Category Archives: Development Economics

Corruption in a Trump Presidency


The president of the United States

In December 2009, I moved to Philippines just before the presidential election.  Like most of the former leaders of the Philippines, the outgoing president, Gloria Macapagal Arroyo, was exiting under a cloud of scandal.  The candidates pledged to end the corruption that plagued the country, promising to jail Arroyo and clean up the government.   

The leading candidate was a man named Manny Villar.  I remember him for two reasons.  First, he had possibly the smarmiest campaign ad I’d ever seen.  But more importantly, he was a billionaire politician – the only Filipino on the Forbes list – running on a promise to end poverty and corruption.  During the campaign, the Senate investigated Villar for using his position as Senate president and head of the finance committee to authorize the building of an extension to the C5 highway around Manila that would pass directly through properties he owned, making them far more valuable in the process.  To go through Villar’s land, the Filipino government would need to pay him for “right-of-way” compensation. The government had already paid right-of-way compensation to different landowners when Villar modified the plans for the road, inserting a provision to pay himself much more than others received.  Not content simply wasting millions in taxpayer money on a massive infrastructure plan to increase his own property values, Villar insisted on extracting payments from the government for the inconvenience to himself.  

The C5 road extension.  The orange houses are Manny Villar's properties.

The C5 road extension.

Once the favorite in the polls and considered a sure winner by the press, Villar couldn’t recover from the scandal.  He finished third, and Benigno “Noynoy” Aquino III, the son of Benigno Aquino Jr., a politician assassinated on tarmac upon returning to the Philippines from exile, and Cory Aquino, who became the first president after her husband’s death catalyzed the People Power Revolution, the largest non-violent revolution in modern history, became the president.  As a candidate, Noynoy was uninspiring.  But with a family name synonymous with the modern chapter of the country, he might be less susceptible to rampant corruption that ensnared his predecessors. He went on to become president for the next six years.  

The story of Manny Villar always stuck with me.  The corruption was so brazen, it was almost as if he hadn’t bothered covering his tracks because he was so confident he’d get away with it.  And despite it all, he came very close to becoming the president of the Philippines.  

Maybe more importantly, the story taught me why corruption is such a destructive force in a country.  It erodes the trust people have in their government, reinforcing their belief that politicians only care about enriching themselves.  It undermines trust in institutions, calling into question every decision made by those in charge.  When people become convinced that their taxes will be misspent, if not stolen outright, they become less willing to pay.  World Bank economist Augusto Lopez-Carlos explains this dynamic:

There is a delicate tension between the government in its role as tax collector and the business community and individuals as tax payers. The system works reasonably well when those who pay taxes feel that there is a good chance that they will see a future payoff, such as improvements in the country’s infrastructure, better schools and a better-trained and healthier workforce. Corruption sabotages this implicit contract. When corruption is allowed to flourish taxpayers will feel justified in finding creative ways to avoid paying taxes or, worse, become bribers themselves.

Lopez goes on to explain the other reasons why corruption is a “destroyer of human prosperity”, including inefficiency, misallocation of resources, and inequality. Corruption makes capital investment projects like the C5 Highway prime targets for exploitation, allowing politicians to extract rents – whether campaign donations, jobs after leaving office, or outright bribes – from businesses vying for contracts.  And in each country I lived – the Philippines, Ghana, and Kenya – I saw the destructive power of systemic corruption.


I hadn’t thought about Manny Villar until this week, when Donald Trump said of his business interests, “The law’s totally on my side, the president can’t have a conflict of interest.” Michael Shear of the Times asked Trump, “what do you see as the appropriate structure for keeping those two things separate, and are there any lines that you think you won’t want to cross once you’re in the White House?” Trump gave a meandering answer, but the point is clear – he doesn’t intend to separate from his business in a way that would eliminate the conflicts of interest (if that was even possible).  In 2010, I couldn’t believe a man whose real estate interests were so entwined with his role in government could come in third in the Philippines.  With Trump, it’s as if Manny Villar won the presidency of the United States.

Before unpacking why this is so troubling, let me give a quick rundown of Trump’s conflicts of interest (for a comprehensive overview, check out this article from the Atlantic).  

When individuals actively running companies are elected to office, they put their business holdings into a “blind trust”, which is managed by a trustee with whom they have no contact.  This isn’t a true Chinese wall, since presumably they know what is best for their business and can still enact policies favorable to their business.  But at least it is an attempt to separate them.  Trump, on the other hand, plans to hand over management of his business to his children.  Unless they spend next Thanksgiving talking about something other than business or politics – is there anything else? – it is hard to believe that one won’t influence the other.  Even if he does turn the business over to his children, all three of them are on his transition team, and his son-in-law, Jared Kushner, is considered to be his most trusted advisor.  Anyone who claims that arrangement constitutes legitimate separation of interests is either lying or delusional.

Then there is his new DC Trump hotel.  According to the Washington Post, the General Services Administration (GSA) provided a 60-year lease to Trump the Post Office Pavilion for $180 million a year.  As president, Trump will nominate the head of the GSA, whose employees will then re-negotiate the terms of the lease with Trump’s children, who will be in charge of the company.  On top of that, any foreign diplomat visiting Washington will be staying in that hotel, because they’d be crazy not to.  

The opening of Trump International Hotel in DC

The opening of Trump International Hotel in DC

Trump has property holdings in foreign countries.  He has an office building in Buenos Aires, and Trump asked the Argentinian prime minister – in his first official state call – to deal with permit issues that were holding up construction.  He has properties in Saudi Arabia, a key frenemy in the Middle East, a golf course in Scotland, where he’s asked Nigel Farage to oppose wind farms that would obscure the view from the fairway, and an apartment complex in Mumbai, whose co-investors visited Trump during his transition.  Unlike domestic policy, where congress passes legislation that becomes law, foreign policy is mainly the purview of the executive branch.  Donald Trump is the commander-in-chief and head diplomat of the United States.  And regardless of who is running his company, he knows where it operates.

Trump with his Indian business partners

Trump with his Indian business partners

And finally, the Philippines.  In April 2016, Rodrigo Duterte, a violent strongman, became the president of the Philippines, succeeding Noynoy Aquino and portending the election of Trump six months later.  Duterte, who called President Obama a “son of a whore”, elected Trump’s business partner in Manila, Jose E.B. Antonio, as the official trade envoy to the United States.  

That is the abridged version of his massive conflicts of interest in the U.S. and around the world.  Already, supporters are offering explanations of why it won’t be a problem.  Reince Preibus, his chief-of-staff, seems to be laying the groundwork for a “we’ll abide by the law” justification, knowing that, as Trump himself said, the law doesn’t explicitly prevent the president from holding these conflicts of interest.  Holman Jenkins, a columnist for the Wall Street Journal, offers a less convincing explanation in his column, “Living with Donald Trump’s Conflicts”:

To imagine that Donald Trump, in order to eliminate conflicts of interest, would or could cash out his stake in his business empire is entirely unrealistic. This, we ought to admit to ourselves, was simply part of the bargain when voters elected Mr. Trump, in full view of his business interests. If the criterion now for supporting President Trump or accepting the legitimacy of his actions is to require of him a basically impossible task of de-conflicting himself from the Trump family business, that would have been a criterion to stipulate before Election Day, not after.

