A liberal arts economist

Digital media: A synopsis

2012-01-16T00:04:00.001-05:00

I was intrigued by this most recent post talking about new media and how artists are responding to digital technologies. The most intriguing are these mash-ups of new and old technologies, whether they be video with digital media OR synthesizers with classical instruments OR those that want to take it even further by enhancing the dimensionality of the art by using mixed media. Many artists have been socially active. In my opinion they are the most interesting. But what is happening now with the internet is that their reach is infinitely larger. It gives me hope for the role of art in social justice and its ability to start deeper conversations.

How do you create a culture of innovation?

2011-12-28T15:47:00.002-05:00

Many authors focus on theimportance of individuals when they talk about creating a culture of innovation. Individuals are important because they can set the tone and use power to drivechange. Think Steve Jobs. Sadly, individuals come and go. And so we need to start thinking more about an organizational culture that needs to be in place to encourage innovation. I recently read an article by Laird McLean thatreviewed the literature on this issue. I thought I would summarize the main points from his review.

Before we begin, however, some definitions are in order. Specifically what do we mean by innovation?McLean talks about the difference between creativity (essentially coming upwith new ideas) and innovation (successfully making the new idea stick). Hesays, “Like other researchers, we define creativity as the production of noveland useful ideas in any domain. We define innovation as the successful implementationof creative ideas within an organization.” Also, it is important tounderstand what we mean by “culture”. “According to"Martin, culture is aboutdeeply held assumptions, meaning, and beliefs.” (Quoted in McLean). Getting atthis is hard, but it can be done. (See my post about change management versus change leadership).

So what does the research say? Here is a basic summary ofthe ingredients one needs in the organizational culture to encourage innovation:

Organizational encouragement. This includes a culture at all levels thatencourages risk taking and idea generation, offers supportive evaluation ofideas, encourages and has systems in place to support collaborative idea flows, and finally participative management and decision making. For example,imagine a situation when an employee wants to implement a new idea or dosomething different. What mechanisms do you have in place to help them findexpertise within the organization? Do you encourage open communication andcollaboration and do you give those employees the resources (time and money)and freedom to make that idea real? Do you have systems and processes to scale employee ideas and spread them across the organization? All of theseaspects have shown to be important in actual decision-making settings.
Supervisory encouragement. This includes clarity of team goals, supervisorysupport of the team’s work and ideas, and an environment where openinteractions are supported. An important finding in the literature isnon-controlling supervisors. Many supervisors encourage by pushing a specificoutcome. Supervisors also like to push their ideas and are concerned aboutthemselves. Non-controlling supervisors are hard to get, especially becauseteams look to their supervisors for leadership and approval. More importantly, leadersoften have big egos (I am self-reflectively laughing while I write this). But the research actually finds that “being Zen”, giving autonomy and letting things evolve leads to better creativity outcomes. Also equally important is the ability of thesupervisor to create “an open, confrontive climate for conflict resolution withinthe innovation team”. Again, this is hard to do because it requires leaders tohave humility and the ability to handle criticism (and conflict).
Workgroup encouragement. Do you have an organizational culture thatembraces and supports different personalities, points of view and criticaldialogue?
Freedom and autonomy. Do you have a workplace culture that givesemployees the freedom to determine how the goals are implemented? Much of thishas to do with maintaining the intrinsic excitement that comes from creatingsomething. If you dampen that excitement by excessive control, again,creativity and innovation suffer.
Resources. This is obvious (but not to all). We need both money AND time. Not giving enoughtime leads to burnout.

Its good to be self reflective and think about where our organizations fall on these cultural ingredients. Ultimately though organizations and culture are made-up of individuals. So when you are in a supervisory capacity, what do you do to encourage a culture of innovation? I just asked this question to myself today.

Sustainable urban development needs governance

2011-12-09T14:21:00.001-05:00

Karachi - Photo From the NYTimes

For the past three years, I have been living or working for short periods of time in fast growing cities of the developing world. What plagues Karachi, seems to be plaguing Dar es Salaam, Bangalore, Delhi and so on. A recent article in the NY Times, talked about "Cities beyond the law". In it, Steve Innskeep discusses how because of rapid population growth, increase in the global demand for goods and services, and the failure of adequate public services, cities are growing haphazardly. What is worse is that the level of inequality in these cities is growing as the affluent build and insulate themselves further from the everyday poverty of new migrants. As this continues to occur, social cohesion is threatened. The issue that rises to the top here is governance, or lack-thereof.

I am hopeful however, because I think things will change, not for cities that are already large, but smaller ones perhaps, where people will be able to intervene before its too late. I think the solutions will come from within the developing world. I am inspired by the UN-Habitats efforts though MILGAP that in 2006 recognized the efforts in Kenya called ‘People United for a New Korogocho’. "The sprawling Korogocho slums; one of the most densely populated and unstable slums of Nairobi, Kenya was an ‘illegal’ settlement born in the early 80s with about 120,000 inhabitants crammed within a single square kilometer." The project created economic empowerment and skills development among the marginalized in the society. The project evidences creative and innovative thinking in addressing poverty alleviation at the local level through the Dandora dumpsite program which has organized scavengers to harvest and resell garbage to earn a living. They also used artists to educate the local population. I look at this solution concept, of organizing decentralized movements for change and see us doing the same thing elsewhere. Whether its in Bangalore or Nairobi, the problems and solutions seem to be very similar. Better governance that empowers the poor.

Rethinking capitalism

2011-11-06T23:46:00.002-05:00

In this video, Michael Porter discovers social entrepreneurship and applies it to the value chain. When a Harvard professor calls for change, it sounds so right, does it not? For those of you that are smart enough to know however, the concept of social entrepreneurship -- innovations and transformative change for the greater good has been around for a while. Whats more, Gandhi said this a while back. In his writings Gandhi did not distinguish between economics and ethics. "Economics that hurts the moral well-being of an individual or a nation is immoral, and therefore sinful. The value of an industry should be gauged less by the dividends it pays to shareholders; than by its effect on the bodies, soul and spirits of the people employed in it. In essence, supreme consideration is to be given to man than to money." Also, Gandhi believed if you paid attention to the means, the ends would take care of themselves. If you worry about paying your coffee suppliers a fair wage because you care about how you do things (means) you will ultimately creating shared value (end).

Trade and (Soft) Power

2011-10-29T13:36:00.002-04:00

Source: Wall Street Journal

There is much hype about China's rise in global trading system. For example, many people look at the fact that China has catapulted to become the biggest source of imports for the US (See WSJ link and pic below). That is one of the reasons why people suggest we are in a G-2 world. China is economically powerful, but I am not sure it can lead in the same way as other European democracies and countries like the US. The US, atleast in theory, leads from the values of freedom, liberty and justice. Recently though the way in which the US activates these values has led me to question is they believe these values are reserved for some more than others. Nevertheless, because these values have not been adopted and practiced by regimes such as that of China, it is more difficult to lead on the world stage. But there are folks that are vying for space in this soft power leadership position, especially in the developing world, here I look at countries like India and Brazil.

Counterpoint: Rich are getting richer? Exactly right

2011-10-11T13:51:00.001-04:00

Jay is one of my professors from grad school and also a co-author with me on an article I wrote way back! When he wrote this piece about inequality, I thought it important to share.
BY JAY COGGINS
Updated: March 29, 2011 - 2:32 PM
Printed in the Minneapolis Star Tribune (startribune.com/opinion)

Steven Cunningham ("The rich are getting richer -- right?" March 25) tells us that the rich in America aren't getting richer. To paraphrase Artemus Ward, a 19th-
century humorist: It ain't so much the things he don't know that get him into trouble. It's the things he does know that just ain't so.

Social Indicators showing the US at the bottom globally. NY Times

Economists, a famously contentious bunch, disagree about many things. On the question of economic inequality, though, they disagree hardly at all: American inequality is high and rising.

Economists use three main tools to study inequality. They measure poverty. They compute the Gini coefficient. And they compare the income or wealth of the rich (or the very rich) to that of the rest of us.

On all of these counts the U.S. record since 1970 is grim for all but those at the top.

The Census Bureau's 2009 poverty threshold for a family of two adults with two children was $21,756; for a single adult aged less than 65, it was $11,161. The poverty rate, giving the percentage of Americans living below this threshold, varies over time as the economy waxes and wanes.

Lately it's been rising. In 2009, 43 million Americans, one of every seven (14.3 percent), lived in poverty. That's up from 25.5 million (12.6 percent) in 1970.

The Gini coefficient measures inequality for all of us, not just the poor. It can be zero (if income is distributed equally); it can be 100 (if, impossibly, a single family captures the entire national income), or anything in between. A higher Gini means more inequality.

The Census Bureau tells us the U.S. Gini has risen from 39.4 in 1970 to 46.2 in 2000, and
to 46.8 in 2009.

Government programs and taxes can and do reduce inequality, though. After accounting for their effects, the U.S. Gini coefficient falls to 38.

How does this compare to Ginis for other rich countries? We take the top prize. Our 38 leaves us tied with Portugal atop the rankings of the richest countries. American exceptionalism indeed. Not since the Roaring Twenties have the richest in America had it so good. Economists Thomas Piketty and Emmanuel Saez have calculated the share of U.S. income going to the top 1 percent of American households. The share was a lofty 18.9 percent in 2007, more than double the 8.3 percent from 1970. The 2007 number was last surpassed in 1928, when the share reached 19.6 percent.

And the other rich countries? The most recent numbers for Germany and Japan, for example, are 8.9 percent and 9.2 percent. We win again, going away.

Inequality of income is high, but inequality of wealth is much higher still. Those on Forbes magazine's 2010 list of the 400 richest Americans, headed by Bill Gates with a net worth of $54 billion, together own wealth totaling $1.27 trillion. Compare that with the total net worth of the bottom 50 percent of households: $1.61 trillion as of 2007, the most recent number. That's right. The 400 richest people in the country are worth nearly as much as the poorest 57 million households.

And the Gini coefficient for household wealth, as opposed to income? An eye-popping 86.5.

Income mobility, on which Cunningham dwells at some length, is different than inequality, but related in an important way. High mobility, if true, sums up the American dream and lightens the burden of inequality. It means that the poor have a good chance to climb the economic ladder. Economists measure mobility in different ways. Some compare all families at two different moments, say 10 years apart; they find that mobility appears to be relatively high.

