest educational attainment is at most Grade 6. Well, the education statistics (all from the NSCB ) tell a very sad tale: elementary school net participation rates (NPR)—the proportion of the number of enrollees 7-12 years old to population 7-12 years old—have plummeted from 95 percent in school year (SY) 1997-98 to 74 percent in 2005-2006, as have high school NPRs.

Cohort survival rates (CSR) have also dropped: Out of every 100 children who enter Grade 1, only 63 will reach Grade 6, down from 69 children in 1997-1998. In high school, CSR have dropped even more: from 71 to 55. Which means, of course, that school dropout rates have increased. Which is one of the reasons why, in 2005-2006, for the first time in 35 years, total enrollment decreased in both elementary and high school: although private school enrollment increased, public school enrollment went down more.

The correlation is not difficult to see, but fixing the problem presents a challenge for several reasons.  According to some observers, the Department of Education Culture and Sports (DECS) in the Philippines is one of the most corrupt government entities in the country.  It has a budget equal to 12% of spending, but is riddled with graft from procurement (buying textbooks and other supplies), grease money, and bribes for just about any sort of movement within the bureaucracy.  The impact on the education system is detrimental:

Embezzlement, nepotism, influence peddling, fraud and other types of corruption also flourish. Corruption has become so institutionalized that payoffs have become the lubricant that makes the education bureaucracy run smoothly. The result: an entire generation of Filipino students robbed of their right to a good education.

This corruption leads to poor allocation of resources.  Teachers are underpaid and treated poorly.  In 2005, the Philippine government spent just $138 per student, compared to $852 in Thailand, another developing country in Southeast Asia.  But graft and corruption are not the only issues.  Poverty is a vicious cycle that leads traps generations of families.

About 80% of the Filipino poor live in the rural areas of the country.  These are towns located deep in the mountains and the rice fields.  The population density in the rural parts of the country is low, and there is a corresponding deficiency in schools and classrooms.  Public school is free, but families still cannot afford to send their children for a complicated network of reasons.  In this editorial for the Pinoy Press, one author delineates the key issue:

With around 65 million Filipinos or about 80 percent of the population trying to survive on P96 ($2) or less per day, how can a family afford the school uniforms, the transportation to and from school, the expenses for school supplies and projects, the miscellaneous expenses, and the food for the studying sibling? More than this, with the worsening unemployment problem and poverty situation, each member of the family is being expected to contribute to the family income. Most, if not all, out-of-school children are on the streets begging, selling cigarettes, candies, garlands, and assorted foodstuffs or things, or doing odd jobs.

Beyond the selling goods on the street, children in farming families are expected to work in the fields during harvest time.  In agriculture-based communities where farming is the primary livelihood, having children around to help with the work means more income for the family.  In a recent trip to Valladolid, someone told me that children are paid 15 pesos for a day’s work in the blistering heat.  They are pulled from school for two or three months at a time and are irreparably disadvantaged compared with their classmates.  So, they may have to repeat the grade, only to be pulled out of school again next year.

Transportation is another big problem.  Kids walk 2-3 kilometers or more to and from school every day.  They have to cross rivers and climb hills with their bookbags.  The ones that can afford it take a tricycle, but that is a luxury.  Schools are sometimes too far for the most remote communities to practically access.  So the families can’t afford to pay and the children are pulled from school.

It seems like an intractable problem.  Corruption in the education bureaucracy and a lack of resources make delivering a high-quality education to all Filipinos a challenge.  Microfinance is one way to help.  With the assistance of microcredit loans, women can pay for the education of their children – to purchase uniforms, textbooks, lunches, and rides to school.  Also, by creating another source of income other than farming, the children do not have to come help the family work the fields.  When I talk to NWTF clients about their dreams, they unfailingly say they hope for their children to “finish their studies.” History has shown that it is an achievable goal.  But real systemic change needs to come from above.  As long as corruption and bureaucracy paralyzes the system, the goal of delivering a decent education to children – which pays dividends to the country in the long run – will remain out of reach.

For the rural poor, non-profits exist to help in the mission of education.  While looking up pictures for this post, I came across a Filipino organization called the Gamot Cogon (“Grass Roots”) Institute:

The Gamot Cogon Institute (a non-stock, non-profit organization) is an Iloilo-based cultural institution working to transform society through human development approaches including education and training. GCI also prototypes or demonstrates alternative approaches to education, agriculture, health, and full human development.

Very cool stuff.