This explanation is a little ridiculous.  I don’t put too much stock in what a hack like Jenkins has to say (just read his column from two months prior about how Trump might clean up corruption), but his take is useful in understanding how Trump’s defenders distort the truth to justify his inherent corruption.  First of all, Trump made this entire election a referendum on corruption.  He promised to “drain the swamp” and claimed that Hillary Clinton was the most corrupt candidate in history.  Here is a statement from October 6th – one month before the election – on Trump’s website:

The more that comes out, the clearer it is that the Clinton State Department was for all intents and purposes an arm of the Clinton Foundation. The fact that Hillary Clinton was handing out government contracts to family friends, siding with Clinton Foundation donors over human rights activists in Burma and having her aides coordinate activity between the State Department and her foundation is deeply troubling. A Clinton White House would be more of the same but worse: the highest office in the land would be brimming with corruption and compromised by undue foreign influence.

Compromised by undue influence?  It has been exactly two weeks since Trump has been elected president and he has already tried to exert his influence to his own benefit in five countries (that we know of).  So, I don’t buy the idea that somehow the voters knew that they were electing a president who would have inherent conflicts of interest.  I think a more plausible explanation is that Trump simply lied.

The larger point is not about whether Donald Trump will become richer as president.  He will.  Every politician does – it is how the system works.  But generally, they wait until they are out of office to cash in.

So what happens now?  For an example of how Trump’s foreign policy might play out, you could look at the example of the Dulles brothers and the United Fruit Company, which bribed officials and exploited Latin American workers in the fifties.  In his book, “The Fish that Ate the Whale”, Rich Cohen explains the network of influence:

John Foster Dulles, who represented United Fruit while he was a law partner at Sullivan & Cromwell – he negotiated that crucial United Fruit deal with Guatemalan officials in the 1930s – was Secretary of State under Eisenhower; his brother Allen, who did legal work for the company and sat on its board of directors, was head of the CIA under Eisenhower; Henry Cabot Lodge, who was America’s ambassador to the UN, was a large owner of United Fruit stock; Ed Whitman, the United Fruit PR man, was married to Ann Whitman, Dwight Eisenhower’s personal secretary. You could not see these connections until you could – and then you could not stop seeing them.

United Fruit Company – known today as Chiquita – became a monopoly in several Central American countries, known today as “Banana Republics”.  The lasting impact on the economies of Honduras and Guatamala is profoundly negative.



But, more importantly, what happens to our perception of our own government?  Trump ran on a promise to end corruption.  As a candidate, he would drain the swamp from the Washington beltway and work on behalf of the forgotten masses.  As a president, it is looking increasingly like he’ll be presiding over the type of kleptocracy more often seen in the developing world.  If he does, he’ll continue undermine the democratic institutions he has already called into question through his speeches and rallies.  And he has convinced a large swath of the country that the one institution that can shine a light on his corrupt dealings – the press – is itself corrupt.

How will Americans look at our institutions in four years?  Maybe they will be fed up with Trump’s self-dealings and elect someone else.  More likely, we’ll live in country with a weaker press – due to media economics, restrictions placed by President Trump, etc. – and one in which what we now call “corruption” is simply the way things are done.  

The people of the Philippines had the good sense to not reward Manny Villar’s corruption with the presidency.  In the U.S., people are asking to give Donald Trump a chance.  But we’ve seen this film before.  And the ending isn’t good.

Racism in America


I. Introduction

In August of 2014, a police officer shot dead Michael Brown, a black teenager from Ferguson, Missouri, blowing the lid off a debate about racism in America. Protesters filled the streets, yelling “Hands up, don’t shoot.” The hashtag “#blacklivesmatter” began trending on Twitter. A few weeks before, bystanders filmed a police officer in Staten Island choking to death Eric Garner, an African-American man who’d been arrested for selling untaxed cigarettes. When the grand jury chose not to bring charges against the officers responsible for the deaths of Brown and Garner, many Americans sadly shook their heads.

This isn’t the first time the deaths of young black men have sparked a national conversation about race. In 2012, George Zimmerman shot and killed Trayvon Martin, an unarmed black teenager in Florida. On New Years Day in 2009, a police officer shot Oscar Grant, a 23 year-old black man, point blank while on top of him at Fruitvale Station in Oakland, California (a film was later made about his death). But unlike in those incidents, the conversation stemming from Ferguson has continued long past the shooting, in part due to a string of stories of overt racism around the country. In March of 2015, a video surfaced showing members of SAE, a fraternity at the University of Oklahoma, singing a racist song on a bus. The fraternity chapter was disbanded, the students expelled, and the national conversation about race and privilege continued.

These incidents are not unique, but are considered emblematic of a broader societal problem with racism in America. Police unfairly target people of color, filling prisons with blacks and hispanics and criminalizing generations of young people. In Ferguson and the communities around St. Louis, municipalities effectively run debtors prisons, jailing people for minor infractions like an expired tag or broken tail light. In 2013, Ferguson alone issued 32,975 arrest warrants for its 21,135 people, overwhelmingly to African-Americans. Clearly, there is a problem.

Unfortunately, these incidents, and even the unjust policies they exposed, are symptoms of the much larger, more nefarious disease of institutional racism. Unlike the overt racism on display in the shooting of Michael Brown or the chants of drunk fraternity members in Oklahoma, institutional racism is not easily seen, measured, or even defined. It has no beginning or end, having permeated every aspect of our society, and its effects are felt all around us. Michael Brown’s death, like Trayvon Martin’s death and Eric Garner’s death, was the output of a system so deeply corrupted by institutional racism that outcomes like these are not only unsurprising, but expected.

In this essay, I will explain the concept of institutional racism, (try to) break down the components of the complex systems that govern society, and explain how institutional racism within those component parts creates a self-reinforcing, unjust system where ethnic minorities are discriminated against not only by individuals within the system, but by the system itself.

II. Unpacking Institutional Racism

It makes sense to start with a definition of institutional racism. From Wikipedia:

Institutional racism is the differential access to the goods, services, and opportunities of society. When the differential access becomes integral to institutions, it becomes common practice, making it difficult to rectify. Eventually, this racism dominates public bodies, private corporations, and public and private universities, and is reinforced by the actions of conformists and newcomers. Another difficulty in reducing institutionalized racism is that there is no sole, true identifiable perpetrator. When racism is built into the institution, it appears as the collective action of the population.

Institutional racism is a difficult concept to unpack because discrimination is rarely overt or entirely unjustified. It can be subtle and almost imperceptible at the individual level, and often stems from discrimination within another system. Let’s look at particular example and trace it back to the origins.