This is the approach taken in the government reports cited by Cunningham.
It has a serious weakness. Using it, much of what appears to be mobility is just college students beginning their careers or older workers retiring. That's not income mobility. It's the normal cycle of economic life. One can, more usefully, compare families only to others in the same age cohort over time. By this measure mobility is much lower,
and it's hardly budged in two generations.

In a recent study, economist Wojciech Kopcuz of Columbia and his coauthors estimated mobility by looking within cohorts. They found that only about one person in 30 can expect to move from the bottom 40 percent of the income scale into the top 20 percent within 10 years. Mobility is not high, and it is not rising.

There exists a determined and noisy band of American inequality deniers, to which Cunningham evidently belongs. We all need to on guard against believing the things they know that just ain't so.

Jay Coggins is an applied economics
professor at the University of Minnesota

Values and achievement

2011-10-05T17:32:00.001-04:00

Values can be the equalizer in achievement: Research from Dr. Hoffreth compares the achievement of school-aged children of immigrant parents with that of children of native parents using data from the 1997 and 2003 Panel Study of Income Dynamics Child Development Supplement....In spite of their greater socioeconomic disadvantage, children of immigrant parents (first or second generation) achieve at levels at least equal to those of children of native parents. In the case of vocabulary, they surpass the achievement of their third generation peers. Children of immigrants spend more time studying and watching television and less time playing video games and sports; these activities mediate some of the effect of generation. Immigrant values and beliefs remain important sources of generational achievement differences even after socioeconomic status is controlled.

Amy Chua - Battle Hymn of the Tiger Mother

youtube.com – http://www.bloomsbury.com/Amy-Chua-Battle-Hymn-of-the-Tiger-Mother A lot of people wonder how Chinese parents raise such stereotypically successful...

Does attending a highly selective college lead to higher incomes? "Its not where you go, its who you are and how you do it"

2011-07-21T16:47:00.002-04:00

By now, many students that are going to college have made a choice. Choosing a college to attend is a process of careful deliberation and substantial investment. Many parents, students, mentors, teachers and guidance counselors spend countless hours poring over college catalogues, arranging campus visits and so on trying to chose between one college and the other. This sort of investment of time and financial resources make sense. By most measures, the returns to a college education are high, anywhere from 8-12% depending on who you are, your smarts, the type of degree (professional, liberal arts, etc), and so on. That said, when choosing colleges, do college characteristics matter? For example, does it matter if you goto a highly selective college, versus a selective one? Recent research by Dale and Krueger (2011) suggests that maybe not.

First some assumptions. Returns to education are measured by comparing your income over your working life to that of the average person that had the next lowest degree. In order to determine the returns to education, one needs data on actual incomes over a long time horizon. Interestingly, Dale and Krueger managed to obtain a sample of anonymous data from the social security administration matched with college questionnaires and records. The social security data contained a long history of actual income data and the college questionnaires contained student characteristics, high school scores and grades before enrollment and so on. So basically our focus on whether a selective college gives you a higher return is based on comparing a graduates income. Now one might argue that income is not the only way to judge whether attending one college over another was worth it. For example, my choice between schools was not based on differences in the earning potentials of its graduates, but a desire to be in the same place as other globally engaged change agents. So, going to college for me was less about income and more about the experiences and people I came into contact with, the relationships that I built, learned from, and have tried to sustain over time. This notwithstanding, most people would agree that income is a good way to compare returns to education across individuals.

Next, what determines how high your income is over long periods of time? What determines your income trajectory over your lifetime? Arguably, the first is how smart and motivated you are, the second is the opportunities that are available to you, the third maybe school characteristics such as selectivity. It is relatively easy to measure observed characteristics of how smart you are, like grades in high school, but it is much harder to measure unobserved characteristics about you, such as your ambition and motivation. This is where the Dale and Krueger paper comes in. They suggest that you can get at unobserved characteristics by looking at the average SAT score of the accepting institution. College admissions counselors spend a lot time looking at recommendations, interviewing and decoding SAT scores to figure out whether a student would be a good fit. But, if on average a students makes or overshoots the SAT or ACT cut-off score for the institution, this is a decent measure of their ambition. So this is roughly how they get at the unobserved student characteristics. So what do they find?

Basically, if you just account for observed student characteristics, school quality (selectivity) does have an impact. Controlling for observed student factors, on average your income will be about 7% higher than if you went to less selective school. Going to a highly selective school does increase your earnings over your lifetime. BUT, when you account for the unobserved student characteristics such as motivation, this premium vanishes or in technical jargon becomes statistically indistinguishable from zero! So its not where you go, its really how you approach your life that matters. Interestingly, the college selectivity premium remains for minorities and first generation college goers. Regardless of your unobserved smarts, if you are from a historically disadvantaged group, it makes sense from a financial perspective to go to the most selective college you can get into. Now there are a lot of caveats one can have about this finding, but Dale and Krueger have affirmed what I tell my students all the time. For an undergraduate education, its is not where you go, its who you are and how you do it.

The Whitefield Brothers

2011-05-09T15:19:00.002-04:00

I listen to a lot of so called "world music" and I came across the german band, Whitefield Brothers as I was flipping through some vinyl at a local record store.

This is an unusual band, a true child of globalization, that assembles a world music pastiche. It makes me wonder though, how I should see bands like this, that are de-linked from the historical context of the music and footage they sample? That said, I do dig their sound.

The Surprising Truth About What Motivates Us

2011-04-08T11:34:00.001-04:00

Does the existence of merit pay make people work harder? In 1998, Jeffrey Pfeffer writing in the Harvard Business Review talked about six dangerous myths about pay. In it, he argued that merit pay or even bonuses did not have positive productivity effects and even created problems with morale. A recent article by Keys and Dee also showed that performance pay for teachers did little to improve student test scores in a randomized experiment. The evidence is also growing in Behavioral Economics literature - performance based pay systems are the wrong way to go when it comes to rewarding highly productive folks in industries where their work is complex and multidimensional. Education is one such industry. The best thing when it comes to pay in educational systems is to pay enough to remove the issue of pay from consideration. Thoughts?

Could inflation be the reason Egypt and Tunisia came down?

2011-02-13T20:00:00.001-05:00

A recent Financial Times article argued that inflation could have been an important contributor that spurred the revolution in Egypt and Tunisia. We cannot ignore the fact that economic repression and the lack of opportunity (youth unemployment) were important contributing forces. Also equally important are the political factors. Egyptians and Tunisians have been denied many political and social rights - the right to a free press, for some to practice their religion, and to assemble an effective opposition. This kind of economic, political, social repression as well as corruption are perhaps the biggest factors that encouraged the revolution.

Much has been said about the importance of social media in propagating the revolution. A recent panel that we hosted at the College of Wooster featured speakers Skyping in from Egypt. We also "conferenced-in" a Tunisian professor. They suggested that since few Egyptians and Tunisians have access to social media, facebook and twitter were perhaps not as important as it would seem. Personal networks seemed more important in spreading the revolution.

What is money?

2011-01-08T16:33:00.002-05:00

This is an issue that I talk a lot about in Monetary Economics, a class I teach every other year. Formally, money is an asset that is accepted as liquid medium of exchange. The key word here is money is "accepted". Acceptance is based on belief or faith. No faith, and money ceases to serve its function as a medium of exchange, unit of account, store of value and so on. Our most recent economic crisis had a lot to do with beliefs and faith, or the loss of faith to be more precise. How? A well put-together program on money is being aired right now on public radio. Have a listen.

Diversity and National Parks

2010-12-02T12:29:00.003-05:00

Recent surveys show that national park visitors are overwhelmingly non-Hispanic whites. Stan Austin, the new superintendent of Cuyahoga Valley National Park, in a NPR Radio interview said that he would like to address this issue as priority given the ethnic makeup of the Cleveland and Akron. Surveys find that many blacks and Latinos face logistical or cultural barriers to making the trip to national parks.

A study conducted by Nina Roberts at San Francisco State University showed that only 10% of national park visitors are people of color (compared to 34% of the U.S. who are people of color).

In a NYTimes blog post, Marcelo Bonta suggests implicitly, that maybe this has something to do with the staff of the National Parks Service. "The first African-American National Park Service Director, Robert Stanton, during his post-NPS days conducted a study that revealed only 9-11% of staff and board members of environmental organizations are people of color. Similar studies show 4-5% of people of color on staff and boards of environmental groups. Another study of over 150 environmental institutions showed that only 33% of non-profits and 22% of government agencies have NO people of color. If the environmental movement wants to be relative and successful far into the future, especially by 2042 when the U.S. will be over 50% people of color, it needs to intentionally and proactively diversify. If it doesn't, it will continually lose relevance in a increasingly diverse society." Incidentally, our local superintendent is a person of color. So we are moving in the right direction locally.

A really exciting program that is tryng to solve the problem of accessibility from the ground up is the Sierra Club's Building Bridges to the Outdoors (BBTO) program, which introduces youth of all backgrounds to the natural environment. Vandenberg, one of the founding leaders said: "My first National Parks experience was at Yosemite in 1999," remembers Vanderberg, who is African American. "What impressed me was the majesty of it all - the size, the scale, and the lack of obvious human impact." At the time Vanderberg was a social studies teacher at Crenshaw High School in South Los Angeles. Inspired by his trip, he began bringing students from Crenshaw's Eco Club to Yosemite. When Building Bridges was established the following year, Vanderberg became one of its first leaders and has been involved with the program ever since.

As I think about these issues of inclusion, I also think back to my home country Tanzania where national parks are increasingly getting less and less accessible to the local population as elites capitalize on international tourism dollars and marginalize local communities from the benefits of national park systems. There are exceptions of course! My favorite is the collaborations between the Masai and local tour operators in the Tarangire Conservation area, quoted in Zepels book on Indigenous Tourism (142). But most people still cannot access these parks. The urban poor are still marginalized.

Diversity and Dilemmas of Collective Action

2010-11-18T10:56:00.003-05:00

I have long been interested in diversity perhaps because of my identity, education and upbringing. Now with my new position co-leading the Center for Diversity and Global Engagement, I am interested in understanding how diverse communities can thrive. I recall reading last year the finding that homogeneous communities are better at providing public goods than diverse communities (Alesina, Baqir, and Easterly 1999)¹. Public goods are important because their benefits accrue to society as a whole and allow us to progress. For example, the reason for why Scandinavian countries may be able to set-up and sustain large welfare states that provide public goods like education and health has a lot to do with their homogeneity. Does this mean that diverse societies like the US find it harder to provide public goods?

