How should we respond to the Bangladesh garment factor debacle?

Many of us – particularly those hailing from the Indian sub-continent – are still reeling from the recent tragedy in Bangladesh which has claimed more than 400 lives. Many of these are children who were brought to work by their mothers. Hundreds are still missing and the death toll might climb.

Incidentally I find it ironic that here and elsewhere the Boston bombing has received more air time than the accident in Bangladesh where the death toll was multiples more!

Unfortunately, these accidents have become all too common.  This is the second such gruesome incident in Bangladesh within a short period following a devastating fire in another garment factory.

In many cases, these are accidents just waiting to happen. When they do there is an outpouring of outrage and guilt; we rush to donate money for the victims and then after a while things settle and we go back to hunting for bargains at our local chain store.

In the aftermath of the tragedy commentators have suggested different responses.

One is to boycott the products of companies who get them made in third-world sweat-shops. Disney has responded by stating that they will no longer rely on Bangladeshi factories to make their merchandise. This is the worst possible response.

Because pitiful as these jobs are, workers sign up for them willingly because the alternatives are far worse; unemployment and starvation. Boycotting these factories will throw thousands of workers out of their jobs and deprive them of the meagre living that they are making now.

It is also worth remembering that low wage countries do not stay that way for ever. Over time as more jobs are created wages increase so that countries that were low wage twenty years ago have much higher wages now leading to higher living standards. This is exactly why more and more companies are moving to countries like Bangladesh and away from countries like China where the wages have started to rise.

A second suggestion is to ask customers to pay more for goods that are produced under more humane conditions. I call this the “fair trade coffee” argument. The problem is that this creates a problem. I am willing to do this but only if others are too and all too often some of us are not.   

Besides, in the middle of a world-wide recession where a majority of households are struggling, it would be silly to expect people to not look for bargains.

We should also not lose sight of the fact that Bangladesh is one of the most corrupt nations in the world. Most of the buildings in Dhaka are shoddily constructed. Builders and developers routinely get around existing regulations by bribing government officials.

And while words such as “corporate social responsibility” sound good, businesses always have an incentive to cut costs. That is the fundamental driving force of the market place. High cost producers will be inevitably be displaced by low cost producers.

It is not surprising that the pursuit of cost savings often crosses into unethical behaviour. Inhuman working conditions have been part and parcel of the development of many major industries across the world and over the years.  There is little point in expecting businesses to monitor this because they have little incentive to do so.

So what can be done? For now the initiative needs to come from the government.

Here I am assuming that the governments of low-wage countries like Bangladesh actually care about the lives of their citizens and are interested in preventing such catastrophes. This might be a heroic assumption.

The only way forward is to get international chains to internalize the costs of such catastrophes.  Yes, there is some negative impact from the adverse publicity but clearly that is not enough of a deterrent. The point is to make these companies explicitly take into account the cost of an accident.

First, workers must be allowed to have a voice and the only way to do that is through powerful unions. Unions have been an integral part of securing the rights and well-being of workers in the first-world countries of today and countries like Bangladesh have to follow that trajectory.

Second, legislated minimum wages may well have to be part of the equation as well.

Third, there needs to be mandatory accident insurance for workers. Of course the fledgling owners of these garment factories cannot be expected to provide such insurance. But when they sign a contract with an international company promising to deliver goods at low cost there needs to be quid pro quo in that contract which stipulates compensation in the case of loss of limb or life. This provides an incentive to ensure safe working conditions because the insurance pay-outs will affect the bottom-line of those companies.

Governments need to implement audits of employers to make sure that such compensation is built in and at the same time allow worker unions to voice complaints when they are not.

But why should international giants continue to do business in Bangladesh or a similar place if the costs are higher? Here the point to remember is that as long as the cost per worker is less than the value of the output produced by the worker the company stands to make a profit. Given the low wages, the mark-ups between cost and price are still large and there will be enough profit left over.

Of course, this does not rule out the possibility of companies bribing officials to get around the regulations but at least it will be a start and a message that the democratically elected government of Bangladesh places some value on the lives of its own citizens.

Are MOOCs the future of higher education?

MOOCs or Massive Open Online Courses are increasingly gaining prominence. According to Wikipedia (yes, there is already an entry for MOOCs in there; what other evidence do you need that MOOCs have arrived?), 2012 became the “Year of the MOOC” with several providers including Coursera, Udacity and EdX emerging. Most of these are joint ventures by leading universities such as Stanford, Pennsylvania, Princeton, Michigan and Berkeley to name a few. Most of them are backed by venture capitalists with deep pockets generating the potential for future success.

So the questions are: if you are a student planning to go to university, or the parents of one worrying about the financial cost of higher education, is this an option you should investigate? And are universities doomed?

While an increasing number of people seem ready to answer these two questions in the affirmative, I am not so sure.

First, I sincerely doubt that MOOCs pose a threat to the traditional liberal arts institutions which rely upon small class sizes that offer close and intense interaction among professors and students. So the likes of Wellesley, Williams, Swarthmore and Amherst are most likely not under much threat.

Second, MOOCs do not have now and will most likely never have the same brand recognition as top universities. But while someone doing MOOCs with Stanford will clearly not have the same credentials as someone actually attending Stanford, the question remains, how does the Stanford MOOCs student compare with someone getting a degree from Auckland? The former is a cheaper. Could it be a better substitute?

This is a valid question. Our biggest lecture theatre at Auckland seats more than 500 people. I can barely make out faces beyond the first ten or so rows. A large number of students clearly cannot see me well since they often confuse me with other professors from the Indian sub-continent!  

If MOOCs pose a threat to any particular type of delivery mode it is this reliance on large impersonal methods of delivery in many of our universities.

To the extent that a part – maybe even a large part of what we do – is mere information transmission from one party to another, MOOCs may be able to achieve the same aim, maybe even better.

