Tuesday, May 17, 2011

The role of pension funds

Global development news, comment and analysis | guardian.co.uk

Pension funds that invest in the commodities market are pushing up food prices with catastrophic consequences for the poorest

Hunger is a scourge that has many causes. Some are natural, the cyclones and tsunamis, volcanic eruptions and earthquakes that devastate communities and destroy crops.

Others are entirely our own fault. They include wars – the spectre of hunger is never far away when fighting starts – and the hapless economic policies foisted on poor countries by richer nations in recent years as the price for trade and aid. Tax-dodging by some unscrupulous multinationals, which deprives developing countries of badly-needed revenues, is another problem.

Today, hunger is growing as food prices reach record levels, and a further 44 million people, according to the World Bank, have found themselves reduced to conditions of extreme poverty since the middle of last year. The figures are imprecise but, according to the UN's Food and Agriculture Organisation, about a billion people now live in chronic hunger – a scandal in what should be an age of plenty.

As the numbers increase, suspicion has mounted that a new factor has been helping to push food prices beyond the pockets of the poor – the vast amounts of money poured into the commodities market in recent years.

In a new report, Hungry for Justice, Fighting Starvation in an Age of Plenty (pdf), Christian Aid says it is not primarily the hedge funds that are behind this trend. More pertinent are the activities of institutional investors such as pension funds looking for a safe place in which to grow their money following the burst of the dotcom bubble and collapse of the property boom.

The scene was set for their entry into the commodities market in 1991, when Goldman Sachs created an index of 18 commodities, including various foods, in which people were invited to invest. As well as providing diversity in the form of different types of commodities, from oil to metals to foodstuffs, that would perform differently, the index would offer diversity at a broader level to those with investments in traditional assets such as shares and bonds.

Business built up quickly, becoming an avalanche once the Commodity Futures Modernisation Act was passed in the US in 2000. That allowed banks, brokers and other financial institutions to develop, market and trade a variety of unregulated financial products.

Crucially, it also allowed more heavily regulated investors to enter the commodities market. Pension funds, for instance, are banned in the US from speculating on commodities futures themselves because that involves leverage, or the use of borrowed money. However, the Act gave them access to the index funds. And they have money – lots of it. An indication of the funds at their disposal is the fact that the combined value of the world's 13 largest pension markets is around $US26.5trn, higher than the combined GDP of China and the US.

The bets they make on commodity indices, however, have a knock-on effect. While they are not allowed to invest in commodities futures directly, every index-linked investment they make tends to produce a related investment in the "futures" of the individual commodities on the index by whichever bank or finance house is managing their business.

The index-fund managers make such bets to cover themselves in terms of prices moving up and down. And they too, particularly with extra money flooding into the system through quantitative easing, have a lot of money to invest.

It is these underlying trades in the commodities futures that are now thought to be distorting prices. This is because the money is invested with little regard to factors such as consumer demand and whether harvests have been good or bad. "Price discovery", the process by which the market sets the real price of a commodity through assessing such factors, has been eclipsed, so the argument goes, by the huge amounts of money sloshing around in the system.

As a result, the signals that producers receive about whether to increase or reduce production are unclear. In the short term (most of the past 10 years) the prices of major foodstuffs have been driven unnecessarily high, with consequences for world hunger. In the longer term, we are at risk of locking in inefficiencies that will prevent the planet from providing for its growing population.

Research into the links between food price rises and commodity investment is at an early stage. However, policymakers must investigate as a matter of urgency the way in which the former now mirrors the latter.


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Helping Ugandan families save for school fees

Innovations for Poverty Action Blog
Sarah Kabay

The Boston Review recently hosted a forum beginning with the article "Small Changes, Big Results" by Rachel Glennerster and Michael Kremer.  The forum featured seven responses, each focusing on a different concern, though as Glennerster and Kremer later noted, "One of the themes of the responses is that randomized evaluations are not the only method that can help inform policy in developing countries."

Chloe O'Gara argued that randomized control trials "complement but do not replace the insights of other approaches – such as participatory rural appraisal, whereby an outsider facilitates conversation within a community about its problems – that aim to collect timely, valid, and useful information for program design."  This is a common critique of randomized control trials, as is the concern that they do not take into account the importance of context and that randomized interventions are immutable, unable to be influenced by other perspectives.  

But there is no rule which states that randomized control trials should be implemented in isolation from other sources of information. In Uganda for example, IPA has drawn continuously on different sources and methods of data collection in the evaluation of a primary school-based savings program.