A recent set of behavioral experiments in Uganda and a book by Habyarimana and associates offer some insight (see below). "The experiments show that when actions are publicly observable coethnics gave significantly more to their fellow coethnics, expected their partners to reciprocate, and expected that they would be sanctioned for a failure to cooperate. This effect is most pronounced among individuals who were otherwise least likely to cooperate." When there are deep ethic divisions and grievances, it is hard to get folks to work with people that are different. I am not sure these results are generalizable to other parts of the world yet. But I am intrigued. It also makes me wonder what can overcome this problem. Is it leadership -- a global mindset in the leadership, institutions or both?

¹ An interesting finding is the correlation (not causaton) between ethnically diverse cities and economic prosperity.

Coethnicity: Diversity and the Dilemmas of Collective Action

James Habyarimana, Macartan Humphreys, Daniel N. Posner and Jeremy M. Weinstein

Winner of the 2010 Luebbert Prize for Best Book in Comparative Politics

Ethnically homogenous communities often do a better job than diverse communities of producing public goods such as satisfactory schools and health care, adequate sanitation, and low levels of crime. Coethnicity reports the results of a landmark study that aimed to find out why diversity has this cooperation-undermining effect. The study, conducted in a neighborhood of Kampala, Uganda, notable for both its high levels of diversity and low levels of public goods provision, hones in on the mechanisms that might account for the difficulties diverse societies often face in trying to act collectively.

The Mulago-Kyebando Community Study uses behavioral games to explore how the ethnicity of the person with whom one is interacting shapes social behavior. Hundreds of local participants interacted with various partners in laboratory games simulating real-life decisions involving the allocation of money and the completion of joint tasks. Many of the subsequent findings debunk long-standing explanations for diversity’s adverse effects. Contrary to the prevalent notion that shared preferences facilitate ethnic collective action, differences in goals and priorities among participants were not found to be structured along ethnic lines. Nor was there evidence that subjects favored the welfare of their coethnics over that of non-coethnics. When given the opportunity to act altruistically, individuals did not choose to benefit coethnics disproportionately when their actions were anonymous. Yet when anonymity was removed, subjects behaved very differently. With their actions publicly observed, subjects gave significantly more to coethnics, expected their partners to reciprocate, and expected that they would be sanctioned for a failure to cooperate. This effect was most pronounced among individuals who were otherwise least likely to cooperate. These results suggest that what may look like ethnic favoritism is, in fact, a set of reciprocity norms—stronger among coethnics than among non-coethnics—that make it possible for members of more homogeneous communities to take risks, invest, and cooperate without the fear of getting cheated. Such norms may be more subject to change than deeply held ethnic antipathies—a powerful finding for policymakers seeking to design social institutions in diverse societies.

Research on ethnic diversity typically draws on either experimental research or field work. Coethnicity does both. By taking the crucial step from observation to experimentation, this study marks a major breakthrough in the study of ethnic diversity.

Outsourcing 3.0

2010-07-22T17:24:00.002-04:00

When one thinks of outsourcing stereotypical images come to mind. The Indian "call center" (so called voice services), outsourced manufacturing, and the Indian engineer or medical technician "stealing jobs from the West". India is rapidly coming away from these stereotypes. A recent conference in Bangalore on Business Process Outsourcing (BPO), a term that encapsulates the different activities related to outsourcing, reported that BPOs were moving away from voice services, enjoying high growth (30% growth in revenues of which 57% came from non-voice services), despite the recent global recession.

Rural BPOs

“India’s BPO sector is rapidly scaling the value chain.. getting into complex analytical and transformational work that brings enterprise-wide efficiency.” (Times of India, June 10). For example GenPact, a business leader in analytics and research tells companies where their products are weak using research tools we learn in business schools and our economics classes. They can also tell credit card companies which customers are more likely to default. The fact that BPOs can provide such tailored answers to the operational needs of companies means that there will be increased competition for consulting services and knowledge management solutions. This is a a good thing in my opinion as clients will now be able to search for such knowledge based solutions globally and prices should fall.

Two trends towards new ways of doing business have promise for economic development and the social sector. The first is rural-shoring and the second is social enterprise BPOs.

Rural BPOs or Rural shoring
According to Sridahr Mitta of NextWealth Entreprenerus, of all the engineering graduates produced in India, 50% are from villages. Of these, 50% are women. These women engineers want to stay close to their hometowns and do not want to move to the city. Hence the scope for (higher value) rural BPOs is huge! (Quoted in Times of India, Thursday June 10th, 2010). NextWealth runs a rural BPO in Tamil Nadu where local women tutor US children in math. Mr. Mitta says that they have measured the quality of tutoring and it is just as good as anyone in the US. Another example of rural shoring is Piramal Foundation that has trained village women to accommodate the vast data entry needs of the western world. Speaking of data entry, it turns out the Enable India places visually impaired clients in the same data entry sector within the context of its medical transcription-training program. As more and more disabled persons and BPO companies get to know about Enable’s work, I am sure more differently-abled people will be able to find the dignity of work.

Social Enterprise BPOs
SE BPOs work with marginalized or underserved populations. They come up with tailored solutions that satisfy both the client’s needs (such as data entry or manufacturing) while also empowering the marginalized group though employment and other services. Exciting examples are Radiant Info Systems a BPO that works in Hyderabad’s Cherlapally Central Jail and Vindhya e-infomedia a Banaglore based BPO where 94% of its employees are differently-abled.

BPOs are moving rapidly up the value chain to knowledge process outsourcing, moving into rural areas, positively effecting the economic development of people outside cities, as well as working to help marginalized groups. The BPO sector is increasingly complex and benefits more folks in more ways than the stereotypical call center. It is time we recognize that in the US.

It’s odd how people relate jobs with nationalist sentiments. I personally think that the notion of a job should be attached to the task and the capabilities of person who is doing it. Jobs do not belong to a country; they belong to the individual who can do it best. But this is a topic for another day.

Half the world is unbanked! Solutions for the poorest of the poor.

2010-06-07T02:17:00.002-04:00

You may remember my last blog entry on the underbanked population in the United States. Twenty six percent of the US population is underbanked. This means about of the quarter of the US population do not have adequate financial services. The picture in the world is worse. A recent report published by the Financial Access Initiative using conservative estimates finds that half the world is not served by financial services at all! Key findings are:

2.5 billion adults, just over half of world’s adult population, do not use formal financial services to save or borrow.
2.2 billion of these unserved adults live in Africa, Asia, Latin America, and the Middle East.
Of the 1.2 billion adults who use formal financial services in Africa, Asia, and the Middle East, at least two-thirds, a little more than 800 million, live on less than $5 per day.

The authors of this report suggest that the lack of financial services access has little to do with urbanization and income. Policy, regulations and the choices that the providers of financial services make are equally, if not more important in explaining the inter-country variation in access. It is clear that the government has an important role here, but are there any other promising avenues for change? What are the solutions proposed by social entreprenerus?

Being in India these past few weeks has made me rethink potential solutions to the unbanked. The traditional answer to extending financial services to the unbanked is microfinance. While this is an important and sometimes effective way to reach those that live on between $2-$5 a day, there may be better solutions to reach the really poor, or "the last mile" where little bank infrastructure exists.

The first solution is to strengthen and continue to innovate and implement mobile banking. The greatest success story here is in Kenya using M-Pesa. "M-PESA is a branchless banking service. It is designed to allow users to complete basic banking transactions without the need to visit a bank branch. The continuing success of M-PESA, in Kenya, has been due to the creation of a highly popular, affordable payment service with only limited involvement of a bank. -M-PESA_reaches 1.6 million_customers and is growing. This growth is exciting, even infecting a student group that I advise as part of our entrepreneruship initiatives at the College of Wooster. Since last year, Global Youth Connection (GYC) has won two regional competitions to develop mobile banking for youth. Mobile banking shows a lot of promise.

The poorest of the poor that live on less than $2 a day manage their money in variety of ways (Collins et al). They save, have developed informal self and co-insurance schemes (keeping money with a relative or participating in a rotating savings club) and also simultaneously rack-up debt. We are finding out the the poor are complex money managers. Many of these poor, especially those that live in India, are served by non-profit self help groups (SHG) and are politically served through Panchayats (Panchayat" literally means assembly (yat) of five (panch) wise and respected elders chosen and accepted by the village community. Traditionally, these assemblies settled disputes between individuals and villages. Recently the Indian government has decentralized several administrative functions to the village level). One can think of banking service provided through self help groups first and then eventually extended to panchayats if mobile banking is not successful everywhere. A recent empirical study by S S Sangwan on financial inclusion and SHGs shows that women SHG may be more effective vehicles to spread financial inclusion.

Many of the poorest of the poor work in the informal sector. These workers are invisible. They do not have formal documents. As a result, they are often not counted in censuses and do not access any formal benefits provided by the state. A really fascinating development in India is Labournet. Labournet organizes informal sector workers, like housecleaners, plumbers, electricians, tailors and so on by offering them a wider customer base. Informal laborers can register their services with labournet and cleints can find these workers using a simple web-based keyword seach. Connecting clients to informal sector workers is not the only thing they do. Labournet can, and does offer additional services like insurance and bank accounts.

There is no one solution. On the African continent, perhaps mobile banking is the way to go. In Asia maybe it is self-help groups. The local context should determine the appropriate solution. One thing is clear, things are getting done.

Graduation and living the life of mind(fulness).

2010-05-10T15:04:00.002-04:00

I have just returned from graduation. It was both inspiring and sobering. We heard some powerful speeches from women who have stood up for marginalized people, against war, and for the earth. These are lofty things to be thinking about, when the tangible fear of being unemployed is upon many of my students. One of my students shared David Foster-Wallace's speech with me. I could not have summarized what I have to say to my students better: Be mindful and aware as you turn each new page of your life. Here it is (and thanks Eric).

David Foster Wallace-Kenyon Commencement Speech 2005
This speech was originally transcribed and posted at Marganlia.org until recently (though it is still available elsewhere) In order to help keep this speech that was free, and can still be found here, here is the originally transcribed version.

"(If anybody feels like perspiring [cough], I'd advise you to go ahead, because I'm sure going to. In fact I'm gonna [mumbles while pulling up his gown and taking out a handkerchief from his pocket].) Greetings ["parents"?] and congratulations to Kenyon's graduating class of 2005. There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says "Morning, boys. How's the water?" And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes "What the hell is water?"