Institution 1: The Prison

Anthony is a 22 year-old African-American kid living in the Queensbridge Housing Projects in Queens, New York. He’s got a girlfriend and a two year-old baby boy, and has been selling drugs since he was a teenager. When he is arrested for selling a small amount of crack cocaine, he is sent to jail on $1,000 bail, which neither he nor his family can afford to pay, so he ends up staying in jail until his trial. Because he has a prior record, the odds are not in his favor when he finally gets his day in court.

Anthony has a one-in-three chance of going to prison.= during his lifetime.

Anthony has a one-in-three chance of going to prison during his lifetime.

In 2009, the incarceration rate of black males in the U.S. was six times that of whites. Is that because blacks are more likely to go to prison than white people? Perhaps. According a report from the Sentencing Project, white Americans overestimate the proportion of crime committed by people of color and tend to support more punitive measures even though they experience less crime. In Florida, a Washington Post poll found that whites believed 50% of crimes were committed by black people, when the real number is closer to 20%. This bias makes them more likely to support tough-on-crime policies, which politicians are more than willing to oblige.

new york prisonersAs a result, blacks are both more likely to be convicted of crimes and receive longer sentences than whites. Nationwide, blacks are 10 times more likely to go to jail for drug offenses. In 2012, a study found that blacks and Hispanics received longer sentences for the same or lesser offenses than white offenders.  People of color remain in prison longer and naturally comprise a larger percentage of the prison population.

If he could afford a lawyer, Anthony might receive a lighter sentence. But he can’t, so he is assigned an overworked public defender who might be meeting him for the first time on the day of his trial, and he appears before a judge wearing a jail uniform, since he couldn’t afford bail. Meanwhile, he’s been evicted from his apartment because he has been in jail, and his girlfriend and baby are staying at her mother’s house, while the primary breadwinner is sitting in jail, unable to work. With a few strikes against him, he receives two years and is sent to prison.

Anthony isn’t the only one dealing drugs in New York City, but this isn’t the first time he’s been arrested. The next questions is: why are so many blacks arrested in the first place?

Institution 2: The Police

Anthony hangs out on the corners and is frequently stopped by the police and searched. Because Queensbridge has a history of drug-dealing, there is a strong police presence in this overwhelmingly black and Latino neighborhood. People in the community have an uneasy relationship with the police, who simultaneously make the neighborhood safer and arrest young people in much higher numbers than in the rest of the city.

Part of the problem is that black males are unfairly targeted by police officers. In New York, a controversial policy called “stop-and-frisk” allows police to stop and question a pedestrian before searching them for guns and contraband. Despite the fact that blacks and Latinos make up 52.6% of the population, they consistently account for 85% of stop-and-frisk encounters. And, if they’re caught, blacks are four times more likely to be arrested for marijuana possession and selling, despite consuming the drug at largely same proportion as white people.

Stop-and-frisk has a notoriously low yield, subjecting thousands of innocent people to unnecessary searches.

Stop-and-frisk has a notoriously low yield, subjecting thousands of innocent people to unnecessary searches.

So it is true the police are overwhelmingly targeting people like Anthony, who was arrested in a stop-and-frisk encounter.  And the stats seem to support a pattern of profiling. New York City releases a report on race and crime statistics every year. In 2012, blacks and Hispanics accounted for 73% of arrestees for misdemeanor mischief, compared with 23% for whites. It is certainly possible, and even probable, that whites are getting away with more crimes than people of color. But blacks and Hispanics are, at the very least, getting caught more often.

The police argue that they’re job is to stop crimes, and arrest those who are committing them, whether they are black, white, or any other color.  When asked about racial bias in Ferguson, former NYC mayor Rudy Giuliani asked: “I find it very disappointing that you’re not discussing the fact that 93 percent of blacks in America are killed by other blacks.”  In a similar vein, responding to critics of stop-and-frisk, the NYPD released a report in mid-2012 showing that people of color made up 96% of shooting victims and 97% of shooting suspects during the first half of the year. The police commissioner, Raymond Kelly, defended stop-and-frisk as “proactive engagement”, calling it a “life-saving measure.” In other words, we’d arrest fewer black people if they committed fewer crimes.

Of course, these shooting suspects represent a tiny fraction of black and Latino youth in NYC, and hardly justify such a blunt policy. Still, given these realities, it is possible to see why police officers would target Anthony for reasons other than racial bias.

Institution 3: The City

Regardless of policy, Anthony was stopped because the police felt they had reason to suspect he may be engaged in illegal activity, so they approached him. But part of the problem is that Anthony lives in Queensbridge, a housing project with a pattern of gang violence and drug dealing. And that means cops approach kids in Queensbridge like Anthony all the time.

The concentration of violent crime around certain geographies has given rise to programs like predictive policing, which uses data analytics to identify crime hotspots and preemptively deploy resources to prevent crimes before they occur. Because those crimes are often committed in predominantly ethnic neighborhoods, police presence is higher and more people of color are arrested. The resulting higher arrest rates are not necessarily due to overt racial bias, but actually an analysis of where crimes are most likely to occur. And, in Anthony’s case, Queensbridge fits the bill.

Stops by neighborhood.  In the ten highest crime precincts, there are 16.9 stops per 100 residents - three times the city average (Source: NYT)

In the ten highest crime precincts, there are 16.9 stops per 100 residents – three times the city average (Source: NYT)

So why do specific urban neighborhoods like Queensbridge have such a problem with crime? Sociologists, criminologists, and economists have tried to answer that question for decades, and proposed several explanations. Conflict theory is one of the more prominent criminological explanations for the concentration of crime in certain neighborhoods:

As a general theory of criminal behavior, conflict theory proposes that crime is an inevitable consequence of the conflict which arises between competing groups within society. Such groups can be defined through a number of factors, including class, economic status, religion, language, ethnicity, race or any combination thereof.  Sociologists and criminologists emphasizing this aspect of social conflict argue that, in a competitive society in which there is an inequality in the distribution of goods, those groups with limited or restricted access to goods will be more likely to turn to crime. 

According to conflict criminology theory, people with fewer means are more likely to turn to crime to make ends meet. And, in a self-fulfilling way, crime begets crime – a fact that underlies the controversial broken windows theory of policing.

It is critical to note that poverty, not race, explains high levels of crime in this and just about every other theory of criminology. The link between poverty and crime is well-documented, going all the way back to Aristotle, who said, “Poverty is the parent of revolution and crime.” In a 2005 paper in the American Journal of Public Health titled “Social Anatomy of Racial and Ethnic Disparities in Violence”, three researchers from the Rand Corporation posit that the relationship between race and crime is based on underlying factors specific to racial groups:

Our theoretical framework does not view “race” or “ethnicity” as holding distinct scientific credibility as causes of violence. Rather, we argue they are markers for a constellation of external and malleable social contexts that are differentially allocated by racial and ethnic status in American society. We hypothesize that segregation by these social contexts in turn differentially exposes members of racial and ethnic minority groups to key violence-inducing or violence-protecting conditions.