But at the end of the day what universities provide – or at least what I hope they provide – is not merely transmission of information, but rather an education. Education clearly has some direct utilitarian ends. But that is certainly not the entirety of education. A crucial humanizing role of our universities is the creation of educated citizens who are vital for a well-functioning democratic society.  

This is where I believe MOOCs come up short. This is because a large part of education also consists of interactions between professors and students and the students themselves.

MOOCs providers realize this and plans are afoot to offer facilities for interaction between students and at times tutorials led by experienced students. But interaction with the super-star professors teaching the courses is not and never will be on the cards.

So what? How much interaction do I have with the students that I teach? Not a lot I admit. But by arriving before lectures, walking the aisles during one, staying back after lectures and making time to meet students during office hours I reach hundreds more than would be the case if I taught a MOOCs course.

Moreover, in many of these interactions the questions I answer are not about the course but rather: what should I major in? How did you know that you wanted to be a professor? And the always popular: what do you think I should do with my life? MOOCs will not be providing answers to these questions any time in the near future.

When I went to college eons ago, I did learn some economics. But what I remember at least as much is that my class-mates turned me on to Albert Camus, Umberto Eco and T.S. Eliot, Sergei Eisenstein, Orson Welles and Woody Allen, Leonard Cohen, Louis Armstrong, Billie Holiday and Chet Baker. This has played a crucial role in defining who I am and what I am today.

In going forward, I anticipate that MOOCs might take over some of our functions as pure information disseminators. To an extent MOOCs may be able to supplant or complement some of what we attempt to do in large lectures. But this is not the same as education and if we equate the two we do so at peril to the future of our societies.

I have neatly side-stepped the question of escalating cost of higher education which is a debate for another day. But whatever the answer to that question is, exclusive reliance in MOOCs is not it.  

Obama and Boehner: one on one negotiations improve chances of success

A version of this article appeared in the New Zealand Herald on December 20, 2012.

As the deadline for averting the so-called “fiscal cliff” looms, President Barack Obama and the Speaker of the House of Representative in Congress, John Boehner have decided to resort to one-on-one negotiations rather than involve a group of players. If no agreement is reached then come the New Year, taxes will go up and there will be sweeping cuts to government spending. This will send the slowly recovering US economy into another recession which, in turn, will have significant spill-over effects on the rest of the world economy.

 

At first, the decision to do away with others seems counter-intuitive because we instinctively expect groups, with members engaged in vigorous debate, to be more deliberative and to find it easier to arrive at a mutually acceptable outcome.

 

But this decision may actually improve the chances of averting disaster. This is because research suggests that groups behave in a more self-interested manner than individuals.

 

Obama and Boehner find themselves caught up in a “prisoner’s dilemma”, a situation where there is tension between cooperation and self-interest, an idea introduced, most likely, by the Princeton mathematician Albert Tucker.  

 

A crime has been committed. The police arrest a couple of likely suspects: Butch and Sundance. They are placed in different cells and cannot talk to each other. Each of them is told separately:  “look, we know you guys did it but it is not too late to save yourself. All you need to do is to rat on your mate and finger him for the crime; then he will get ten years in prison, and we will let you go free. But all we need is one confession. So if the other guy takes the deal first, then he goes free while you go away for ten years.”

 

“What happens if I keep mum and so does my mate?” asks Butch (or Sundance). “We still have enough to put each of you in jail for a year.” “And if we both rat on each other?” asks Butch (or Sundance). “Then you both go to jail for five years,” says the officer.

 

Let us assume that Butch cares only about what happens to him. If Sundance confesses and fingers Butch, then Butch’s best bet is to do the same as well; by staying mum Butch gets ten years in jail, but by also confessing and ratting out Sundance he gets five years.

 

But suppose Sundance does not confess; even then Butch is better off confessing and ratting out his mate! Because this guarantees that Butch will go free instead of one year in prison, while Sundance gets ten years.

 

Self-interest suggests that we should expect both Butch and Sundance to rat on each other and end up in prison for five years. Except if only both could have kept their mouths shut, they would both be better off and spend only one year in jail! This particular scenario is, in fact, a regular feature of TV cop shows like NYPD Blue.

 

The fiscal cliff negotiations set up a similar tension. Both Republicans and Democrats have an interest in protecting the priorities of their core voters. Democrats prefer fewer cuts to entitlements while Republicans wish to preserve lower tax rates for the wealthy. Yet both sides need to make compromises in order to achieve an outcome that benefits society as a whole.

 

Compromise is the same as staying mum; leads to a better overall outcome. But the problem is that each side has an incentive to renege; that is to confess and protect their own interests. Each has a vested interest in extracting concessions from the other side without offering any of its own. But if neither side compromises we are faced the worst possible outcome; a five-year jail sentence which in this case would be another impasse like the one we had over raising the debt ceiling.

 

Economists and psychologists have long been engaged in understanding behavior when compromise and self-interest collide. The usual method is to have volunteers take part in a “game” where at times they can earn real money based on the decisions that they make.

 

Chester Insko, a professor of psychology at the University Of North Carolina, Chapel Hill, along with many of his colleagues, has done extensive work demonstrating that groups are more self-regarding.  

 

They identify two primary reasons behind this. The first one is “social support for shared self-interest”. The greater self-interest among groups arise from the fact that group members provide each other with moral support for acting in more selfish and in-group oriented ways.

 

The second reason has to do with “schema based distrust”. This holds that groups expect their opponents to act in a self-interested manner and therefore protect themselves against possible exploitation by acting in a self-interested manner at the very outset. The degree of distrust increases when group-membership is particularly salient as it is with entrenched political affiliations.