This is a standard requirement of US commencement speeches, the deployment of didactic little parable-ish stories. The story ["thing"] turns out to be one of the better, less bullshitty conventions of the genre, but if you're worried that I plan to present myself here as the wise, older fish explaining what water is to you younger fish, please don't be. I am not the wise old fish. The point of the fish story is merely that the most obvious, important realities are often the ones that are hardest to see and talk about. Stated as an English sentence, of course, this is just a banal platitude, but the fact is that in the day to day trenches of adult existence, banal platitudes can have a life or death importance, or so I wish to suggest to you on this dry and lovely morning.

Of course the main requirement of speeches like this is that I'm supposed to talk about your liberal arts education's meaning, to try to explain why the degree you are about to receive has actual human value instead of just a material payoff. So let's talk about the single most pervasive cliché in the commencement speech genre, which is that a liberal arts education is not so much about filling you up with knowledge as it is about "teaching you how to think". If you're like me as a student, you've never liked hearing this, and you tend to feel a bit insulted by the claim that you needed anybody to teach you how to think, since the fact that you even got admitted to a college this good seems like proof that you already know how to think. But I'm going to posit to you that the liberal arts cliché turns out not to be insulting at all, because the really significant education in thinking that we're supposed to get in a place like this isn't really about the capacity to think, but rather about the choice of what to think about. If your total freedom of choice regarding what to think about seems too obvious to waste time discussing, I'd ask you to think about fish and water, and to bracket for just a few minutes your scepticism about the value of the totally obvious.

Here's another didactic little story. There are these two guys sitting together in a bar in the remote Alaskan wilderness. One of the guys is religious, the other is an atheist, and the two are arguing about the existence of God with that special intensity that comes after about the fourth beer. And the atheist says: "Look, it's not like I don't have actual reasons for not believing in God. It's not like I haven't ever experimented with the whole God and prayer thing. Just last month I got caught away from the camp in that terrible blizzard, and I was totally lost and I couldn't see a thing, and it was 50 below, and so I tried it: I fell to my knees in the snow and cried out 'Oh, God, if there is a God, I'm lost in this blizzard, and I'm gonna die if you don't help me.'" And now, in the bar, the religious guy looks at the atheist all puzzled. "Well then you must believe now," he says, "After all, here you are, alive." The atheist just rolls his eyes. "No, man, all that was was a couple Eskimos happened to come wandering by and showed me the way back to camp."

It's easy to run this story through kind of a standard liberal arts analysis: the exact same experience can mean two totally different things to two different people, given those people's two different belief templates and two different ways of constructing meaning from experience. Because we prize tolerance and diversity of belief, nowhere in our liberal arts analysis do we want to claim that one guy's interpretation is true and the other guy's is false or bad. Which is fine, except we also never end up talking about just where these individual templates and beliefs come from. Meaning, where they come from INSIDE the two guys. As if a person's most basic orientation toward the world, and the meaning of his experience were somehow just hard-wired, like height or shoe-size; or automatically absorbed from the culture, like language. As if how we construct meaning were not actually a matter of personal, intentional choice. Plus, there's the whole matter of arrogance. The nonreligious guy is so totally certain in his dismissal of the possibility that the passing Eskimos had anything to do with his prayer for help. True, there are plenty of religious people who seem arrogant and certain of their own interpretations, too. They're probably even more repulsive than atheists, at least to most of us. But religious dogmatists' problem is exactly the same as the story's unbeliever: blind certainty, a close-mindedness that amounts to an imprisonment so total that the prisoner doesn't even know he's locked up.

The point here is that I think this is one part of what teaching me how to think is really supposed to mean. To be just a little less arrogant. To have just a little critical awareness about myself and my certainties. Because a huge percentage of the stuff that I tend to be automatically certain of is, it turns out, totally wrong and deluded. I have learned this the hard way, as I predict you graduates will, too.

Here is just one example of the total wrongness of something I tend to be automatically sure of: everything in my own immediate experience supports my deep belief that I am the absolute centre of the universe; the realest, most vivid and important person in existence. We rarely think about this sort of natural, basic self-centredness because it's so socially repulsive. But it's pretty much the same for all of us. It is our default setting, hard-wired into our boards at birth. Think about it: there is no experience you have had that you are not the absolute centre of. The world as you experience it is there in front of YOU or behind YOU, to the left or right of YOU, on YOUR TV or YOUR monitor. And so on. Other people's thoughts and feelings have to be communicated to you somehow, but your own are so immediate, urgent, real.

Please don't worry that I'm getting ready to lecture you about compassion or other-directedness or all the so-called virtues. This is not a matter of virtue. It's a matter of my choosing to do the work of somehow altering or getting free of my natural, hard-wired default setting which is to be deeply and literally self-centered and to see and interpret everything through this lens of self. People who can adjust their natural default setting this way are often described as being "well-adjusted", which I suggest to you is not an accidental term.

Given the triumphant academic setting here, an obvious question is how much of this work of adjusting our default setting involves actual knowledge or intellect. This question gets very tricky. Probably the most dangerous thing about an academic education--least in my own case--is that it enables my tendency to over-intellectualise stuff, to get lost in abstract argument inside my head, instead of simply paying attention to what is going on right in front of me, paying attention to what is going on inside me.

As I'm sure you guys know by now, it is extremely difficult to stay alert and attentive, instead of getting hypnotised by the constant monologue inside your own head (may be happening right now). Twenty years after my own graduation, I have come gradually to understand that the liberal arts cliché about teaching you how to think is actually shorthand for a much deeper, more serious idea: learning how to think really means learning how to exercise some control over how and what you think. It means being conscious and aware enough to choose what you pay attention to and to choose how you construct meaning from experience. Because if you cannot exercise this kind of choice in adult life, you will be totally hosed. Think of the old cliché about "the mind being an excellent servant but a terrible master".

This, like many clichés, so lame and unexciting on the surface, actually expresses a great and terrible truth. It is not the least bit coincidental that adults who commit suicide with firearms almost always shoot themselves in: the head. They shoot the terrible master. And the truth is that most of these suicides are actually dead long before they pull the trigger.

And I submit that this is what the real, no bullshit value of your liberal arts education is supposed to be about: how to keep from going through your comfortable, prosperous, respectable adult life dead, unconscious, a slave to your head and to your natural default setting of being uniquely, completely, imperially alone day in and day out. That may sound like hyperbole, or abstract nonsense. Let's get concrete. The plain fact is that you graduating seniors do not yet have any clue what "day in day out" really means. There happen to be whole, large parts of adult American life that nobody talks about in commencement speeches. One such part involves boredom, routine and petty frustration. The parents and older folks here will know all too well what I'm talking about.

By way of example, let's say it's an average adult day, and you get up in the morning, go to your challenging, white-collar, college-graduate job, and you work hard for eight or ten hours, and at the end of the day you're tired and somewhat stressed and all you want is to go home and have a good supper and maybe unwind for an hour, and then hit the sack early because, of course, you have to get up the next day and do it all again. But then you remember there's no food at home. You haven't had time to shop this week because of your challenging job, and so now after work you have to get in your car and drive to the supermarket. It's the end of the work day and the traffic is apt to be: very bad. So getting to the store takes way longer than it should, and when you finally get there, the supermarket is very crowded, because of course it's the time of day when all the other people with jobs also try to squeeze in some grocery shopping. And the store is hideously lit and infused with soul-killing muzak or corporate pop and it's pretty much the last place you want to be but you can't just get in and quickly out; you have to wander all over the huge, over-lit store's confusing aisles to find the stuff you want and you have to manoeuvre your junky cart through all these other tired, hurried people with carts (et cetera, et cetera, cutting stuff out because this is a long ceremony) and eventually you get all your supper supplies, except now it turns out there aren't enough check-out lanes open even though it's the end-of-the-day rush. So the checkout line is incredibly long, which is stupid and infuriating. But you can't take your frustration out on the frantic lady working the register, who is overworked at a job whose daily tedium and meaninglessness surpasses the imagination of any of us here at a prestigious college.

But anyway, you finally get to the checkout line's front, and you pay for your food, and you get told to "Have a nice day" in a voice that is the absolute voice of death. Then you have to take your creepy, flimsy, plastic bags of groceries in your cart with the one crazy wheel that pulls maddeningly to the left, all the way out through the crowded, bumpy, littery parking lot, and then you have to drive all the way home through slow, heavy, SUV-intensive, rush-hour traffic, et cetera et cetera.

Everyone here has done this, of course. But it hasn't yet been part of you graduates' actual life routine, day after week after month after year.

But it will be. And many more dreary, annoying, seemingly meaningless routines besides. But that is not the point. The point is that petty, frustrating crap like this is exactly where the work of choosing is gonna come in. Because the traffic jams and crowded aisles and long checkout lines give me time to think, and if I don't make a conscious decision about how to think and what to pay attention to, I'm gonna be pissed and miserable every time I have to shop. Because my natural default setting is the certainty that situations like this are really all about me. About MY hungriness and MY fatigue and MY desire to just get home, and it's going to seem for all the world like everybody else is just in my way. And who are all these people in my way? And look at how repulsive most of them are, and how stupid and cow-like and dead-eyed and nonhuman they seem in the checkout line, or at how annoying and rude it is that people are talking loudly on cell phones in the middle of the line. And look at how deeply and personally unfair this is.

Or, of course, if I'm in a more socially conscious liberal arts form of my default setting, I can spend time in the end-of-the-day traffic being disgusted about all the huge, stupid, lane-blocking SUV's and Hummers and V-12 pickup trucks, burning their wasteful, selfish, 40-gallon tanks of gas, and I can dwell on the fact that the patriotic or religious bumper-stickers always seem to be on the biggest, most disgustingly selfish vehicles, driven by the ugliest [responding here to loud applause] (this is an example of how NOT to think, though) most disgustingly selfish vehicles, driven by the ugliest, most inconsiderate and aggressive drivers. And I can think about how our children's children will despise us for wasting all the future's fuel, and probably screwing up the climate, and how spoiled and stupid and selfish and disgusting we all are, and how modern consumer society just sucks, and so forth and so on.

You get the idea.

If I choose to think this way in a store and on the freeway, fine. Lots of us do. Except thinking this way tends to be so easy and automatic that it doesn't have to be a choice. It is my natural default setting. It's the automatic way that I experience the boring, frustrating, crowded parts of adult life when I'm operating on the automatic, unconscious belief that I am the centre of the world, and that my immediate needs and feelings are what should determine the world's priorities.