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What “Why You Should Travel Young” Misses

Kiserian, Kenya

In an article titled “Why You Should Travel Young,” Jeff Goins makes the case for seeing the world while you are unencumbered by the responsibilities of adulthood.  Career, marriage, children – these all stand as barriers to experiencing the wide world.  For the most part, I agree with a lot of the things he says about the merits of travel.  But I think he misses the larger meaning and importance of the experience.

Goins begins by offering advice to some poor soul who is deciding between returning to graduate school and “moving to Africa.”  Without hesitation, he tells the girl to blow off school and hit the road, for the personal growth she will achieve under the tutelage of experience beats the knowledge she will gain in school.  Why?  Because the excuses we make “allow us to be cowards while sounding noble.”  Perhaps this person had substantial student loans or an obligation to provide for her family.  Either way, it’s a bit harsh I think.

But I do think Goins’ final point – that travelling widens our perspective and generates empathy for things we might not have understood had we not sought them out – is valid.  He sums up his thesis in the last few paragraphs:

Traveling will change you like little else can. It will put you in places that will force you to care for issues that are bigger than you. You will begin to understand that the world is both very large and very small. You will have a newfound respect for pain and suffering, having seen that two-thirds of humanity struggle to simply get a meal each day.

While you’re still young, get cultured. Get to know the world and the magnificent people that fill it. The world is a stunning place, full of outstanding works of art. See it.

You won’t always be young. And life won’t always be just about you. So travel, young person. Experience the world for all it’s worth. Become a person of culture, adventure, and compassion. While you still can.

These are all fair points, most of which I agree with.  Like a picture worth a thousand words, seeing the conditions most of the world endures and the daily struggles of the poorest of the poor give you an appreciation for things you didn’t even know you were lucky to have.  I don’t fully agree with the idea that you need to see works of art in person to become cultured.  But I would say that being exposed to different music, clothing, dance, and food also gives you an appreciation for the breadth of tastes in the world, and a better understanding of how tradition and history influence culture and vice versa.   And, lastly, I think the spirit of adventure is inherent to some degree in travelers.  But the number of stamps in your passport is hardly an indication of your adventurousness.  And it is in this last point that I think Goins misses the virtues of travel.

Goma, Democratic Republic of Congo

A couple of years ago, the American Psychological Association published a study explaining that people who had lived abroad tended to be more creative than people who stayed at home.  Using a cognitive performance test called Duncker’s Candle Problem, researches demonstrated that current and former ex-pats thought about problems differently than their counterparts.  There is the obvious problem of causality – does going abroad make you more creative, or do more creative people go abroad?  Either way, the correlation is real.

But there is a caveat.  To gain the benefits of travel, you have to not only live in a new place, but also immerse yourself in the culture.  The Daily Telegraph explains:

According to the study, creativity levels were unlikely to be high in people who had travelled abroad for a short period of time, or who had not attempted to adapt to the culture they were living in. But creativity was far more prominent in people who had made efforts to learn the language of their new home.

“Interestingly, high levels in creativity only seemed to show in people who had lived abroad, and not in those who had a superficial exposure to foreign countries through travel, “said Professor Maddux.

“In order to widen their creative abilities, it seems that people have to really try and fit into a different environment, and learn how to do things in a totally different way.”

In other words, only by pushing yourself outside your comfort zone can you really expand your cognitive abilities.  Goins is right that you can develop a strong sense of empathy and compassion from only a short stint in a place.  But to establish habits that will outlast your time in the wild, you have to fully commit.  Taking a walk in the streets of Paris or seeing the Great Wall of China will not cut it.

Wedding in Kumasi, Ghana

Seeing the world and going to cool places is great.  But, like Lao Tzu said, the journey is the reward.  Living in France or China or Ghana does not inherently make you more creative, or adventurous, or compassionate, or cultured.  The process of adapting to a new environment and opening yourself to new experiences is the real reward of immersing yourself in a new country.  Adaptability and openness are the root of the attributes the author of “Why You Should Travel Young” values.  One follows the other, but not always.