 

One would think that allowing participants to talk to one another should help break the gridlock. But it turns out that while unrestrained communication does improve cooperation among individuals, it makes things worse among groups, partly because the distrust of out-group members makes such communication less credible.

 

Whether knowingly or unknowingly, Obama and Boehner have made the right choice and I think we can be cautiously optimistic that an agreement will be reached before the deadline. Whether Boehner can then get his Republicans colleagues in the House to support him or whether he finds himself faced with a challenge for the Speaker’s post is, of course, a whole different question.

Help the world - educate the girls

A version of this article appeared in the New Zealand Herald on October 12, 2012.
On Tuesday, Malala Yousufzai, a fourteen year old school-girl and activist was shot in the head and the neck by a Taliban gunman in northwestern Pakistan. According to the New York Times Malala “is a champion of girl’s education and a potent symbol of resistance to militant ideology”. Why was she shot? According to a Taliban spokesman ““She has become a symbol of Western culture in the area; she was openly propagating it.”

Girls are forbidden from attending school in Taliban controlled areas of Afghanistan and Pakistan. Malala’s father ran a school for girls which was shut down by the Taliban in 2009. Malala seems to have survived the attack but is still to regain consciousness. The Taliban has promised to try again.

I am going to leave aside the heart-breaking question of exactly how a society gets to a point where a fourteen year old has to take on the mantle of being a champion of female education and the face of resistance to militancy. I am also going to side-step the question of what kind of theological movement teaches its followers that it is okay to shoot a fourteen year old girl for demanding nothing other than the right to be educated.

For now, I will concentrate on why educating women in under-developed countries is important, something that does not seem to be widely understood. Providing education for women is not only a way of ensuring gender equality but has far more profound implications for the economic development of poor countries. In fact if I am asked to suggest a single policy intervention that will have the maximum impact on poverty across the world it is this: educate the girls.

Interviews of parents in five states in north India report that as much as 10 percent of them believed that it was not important for girls to be educated, while only up to 1 percent believed the same for boys. Fifty-seven percent wanted their sons to study “as far as possible,” while only 28 percent wanted the same for their daughters.

Clearly, providing education for girls improves their employment prospects and addresses issues of gender equality. This is important and a worthy goal to achieve in and of itself. But are there other positive fallouts from educating the women? Not surprisingly, the answer is yes. James Wolfensohn, the former President of the World Bank, points out that education for girls influences literally all aspects of development. It leads to lower child and maternal mortality rates, increased educational levels of their children and better management of natural resources. Collectively all of these are essential pre-conditions for successful economic growth. More education for girls also enables more women to attain positions of leadership and it has been shown that increased female participation in government leads to reduced corruption.

Other studies have found strong positive correlation between mothers’ education and earnings and child health. Incidentally the correlation for mothers is much stronger than that between father’s education and earning and child health outcomes. Not only does higher education translate into higher income for women, research suggests in developing countries that income or assets in the hands of women is associated with more money being spent on household nutrients, health and housing and less on things like alcohol and tobacco. This is one reason why, around the world, many micro-finance organizations like the Grameen Bank in Bangladesh, make their loans exclusively to women.

Closer to home, John Gibson of the University of Waikato studies the relationship between women’s education and stunting in children using data from Papua New Guinea. Stunting refers to short stature on the part of children due to poor living conditions and malnourishment. Gibson finds that mother’s education has three times as large an effect compared to father’s education on reducing the risk of stunting in children, even after making allowances for other factors like overall household wealth and parental health.

The bottom-line is incontrovertible: societies that do a better job of educating their girls experience better overall economic outcomes than those who fail to do so. As for me when I go home tonight I am going to hug my two girls close to my chest, ignoring their embarrassment at such effusive display of fatherly affection and hope that in their lifetime they will be able to live in a world where no teenage girl is shot simply for demanding the right to education and equal treatment.

Foreign aid in the 21st century

Last week Barack Obama and Mitt Romney shared the stage at a function organized by the Clinton Global Initiative. In his speech Mr. Romney, who might become the next President of the USA, laid out how he views foreign aid. “The aim of a much larger share of our aid must be the promotion of work and the fostering of free enterprise,” he said. Mr. Romney added that the “United States should make foreign aid conditional on countries’ lowering barriers to entrepreneurship and trade with the United States.”

This view of foreign aid is, at the very least, grossly outdated. Normally, Mr. Romney’s views on aid should not be of much concern to us except that I think that our government’s view on this matter is similar; “Trade, not aid” is the mantra. A key piece of evidence here is that New Zealand Aid, a body which is in charge of handling our foreign aid is part of the Ministry of Foreign Affairs and Trade.

Before I discuss why this is a misguided way to view foreign aid, let me disabuse readers of some often held misconceptions. Most rich counties in the world actually provide a very small fraction of their gross national product in foreign aid.

The governments of developed countries promised to spend 0.7% of their gross national product on development assistance in 1970, 42 years ago! They have consistently failed to reach this goal; the amount of aid has been around 0.2 to 0.4% on average. Among developed nations only USA, Italy and Japan donate less in percentage terms than New Zealand.

So no, we are not really spending that much of our hard-earned money to help out “victims” in poor third-world countries who fail to take responsibility for their own well-being. But then do we have any obligation to help out those people at all?

Usually, those who answer this question in the affirmative, do so by appealing to morality, compassion and fairness. Those are valid arguments and I agree with them. But there is a case to be made in favour of foreign aid purely on the grounds of national security and self-interest. And that is where we need to think of foreign aid in different and more strategic terms.

First, in today’s globalized world opening up markets for our country’s businesses is not a major concern anymore; at least it is not a predominant concern. Most countries around the world are now clamoring for foreign investment. There are few counties in the world with the possible exception of North Korea and Myanmar which hang on the old-school ideas of autarky and self-sufficiency. If there is one thing that we have learned from the rapid growth of countries like China, India, Singapore, Taiwan and others it is that international trade provides poor countries an escape out of poverty. India recently opened up its retail sector to foreign investment. This was one of the few remaining sectors of that vast market. Yes, there may be some sectors in some countries that may require opening up but that is a minor concern.