The authors go on to offer a few statistically-significant examples of those social contexts, including marital status of parents, immigrant generation, and neighborhood characteristics associated with racial segregation. So, what exactly is it about these neighborhoods that help to explain the propensity to commit crimes?

Institution 4: The Neighborhood


Nas in Queensbridge

Anthony’s neighborhood, Queensbridge, is the largest housing project in the borough of Queens in New York City. It was first built in 1939, and has around 6,500 residents at any given time. During the late 1950’s, the management converted it to a low-income housing project, transferring families with an annual income of more than $3,000/year, most of whom were white, to a middle-income project, leaving a predominantly poor black and Hispanic population.

Throughout the 70’s and 80’s, poverty increased, and Queensbridge became notorious for the prevalence of crime, gaining the dubious distinction of having the most murders of any project in New York in 1986. Queensbridge’s most famous resident, Nas, described growing up there in the song, “Memory Lane”, from one of your correspondent’s favorite albums, Illmatic:

My window faces shootouts, drug overdoses
Live amongst no roses, only the drama, for real
My pen taps the paper then my brain’s blank
I see dark streets, hustling brothers who keep the same rank
Pumping for something, some’ll prosper, some fail
Judges hanging niggas, uncorrect bails for direct sales
My intellect prevails from a hanging cross with nails

Things have changed from the days when Nas lived there. Since the 2000s, crime in Queensbridge, along with the rest of NYC, has decreased, but is still higher than in many places around the city. The median income today is between $21,000 and $25,000 a year, and the average rent is less than $500.

Queensbridge fits a common pattern of poor urban neighborhoods during the 20th century that has been well-researched by sociologists. In his 1987 book, The Truly Disadvantaged: The Inner City, The Underclass, and Public Policy, William Julius Wilson, a Harvard professor focused on urban communities, introduced the concept of “concentrated poverty” – a poverty incidence of 40% or greater, which has since become the de facto threshold for sociological research around urban ghettos. He argued that concentrated poverty creates “social isolation”, in which the community has fewer interactions with mainstream society, and, as a result, limited access to job networks and economic opportunities. With fewer opportunities to earn a living, people in poor communities are more likely to turn to crime as an alternative.

Share of the poor population living in neighborhoods with poverty rates of 40 percent of higher, 2008-2012. (Source: Brookings Institution)

Share of the poor population living in neighborhoods with poverty rates of 40 percent of higher, 2008-2012.
(Source: Brookings Institution)

According to Wilson, there are a number of reasons for the high proportion of blacks and Hispanics in communities marked by concentrated poverty. First and perhaps foremost to this discussion, overt systemic racial discrimination and segregation pushed more minorities into the inner cities:

Blacks were discriminated against far more severely in the early twentieth century than were the new white immigrants. Through restrictive covenants, municipal policies, and federal housing programs, blacks, unlike other immigrant groups, were forced into particular areas inner cities. At the same time blacks were discriminated far more severely than other groups in the labor market making them disproportionately poor and concentrated in low-paying jobs, particularly in the industrial sector. Collectively these forms of racial and spatial discrimination laid the basis for most areas of contemporary concentrated poverty.

Later on in the twentieth century, broad societal changes that I describe in another post, “The Convergence: America’s Long Arc of Development”, ushered in a period of de-industrialization, reducing the number of low-wage jobs available to blacks, while white flight and “spatial mismatch”, which describes the expanding geographic rift as economic growth shifted from the cities to the suburbs, all led to the further decline of urban ghettos.

This is exactly what happened to Queensbridge. The shift to a low-income housing project in the 50’s increased racial segregation in the community and declining socioeconomic conditions intensified, causing violent crime to increase. The escalation of the war on drugs during the Reagan Era only exacerbated the situation, and Queensbridge became a more dangerous place than ever.

The result for communities like Queensbridge is a decades-old poverty trap, in which social isolation and declining economic opportunities make it increasingly difficult for the overwhelmingly minority inhabitants to pull themselves out of poverty, creating a permanent underclass.  And for people like Anthony, fewer economic opportunities put pressure on them to support their families in other ways.  When drug dealing is ubiquitous in a community, it becomes an attractive proposition for someone without a lot of options.

Institution 5: The Schools


The kids from Season 4 of The Wire.

Poverty does not only lead to more crime in neighborhoods like Queensbridge. It affects just about every institution that is built in and around the community. The Brookings Institution explains some of the other ramifications of concentrated poverty:

Poor individuals and families are not evenly distributed across communities or throughout the country. Instead, they tend to live near one another, clustering in certain neighborhoods and regions. This concentration of poverty results in higher crime rates, underperforming public schools, poor housing and health conditions, as well as limited access to private services and job opportunities.

We have covered higher crime rates and limited access to private services and job opportunities, so let’s turn our focus to the underperforming public schools. In the U.S., funding for public schools comes from local property taxes. As the poverty level creeps up, housing prices decline dramatically. According to one study, once the poverty level in a community exceeds 10%, housing and rental prices steeply decline until it reaches the 40% threshold of concentrated poverty, at which point prices level out.

Since property taxes are calculated using housing prices, schools in poor communities have fewer resources available than those in more affluent communities, where housing prices are higher. This systemic problem, coupled with limited job opportunities for high school graduates due to spatial mismatch, fewer mentors to provide positive guidance, and the high prevalence of crime in and around the schools, results in an inferior education for children in areas of concentrated poverty, leaving them ill-prepared to succeed, further widening the income divide and compounding socioeconomic inequality.

In New York City, spending on a pupil in a neighborhood with 30% poverty is 11% less than in one with very little poverty.

In New York City, spending on a pupil in a neighborhood with 30% poverty is 11% less than in one with very little poverty.

I have covered the tragedy of the American education system ad nauseum in this blog, and have discussed the importance of education for economic development in several posts. Without a decent education, generations of children born into poverty have few opportunities to break the cycle of poverty, keeping them ensnared in a vicious cycle of poverty that all too often ends with prison.

It is impossible to say whether a strong public school system would have set Anthony on a different path. But the purpose of education is to give children the tools to succeed and skills to find employment. Without a good education, the opportunities are limited.

III. Conclusion

Let’s take a step back and review the each of the institutions, starting at the beginning. Anthony is arrested, tried, and convicted of dealing drugs, after being stopped-and-frisked on a project corner. His neighborhood, Queensbridge, is poor and overwhelmingly black and Hispanic. The school system is underfunded, the community is isolated, and few economic opportunities exist for young people, increasing the likelihood that they join a gang, either to earn money from selling drugs or simply for protection. Anthony gets caught up in the life and goes to jail, leaving his girlfriend without a breadwinner and son without a father.

Systemic racism has a long history in America

Systemic racism has a long history in America

Now we can generalize his experience more broadly. Historical racial segregation and discrimination and the changing dynamics of the American economy led to concentrated poverty and increasing social isolation in urban ghettos, the majority of whose inhabitants are black and, more recently, Hispanic. Higher levels of poverty drive down housing prices, which deprive the community of property taxes, which creates an inferior school system for black children and prevents poor urban communities from improving.