And this, I think, is the larger lesson I gained from my life on the road.   I have a vivid memory of sitting at a chop bar in Tamale, the capital city of Northern Ghana, with a few friends who worked with Engineers Without Borders Canada, an innovative development organization.  They were talking about how much the pigs in the villages they lived liked eating shit.  One guy told a story about getting typhoid and having to get up every 10 minutes in the middle of night to relieve himself outside his hut in the pouring rain.  Each time he returned to the spot, it was freshly cleaned, having been visited by the local pigs.  Clearly, these kids were having a much different experience than mine.  Here we were, living in the same small part of the same small country in the same small region of the world.  And yet our experiences were completely different – the result of their willingness to go all in and immerse themselves in a life altogether unfamiliar and uncomfortable in the hope that, by living it, they would understand the life.

This brings me to my biggest problem with Goins’ article on travel.  If the way to become compassionate, cultured, and adventurous is to become open and adaptable, then you don’t have to fly across the world to reap the rewards of travel.  I would say that you can gain a lot of those same benefits just by moving to a new city, changing your routine, and making a concerted effort to consistently live outside your comfort zone.  In doing so, you will open yourself up to new experiences, your perspective will change, and you will begin to see the world differently.  And this, to me, is the best part of travel.

Summit of Mt. Nyiragongo, Goma, Democratic Republic of Congo

The Nile River, Jinja, Uganda

Koh Phangan, Thailand

Lome, Togo

Seoul, South Korea

Seoul, South Korea

Boracay, Philippines

Rangoon, Burma

Sydney, Australia

Mt. Nyragongo, Goma, Democratic Republic of Congo

Bantayan Island, The Philippines

Stonetown, Zanzibar, Tanzania

Lake Wanaka, New Zealand

Jerusalem, Israel

Ephesus, Turkey

Barcelona, Spain

Saigon, Vietnam

Kumasi, Ghana

Buenos Aires, Argentina

London, England

Kep, Cambodia


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The Promise of Social Impact Bonds

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 Intangible Wealth of Nations

Lady Justice: 57% of a country’s intangible wealth

A few months ago, the White House released its “New Strategy Toward Sub-Saharan Africa,” which contains four key bullets summarizing its approach.  The first, and most important, goal is one that has been a pillar of American foreign policy for decades: “Strengthening democratic institutions.”  The State Department has tried to use a variety of carrots and sticks to make this a reality, including providing incentives for implementing democratic reforms in the form of of financial and in-kind aid.  In the most recent Economist, one of the lead articles calls for Western nations (specifically, the United States and Great Britain) to withhold aid from Rwanda, in protest of the Kagame government’s alleged human rights abuses in his own country and in the neighboring Democratic Republic of the Congo.

But, in this post, I’m less interested in discussing how to achieve democratic reforms than explaining why they are important.  With China’s model of “state-run capitalism” running circles around paralyzed developing-world democracies like India – a country whose legislative gridlock and inept bureaucracy produced a two-day blackout – and a largely-autocratic government in Rwanda producing remarkable reforms (I saw them firsthand in the beautifully-run capital of Kigali), some people have challenged the notion that democracy is the answer.  But, if democracy is executed well, as it is in Ghana, the rewards are increased wealth, though not in the form you might expect.

There is a concept called “intangible wealth,” which refers to the wealth created by functioning institutions.  And, according to a study by the World Bank, intangible wealth accounts for a huge part of a country’s overall wealth.  In an article titled “The Secrets of Intangible Wealth,” Reason magazine explains the concept in greater detail:

Two years ago the World Bank’s environmental economics department set out to assess the relative contributions of various kinds of capital to economic development. Its study, “Where is the Wealth of Nations?: Measuring Capital for the 21st Century,” began by defining natural capital as the sum of nonrenewable resources (including oil, natural gas, coal and mineral resources), cropland, pasture land, forested areas and protected areas. Produced, or built, capital is what many of us think of when we think of capital: the sum of machinery, equipment, and structures (including infrastructure) and urban land.

But once the value of all these are added up, the economists found something big was still missing: the vast majority of world’s wealth! If one simply adds up the current value of a country’s natural resources and produced, or built, capital, there’s no way that can account for that country’s level of income.

The rest is the result of “intangible” factors—such as the trust among people in a society, an efficient judicial system, clear property rights and effective government. All this intangible capital also boosts the productivity of labor and results in higher total wealth. In fact, the World Bank finds, “Human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries.”

Once one takes into account all of the world’s natural resources and produced capital, 80% of the wealth of rich countries and 60% of the wealth of poor countries is of this intangible type. The bottom line: “Rich countries are largely rich because of the skills of their populations and the quality of the institutions supporting economic activity.”