Let us talk about tuberculosis in New Zealand. According to a report issued by the Ministry of Health there were 626 cases of TB in New Zealand in 2011. “The most commonly reported risk factors among the cases were being born overseas and current or recent residence with a person born outside of New Zealand.  Based on country of birth, the highest TB disease rate was among those born in Asia (61.7 per 100,000, 155 cases), followed by those born in Sub-Saharan Africa (38.9 per 100, 000, 23 cases) and in the Pacific Islands (27.2 per 100 000, 37 cases).”

Given that the symptoms of TB can be dormant for many years, routine health-checks as part of the immigration process may not pick up on this.

Another serious medical problem facing us is the over-the-counter availability of potent antibiotics in third-world countries leading to their widespread abuse. This in turn is giving rise to numerous multi-drug-resistant diseases which are spreading rapidly around our globalized world.

Pandemics like SARS, swine-flu or bird-flu (or ones that may happen in the future) have enormous detrimental effects on our economy. 

Note: If you are inclined to dismiss these arguments as fear-mongering then, if nothing else, you need to borrow a copy of the DVD of Stephen Soderbergh’s film “Contagion” and watch it immediately!

This implies that any aid program that leads to greater immunization of children in third-world countries or prevents the widespread abuse of antibiotics has positive implications for our own well-being.

But a much bigger threat to our interests and security come not from disease but from failed states like Afghanistan, where a number of Kiwi soldiers have died recently.

The problems we face in Afghanistan, Iraq, Somalia, Congo, Angola, Haiti or Sudan is not of opening up their markets. There are no markets in those countries! Because there is no government to create functional markets in the first place. And the problems are the same: corruption, graft, terrorism, civil unrest, warfare, genocide.

And much of that unrest is washing up on our shores in the form of the smouldering ruins of cafeterias and bars and ships and yes, skyscrapers.

Here is the lesson from the Arab Spring. In order to improve the situation in poor countries the primary focus needs to be on only one thing: governance. This means reducing corruption, creating rule of law and transparency in the operations of the government, ensuring property rights and fostering democratic ideals.

Therefore aid that goes towards providing primary schooling or towards microfinance in helping people get out of poverty may not pay off in terms of business interests in the immediate present but has a far greater payoff for our security interests down the road. It is not easy to recruit “shahids” for “jihad” when the prospective shahid has a job and a wife and children who go to school; people who have middle-class dreams and aspirations and stability in their lives and things to look forward to.

The result of this will not always be to our liking; people whose viewpoints are radically different from ours will sometimes end up in power. But then we must have faith in the people of those countries to overthrow their own despots. The west has tried doing it at gun-point and yes, there are clearly times when military intervention is unavoidable. But military interventions are costly in terms of money and lives lost. In the wake of the current recession, few nations, if any, have the appetite for incurring those costs. This is mostly why we have all gone about business as usual in the face of the massive human calamity unfolding right now in Syria. 

It is time that the rich countries in the world began to wake up to the real threats facing us in our globalized world. Yes, some of the aid we provide will be stolen; some will go towards helping ultra-conservative religious zealots or despots who will stash the money in Swiss accounts. But if we are smart about it and direct our aid well then much of it can help bring about lasting change in poor countries. In the long run this will be a good investment in our own future and that of our businesses.

Are women less corrupt?

A version of this article appeared in the New Zealand Herald on September 27, 2012.

Recently I took part in a panel debate at the University of Auckland following the showing of the film “The Inside Job” which indicts investment banks for risky strategies that almost certainly led to the current global financial crisis. The film also holds responsible a number of leading economists for aiding and abetting behavior that led to the crisis.

During the panel discussion one of my colleagues in economics made an interesting point. She suggested that one notable fact in all of this is that all the people responsible for engaging in such questionable behavior are men! Her implication is that women would not have engaged in similar behavior. That got me thinking – is she right?

Regardless of how one views the actions that led to the financial crisis, it seems clear that some of the people involved must have realized at some point that the behavior they were engaging in were at the very least, ethically questionable, if not downright corrupt. To take one example, in October 2011 the New York Times reported that “Citigroup agreed to pay $285 million to settle charges that it misled investors in a $1 billion derivatives deal tied to the United States housing market, then bet against investors as the housing market began to show signs of distress....The S.E.C. said that the $285 million would be returned to investors in the deal. ...The commission said that Citigroup exercised significant influence over the selection of $500 million of assets in the deal’s portfolio. Citigroup then took a short position against those mortgage-related assets, an investment in which Citigroup would profit if the assets declined in value. The company did not disclose to the investors to whom it sold the collateralized debt obligation that it had helped to select the assets or that it was betting against them.”

So are women less corrupt or less ethically challenged than men? My research suggests that the answer is yes.

Researchers have approached this question from different directions. One group of researchers from the World Bank looks at whether increasing female presence in a country’s parliament leads to reduced corruption. Using international measures of the level of corruption in a country they find that across a range of countries and after controlling for various other factors that could have an effect, increased female representation in parliament does reduce corruption.  

Another group of researchers from academia and the World Bank use data provided by the World Values Survey. They look at data from 61 countries around the world where respondents were asked about the acceptability of a series of dishonest or illegal behaviours such as claiming government benefits one is not entitled to, avoiding fare on public transports, cheating on taxes, buying something that one knows was stolen, someone accepting a bribe in the course of their duties, throwing away litter in a public place, driving under the influence of alcohol and so on.   For each of these situations, respondents were asked to indicate their responses on a 1 to 10 scale where 1 indicates that the behaviour can “never be justified” while 10 indicates that it can “always be justified”. For all questions, a significantly higher proportion of women than men believe that the behavior described is never justifiable. In fact for all questions the proportion of women who think that the behaviour described is not justifiable is always larger than the corresponding proportion of men.