The thing is that, of course, there are totally different ways to think about these kinds of situations. In this traffic, all these vehicles stopped and idling in my way, it's not impossible that some of these people in SUV's have been in horrible auto accidents in the past, and now find driving so terrifying that their therapist has all but ordered them to get a huge, heavy SUV so they can feel safe enough to drive. Or that the Hummer that just cut me off is maybe being driven by a father whose little child is hurt or sick in the seat next to him, and he's trying to get this kid to the hospital, and he's in a bigger, more legitimate hurry than I am: it is actually I who am in HIS way.

Or I can choose to force myself to consider the likelihood that everyone else in the supermarket's checkout line is just as bored and frustrated as I am, and that some of these people probably have harder, more tedious and painful lives than I do.

Again, please don't think that I'm giving you moral advice, or that I'm saying you are supposed to think this way, or that anyone expects you to just automatically do it. Because it's hard. It takes will and effort, and if you are like me, some days you won't be able to do it, or you just flat out won't want to.

But most days, if you're aware enough to give yourself a choice, you can choose to look differently at this fat, dead-eyed, over-made-up lady who just screamed at her kid in the checkout line. Maybe she's not usually like this. Maybe she's been up three straight nights holding the hand of a husband who is dying of bone cancer. Or maybe this very lady is the low-wage clerk at the motor vehicle department, who just yesterday helped your spouse resolve a horrific, infuriating, red-tape problem through some small act of bureaucratic kindness. Of course, none of this is likely, but it's also not impossible. It just depends what you want to consider. If you're automatically sure that you know what reality is, and you are operating on your default setting, then you, like me, probably won't consider possibilities that aren't annoying and miserable. But if you really learn how to pay attention, then you will know there are other options. It will actually be within your power to experience a crowded, hot, slow, consumer-hell type situation as not only meaningful, but sacred, on fire with the same force that made the stars: love, fellowship, the mystical oneness of all things deep down.

Not that that mystical stuff is necessarily true. The only thing that's capital-T True is that you get to decide how you're gonna try to see it.

This, I submit, is the freedom of a real education, of learning how to be well-adjusted. You get to consciously decide what has meaning and what doesn't. You get to decide what to worship.

Because here's something else that's weird but true: in the day-to-day trenches of adult life, there is actually no such thing as atheism. There is no such thing as not worshipping. Everybody worships. The only choice we get is what to worship. And the compelling reason for maybe choosing some sort of god or spiritual-type thing to worship--be it JC or Allah, be it YHWH or the Wiccan Mother Goddess, or the Four Noble Truths, or some inviolable set of ethical principles--is that pretty much anything else you worship will eat you alive. If you worship money and things, if they are where you tap real meaning in life, then you will never have enough, never feel you have enough. It's the truth. Worship your body and beauty and sexual allure and you will always feel ugly. And when time and age start showing, you will die a million deaths before they finally grieve you. On one level, we all know this stuff already. It's been codified as myths, proverbs, clichés, epigrams, parables; the skeleton of every great story. The whole trick is keeping the truth up front in daily consciousness.

Worship power, you will end up feeling weak and afraid, and you will need ever more power over others to numb you to your own fear. Worship your intellect, being seen as smart, you will end up feeling stupid, a fraud, always on the verge of being found out. But the insidious thing about these forms of worship is not that they're evil or sinful, it's that they're unconscious. They are default settings.

They're the kind of worship you just gradually slip into, day after day, getting more and more selective about what you see and how you measure value without ever being fully aware that that's what you're doing.

And the so-called real world will not discourage you from operating on your default settings, because the so-called real world of men and money and power hums merrily along in a pool of fear and anger and frustration and craving and worship of self. Our own present culture has harnessed these forces in ways that have yielded extraordinary wealth and comfort and personal freedom. The freedom all to be lords of our tiny skull-sized kingdoms, alone at the centre of all creation. This kind of freedom has much to recommend it. But of course there are all different kinds of freedom, and the kind that is most precious you will not hear much talk about much in the great outside world of wanting and achieving.... The really important kind of freedom involves attention and awareness and discipline, and being able truly to care about other people and to sacrifice for them over and over in myriad petty, unsexy ways every day.

That is real freedom. That is being educated, and understanding how to think. The alternative is unconsciousness, the default setting, the rat race, the constant gnawing sense of having had, and lost, some infinite thing.

I know that this stuff probably doesn't sound fun and breezy or grandly inspirational the way a commencement speech is supposed to sound. What it is, as far as I can see, is the capital-T Truth, with a whole lot of rhetorical niceties stripped away. You are, of course, free to think of it whatever you wish. But please don't just dismiss it as just some finger-wagging Dr Laura sermon. None of this stuff is really about morality or religion or dogma or big fancy questions of life after death.

The capital-T Truth is about life BEFORE death.

It is about the real value of a real education, which has almost nothing to do with knowledge, and everything to do with simple awareness; awareness of what is so real and essential, so hidden in plain sight all around us, all the time, that we have to keep reminding ourselves over and over:

"This is water."

"This is water."

It is unimaginably hard to do this, to stay conscious and alive in the adult world day in and day out. Which means yet another grand cliché turns out to be true: your education really IS the job of a lifetime. And it commences: now.

I wish you way more than luck."

Is scale the most important goal for social entrepreneurs?

2010-04-13T22:27:00.001-04:00

I am a bit troubled by the fascination that social entrepreneurs currently have with achieving scale or at least the way in which many I have met think about it. Scale is a worthwhile goal and appropriate in some contexts. But, I do not believe it should be the only metric by which we judge a social entrepreneur’s success.

Regular businessmen, often confused with entrepreneurs, are motivated by scale because they want to decrease unit costs, increase profits, reach new customers or gain market share. For businesses that produce goods, to achieve scale is to grow the organization. I am not sure the same argument applies to social entrepreneurs. Social entrepreneurs, in providing social benefits, should not be motivated by just growing the size of the organization (a narrow interpretation of scale which may come from equating scale in business or economics to scale to the problem at hand). Scale in social entrepreneurship comes in many forms. As Dees in a recent Mckinsey Report points out, scale can also include advocacy and partnering strategically with other organizations. Partnering and advocacy can create long lasting changes because governments or multilateral institutions change policy in response to advocacy. Advocacy and educational campaigns can also cause people to rethink how they do things. Examples abound - I am thinking about the Ban on land mines led by Jody Williams, the East African environmental movement started by Waangari Maathai or a revolution in education started by a modest teacher, Maria Montessori. These are individuals who achieved wideSCALE change without growing the sizes of their organizations.

In Forces for Good, Crutchfield et al analyzed the common ingredients in high impact non-profits. Again here, they found that successful non-profits that achieved the greatest impact in their respective spaces served their clients, but also spent considerable time and resources focused on advocating for change (often to governments).

In my mind social entrepreneurs have a greater responsibility when they are considering scale. They have a responsibility BOTH to their current and future constituency and clients. If their social impact, providing to the core customers is reduced by increasing in physical size, I would consider their scaling a failure. My view is that, rather than scale, social entrepreneurs need to place more emphasis on performance. I am more interested in social entrepreneurs that provide a service at the lowest possible unit cost without increasing organizational size. I am more interested in change agents whose innovation minimizes unintended consequences or whose innovation provides social value in multiple spaces with little effort and few resources. Like any economist, I prefer productivity to output. In layman’s terms I like my “bang!” or “bling” when I can get it, but I prefer greater “bang for my buck!”.

Legal immigrants, productivity and taxes

2010-03-08T18:15:00.009-05:00

Every year international students that have been trained in the US complete their education successfully and return home. This is sadly a substantial lost opportunity for the US and is the principle behind HR 1791: The Staple Act. The Staple Act guarantees permanent residency to some international PhD. graduates trained in the US. This guarantee is mostly for science and technology graduates because US natives normally lag behind their foreign counterparts here. Given recent evidence, I suggest we extend this Act to students that graduate with Bachelors degrees as well.

The number of international students at US colleges and universities increased 8% to an all-time high of 671,616 in the 2008-09 academic year, according to the Open Doors report. International students are a good source of revenue for the US higher ed. system but more importantly, they can serve as an important contributor to future productivity growth. Jennifer Hunt's recent paper illustrates conclusively that immigrants "who first entered on a student/trainee visa or a temporary work visa have a large advantage over natives in wages, patenting, commercializing or licensing patents, and publishing." Hunt shows that "this advantage is explained by immigrants higher education and field of study." It is also true that immigrants are more likely to start companies than natives with similar education. If educated legal immigrants are more productive than natives, is this not a good reason to want to keep them in the US?

Source: Kootr. City-Data.com

So productivity aside, would this also not be a good way to raise tax revenue? Hmmm.

Taxes and philanthropy

2010-02-21T17:13:00.002-05:00

Tax season is coming. It has me wondering if the deductions I get from declaring my philanthropic contributions actually increases how much I give. It turns out that a recent paper says no. Well it doesn't actually say that, but it says there is a better way for the federal government to encourage giving to social causes.

When I donate funds to say, Haiti Relief, the US government allows me to deduct that donation from my taxable income. In other words the current tax policy can be thought of as a rebate from the government. Now, there are all kinds of problems with this system. First, people can lie. Taxpayers can claim that they are donating a higher amount then they actually do. Second, people find the reporting requirements too onerous. Taxpayers may under-report what they give out. The latter of course is not a loss to the government, but a loss to us. While individual misreporting maybe small, when you aggregate small amounts over all the people in the US, it can become a huge number. For example, if everyone in the US that pays taxes over-reported by $2, with 138 million tax payers in 2007, you are looking at $276 million! That is over six times the budget for Wooster City Schools in a year!

The usual way one fixes this problem of over-reporting is to increase documentation requirements. Now of course this may decrease charitable donations because people may be dissuaded to fill out all the paper work. Not something you want in a time when charitable donations fund the community soup kitchens that are feeding the unemployed. So what does one do? The answer is a federal government match. If I give funds to a soup kitchen, the government provides a proportional match to the registered non-profit. This may be a good way for governments to use people's knowledge about non-profits to support the work of the more effective social sector organizations. Nice!

"Clean up after yourself!”

2010-01-24T21:51:00.001-05:00

It would seem like we have many pollution problems in the world. Large and small firms pollute by discharging substances into the air/water/ground, marine life is threatened because people from all walks of life discard plastic bags that end up in the sea, people litter in parks and at beaches, in the western world we send tonnes of food down the garbage disposal which comes back into our water streams only to make us sick, and the list goes on. We humans are often completely oblivious of the effects of our consumption and production on public land and public goods or we do not care. Ignorance can be forgiven (sometimes), but not caring or not having the incentive to care is unacceptable. There are two textbook economic solutions to this problem, one is well defined property rights and the other is a government that tells us to “clean-up after ourselves.”