Those inhabitants have fewer economic opportunities and are more likely to turn to crime as a way of making ends meet. Crime becomes increasingly concentrated in these communities, leading to a greater police presence and higher rates of arrest. Various factors, including generic racial bias, politicians’ fears of being labeled soft on crime, and the disproportionate media coverage of black criminality, leads to policies like mandatory sentencing that unfairly result in longer sentences for people of color. And all of these factors combined result in an incarceration rate of six times that of white people, which is right where we started.

The dog whistle that results in tough-on-crime policies

The dog whistle that results in tough-on-crime policies

In this essay, I have tried to break down the infinitely complex systems that govern individuals and highlight how systemic institutional racism pervades every aspect of society. This racism is not overt, and it is not sensational. It is not a white police officer shooting an unarmed black teenager and leaving him to die in the streets. It is not a bunch of white fraternity members chanting racial epithets on a bus. It is not spoken, nor is it perpetrated by any one individual. This racism is built into the very fabric of our society, creating a permanent underclass that is overwhelmingly black and Hispanic. And it is getting worse.

I don’t know the answer to this problem. I fear that it is so ingrained into our society that we cannot diagnose, much less eliminate, the disease. As a society, we must be be willing to engage in collective self-criticism that makes most people uncomfortable.  Whenever a politician tries to have an honest conversation about systemic racial inequality, they risk being labeled an apologist for America.  And, unfortunately, in every society, the underclass, despite having the numbers, rarely has the political influence or money to effect real pro-poor policies.

I welcome the discussion about race that the the events of the last year have forced America to have. But as long as we focus on the symptoms, rather than the disease, the problem will only continue to get worse.

Develop Economies’ Music Recommendation

Why Do Some Countries Have It So Bad?


Open a newspaper today and you’ll be bombarded with a panoply of terrible news. Ebola is ravaging West Africa, with a projected 10,000 new cases per week and the possibility for 1.4 million people infected in Sierra Leone and Liberia alone. Two decades ago, those same countries were embroiled in one of the most horrific civil wars in modern history. A few thousand miles away, a possible genocide in the Central African Republic has been unfolding – largely unnoticed – since the end of 2013. Head south and you’ll find never-ending violence in the Democratic Republic of Congo that has claimed the lives of 5.4 million people since 1998. Outside Africa, uprising and rage are threatening to topple the government in Yemen, and Haiti struggles to recover from the earthquake that killed 160,000 people. The list goes on and on. Beyond the penchant for inflicting misery on the people who live in them, these countries share a common bond.

Among the 196 nations in the world, some countries, it seems, consistently draw the short straw. There is no shortage of colloquial terms for them – basketcases and failed states, to name a few – but the United Nations has a specific designation for countries that occupy the bottom of the human and socioeconomic development indices: the “least-developed countries”. Of the 48 countries to receive the ignominious distinction of being considered an LDC, only four have ever graduated to “developing country” status: Botswana, Cape Verde, Maldives, and, until 2014, Samoa. The LDCs have 880 million people, or 12% of the world’s population, yet they contribute 2% of its GDP and 1% of its global trade in goods. With so many people, the question is: why do these countries have it so bad?


The least developed countries in the world.

Before examining the underlying causes, let’s first define what it means to be a least-developed country. Here is the United Nations’ description of the attributes that warrant the distinction:

The Least Developed Countries represent the poorest and weakest segment of the international community. Their low level of socio-economic development is characterized by weak human and institutional capacities, low and unequally distributed income and scarcity of domestic financial resources. They often suffer from governance crisis, political instability and, in some cases, internal and external conflicts. Their largely agrarian economies are affected by a vicious cycle of low productivity and low investment. They rely on the export of few primary commodities as major source of export and fiscal earnings, which makes them highly vulnerable to external terms-of-trade shocks. Only a handful has been able to diversify into the manufacturing sector, though with a limited range of products in labour-intensive industries, i.e. textiles and clothing.

These constraints are responsible for insufficient domestic resource mobilization, low economic management capacity, weaknesses in programme design and implementation, chronic external deficits, high debt burdens and heavy dependence on external financing that have kept LDCs in a poverty trap.

There is a lot to unpack in that statement, but, suffice it to say, LDCs are in a tough spot. Most of the people are subsistence farmers, growing just enough for themselves and their families, and relying on nature for their livelihoods. More than 70% live in rural areas, compared with 55% for other developing countries. They struggle to get by and move from crisis to crisis with little opportunity to implement systemic changes and reforms that will break the cycle of poverty and stagnant growth. With much of the population growing just enough to feed their families, the people are one natural disaster, family illness, or armed conflict away from the edge. They are the proverbial sailors in the boat with a hole in the bottom, bailing out just enough water to keep them from sinking any further. Only these boats are trying to stay afloat amidst raging seas, and a big enough wave – in the form of an earthquake or cyclone, a planned genocide, or an ultra-deadly virus that kills more than 70% of people it infects – is enough to tip the boat and send the sailors overboard, reversing any progress they have made in the past.

The question is: why these particular 48 countries? Economists have different underlying causes, ranging from the strength of institutions to the physical attributes of the geography. In the next few posts, I’ll review at a high level three arguments from three different books: Why Nations Fail, by Daron Acemoglu and James A. Robinson, Collapse: How Nations Choose to Fail or Succeed by Jared Diamond, and The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It, by Paul Collier. In the end, I’ll weigh in on the question myself and give my own opinion, though, as a mere dilettante in the field of development economics, your humble correspondent warns you in advance of the dangers of listening to him.

In the next post, I’ll cover some of the theories explaining why LDCs are so poor.

Develop Economies’ Music Recommendation

Free Trade is Good for Global Development


This is the fourth in a series of six posts about the trouble in America today and policy solutions going forward.  The first post is about income inequality, the second introduces the basis for my policy recommendations, and the third presents economic policies.  In this post, I will address policies related to international trade.

I know less about the specifics of free trade agreements, and, admittedly, they are one of the most contentious economic policies that exist.  I find myself on the side in favor of free trade agreements, and believe that they are fundamentally good for America. A lot of the proposals I have made in previous posts are ending inherent subsidies – whether tax breaks, refunds, or direct payments from the government – that do not benefit the economy as a whole. These solutions are generally associated with left-leaning politics. Free trade agreements, in contrast, are more often advocated by conservative politicians and liberal economists (yes – political conservatives are economic liberals).

Going back to how economies work, economic policy is dictated at the level of of the entity that is being governed. In my hometown, the board of selectmen granted the first liquor license to a restaurant, hoping to entice more restaurants to the town, which would generate higher taxes, which could then be spent on schools, roads, and other projects. People opposed it because they saw it as a slippery slope that threatened to upset the utter boringness of the place. They debated, and the other side won.