One obvious criticism of the above approach is that people may or may not respond truthfully when asked hypothetical questions. That is to say they might say bribe taking is unacceptable when asked about it but then change their behavior and indulge in bribery when the opportunity arises and especially if there is actual money on the table.

So along with my students at the University of Auckland as well as colleagues from the University of Melbourne and the World Bank I designed a set of economic experiments. Here participants take part in a simulated corruption game where they are asked to play the role of a firm, a government official or a citizen. The firm can give a bribe to the official which if accepted by the latter leads to a large increase in the payoff to both of them at the expense of the citizen whose earnings go down. The citizen can then meekly accept this or if the citizen wishes he can choose to forego some more money in order to punish the firm and the official. For every dollar that the citizen decides to forego, we reduce the firm’s and the official’s earnings by $3 each. The basic idea is along the lines that the citizen can engage in costly litigation to take the firm and the official to court. This costs the citizen time and money but if successful can hurt the firm and the official even more.

But the important point is that there was real (and often substantial amounts of money) involved! Essentially we were asking people to put their money where their mouth is. We carried out our experiments in Auckland, Bangkok, Jakarta, Kolkata, Melbourne, New Delhi and Singapore.

Subsequently a number of other researchers have used modified versions of our game to look for gender differences in behavior and carried out experiments in other locations such as Nairobi, Kenya and Barcelona, Spain.

So what do we find? We find that indeed the preponderance of the evidence suggests that in these simulated corruption situations female “firms” are far less likely to offer bribes and female “citizens” are much more likely to punish the firms and officials who engage in bribery.

Organizations around the world are beginning to respond to these findings. In mid-1999, Mexico City took away the right to write traffic tickets (a major source of bribery) from male police officers and gave that right exclusively to an elite corps of women traffic officers who were deemed less corrupt than their male counterparts. Around the same time the city of Lima in Peru enacted a similar reform. In a number of developing countries around the world there have been proposals for reserving parliamentary seats for women in an attempt to increase female representation in government. In India, for instance, some seats are reserved for female candidates in elections to local bodies such as municipal and village councils. A bill to do so at the level of the national parliament is still pending.

But our findings come with a strange twist. The finding that women are less tolerant of corruption is more pronounced in developed nations than in developing nations! This is a pity because corruption is a far more pervasive problem in developing nations than in developed ones and corruption often is the primary cause behind why those countries are poor. The reasons behind why this difference may arise and how one might address this are beyond the scope of this article.

But the bottom-line: yes, I think my colleague is right. We may have averted the crisis if, for instance, there were more women in positions of power at the investment banks!

India opens up its retail sector to foreign businesses

A version of this article appeared in the National Business Review in September 2012.

On Friday, India’s government, after years of deliberation and in an attempt to arrest slowing growth decided to open up India’s retail market to foreign investors. International retail giants like Walmart have been salivating at the prospect for a while and look poised to cash in.

Many people around the world and in this country think of India as a very poor country and to an extent they are correct. About 800 million people in India are indeed poor. According to a 2007 report by McKinsey, in 2005 India’s middle class accounted for only 5% of its population. But this figure is slated to grow to 20% in 2015 and to 40% by 2025. Now consider this: India has a population of a little more than 1 billion! 20% of 1 billion is 200 million; that is the size of roughly three-quarters of the United States, about eight Australias and fifty New Zealands!

So are there any opportunities here for Kiwi businesses? Clearly it is difficult to go head-to-head against the international giants like Walmart or Carrefour. So what New Zealand businesses need to think about are more niche markets, where entry may be easier. One such area is the production of milk and milk products which might be a viable opportunity for a company like Fonterra.

According to recent reports last year the price of milk and milk products in India rose by 15.3% - driven in large part by increased demand even in the face of steady supply. In order to keep up with demand, milk production in India will need to increase by over 4% in the near future, up from the 3.5% where it is today.

But the big challenge is to reach out beyond the urban elite, concentrated in the cities, numerous as they may be. The point to bear in mind is that by 2025 the middle class in India will double in size, which means that about 200 million more people will be joining in. One option might be to target that segment of Indian society.

I profess no particular knowledge or expertise regarding expanding into a new country but here the story of Grameen-Danone may be instructive. In 2005 the CEO of Groupe Danone in France (Dannon in the USA) met with Muhammad Yunus the founder of Grameen Bank, the well-known microfinance organization. This eventually led to the establishment of Grameen Danone, a “social (non-profit) business” consisting of a small plant located in Bogra, that produces Shakti Doi (or “Strong Yoghurt”), an yoghurt fortified with micronutrients for sale in rural areas of Bangladesh, an area that suffers from malnutrition and calcium deficiency along with large parts of the sub-continent. Among other things there are “yoghurt ladies” who cycle from village to village with small quantities of yoghurt at one time (the lack of refrigeration facilities is an active constraint) and sell it at a low price. All profit is ploughed back into the operations of the enterprise.

While selling yoghurt to the poor at no profit may not seem like a winning strategy it appears that Danone has learned some valuable lessons from this undertaking in terms of product development, factory design and how to make inroads into new markets.

According to a recent report in Time, Danone has figured out how “to put enough vitamin A, iron, zinc and iodine into a 60 g or 80 g cup of yogurt to meet 30% of a child's daily needs…. Part of the answer lay in a new, less reactive iron that Danone had learned about from an NGO — not the sort of partner a global corporation tends to come across in its normal line of business. Now Danone is using that iron in products for the developed world, where the company sells fortified yogurt targeting things like bone strength in older women.”  