I was reminded about these larger problems today when I was frustrated at my children for a constant mess that I (the government) had to clean up even when I had clearly defined property rights between us. It dawned on me that maybe we would not have any of society’s pollution problems if all parents, including me, would teach their children to “clean-up after themselves” naturally no matter where they were. If they were in their own space they should keep it clean and so too, if they undertook activities in a public space. Parents could enforce the “clean-up after yourself” mantra, not because it was the right thing to do for oneself, but because it was the right thing to do for all. Now if we all took this up as parents first, and teachers jumped on the band-wagon, then came the small firms in our towns, corporations, media, actors, singers, songwriters… I wonder if our children and the corporations they eventually run would pollute less?

A modern day travesty: Findings from the FDIC report on the unbanked and the under-banked.

2009-12-08T23:37:00.019-05:00

The Federal Insurance Deposit Corporation (FDIC) of the U.S. just released a report showing that 60 million adult Americans live without bank accounts or have limited access to financial services.

The unbanked and the under-banked – those served only peripherally by the likes of pay-day loans, comprise nearly 26 percent of all U.S. households! This is real travesty in the richest country in the world! While we expend substantial effort and resources trying to ensure that all American’s have access to health care, there are more American’s that lack access to basic financial services. In a market economy such as the U.S., three things are needed to survive: health, a job, and access to credit to smooth consumption and invest in your own future. This is especially important for the very poor that live on low fixed or intermittent incomes and suffer from long spells of unemployment. When there is such a large portion of the country that is unbanked or under-banked, an interesting question arises, which issue should we focus on more, providing banking services for the underprivileged or health services for the uninsured? This is a false choice of course. We can have both.

A simplified view of health care
The uninsured within health care is essentially about two sorts of people, young or healthy people who chose not to be insured because they are, well, healthy, and those that are so sick-prone that insurance companies do not want to touch them. Access to health care can be solved simply. Pass a law that says it is illegal to not have health insurance. The premiums from the healthy should subsidize the sick. What vehicle you use to deliver this insurance is secondary in my mind and has more to do with ideology. For example, free market lovers may want a private system to do this. Others may want a public option. (I am simplifying this issue a bit and abstracting from political economy. But essentially this is the direction the debate has moved in.)

Back to thrift
For banking services the problem is similar. There are many types of people when it comes to the unbanked or under-banked. Some of these folks are unemployed and do not have steady incomes, and hence they believe they have little use for bank accounts, while other folks are employed but because banks are not close by, or because they do not have an address or social security number, they use the services of pay-day-loans or more informal institutions, both of which are profitable. Interestingly, “the report found that poor access correlated with race and ethnicity. Nearly 54 percent of African American households and 43 percent of Hispanic households were either unbanked or under-banked. Income also plays a role. Households earning less than $30,000 a year made up 71 percent of the unbanked.” Many of us know from Desoto that having access to financial services is less about a safe-place to put your funds and more about access to capital that allows one to invest in their own future.

A private solution exists.” Backed by more than $25 million in venture capital, Progress Financial Corp., or Progreso Financiero, created a network of 20 loan centers based in pharmacies and markets in the Spanish-speaking communities in California. It has made more than 30,000 loans averaging $900 to help families build credit histories.” (SF Chronicle, Dec 3). We need more such institutions that provide loans to the under-banked or unbanked, but more importantly, teach financial literacy to the under and unbanked.

Providing financial literacy within such institutions needs to be strengthened. There are efforts to improve financial literacy. For example, The President’s Council on Financial Literacy, has implemented “the “Community Financial Access Pilot,” an eight-community pilot program partnering community-based organizations, government resources and local financial institutions together to move previously unbanked and underserved individuals into a relationship with a financial institution.” This pilot should be expanded rapidly and incorporated into the regular offerings of financial institutions that support the under-served. If Muhammad Younus can raise capital for the poor in Bangladesh, what is holding us back?

Falling fertility and entrepreneurial activity

2009-11-23T12:29:00.008-05:00

One of the more fascinating demographic changes that has occurred in the world is the dramatic falls in fertility. There are many reasons for this change but chief among them is the increases in average incomes since the 1960s. Developed and developing countries are materially better-off now then they were then. In countries where fertility has dropped the most, one may ask what has happened to entrepreneurial activity? A pet theory of mine is that when fertility drops, at some point in time you have a younger population of folks in the economy. The "demographic bulge" of young people seek change, as young people often do and that in turn drives innovation. Why might these young people seek change? Since a large population of folks have fewer children they have more leisure-time to pursue the change they seek and this enables innovation. How might I show this?

The Global Entrepreneurship Monitor(GEM) dataset contains the so-called Total Entrepreneurial Activity (TEA) rate. TEA measures the relative amount of nascent entrepreneurs and business owners of young firms for a range of countries. This variable is (consistently) measured across a variety of countries and appears a useful index for measuring the extent of 'entrepreneurship'. (Van Stel, A.J., M.A. Carree and A.R. Thurik (2005), The Effect of Entrepreneurial Activity on National Economic Growth, Small Business Economics 24 (3), pp. 31 1-321) Plot the TEA (y-axis) against the change in fertility rate (x-axis) and voila!

In countries where there has been the greatest fall in fertility, entrepreneurial activity is the highest. Nice! But remember, correlation does not imply causation.

Harrissa

2009-10-25T16:30:00.011-04:00

Harissa is a North African hot red sauce or paste whose main ingredients are chili peppers (often smoked or dried) and garlic. Though most closely associated with Morocco, Tunisia and Algeria, it is a standard ingredient of North African cuisine. Every fall, I make it in large batches. We store what we make in small canning jars, properly canned and sealed, so that we can have something fiery and flavorful to get us through the grey Ohio winters. I like to experiment with different red and yellow peppers of varying heat when I make this. Be creative!

Here is my recipe:

3 Large Red Peppers, preferably farm fresh. Pick firm and waxy ones.
3 Serrano Red or Fresno Red Peppers.
1 hottest red pepper you can bear. I like Habanero red.
6 cloves of garlic with skin on.
1 Tablespoon whole coriander seed. It is important to get fresh whole spices. My favorite place to get spices is Penzeys.
1 Tablespoon whole caraway seed.
1/2 cup olive oil. You can use more if you want a creamier texture.
Salt to taste.

1. Roast the peppers over a flame until the skin becomes charred. I prefer to do this on my ancient charcoal grill. Once the skin is charred, transfer to a stainless steel pot with a nice fitted cover. Let rest for about 20 mins. Use gloves to handle peppers. In a sink, remove the skin, seeds, de-vein, and take of stems from peppers. Place the roasted peppers aside.
2. Lightly toast the wholes spices in a cast-iron skillet being careful not to burn them. You should be able to smell the aroma. Transfer them to a bowl.
3. Roast the garlic cloves on the cast iron pan. Turn them so that the garlic skin starts to fall off and becomes blackened evenly. Set aside.
4. Combine all ingredients except for the oil in a kitchen mixer with a sharp blade. Pulse and pour the oil into the container as it mixes (you need a special mixer that can do this. If you do not have one, combine the ingredients with the oil and mix until it becomes a paste). Add salt to taste.
5. Feel free to add more olive oil to the mixture depending on the consistency you want.

Greg and Lucy Malouf have a neat recipe in their book, Artichoke to Za'atar: Modern Middle Eastern Food . University of California Press.

On rationality

2009-09-14T13:25:00.008-04:00

My economic training is rooted in the new classical school of economics, where the "rational" and hyperindividualistic maximizers are the workhorse assumptions of how the world is modeled. Now of course, I do not believe the world to be habited by such folks. What economists who study "rationality" think of as rationality is not consistent with what most regular folks think of as rationality. "Rationality" is the weighing of costs and benefits to arrive at a decision and even if I may extend it further, thinking on the margin. Enumerated costs and benefits are subject to the information you have available. If your information is wrong or incomplete, then your cost-benefit analysis is said to be "bounded by that information set" and as such is fallible. This is why I believe strongly in empiricism, hypothesis testing based on a collecting as much data as possible. However, even such bounded rationality is too strong. What about people that are ruled by sentiment, herd behavior or do things just because: "It’s always been done like that!", one hears. Two things that you should know about if you already did not know it.

Behavioral economics is a key to understanding the shortcomings of the rationality assumption. Behavioral economists use psychology and game theory to study how people make choices. What we have been missing in economics, especially in the classical schools of theoretical economics, is we have assumed people make choices in a certain way. Behavioral economics complements standard economic reasoning by shedding light on choices that do not follow the standard cost-benefit calculation. For example, people do not make rational cost-benefit calculations when there is an identified "expert" in the room. They turn their brains off, literally! (Engelmann et al, 2009) While this is a nice result, how does one include behavior like this into conventional economic models is the challenge of the future and it is been taken on by economists like Loisel, Pommeret and Portier.

Irrationality can also be modeled in rational models. For example, people that are ruled by sentiment, emotion, rules of thumb, altruism or even herd behavior, can exist within rational cost-benefit structures. If we know how people act, we can model it! However, it may be nice to remember Box's rule: “Essentially, all models are wrong, but some are useful."

Reflections on the link between Gandhian Economic Philosophy and Social Entrepreneurship.

2009-09-02T14:53:00.005-04:00

Last semester I was asked to offer an interactive lecture on the similarities and differences between Gandhian Economic Philosophy and Neo-classical Economics. In the lecture, amongst other things, I talked about one of the principles that Gandhi espoused. Gandhi was a proponent of social responsibility. As such, he urged people to “think about the consequences of their actions”. He argued that the real value of wealth and goods depended not on its market price, but what you did with your goods or wealth. A simple example illustrates the point: If you buy a car and use it for yourself, this is less valuable than if you also use it in the service of others.

Social Entrepreneurship (SE), which is a program I direct here at Wooster is “the process of creative thinking, innovation, risk-taking, and analysis that creates opportunities with sustainable social and economic value.” While some social entrepreneurs focus on innovation and risk, there is a strong social dimension to our definition, as it is practiced here at Wooster. I find many similarities between the Gandhian ideal and SE. The process social entrepreneurs engage in asks them to be accountable to their constituents or “neighbors” as Gandhi would call them. In this way SE asks entrepreneurs to think about and be accountable for the social implications (outcomes) of their actions.