The same thing happens at a country level, only, instead of 15,000 people in a suburb outside of Boston, 300 million people have skin in the game. And when you open up borders to competition by establishing free trade agreements, like NAFTA (North America Free Trade Agreement) between Mexico, Canada and the US, or the TPP (Trans-Pacific Partnership) with the US and much of Southeast Asia, you not only strengthen relations with the those countries, reducing the possibility of conflict in the future, but also generate a tremendous amount of wealth by leveraging the competitive advantages of each country.

In free-trade agreements, countries agree to reduce or eliminate tariffs on one another’s goods. So let’s say that China and the U.S. both manufacture laptop computers. Because labor is so much cheaper, China is able to build a computer for $200, while it costs $300 to build one in the U.S. Now, if there were no tariffs, everyone would buy computers from China, and all of the U.S. manufacturers would go out of business. But U.S. politicians in districts where U.S. computer manufacturers have their factories would stand to lose if those companies went under. So they pass tariffs, which are effectively taxes on imported goods that are designed to make domestically-produced goods more competitive.

Here is how the International Trade Administration – an within the U.S. Department of Commerce – describes the impact of free-trade agreements:

Free Trade Agreements (FTAs) have proved to be one of the best ways to open up foreign markets to U.S. exporters. Trade Agreements reduce barriers to U.S. exports, and protect U.S. interests and enhance the rule of law in the FTA partner country. The reduction of trade barriers and the creation of a more stable and transparent trading and investment environment make it easier and cheaper for U.S. companies to export their products and services to trading partner markets. In 2012, 46 percent of U.S. goods exports went to FTA partner countries. U.S. merchandise exports to the 20 FTA partners with agreements in force totaled $718 billion, up 6 percent from 2011. The United States also enjoyed a trade surplus in manufactured goods with our FTA partners totaling $59.7 billion in 2012, a 30 percent increase from the surplus in 2011.

Tariffs are harmful for several reasons. First, they discourage innovation by stifling competition. When companies know that they can remain competitive through government intervention, rather than from greater efficiency, innovation, or marketing – they have little incentive to change. The same is true for monopolies. When was the last time you had a good customer service experience with Comcast, Verizon, or United Airlines (on which I am actually writing this post as I fly from San Francisco to Boston)?

Second, and more relevant to the present discussion, tariffs drive up costs for everyone else. If a computer costs $200 to build, consumers should pay $220 to buy one (or some other margin, which is irrelevant). Because of tariffs, they pay $320 instead. Instead of saving $100, which could be spent on other things, consumers pay more to inefficient manufacturers in order to preserve jobs.  The graph below explains how tariffs increase the price to consumers, creating an aggregate societal loss.

The pink regions are the net loss to society caused by the existence of the tariff.

The pink regions are the net loss to society caused by the existence of the tariff.

Passing FTAs is difficult, because, in the near term, people stand to lose their jobs. But, if you were to reduce tariffs in concert with the tax proposals listed above, the additional revenue generated not only from cost reductions, but also increased exports to other countries in the FTA, would allow the U.S. to invest in job training and other social welfare programs, like a higher minimum wage and a greater earned income tax credit (which I will explain in subsequent sections). As a result, you could enrich the broader population without completely pulling the rug out from under the workers whose jobs would be outsourced.

In my next post, I’ll talk about immigration reform.

How to Get America Back on Track



In my last post, I discussed the unfortunate state of affairs in the United States today. From a pre-industrial agrarian economy controlled by wealthy landowners, to an era of industrialization marked by the creation of a middle class and a period of prosperity, and ultimately a post-industrial phase where the middle is systematically being hollowed out and the extremes once again dominate the landscape, the United States finds itself at a crossroads. The country can ignore the state of affairs or rationalize it as a byproduct of modernization, continue along its current path, where increasing income stratification creates an oligarchy controlled by wealthy elites from a few key sectors – financial services and petrochemicals, to name a few. Or, it can collectively come to terms with the fact that the country has fundamentally changed over the last four decades in ways that demand significant political and culture reform.

Identifying the problems is not sufficient. With that in mind, I want to propose solutions that address what I consider to be the root causes. The criteria is that they be practical, yet attainable. They are ambitious reforms that include a mix of proposals embraced by Democrats, Republicans, or both (or neither). While they are achievable legislatively, I am ignoring the political horsetrading and gamesmanship that would be required to have them pass.

What’s Next

The thirty years leading up to 2008 are generally considered to be a period of prosperity in the U.S. A few cyclical recessions aside, the 80’s, 90’s, and 00’s were marked by solid GDP growth and a strong increase in the overall wealth of the country. Yet, with the outsourcing of labor-intensive jobs (and the weakening of labor unions in the manufacturing sectors that remained) and the overall movement toward a service-based economy, dominated by a fast-growing financial sector, income gains largely went to the top 10% of earners, with a disproportionate share going to the top 1%. Simultaneously, short-sighted economic policies designed to control government spending steadily dismantled much of the social welfare system – a trend that continues today at an accelerating pace, with family planning and food stamps as the most recent victims of the guillotine.


Some of this was inevitable. The depletion of the middle class is a byproduct of globalization. On a global scale, it is actually a good thing, as developing countries reap the benefits of burgeoning manufacturing sectors. The result will be the greatest migration out of poverty the world has ever seen. But there is no denying that the U.S. itself will be worse off. More specifically, the low-wage workers, the urban minorities, the recent immigrants, the rural whites, the high school-educated, and all of the other would-be chasers of the elusive American dream will find fewer opportunities in this new world, and their struggles will only get worse.

So the question remains: what can we do about it? If we are undergoing a systemic change at a global level, is the situation hopeless? The answer to the second question is no. The answer to the first question is the subject of this post.

Why Tax Reform Makes Sense

On the most basic level, an economy – whether a nation or a household – is a self-contained entity in which goods and services are exchanged. In a modern economy, the medium of exchange is money – a fiat currency issued by a central bank that regulates its volume and the cost of borrowing it. When economies trade with one another, money either comes in or goes out. Rather than trying to do everything, economies specialize in whatever they are best at doing, relative to their peers. On the most basic level, you pay a plumber to fix your pipes or a carpenter to build your cabinets because it doesn’t make sense for you to do those things yourself. Instead, you earn money by specializing in what you do, and use the money generated from your expertise to pay others who specialize in something else. On a much higher level, nations specialize in broad industries. Manufacturing in Germany, financial services in Switzerland, carmaking in Japan, and electronics in South Korea are all examples of what is known as competitive advantage – where countries excel in particular sectors and trade with one another.

Within larger economies, there are smaller economies – the household, the community, the city, the state, etc. – that also trade with one another. The doctor provides care for patients and decides to re-do his kitchen. He hires a general contractor, who subcontracts to an electrician, a painter, a plumber, and a carpenter, all of whom purchase materials at Home Depot, which employes hourly workers and buys products wholesale from equipment manufacturers, which hire truck drivers and warehouse workers to move pallets. All of these people buy food from the grocery store and clothing from retailers. They buy cars and houses and school supplies. And all of those products – known as “durable goods” – that used to be manufactured here in the U.S., are now made overseas. And the people who used to make them have find new jobs, which are now in shorter supply.