Another important lesson that Danone picked up in Bangladesh is how to keep milk fresh for a longer time by using enzymes since refrigeration is often not an option.  

But equally importantly this attempt has provided a template for how the company may push deeper into the developing world primarily Asia for now but, in the not too distant future, Africa.

While Danone may not make money out of its social business, the value of its name recognition is immense and most likely surpasses what could have been accomplished via large amounts of advertising.

Danone already has a presence in India through its Yakult brand of probiotic milk drink. This is a joint venture with Yakult Honsha, Japan. But given the size of the market it is likely that there is scope for other players. It is also probably not out of bounds to simultaneously enter into profitable joint ventures in the urban areas while setting up social non-profit undertaking in rural areas in order to get market penetration.

Danone hired Zinedine Zidane, the French soccer star to launch Grameen Danone in Bangladesh. Here we have an edge. Everyone in India knows who John Wright is!

Expand the scope of microfinance to stop predatory lending

This post is co-authored with Dr M. Claire Dale of the Retirement Research Centre at the University of Auckland .

A recent report issued by a group of researchers at Otago University finds that some of the less well-off members of our society are at times paying as much as a 400 percent interest on loans taken from money-lenders. The report calls for, among other changes, a cap of 48 percent on any such loans.

 

Simon Bridges, the Minister for Consumer Affairs has continued the slow progress since 2007 toward a law change to ensure responsible lending, but his proposals exclude an interest rate cap.

 

The poor resort to loans from moneylenders at very high rates of interest because that is their only recourse. Given that they are considered not credit-worthy and often have no collateral to pledge, it is difficult for them to get loans from commercial banks. And banks and second-tier lenders are often reluctant to lend to those on welfare or dependent on part-time work, so they have a hard time borrowing, even it is for the purpose of starting a small business. This means if someone who is poor needs a loan, sometimes at short notice, then the only option is to turn to money-lenders. This is true of the poor not only in New Zealand but all over the world.

 

One potential argument against capping interest rates is that the interest rate on a loan is a price. It is what the money-lender earns by making the loan. Therefore putting an artificial cap on this interest rate might actually reduce the pool of money available for borrowing. However, it seems to us that even if we cap that rate at 48 percent it provides a “high enough” return to the moneylender, at least higher than what could be earned from alternative investments. Furthermore, available evidence suggests that the amount of loans forthcoming from money-lenders is not very price responsive and that capping interest rates does not seem to significantly reduce the amount of money available for borrowing. It also appears that commercial banks are prepared to develop loan products for small entrepreneurs at interest rates close to cap rate, thus increasing the available pool of credit funds.

 

Under current conditions, that act of taking out a loan at 400 percent may not be “irrational”. If a poor family borrows money to finance an important family or religious event then it is most likely that their calculations suggest that the price of not funding the event exceeds the cost of borrowing the money.  Too frequently though, the money is borrowed to pay for electricity, or food, or car repairs so the worker in the family can get to and from their job. As Abhijit Banerji and Esther Duflo of the Massachusetts Institute of Technology argue in a recent influential book “Poor Economics” the weight of the evidence suggests that when it comes to matters of money, the poor are no less rational than the more affluent.

 

The problem is three-fold. First, to the extent that some of this borrowing is going to finance social events, there may be a case for tackling entrenched social norms like hundreds of guests at weddings or feasts at funerals. There is also a need for financial literacy, so the full price of the debt and the burden are clearly understood. Most of all, there is the need for another option. For consumers on low incomes, access to small loans to cover emergencies or to smooth out the costs of large expenses could be considered an essential financial service.

This is exactly why all over the world we have seen the rise of microfinance institutions which provide loans to the poor.  In most countries where microfinance organizations are active, they have made substantial contributions towards reducing poverty. As the Otago University research states: “A critical and complementary factor supported by other research and informants is ensuring an adequate supply of affordable micro-finance through mainstream banks, credit unions and other community lenders.” 

When the consumer has no choice, 400 percent interest becomes the norm. And it turns out that even in developed countries there are substantial numbers turning to the money-lenders because they are, for whatever reason, excluded from accessing mainstream bank loans.

The reach of microfinance organisations in New Zealand at this point seems limited.  Nga Tangata Microfinance was introduced by Child Poverty Action Group, NZ Federation of Family Budgeting Services and NZ Council of Christian Social Services in 2011. It is accredited by Australia’s Good Shepherd Microfinance as a No Interest Loan Scheme (NILS) provider, with loan funds for asset-building and family development provided by Kiwibank.

Safe, fair, affordable alternatives to predatory lenders are necessary in a low-wage society like New Zealand. Such microfinance loans also provide the opportunity for borrowers to develop financial literacy, build a positive financial history, and ultimately to access credit when needed from mainstream lenders. Until such alternatives are available, money-lenders will continue to legally constrain poor families in poverty.

A two-fold response to the problem of predatory lenders would be to expand the scope of such No Interest Loan Schemes, and include capping of interest rates among the Responsible Lending amendments.

 

The choice of Paul Ryan

I wrote this in mid-2012 during the campaign for the US Presidency .

The choice of Paul Ryan as mitt Romney’s Vice-Presidential running mate has caused a degree of surprise. Many commentators felt that Romney would have been better off with someone like Marco Rubio of Florida. Rubio, for instance, brought two major advantages to the table. One, he is from Florida and could have helped Romney carry Florida, a – crucial swing state in Presidential elections. Rubio is also Hispanic, a significant demographic in the United States currently and one where Romney is not faring particularly well.