We can go further and attempt to be truer to the Gandhian ideal. Social entrepreneurs should not compartmentalize and disassociate means and ends but weave the social mission into the value creation process. The way in which social entrepreneurs create value should not only be limited to outcomes (did our product or service decrease poverty?), but also how one goes about achieving those outcomes (means). In other words, pillaging the poor and donating all your funds to a good cause is not the way to go. Neither is providing food to the poor in a way that does not think about long-run environmental damage or the impact of providing free-food on local income generation possibilities. If we can tie means to ends in all cases, I believe social entrepreneurs can better deliver on their promise to offer valuable solutions to the worlds most pressing and intractable social problems, such as hunger, the provision of clean water, poverty or even global warming.

Supply chains, the environment, and income distribution

2009-08-28T12:25:00.006-04:00

A recent-report by "Ernst & Young underlines that as much as 70 per cent of a manufacturing company’s carbon footprint can come from transport and other costs in its supply chain" (Financial Times, Aug 9, 2009). Since the early eighties outsourcing has increased with the pace of globalization facilitated by lower shipping costs, lower trade barriers and a fall in the overall costs of doing business across borders. Supply chains have spread globally. Now, in anticipation of Conference on Climate Change in Denmark, and the environmental legislation in the US congress, supply chains are becoming more local. Manufacturing now considers it “smart business” to source their products locally (Financial Times, Aug 9, 2009). This is really good for local communities. It may also be good for the environment as a whole, at least when it comes to global CO2 levels. There could be downsides however that we should be cognizant of. In the move to local sourcing, if firms use the same environmentally polluting technologies to produce and distribute products, we will not have done much to improve the local environmental situation.

With local supply chains, I can imagine more local factories, distribution centers and additional roads that will have to be built. What would happen to the local environment if more trucks roll-by with greater frequency and more roads are built to accommodate them? What will happen to the demand for local power supply? For example, eighty six percent of Ohio’s electricity comes from coal (PUCO [Online]). If the demand for local electricity goes up and the local space does not have the appropriate green technology to deal with increased demand we can expect more coal usage and more local pollution. That said, I am less concerned about factories, distribution centers and power plants polluting per se. In the US at least there are some rules to regulate pollution from such point sources. I am more concerned about transportation logistics.

The transportation demands for local sourcing may only reallocate carbon from a global to the local space. Coming back to my idyllic country existence from a trip to India, where I saw first hand the effects of rampant intensification of local industry on transportation networks and its effect on the local environment, I am worried. I am even more worried that we do not have information systems that tally-up the cost on the local environment for increasing the intensity and density of local supply chains.

Another cost of localizing supply chains is foreign (and local) communities reliant on exports suffer. For example, large parts of the coastal Chinese export zones have shut down, not just because of the global recession but also because of other long-term considerations. Just like free trade, the localization and regionalization of supply chains will have interesting geographic income distribution effects whose overall benefit is unclear. What is clear is that exporting communities will lose and local environments will not necessarily get better, especially if environmental policy and civically minded consumers do not encourage the greening of local supply chains.

Bongo flava: An informal introduction to Tanzanian hip-hop

2009-07-23T12:51:00.006-04:00

I just had to get my amateur attempt to say something about rap off my chest. Here goes!

Tanzanian hip-hop or "Swahili rap" began on or around 1991. The first person that we know of that rapped in Swahili was Saleh, a young Tanzanian-Arab who rapped to the tune of "Ice-ice baby". The idea of rapping in kiswahili spread quickly and the "first group", Kwanza Unit (KU) was formed. KU was a collective of young urban Tanzanian folks some educated in the North America. Kwanza unit and some current Bongo Flava musicians are motivated by social causes. Common themes were anti-corruption messages, poverty alleviation and social justice issues, HIV prevention messages and so on. It is not uncommon to see Bong Flava musicians use language borrowed from social activist rappers like Africa Bambaataa. Infact Kwanza Unit saw themselves as "heroic warriors resisting oppression".

Swahili rap began in the urban areas and was mostly propagated by the younger generation that frequented night clubs such as Continental that I frequented in my younger days. Swahili rap spread throughout the country. Elements that contributed to the success and spread of this music was the widespread support from the national radio station, Radio Tanzania, the entry of privatized radio stations in the early 1990s that sought to create unique identities, donor interest in youth (some aid agencies supported these fledgling groups), the widespread use of Swahili in Tanzania as opposed to regional ethnic languages, growing social and political activism and the political freedom to speak your mind.

Swahili rap which is often called “old school” gave way to “Bongo Flava”. What is unique about Bongo Flava? According to P-funk, Bongo Flava is
“Any song that married hip-hop and swahili lyrics”…Keyboards…Music is more melodic.” For me Bongo Flava also incorporates traditional elements that have influenced East African music for centuries and here I am talking about the highly evolved Taraab music found along the East African coast, music from India and the west. My favorite Bongo Flava group is none other than X-Plastaz. Here is a recent video. I like their socially conscious lyrics (you can activate subtitles on their video) more than I like the some of the other Bongo Flava variants.

What is fascinating and needs to be studied more is how rap has spread through the African continent and how different countries are making this very-American genre their own. For example, in Senegal and in the French speaking Diaspora, Islam lyrically influences the music in ways that the Swahili in Bongo have not taken on. Here is an interesting article on Islamic hip hop and a video by Sista Fa.

If you like this listen to my radio show on WCWS.

In India with Global Social Entrepreneurship

2009-07-05T01:23:00.004-04:00

I am in the process of extended and innovating Wooster's Social Entrepreneurship (SE) program. One way I am doing this is by extending our SE program globally. We are calling the program Global SE. I am currently on an assessment trip in Bangalore and Chennai, India with one of my students who helped me write the business plan for this new venture. Feel free to follow our trip on the GSE blog.

Don't just harp on the car-makers. What about you?

2009-06-02T13:18:00.004-04:00

Demand side measures need to be considered as well if we are going to decrease pollution.

One of the largest sources of carbon dioxide emissions is vehicles and airplanes not necessarily power plants and factories. Any C02 mitigation program must find a way to reduce emissions from these sources. This is not easy. Obama’s plan includes a revision of the CAFÉ standards. This is long-overdue and is a good first step. However, this is a supply side measure and what is needed is to couple this very positive first-step with demand side measures. What do I mean?

When you drive your car how much CO2 you spew-out into the earth’s atmosphere depends on how fuel efficient your car is and tail-pipe emissions AND how long your drive. So, improving vehicle efficiency takes care of the fact that if I decide to drive to the grocery store, I will pollute less per mile. Improving vehicle efficiency will not change my behavior however. Millions of people living in the US (me included) make many unnecessary trips or short trips when we could easily walk or ride a bike. A more fuel-efficient car will not make me drive less. It may on the margin do the opposite and make me drive more!

Basically to change my behavior and that of my millions of American brethren, I have to “feel the pinch”. One way to do is this is Dr. Stavin’s proposal to increase the tax on gasoline. This tax is just really low in the US compared to other countries and it can be raised. While Dr. Stavin’s idea is fine, it strikes me as a bit of regressive tax that will hurt the poor more than the rich. A better way to make consumers “feel the pinch” is to get families that have a car with over say, $50,000 in income to pay an emissions tax based on their odometer reading when they renew their vehicle license tabs. With airplanes, Virgin Atlantic voluntarily collects carbon taxes from folks that fly. Make it mandatory! All these are neat measures that will force us to question our behavior as consumers on the demand side. These measures will change behavior and make us pollute less.

Policymakers beware: Cap-and trade allowances for carbon dioxide pollution can be used to mislead you.

2009-05-25T13:15:00.000-04:00

On April 24th, the EPA ruled “that carbon dioxide is a dangerous pollutant that threatens the public and therefore must be regulated under the 1970 Clean Air Act. This so-called "endangerment finding" sets the clock ticking on a vast array of taxes and regulation that EPA will have the power to impose across the economy, and all with little or no political debate.” (Wall Street Journal). One regulatory instrument that the EPA is proposing is a cap-and trade system. While a cap-and-trade system has been successfully used in the US to regulate NO2/SO2, its implementation has to be done right. Otherwise we will not mitigate the endangerment that the EPA has found.

In 2003 my colleagues and I published a paper in which we showed that in a cap-and trade scheme, a polluter could mislead a well-meaning regulator into issuing more permits or allowances than are needed. This could lead to more (not less) environmental pollution than is necessary. To understand why this is the case, one must first understand how a cap-and trade permit system works.

Cap-and trade systems are disarmingly simple. The regulator, in this case the EPA, decides how many tons of CO2 should be released into the earth atmosphere. In theory, the way the EPA decides this is by comparing the costs versus the benefits of reducing emissions. In practice, we find out how many tons of CO2 are realeased into the atmosphere. We then politically negotiate on a percentage reduction. Say we want a 20% reduction from some historical level, say 1980 pollution levels. We then allocate tradeable permits/allowances for 80% of the C02. If we polluted 100 tons of CO2 in 1980 and we want a 20% reduction, we allocate 80 allowances which are rights to pollute each ton of CO2. These permits are tradeable. This means any firm that is an emitter of CO2 can sell their permits if they manage to pollute less than their allowances. Firms therefore can make tidy sums of cash if they pollute less than their allocation or if the initial allocation of permits is too high. The EPA on their website FAQ explains that:

There are two ways in which allowances under a cap and trade program can be distributed: they can be auctioned off or assigned for free to certain entities. A combination of both methods is also a possibility. In an auction system, the government must design an auction and allocate the proceeds. In an allocation system the government must decide who receives allowances and how many they receive. The process of determining which cap and trade system to use is not a substantial factor in a program’s success. It is an important step, but one that does not affect the ability of a program to promote human health and environmental benefits. (Emphasis mine)

I disagree. As I have argued in the paper, if allowances are auctioned, firms have an incentive to be cleaner because they will have to purchase permits now and into the future. If permits are distributed free-of-charge based on a historical pollution record then strategic firms will resist the temptation to clean-up their pollution as quickly as firms in an auction regime in order to convince the regulator to issue more permits into the future.

If the EPA is to do this right then it must auction the permits. Lobbyist on behalf of point sources such as power plants and industries that produce a lot of C02 will lobby against auctions and will insist on free allowances. Caving into this pressure may be politically costly in terms of public health because it will slow the rate at which we can reduce C02 emissions and the total amount of emissions.

Stimulus funds: Part 2: Child care funds and labor market effects.