So why does any of this matter? Because money moves around an economy is when people spend it. After the financial crisis, the Bush administration send every American a check for $600 so that they would get out and spend it. The much-maligned stimulus package and the tactic called “quantitative easing” – otherwise known as printing money – are both massive efforts to get people to spend money. There is a term in economics called velocity, which is the number of times a dollar changes hands during a year. The velocity of money describes the speed with which people are spending money, and, in general, faster is better.

Chart showing the log of US M2 money velocity (green), calculated by dividing nominal GDP by M2 stock, M1 plus time deposits 1959–2010. Employment-to-population ratio is displayed in blue, and periods of recession are represented with gray bars).

Chart showing the log of US M2 money velocity (green), calculated by dividing nominal GDP by M2 stock, M1 plus time deposits 1959–2010. Employment-to-population ratio is displayed in blue, and periods of recession are represented with gray bars).

So when the economy is moribund and fewer people are reaping the benefits of broader economic prosperity, the solution is to spend money. And the people who spend the most money, as a percentage of their income, are the ones who have very little. As I mentioned in my last post, the bottom 20% of earners spend more than 60% of their income on clothing and housing. After food, schooling, car payments, and other incidental expenses, they have very little left to save, much less invest in the future. To make ends meet, these individuals take on debt, which traps them in an escalating spiral of interest payments that culminate in eviction and bankruptcy. Not many people are aware of debt agreement plans, the awareness of which might have solved the issues with bankruptcy.

In short, the best way to increase the velocity of money in an economy is to put it in the hands of people who have very little, because they will spend every last penny. And the people they buy goods and services from will, in turn, spend that money at the same pace. In contrast, the best way to slow the velocity of money is to give it to people with nothing to spend it on.

It is this insight that leads liberal economists to the conclusion that taxing the rich is the solution to the problem. I don’t fully agree with this point. There is a legitimate case to be made that excessive taxes on the rich create a perverse incentive toward investment. I am not advocating raising taxes on ordinary income for the top quintile of earners. But there is another road.

In my next post, I will explain what that I believe that road looks like, from a financial and economic policy perspective.


Develop Economies’ Music Recommendation

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.

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.

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.

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

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 for the rich and poor

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.

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.


Develop Economies’ Music Recommendation

The Sad Aftermath of the Nairobi Attack

APphoto_Kenya Mall Fact Check

Last month, terrorists from the group al Shabaab attacked the Westgate Mall in Nairobi, killing 67 people. In the wake of the devastating event, Kenyans rallied together in a showing of national unity often missing in this deeply divided country. Outside Kenya, the world expressed its sympathy and offered support to the country. And over the last month, under the bright spotlight of media, the government has manage to squander that good will so spectacularly that it calls into question the integrity of the most respected state institutions.

The attack occurred on a Saturday morning. The police were the first to respond, and, according to reports, managed to contain the terrorists in a corner of the Nakumatt grocery store. On Saturday evening, the KDF (Kenya Defence Forces) took over the operation from the police. A breakdown in communications between the groups led to confusion about the whereabouts of the remaining terrorists, and possibly allowing some to escape. At one point, the Kenyan military fired at the police inside the mall, killing one policeman who was responding to the attack. The siege on the mall lasted for four days, ending only after the Kenyan military fired anti-tank missiles into the store and destroyed three floors of the mall, possibly killing additional hostages.

During the siege, few details emerged about the attack and its immediate aftermath. Initial reports said that between 10 and 15 attackers stormed the mall. A month after the attack, a CCTV camera from the Nakumatt released to the press showed four men armed with AK-47s seeking refuge in the loading area of the supermarket, often putting down their weapons to pray. In addition to killing 70 innocent people, Al Shabaab could now say that four of its members held off one of the strongest militaries in Africa for four days.

A week after the attack began, shop owners were allowed to return to the mall to survey the destruction, and were surprised by what they saw. The entire mall had been looted. Everything – watches, jewelry, lingerie, electronics, and alcohol – was gone. The banks had been robbed. Six ATM machines were shot open and cash registers were emptied of their contents. Stunningly, the military claimed that it had not stolen the money, but rather “recovered and repatriated” it for the tenants at Westgate.

Within a week, 21 of the 85 businesses had filed reports with the police saying their stores were looted. Some business owners even questioned whether the military deliberately prolonged the attack to enable it more time to steal. Jeffrey Gettleman describes the aftermath:

Four days after that, the first shopkeepers were allowed back in to survey the wreckage. Millions of dollars of property had been destroyed, and businesses said that at least hundreds of thousands of dollars in cash and merchandise were missing.

On Thursday, the talk among a group of forlorn shopkeepers was of “terrorism insurance.” Nobody there had it. But Mr. Manji hoped that would not matter.

“This was not terrorism; this was looting,” he said. “It’s sad that the people who were supposed to protect us have robbed us.”

At first the Kenyan military denied the accusations. A spokesman for the KDF, Major Emmanuel Chirchir, claimed that the military was being falsely accused, citing that one store – a shoe store – had not been looted. Chirchir stated: “It would also be good to list shops that were vandalised out of the over 80 stores. So far, Bata shop has talked of its shop being intact. KDF did a fantastic job, we know our enemies who have decided to use propaganda to undermine our public good will.” That was on October 5th.

On October 3rd, A Kenyan TV station claimed to have viewed surveillance footage that showed soldiers emptying cash registers into bags and walking out of the mall with white plastic bags. Last week, television stations in Kenya aired that footage, and it was damning. Soldiers walk into the supermarket, guns raised, and later are shown walking out carrying goods with one hand and rifles with another. One soldier is shown trying to break into a jewelry case, but is unsuccessful. The military claimed that the men were only taking bottled water from the supermarket to “quench their thirst” during the assault.

The Kenyan news media, led by the Daily Nation and the Standard, are generally hard-hitting journalistic institutions, particularly by African standards. They were highly critical of the military in the aftermath of the attack, as more information came to light. And they spared no institution in their excoriation of the government and its handling of the attack.

Instead of admitting they had indeed looted the mall, the military instead began looking for the source of the leak. They interviewed the founder of Nakumatt at a police station, and, when that did not turn up anything, trained their guns on the media. On October 24th, they announced that they would be arresting and prosecuting two journalists from the Standard for their coverage of the scandal. “You cannot provoke propaganda and incite Kenyans against the authorities. The two journalists will be apprehended,” explained the Inspector-General of the police, David Kimaiyo. So much for freedom of the press.

In perhaps the strangest twist of all, the Standard published an article on October 26th titled “Kenya Defence Forces considered among strongest, most disciplined army in the world.” The timing is certainly suggestive.

The drama continues to unfold in plain sight of the rest of the world. Coverage of the looting and the internal squabbles and blame-throwing can be found in every major newspaper in the world. Kenya’s reputation as lion of East Africa – a fast-growing economy with tremendous potential in the midst of region wracked by instability – is slowly being chipped away.