Conventional wisdom has it that Ryan is a risky choice; that the most compelling reason for choosing Ryan is that Mitt Romney recognizes that he is clearly behind Barack Obama at the moment. Therefore he needed to do something to shake things up and change the nature of the game. After all the last time a member of House was part of the winning ticket was John Nance Garner who was elected Franklin Roosevelt’s Vice President in 1932. Garner was the Speaker of the house at the time. The last time that an ordinary member of the House was on the Republican ticket was when John Sherman was elected Vice President with William Howard Taft in 1908!

It is certainly true that when combating against superior forces it is better to introduce greater uncertainty. So to take an example, if you have to play tennis against Roger Federer then it is better to do that on an uneven playing surface. This tends to nullify some of the advantage of the superior opponent.

However, it is not at all clear whether the Ryan choice does introduce that element of uncertainty; clearly it does not to the extent that the choice of Sara Palin did for John McCain. Palin was almost completely unknown nationally and after she burst on to the scene, McCain experience a significant bounce in the polls.

Ryan on the other hand is much better known. However, in choosing him it is not clear that Romney nullifies any of Obama’s advantages. For one thing, Ryan is best known for the Republican House budget, a deeply unpopular document which proposes to gut entitlements and in many ways takes aim at the whole notion of the welfare state.

Till this point the Romney strategy was to set up this election as a referendum on Obama’s Presidency; draw attention to Obama’s failures and hope that the electorate will throw him out.

But by choosing Ryan, Romney is implicitly setting this up as a conflict between two radically different views of government and of the whole rationale of the welfare state. But this is not a wining argument. The US electorate has faced these choices and has repeatedly and overwhelmingly rejected similar attempts including the Bush proposal to privatize social security.

What is Romney’s thinking then? I think the fundamental calculation here is very different. Contrary to the views expressed by many talking heads there are few if any centrist voters, at least in the classical sense of the term. The US electorate is now divided into a series of well-defined voting blocs. The Presidential election boils down to a gruelling attempt to put together a patchwork of enough of these blocks within each state that allows the candidate to prevail in the state and thereby garner enough electoral votes. However, there are two challenges here. One is to hold on to the blocs that typically vote in a particular way. For instance, Mitt Romney is not going to get any significant portion of the black vote. Obama is not going to win the white blue-collar workers without a college degree. The trick then is to hang on to enough of these “captive” blocs while trying to snatch some away from the other camp.

But Romney was in grave danger of losing out on the conservative vote. These people – as embodied in the support for the Tea Party – have been deeply suspicious of Romney and there was a real possibility that these people would have stayed home on election-day.

The defeats of George Herbert Walker Bush at the hands of Bill Clinton and that of John McCain to Obama most likely had multiple reasons but an important contributing factor was that both of these candidates failed to mobilize the conservative base. George W Bush – actually Karl Rove - on the other hand did a masterful job of motivating the base via a series of legislative measures on the ballot in many states. This was to a large extent instrumental in Bush’s easy victory over John Kerry even though polls had suggested a much closer race.

Losing the conservative base was a recipe for certain disaster for Romney. By choosing Ryan he has locked up those votes. It is likely that Romney will still lose. His unfavourable ratings are high. A large part of the electorate does not trust him and he gives the impression that he does not have strong convictions. Add to this the fact that Ryan’s budget proposals are unacceptable to a large part of the population. But at least Romney no longer has to worry about the conservative vote and can now make a play for putting together a coalition that can take him over that threshold.

Mitt Romney and the capitalism of Bain Capital

(This was written during the run for the 2012 US Presidency between Mitt Romney and Barack Obama)

As the race for the US Presidency heats up, it is clear that Mitt Romney’s role at the private equity firm Bain Capital is going to be a major focus. Barack Obama’s campaign has been running advertisements that accuse Bain Capital and by implication Mr Romney of predatory practices such as buying companies and then stripping their assets as well as job destruction and out-sourcing of jobs overseas. The current debate centres around when most of these practices occurred and whether Mr Romney was still in charge or not. Mr Romney claims that he left before many of these adverse events occurred while a report in the Boston Globe last week suggests otherwise. This week Mr Romney is embarking on a sustained media campaign and will be giving interviews to all the major television channels talking about Bain Capital and his tenure there.

The Obama campaign’s attack on Romney’s role at Bain Capital has attracted a lot of attention and come under fire from defenders of capitalism including many prominent Democrats and supporters of Mr. Obama. Criticism of Bain Capital is being viewed as criticising the capitalist system as a whole. Nothing can be further from the truth. Debate on this issue has implications for the rest of the world not only because who becomes the next US President matters for all of us but also because success in the corporate world is often touted – elsewhere and in New Zealand - as a pre-requisite for success as a country’s leader.

It is true that the forces of competition as espoused by Adam Smith are fundamental to the success of our market system. Under this view competition leads to better decision making and greater efficiency; the firms that excel, prosper; the rest perish. But as any serious economist can tell you markets do not always deliver optimal outcomes and at times the cause of market failure is rooted in the very nature of the competition that characterizes much of contemporary economic transactions. As the Cornell University economist Robert Frank points out, a large part of modern-day competition resembles the Darwinian struggle of the animal world, where mutations that confer individual benefits can be detrimental to the group as a whole.

Frank points out the example of elephant seals. Bulls of the species often weigh as much as six thousand pounds, more than five times as much as the average female. During the mating season pairs of mature bulls engage in ferocious and bloody battles for access to females. Being larger than rivals makes it easier to prevail in battles and consequently have much larger harems with greater reproductive success. But at the same time such large bulk is a serious drawback for the bulls as a group because this makes it more difficult to escape from predators like sharks. If it was possible to reduce the size of each bull by half, everyone would be better off since it is relative and not absolute size that matters in gaining access to females and it would also make it easier to escape from predators. Similar evolutionary forces lie behind the long and colourful tails of peacocks and the large antlers on stags. They make the possessor more attractive to females but more vulnerable to predators. The quest for reproductive success becomes an escalating “arms race” which leaves everyone worse off.