2009-05-04T14:37:00.003-04:00

The current stimulus package earmarks funds to support the Child Care and Development Block Grant. The Grant “assists low-income families, families receiving temporary public assistance, and those transitioning from public assistance in obtaining child care so they can work or attend training/education”(US Department of Health and Human Services, Online). I asked the following question to my Principles of Economics class:

“Think about two markets, the market for female labor and the market for early childhood education/daycare centers. If there are more funds available to support low-income mothers who demand day care, what may happen to the price and quantity of day-care services? Cetris paribus, what sort of impact could this policy have on the market for female labor? Make sure your assumptions are clearly stated. In this discussion, you should be very clear about the winners and losers. Your hypothesis about what happens in this question should draw from the theory you learned in class AND empirical research from secondary sources.”

Here are some responses…

Bungling bailouts

2009-04-01T17:31:00.000-04:00

Part 1: Protectionism

Part of the bailout package that was passed by the House and the Senate specifies that goods purchased with these funds should be American made products. The House legislation states that Federal money spent on US infrastructure had to be used to buy US steel. The Senate Bill “softened the language” by suggesting that we should not break any current trade agreements, but that we still prefer American products. Bailout funds also come with the stipulation that they should not be used to hire foreigners, specifically those who are legally in the US on work visas. Are these wise policy choices for the short term and long term? My argument is no.

Buy American for all? Who benefits?
Imagine a country where there are two people, rich and poor. It goes without saying that the rich have higher incomes than the poor. Assume that these people are similar in every other way (Okay I know this is stretch but bear with me). Both people need food. For example, they need the same number of calories to survive. Also assume that the price of food is the same across people. If this were true, then a greater share of the poor person’s income is made up of food expenditures. Similarly, the rich person’s food expenditures, as a percentage of income, will be small. As a rule, this would imply that the poor benefit more from cheaper food than the affluent.

Now, suppose, we have two types of food: local food and imported food. Imported food is cheaper than local food. Because the poor person’s share of food expenditures in income is higher, they are less likely to purchase the more expensive local food, all else being equal. Therefore, a uniform policy that limits all citizens to purchasing local food will hurt the poor more than the rich. The poor know this very well. This is why they do not shop at Whole Foods or high-end grocery stores.

What is more interesting in this thought experiment is that the poor often have no voice. While they are hurt more, they often do not have the political power to say something. This is why the US can get away with such a policy. This policy of “Buy American” may be good populist political rhetoric; it benefits a small group of people in the United States (US steel producers) at the expense of others.

There is, however, a bigger philosophical issue. It makes sense to me that I need to support my local economy. When times are good or bad, I need to do my utmost to support my neighbors, my local farmers, and local producers of goods. Yet if I support them solely on the basis of the fact that they are local, I am missing the point. Support based on such a principle would amount to a subsidy and discriminate against others, who may not be as proximate. In a globally integrated world, we need to expand who we think of as neighbors. We need to understand that our choice to help our proximate neighbor may hurt our other neighbor further down the road. This is why, protectionism led by the United States that has enjoyed an upsurge in recent months here and elsewhere, is often called a “beggar thy neighbor policy”.

So what should one do in this case? Should we not buy American? Should we not buy local food within a 100-mile radius? To legislate such a principle hurts one group at the expense of the other both domestically and sometimes internationally. Perhaps we should leave these choices to the individuals who can afford it and ask the government to not legislate a one-size fits all policy. Further, if the US is really a leader, shouldn’t it ask if its policies impoverish its neighbors?

Grassley-Sanders Sandbag
In the presence of the bailout package’s “Buy-American” clause, the Grassley-Sanders Amendment has been overlooked. The Amendment forbids the hiring of documented, high-skilled foreign workers for recipients of federal bailout funds. Again, is this a wise decision?

We often hear that America is a nation of immigrants. America’s greatness, its success with innovation and its success internationally, has much to do with its relatively open door policy towards immigrants. Einstein was an immigrant and so too, are the many great innovators in Silicon Valley who gave us the 1990s tech boom. Yet, in the US, there is a continual move to limit the flow of scientists and highly skilled workers. Grassley-Sanders is just one more blow against innovation and an investment in the future of the United States.

First, what are the implications of Grassley-Sanders? According to the Bureau of Labor statistics, 15% of the native-born population was in Management, business, and financial operations occupations in 2007. I assume this is the sector that would benefit from bailout money. In the same sector, 10% of the employed are foreign-born. (Caveat emptor the author is a foreign-born worker) So, there are fewer foreign-born workers in these sectors than American born. Some interesting empirical evidence suggests that for every one “American job” that a foreign-born worker takes, they create two more jobs for native-born workers. Foreign-born workers pay taxes just as native-born American workers. Foreign-born workers also contribute to the productivity of companies. Grassely-Sanders essentially argues that firms need to ignore the skills and contributions of individuals to the firm and chose who to retain based on country of birth. Bailout funds should not flow to the foreign-born.

There is clear evidence that foreign-born workers, especially in science and technical professions, contribute greatly to US innovation. Recent work has shown that when work visas are limited, US companies innovate less or file fewer patents. In the face of such evidence, this legislation seems short sited.

A large portion of the US’s innovative machine rests on the shoulders of foreign born workers. This is true in Silicon Valley, in the financial sector, and in America’s universities that train BOTH foreigners and native-born Americans. Grassley-Sanders is a short-sited move that may be justified on the grounds of economic nationalism, a great election gimmick, but in reality hurts the ability of native-born Americans to prosper beyond the bailout. Firms that want to prosper and grow should not have to put Americans first. They need to put the smartest person who can get the job done first. If you are worried about American workers falling behind, train them better. If you are worried about stimulus money flowing abroad, where do documented foreign-born workers buy their milk?

Can Islamic banking offer solutions to the current financial crisis?

2009-03-17T10:33:00.002-04:00

One reason for the current global financial crisis is the unregulated and opaque use of structured investment vehicles (SIVs) such as collateralized debt obligations. Until recently, SIVs were considered one of the great innovations of modern finance, primarily because they allowed risk to be spread among many individuals, they allowed risk to be priced, and they leveraged current funds to provide more liquidity in financial markets. Of course, also important is the fact that they made tidy sums for people that sold them. These were all good things when the value of the underlying collateral was increasing and loan payments were being made on time. The whole house-of cards collapsed, however, when house prices started to fall, sub-prime mortgages began to default, foreclosures increased and the US and world economy slowed. This is the conventional story that has evolved about the crisis. However, there are more problems with SIVs than meet the eye. No amount of transparency related regulation will completely eliminate the agency problems that can threaten the stability of a networked system. Islamic finance can offer guidance on dealing with the downside risks related to SIVs.

One principle of Islamic finance is that individuals cannot profit from the risk and uncertainty of others. If a lender can package and sell credit-card debt to others, they are profiting from the uncertainty of the credit cards holders (and the buyers of debt) while not sharing in the risks. In an Islamic financial system then, mortgages, credit card loans, and other debt cannot be packaged and sold to others especially in an environment of imperfect information. Why would someone go to such dramatic lengths to forbid one of the great innovations of modern finance?

Financial intermediation is plagued with information problems. The quintessential information problem is that of moral hazard. Once a bank gives someone a loan, the debtor can undertake risky activities that the bank did not foresee, and default, leaving the creditor with nothing. Another problem is adverse selection. In a world of imperfect information, bad investments are more likely to be selected because dodgy folks dress up bad debt in really nice clothes. These problems are often referred to as the problems of agency.

Now take these information problems that plague any one institution and place them within a networked system and you have a recipe for potential disaster. The easiest way to think about this is if one imagines the global financial system as a series of networked institutions much like airplanes flying around the world. A small delay in the departure of a few planes from JFK can cause negative effects as far away as Heathrow and Jakarta. The larger the delay and the more nodes that are connected to JFK, the greater the effect that is felt elsewhere. This simple example is called systemic risk. Because the global financial system is a network of transactions and institutions, one small failure can have effects far-and-wide. A large failure can cause the system to collapse.

Western finance has come a long way and mitigated many agency cost problems and problems related to systemic risk. But problems still exist, especially given the rapid innovation that has occurred in finance in the last two decades and the fact that private equity and other non-bank institutions are under a patchwork of financial regulators, if at all. Uncertainty and risk-related behavior still exists in financial markets and this crisis is a perfect example.

What do we mean by uncertainty and risk-related behavior? The fact that one party can make a loan for a car, a house, or even consumption (credit card companies), and then sell the loan to someone else results in an agency cost problem. The market for SIVs was unregulated and suffers from imperfect information. Furthermore, companies that were supposed to provide greater transparency in the SIV market by giving buyers information about the quality of the assets in the SIVs suffered from serious conflicts-of-interest that are only now being realized and addressed. Policymakers know this and will undoubtedly offer the solution of greater regulation to increase transparency and information. Surely transparency has to increase, but no amount of transparency will solve the problems inherent in the system. The reasons: moral hazard and adverse selection can be minimized, but not eliminated. Furthermore, if any institution is allowed to sell risk, in a heavily networked system, failures related to one packaged asset class can wreak serious havoc on asset values all around as we have seen.

There is another more insidious problem that plagues the way in which western finance assesses risk. Risk is not a static concept. It changes constantly, sometimes more rapidly than we can imagine according to market conditions. Most investors and buyers of SIVS may assess risk as static. Assets are rarely, if ever, stress-tested to understand how changing assumptions and realities about the underlying value of the asset will affect risk and return. Furthermore, models of risk may, in some cases, be time varying, but they do not take into account how individuals act in the presence of contagion. In other words, risk modeling in the past has not factored in the human element. In such a world, it makes little sense to allow risk to be sold. The risks to the financial system and asset values around the world are high. Asset values aside, if governments now have to be in the business of guaranteeing all credit related activity that is affected by information problems and contagion every time there is a crisis, I am sure the implications for government budgets will be severe. So, is there a solution? One solution is to bring non-bank institutions within the regulatory umbrella, improve the effectiveness and uniformity of regulation, and increase transparency within the financial markets. Islamic finance may offer another solution.

Mortgages, loans, and any other investment vehicles cannot be packaged and sold to others if you follow the principle that we cannot profit from the uncertainty of others. No bank or institution would be able to profit from risk by selling assets from its balance sheet. I am not advocating that Islamic finance does not suffer from problems of agency. What I am saying is that in an imperfectly-informed networked world there are benefits to letting risks (mortgages, credit card debt and loans) stay on the balance sheets of financial institutions that initiated the transactions. Another substantial cost is the loss of liquidity in the financial system, but this MAY pale in comparison to the losses from the current financial meltdown. Adopting Islamic banking principles may seem like a very conservative system, but it is worth thinking about when we know the systemic risks and information problems in modern finance cannot be completely eliminated. At the very least, this is what we economists call the "second-best policy".