Intangible wealth helps explain why some countries are rich and others are poor.  At some level, natural resources, climate, strategic geography, and proximity to water and coastline are important.  But it is not hard to see why well-designed and functioning institutions are critical to growth.  Let’s dissect the components.

According to the report, the rule of law accounts for 57% of a country’s intangible wealth – by far the largest percentage.  So how does the rule of law facilitate economic growth?  One big reason is the enforcement of contracts.  Businesses and individuals need to have confidence that, when they enter into an agreement, the terms of the agreement will be respected by the other party.  Contracts enable investment, which provides capital to allow business to expand.  In the United States, the legal resources for lenders and negative repercussions for borrowers have led to a financial system that offers the cheapest credit in the world (perhaps too cheap).  In contrast, in Africa, interest rates on a business loan might be 10-20% or more, since the legal channel for dealing with default is obscure or corrupt or non-existent.  As a result, investment capital is difficult to source and businesses find it more difficult to grow.

Container volume by port

Another example is corruption.  In Kenya, the port in Mombasa, a coastal city, competes with Dar es Salaam, the capital of Tanzania, for ocean cargo throughout East Africa.  Both ports operate at a fraction of their capacity because of the corruption that has prevented their modernization and the streamlining of the process.  Here are a few illuminating statistics:

  • It takes 19 days to move a container from Singapore to Kenya, and another 20 days to move it by road from Mombasa to Nairobi.   It takes 71 days to get a container from Burundi to anywhere in East Africa.
  • The cost of shipping in East Africa is 70% higher than in the United States and Europe.
  • The port in Singapore processes more cargo in one week than the Mombasa port does in a year.

If the government of Kenya invested money in modernizing the port, rather than embezzling the money intended for improvements, and ran the port at the same level of efficiency as Dubai, Singapore, or Hong Kong, it would add several points to the country’s GDP.  Better yet, if it privatized the port, which is what most shippers would prefer, and enforce anti-corruption laws, the amount of wealth generated would be massive.

The second largest component is education, which accounts for 37% of intangible wealth.  It is not difficult to see why investment in human capital pays dividends for an economy in the long-run.  Providing a strong primary and secondary education to all students, and establishing a robust post-secondary education system prepares people to compete in an increasingly global marketplace.  This, in turn, generates greater income and accrues more wealth for a country.

The American Enterprise Institute – a thinktank that I don’t typically agree with – provides a list of some other reforms that facilitate the generation of intangible wealth and alleviate poverty:

  1. Establish and maintain the rule of law.
  2. Focus the jurisdiction of government primarily on maintaining the rule of law, and limit its jurisdiction over the economy and the institutions of civil society.
  3. Implement a formal property system with consistent and accessible means for securing a clear title to property one owns.
  4. Encourage economic freedom.
  5. Encourage stable families and other important private institutions which mediate between the individual and the state.

I do not think that democracy has a monopoly on producing a strong legal system and a good education system.  I do, however, think that the United States has one of, if not the best, legal systems in the world, and a good education system, despite the glaring inequities I discussed the other day.  Despite its shortcomings, of which there are many, the American democratic system has produced an immense amount of intangible wealth for the country.  It is a good model for other countries to emulate.  And, if executed well, the potential dividends are huge.


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Why Poverty Persists in America, pt. 2

The other day, I talked about the first of the four reasons why we cannot end poverty in the United States.  Now I will talk about the other three.

Single parenthood is another challenge.  According to Edelman, poverty rates among families led by single mothers is an astonishing 40%.  I don’t know enough about the problem to propose any solutions.  In the past, I have discussed how the the problem is systemic and self-reinforcing.  But, from a policy perspective, I am not sure there is much that can be done.  And race and gender are also big problem.  There are certainly policy prescriptions here, but the issue is so systemic that I won’t even try to address them in this post.

The last reason – the reduction of the safety net and elimination of certain assistance programs – is really troubling however.  Edelman explains the implications:

The census tells us that 20.5 million people earn incomes below half the poverty line, less than about $9,500 for a family of three — up eight million from 2000.

Why? A substantial reason is the near demise of welfare — now called Temporary Assistance for Needy Families, or TANF. In the mid-90s more than two-thirds of children in poor families received welfare. But that number has dwindled over the past decade and a half to roughly 27 percent.

One result: six million people have no income other than food stamps. Food stamps provide an income at a third of the poverty line, close to $6,300 for a family of three. It’s hard to understand how they survive.