How is this relevant to the work of private equity firms like Bain?  Many of the decisions that eventually led to the current global financial crisis can also be traced back to this type of Darwinian competition and the consequent jockeying for higher rank within the social hierarchy. Consider the incentives in the financial industry which was instrumental in causing the current crisis. For money managers, the larger component of their pay is bonuses rather than salary. Your bonus depends on whether your fund has a higher rate of return relative to others or whether your company’s stocks made greater gains. This provides strong incentives to invest in highly leveraged risky assets, which yield higher average returns or engage in strategies that provide a short-term boost to your company’s stock prices. But as recent events have shown such strategies designed to create short-term gains generate considerable systemic risk.

The point is that even if you are successful at making money for your shareholders, it says nothing about your ability to run a country because success as a CEO says nothing about success as a President. In fact such success says nothing about your ability to successfully handle even the economy, forget foreign affairs and the like.

In running these advertisements Obama and his team are really not asking whether Mitt Romney created jobs at Bain Capital or destroyed them as the advertisements seem to imply. That is somewhat beside the point. What they are doing is to raise questions about what Mitt Romney’s work at Bain says about Mitt Romney and his vision for the economy. Even now as we absorb JPMorgan’s loss of US $2 billion (or maybe US $6 billion!) and everything else that has gone wrong with the world financial system, Mitt Romney opposes the Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), legislation that would lead to greater governmental oversight of the financial services industry, an industry known for its lack of transparency and lobbying clout.  

The issue here is what kind of capitalism does Mitt Romney and his supporters believe in? Is it the kind envisioned by Adam Smith that leads to creative destruction and the triumph of good ideas or the Darwinian one where individual success comes at the expense of the greater good? Many people – both in the US and outside – fear that Mitt Romney embodies the latter view. But the fundamental question at the heart of this debate should have as much resonance in this country as in the United States.

Class size and teacher quality

Now that the hue-and-cry over the government’s proposed changes to the way schools are funded has subsided, it may be a good time to undertake a sober reflection of the issues because they are bound to re-surface in the future.

First, common sense suggests that increasing class sizes is detrimental to student performance. More students per class mean more harried teachers and therefore less attention per student. The causality here is clear. 

But, teacher quality certainly plays a crucial role as well. So what the government is essentially proposing is a trade-off: larger classes (bad) but better teachers (good).

The important question, however, is does the additional value created by good teachers counter-act the bad consequences of larger class sizes? At this point the answer is not clear.

It is most likely that in supporting this change in policy the government is drawing inspiration from a recently released study undertaken by Raj Chetty and John Friedman of Harvard and Jonah Rockoff of Columbia. In this large and comprehensive study, which has been cited approvingly by many, including Barack Obama, the authors claim that students with high value added (HVA) teachers who raise their standardized test scores are “more likely to attend college, earn higher salaries, live in better neighborhoods and save more for retirement.”

But how reliable is this work? As Gary Gutting, professor of philosophy at Notre Dame, writing for the New York Times asks: does this compare with the work by biochemists on the effects of light on plant growth? No one, for example, questions the validity of the physics on which our space programs are based. But even the best-developed social sciences like economics have nothing like this status. Since humans are much more complex than plants and biochemists have far more refined techniques for studying plants, we may well expect the biochemical work to be of greater validity.

Furthermore when it comes to generating reliable scientific knowledge the most important issue is the ability to predict future events. And the only way we can make such informed predictions about teacher impact would be to run randomized controlled experiments. Suppose that you could randomly assign some students to a teacher rated HVA, and other students to a teacher rated low value-added (LVA). If the students are identical on average, you could compare the test scores of each group. If the kids with the HVA teacher do better, then we can draw reasonable conclusions about the teachers’ value added

But such controlled experiments are nearly impossible for obvious reasons. So instead Chetty and his colleagues look at data from grades three to eight for 2.5 million children in one of the largest school districts in the USA over a 20-year period (1989-2009). They then used other public records to track students after high school. They used a massive data set of nearly 20 million observations to find situations that were virtually identical to the controlled experiment that I have described above.

But here is the next problem. Chetty and his colleagues do all of this while holding class size constant. What happens when the class size changes? Now the controlled experiment required becomes more complex. For one thing now you would have to measure the impact of HVA and LVA teachers separately for large classes and small classes and then measure if the higher value added by HVA teachers counter-act the drop in performance in larger classes.

And underlining the difficulties of making meaningful predictions the authors point out that while the impact of HVA teachers may be significant, there are a whole host of other factors that affect performance including relationships with parents and peers.

Furthermore, how much faith can or should we have in the government’s ability to identify good teachers or a set of best practices in the classroom? Teaching is a multi-faceted and complex activity that defies easy quantification. If we measure teacher performance by improvements in students’ test scores as the Chetty et al study proposes, then does that not leave us open to the possibility of teachers teaching to the test? Researchers at the University of Chicago have also shown that when student test scores are the only metric, then teachers are not immune to cheating by changing student answers on standardized tests ex post.

In New Zealand we already have experience with the government’s attempts to measure the quality of university staff. This is called the Performance Based Research Funding Exercise. One would be hard pressed to find a single academic in the whole country who thinks that the PBRF actually does a good job of measuring quality; because quality is an extremely elusive concept and because university staff engage in a diverse array of activities including research, teaching and service. PBRF is a cumbersome and costly (both in terms of money and time) process that has significantly increased the administrative burden at universities. The pool of money available for division remains unchanged, except that the universities are now spending increasingly more resources in chasing that constant sum.

Given the inherent constraints in social science research and the difficulties in making meaningful predictions, it seems impulsive to use the findings of such research to usher in sweeping changes in existing policy. Certainly we should expect world class research to inform our policy decisions but they cannot really be a substitute for practical experience, empathy and common sense.