No where is this feeling more palpable than in Kenya itself. In a letter to the editor, a Nation reader shared his thoughts about the crisis:

Much has been said about Kenya Defence Forces’ conduct during the Westgate siege. I feel betrayed by our forces should the allegations against them be proved true. It is disheartening watching the last bastion of integrity falling to the beast of looting and corruption.

His opinion reflects the broader feelings of many in the country. Kenya is one of the most corrupt countries in the world. It ranks 139th out of 176 on the 2012 Corruption Perceptions Index, the standard for assessing the level of graft in a country. The average urban Kenyan pays 16 bribes every single month. By some estimates, one-third of Kenya’s GDP is lost to corruption every year.

The national security apparatus was thought to be the last bastion of integrity in a sea of corrupt state institutions. This is why the realization that the KDF exploited one of the most vulnerable collective moments for the country in recent memory for its own deeply selfish gains is so troubling. If the core of the military is rotten, the thinking goes, what else is left?

The role of a free press is to expose corruption and graft and hold the guilty accountable for their misdeeds. Yet now the institutions that were supposed to protect the country are threatening that freedom by arresting and prosecuting journalists who are doing their jobs. It is a sad turn of events for a country that, just a few months ago, seemed to be on the verge of a renaissance.

John Githongo, a former journalist and anti-corruption official in the Kenyan government and subject of the book It’s Our Turn To Eat, lamented the Westgate scandal as unfortunate, not only with respect to the looting itself, but because of its predictability. In his conclusion, he explains the current state of affairs:

In truth, we celebrate thieves instead of imprisoning them; we elect those who pilfer public funds instead of throwing the book at them; we virulently abuse each other on the basis of tribe and yet employ grand pretentions to modernity.

This modernity is skin deep. Since the middle of the Kibaki regime, deepening and spreading graft has been excused away by throwing GDP numbers at those who complain about graft.

But then our entrenched corruption is merely a symptom of a deeper malaise that has de facto legalised graft. With the discovery of oil and other minerals, even Western countries that once placed graft near the top of their agenda in their interactions with us have gone silent.

The scandal is in the process of unfolding now. Where it will go remains to be seen. But what is certain is that the Al Shabaab did more than just murder 70 innocent people and terrorize a country. It revealed that even Kenya’s most venerable institutions are mired by corruption. And it is not surprising. Corruption is a cancer. Once it metastasizes, it spreads through the organism, infecting every piece of it. And Kenya, it appears, is even more infected than once thought.

The Hult Prize: Food Security in Urban Slums

A few weeks ago, I competed in a social enterprise business plan competition called the Hult Prize.  The competition is ambitious in scale and scope, giving a broad mandate to competitors and rewarding the best ideas with the chance to win $1 million in seed funding.  This year’s challenge was developing a solution to the problem of urban hunger by 2018.

The catch is that the business needs to be scalable and financially sustainable.  The product or service needs to be culturally relevant enough to be useful, while culturally agnostic enough to work anywhere.  It needs to address the root cause of urban hunger, facilitating access to nutritious food at affordable prices.  With those marching orders, we went to work.

My team consisted of some seasoned industry veterans.  Aleem Ahmed spent three years at LEK Consulting before moving to Western Kenya to implemented a clean water program for Innovations for Poverty Action, and later Ethiopia to work with the Agriculture Transformation Agency.  Ahmed El Mahi had a stint as a trader in London before sourcing investments in Mali for D.Capital, Dalberg Global Advisors’ impact investing arm.  Caroline Mauldin spent four years at Accion International, one of the largest microfinance organizations in the world, before heading to the State Department to write speeches for senior officials in the Obama Administration and and set up the super cool Open Government Partnership.   We are all MBA students at the MIT Sloan School of Management, and the other three are picking up a Masters of Public Administration from the Harvard Kennedy School along the way.  Our team was stacked, and it was great to work with such an accomplished crew.

After tossing around a couple of dead-end ideas – including one proposed by me around vitamin-enriched flavoring packets – Aleem first proposed the idea of “slum meal plans.” When you dig down to the root cause of hunger in the urban slums, the availability of food is not necessarily the issue.  Generally, there is enough food to go around in most countries (with the exception of places plagued famine, like Somalia in 2011).  The problem is that food is expensive to purchase in small quantities.  We started to think about why this was the case, and came to the conclusion that there were two problems: finance and distribution.

On the financing side, people in the slums have irregular income that can be volatile throughout the month.  It is common to hear about people living on less than $2 per day.  But one of the most interesting insights to come from the research into the financial lives of the poor came from a book called Portfolios of the Poor.  After analyzing financial diaries collected from people living in slums in South Africa, Bangladesh, and India, the authors realized that income fluctuates wildly from week to week, and the poor use a variety of informal financial instruments to smooth consumption.  From this realization came their central conclusion:

“The poor are as diverse a group of citizens as any other, but the one thing they have in common, the thing that deines them as poor, is that they don’t have much money. If you’re poor, managing your money well is absolutely central to your life—perhaps more so than for any other group.”

So we took this as a starting point and applied it to the problem of food consumption.  What if we could construct a micro-savings program that could allow people to put money away for food when they earn income, in order to buy food when they don’t?  There are plenty of mobile-based savings platforms that exist around the world.  Safaricom, the East African telecom that developed M-Pesa, recently released M-Shwari, a savings platform that has seen swift uptake among the poor.  Our idea was to use a food-oriented savings account to take advantage of what is called an “illiquidity preference” – putting cash where you don’t have have instant access to it in order to prevent it from being spent on unnecessary purchases.  In order to incentivize people to join, we would need to offer some sort of discount or loyalty program.  To that end, we started to the think about distribution.

The second part of the equation is what we called the distribution problem.  Disparate suppliers outside the cities and fragmented vendors and retailers in the slums makes achieving economies of scale for any product, let alone food, difficult.  On a per-unit basis, people in the slums pay more for basic goods than their comparatively wealthier counterparts.  If we could develop a network of food vendors in the slums and effectively become a wholesaler of certain products, we could potentially shrink the existing margins between supplier and customer.  We could then distribute a portion of the savings to our customers, and reinvest the remainder in growing the business.

And with these two components, our idea took concrete form.  We called the idea M.yala – taken from the name of a town in Western Kenya and the Arabic word for “Let’s go.”  We spent weeks putting together our presentation and practicing our pitch.

On the day of the competition, we went head to head with 46 teams from schools around the world.  We were selected as one of four semi-finalists, and invited to present to 18 judges and 300 spectators.  Unfortunately, we just missed winning the regional final.  But there is a great team from Hult San Francisco that will be competing at the final round at the Clinton Global Initiative in October, and we wished them the best of luck.

All in all, it was a great experience.  Best of luck to all of the other competitors, and hopefully one of them makes a dent in the problem of urban hunger.

Develop Economies’ Music Recommendation

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.

Develop Economies’ Music Recommendation

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.

Develop Economies’ Music Recommendation