At least we have food stamps. They have been a powerful antirecession tool in the past five years, with the number of recipients rising to 46 million today from 26.3 million in 2007. By contrast, welfare has done little to counter the impact of the recession; although the number of people receiving cash assistance rose from 3.9 million to 4.5 million since 2007, many states actually reduced the size of their rolls and lowered benefits to those in greatest need.

During a recession, expanding the food stamp program and other TANF programs provide the greatest ROI in terms of stimulating demand.  Unlike the stimulus checks of 2008, which most people used to pay down debt and squirrel away in a savings account, food stamps and other credits are spent immediately.  Aside from the fact that we, as a country, have an obligation to make sure that people can eat, these programs make sense from an economic recovery standpoint.

The chart on the right shows spending on low-income programs, with and without Medicare and Social Security, as a percentage of real GDP over time.  In the War on Poverty during the LBJ administration, federal spending increased significantly before leveling off until the recession in 2008.  It has increased since Obama took office, primarily in response to the downturn, which increased the rolls of people in need.  Despite this mini-surge in spending, there a danger that it could be reversed.

Edelman ends the article with a stark warning that the status quo, as inadequate as it is, may not last.  There are long-term ways of dealing with the growing income and wealth gaps – simplifying the tax code, allowing the Bush tax cuts to expire, increasing the capital gains tax, regulating financial institutions, and investing in education and infrastructure, to name a few.  But an easy short-term solution is to, at the very least, maintain the current TANF programs, if not expand them to include the growing numbers of people living at or below the poverty line in this country.

Poverty in this country is a challenge.  But we can deal with the problem by reforming our education system and maintaining and potentially expanding the social safety net.


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Why Poverty Persists in America, pt. 1

There are four reasons, says Peter Edelman, author of “So Rich, So Poor: Why It’s So Hard to End Poverty in America”:

With all of that, why have we not achieved more? Four reasons: An astonishing number of people work at low-wage jobs. Plus, many more households are headed now by a single parent, making it difficult for them to earn a living income from the jobs that are typically available. The near disappearance of cash assistance for low-income mothers and children — i.e., welfare — in much of the country plays a contributing role, too. And persistent issues of race and gender mean higher poverty among minorities and families headed by single mothers.

In the wake of the recession, with so many people currently unemployed, the poverty level in the U.S. continues to grow.  And, while Edelman’s diagnosis is right, the fixes for at least some of the problems seem more difficult.  The number of low-wage jobs in America reflects the spread of globalization and the movement of jobs overseas.  This process has been ongoing for several decades, as manufacturing steadily moved abroad and, increasingly service industries, like call centers and business process outsourcing, followed suit.  Ironically, America’s loss became the developing world’s gain, as hundreds of millions of people climbed above the poverty line in places like China, India, Brazil, and the Philippines.  On a global scale, the trend toward low-wage jobs in the United States may actually reflect a global poverty reduction trend.

Still, working a low-wage job in the U.S. is no doubt difficult.  More than 100 million people – nearly a third of the population – live below twice the poverty line ($38,000 for a family of three).  Edelman says that this trend has been ongoing since the 80’s, but we only opened our eyes after the recession.  This is true, but doesn’t tell the whole story.  Amidst one of the longest, deepest recessions since the Great Depression, corporate profits have broken records for the last three years.  As companies retrenched and laid off their employees to cope with a crash in demand, they became more nimble and cost-conscious.  As the economy recovered, instead of hiring back old employees, they outsourced jobs overseas or automated wherever possible, lowering their operating costs and increasing profits.  In the long-run, the U.S. economy will be stronger and more globally-competitive as a result.  But, in the short-term, the number of people living below the poverty line in the US will surely increase.

Those jobs are not coming back.  Edelman suggests investing more heavily in education and skill development, and I agree.  Because the funding source is local, our current public education system is failing to educate huge swathes of the population in a vicious cycle that creates a poverty trap.  Setting aside the fact that discriminating on the basis of zip code is morally wrong, as I have discussed on this blog, it will only exacerbate our competitiveness problem.

On the Program for International Student Assessment (PISA) test, a global test given to 470,000 students in 2010, the U.S. ranked 14th in reading, 17th in science, and 25th in math.  But these numbers do not tell the entire story.  When the results are segmented by the percentage of students participating in the subsidized lunch program, which is the most accurate gauge of poverty levels in schools, the level of stratification is striking.  In schools where less than 10% of students apply for subsidized lunch, the U.S. has the highest PISA scores of any OECD nation.  In schools with more than 50% participation, the U.S. sits between Austria and Luxembourg.  Mel Riddle, the head of the National Association of Secondary School Principals, explains the other side of that coin:

The problem is not as much with our educational system as it is with our high poverty rates. The real crisis is the level of poverty in too many of our schools and the relationship between poverty and student achievement. Our lowest achieving schools are the most under-resourced schools with the highest number of disadvantaged students. We cannot treat these schools in the same way that we would schools in more advantaged neighborhoods or we will continue to get the same results. The PISA results point out that the U.S. is not alone in facing the challenge of raising the performance of disadvantaged students.

This is a travesty for a number of reasons.  Not only are we denying huge numbers of children a decent education, we are also diminishing our own competitiveness as a nation in the future.

In the next post, I will talk about the other three reasons.


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The Idea of Travel as a Search

At the summit of Mt. Nyiragongo, a volcano outside Goma in the Democratic Republic of Congo

That is what Ilan Stavans and Joshua Ellison posit in the their essay, “Reclaiming Travel,” featured on the New York Times philosophy blog, The Stone. The literary professor from Amherst and editor of a literary journal lament the packaging of travel and its reduction to a commodity, rather than a unique experience marked by uncertainty.  A cruise ship, like a guided tour through a historical site or an all-inclusive stay at a resort, is a known entity where the only action required is putting down a credit card and showing up.  Not having to seek out an experience makes people complacent and prevents them from actually understanding the place they are visiting.

On top of Treble Cone in Lake Wanaka, New Zealand

The result, according to the authors, is a dramatic shrinking of the world, where accessibility leads us to think we understand people and places, when, in reality, we are just consuming specific perceptions of the world.  In their conclusion, Stavan and Ellison explain what they feel are the implications of this effect:

This lack of awareness is even more pronounced when it comes to different cultures. The media bombards us with images from far-away places, making distant people seem less foreign, more relatable to us, less threatening. It’s a mirage, obviously. The kind of travel to which we aspire should tolerate uncertainty and discomfort. It isn’t about pain or excessive strain — travel doesn’t need to be an extreme sport — but we need to permit ourselves to be clumsy, inexpert and even a bit lonely. We might never understand travel as our ancestors did: our world is too open, relativistic, secular, demystified. But we will need to reclaim some notion of the heroic: a quest for communion and, ultimately, self-knowledge.

Our wandering is meant to lead back toward ourselves. This is the paradox: we set out on adventures to gain deeper access to ourselves; we travel to transcend our own limitations. Travel should be an art through which our restlessness finds expression. We must bring back the idea of travel as a search.

For the most part, I agree with the authors in their distaste for pre-packaged travel experiences, but I also recognize that this isn’t for everyone.  Most people travel to get away from the daily grind and relax, see the sights, and enjoy themselves.  Most people don’t want to deal with the struggle that is really only enjoyable in retrospect and causes unnecessary stress, which the very types of travel experiences the authors dislike prevents from happening.  So, while I enjoy the discomforts of travel as much as the next person, I understand why people would not want the same experience in the three weeks of vacation they get every year.

At a soup restaurant in Chiang Mai in Northern Thailand

The authors get this point, and address it in the article:

Travel is a search for meaning, not only in our own lives, but also in the lives of others. The humility required for genuine travel is exactly what is missing from its opposite extreme, tourism.

Modern tourism does not promise transformation but rather the possibility of leaving home and coming back without any significant change or challenge. Tourists may enjoy the visit only because it is short. The memory of it, the retelling, will always be better. Whereas travel is about the unexpected, about giving oneself over to disorientation, tourism is safe, controlled and predetermined. We take a vacation, not so much to discover a new landscape, but to find respite from our current one, an antidote to routine.

Riding back from Ngong Hills in Kiserian outside Nairobi, Kenya

They are right about why most people travel, but wrong in their judgment of the merits of modern tourism.  The kind of travel experiences the authors advocate are difficult to condense into a week or two.  It is possible in places where the comforts and conveniences of modern travel don’t exist, but, in more trafficked places, it requires a lot of effort to remove yourself from the grid and connect with the people in the places you are visiting, particularly when you don’t already know people who live there.  It has been much easier for me to have more authentic experiences, since I usually have friends or friends of friends who can show me around.  I am lucky in that respect.

I like the idea of travel as a journey.  But sometimes people just want to relax take it easy.  And who can blame them?


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The Top Three Social Enterprises in the World

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.

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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