Throughout the implementation of the program, IPA has monitored attendance, enrolment and basic scholastic payments in all 136 schools involved in the study.  In addition to this data collection, researchers are in constant discussion with school administrations and their pupils, building trust and collecting qualitative information to better understand the numbers. 

Additionally, program implementation has offered great insight into the challenges facing schools and the various dynamics affecting their pupils. For example, it became clear during the first year of implementation that parental involvement was an important concern.  We observed that in some schools children were saving on their own and that parents were unaware of the program, but that school fees and scholastic materials were most often funded by parents.  Involving parents, it was believed, would be critical to keeping children in school.

We polled teachers in all schools and their responses supported our observations, not just in relation to saving but for education in general.  The majority of teachers identified "parent sensitization" as the best way in which to improve primary education.  Our research question is to determine whether savings can influence educational outcomes; attendance, the number of children with school materials, paying fees, and drop-out rates.  In order to answer these questions, we have to first implement a savings program that works.  We saw in focus group discussions, individual interviews and informal conversation that our program needed greater parental involvement in order to "work."

For this reason, we designed and are in the process of implementing a parent outreach program as an extension of the savings program.  This insight will also be highly valuable when we come to analyzing the results of the impact assessment.

The ability of randomized control trials to robustly demonstrate causal correlations between variables and thus determine the effects of programs is not found in any other form of evaluation. This is not to say that a randomized control trial cannot benefit from other forms of evaluation.  As regards the primary school based savings program, with many different types of information and evaluation we are able to implement a better program and are better able to design and understand the results of the randomized control trial study.

Click here to learn more about this project at Global Giving.

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Four more short form ideas, mostly on crowdsourcing

PHILANTHROPY 2173
Four more "short thoughts" - will be back with more.

1) Foundations and social media
I'm participating in some very interesting discussions and watching some experiments on this. It's always important to stay up on what Beth Kanter is talking about in this regard, and her report from the CEP conference is one of the best. It's almost time for me to check back in with the good folks at the @IrvineFdn on their experiments. I'm also intrigued by the crowdsourcing effort that Natan is undertaking. For a new media initiative they've asked the community to help design the application process itself. Take a look here.

Now funders are opening up all kinds of things, but the actual design of the application process? That one was new to me. I asked Felicia Herman, Executive Director of Natan, "what are you trying to do here?" She said:
"...we recognize that we are by no means new media experts, and that the field - practitioners, theorists, investors, and users - might have greater insight into how best to solicit (and instigate?) quality new media initiatives. We also recognize that the contours of this field demand a new way of doing our philanthropic business. Opening the design process up to external inputs is one of the ways we're trying to do business differently, as is having a briefer application review process (which responds better to the fast pace of change in this field than our usual process) and a much briefer, different application "form" (which tries to even the playing field between people who are used to applying to foundations for grants and people - especially new media entrepreneurs - who are not)."

Should be interesting to see what Natan learns and how they use it. Go add your ideas to their efforts - we'll all benefit. On another note about Jewish Social Media - check out the Fulcrum Project a crowdsourced repository of media uses/experiments for Jewish community building.

2) I'm fascinated by the Digital Public Library of America. Not only do I think a digital public library is much needed, but the dynamic between the public resource effort to create this and the private sector efforts driven by Google offers a real-time case study of the hybrid social economy in which we now live.

The folks behind the DPLA, which is being coordinated by Berkman Center at Harvard, demonstrated their thorough commitment to public input when I, a complete unknown to them, tweeted an idea I had after reading about the DPLA in The New York Review of Books (here and here) and The New York Times (here and here). My tweet had to do with crowdsourcing the search for "authors of orphan works," a wonky issue of great importance for digital book efforts. A small number of twitter followers responded saying they thought the idea had merit.

That was enough encouragement for me to email Robert Darnton, Carl H. Pforzheimer University Professor and University Librarian at Harvard, head of the project. He soon put me in touch with the staff person in charge, who pointed me to the wiki and group listserv Voila! just like I had shared my idea, people responded, I reached the right decision makers, and I was welcomed to participate more (which, sadly, I haven't had time to do).

That's what this is about - ideas can come from anywhere. Newspaper articles spark thinking which spark conversations which spark more ideas which are then shared by social networks and put to use. Think about how that flow of information, ideas, outsiders, insiders works in your world.

3) The Omidyar Network Executive Forum (ONEF)
I've been invited to attend and blog/tweet from the Omidyar Network's Executive Forum this coming Tuesday and Wednesday, May 17-18. Because of scheduling conflicts (SSIR Webinar, May 17th 11:00 am pst) and participation in the annual meeting of the League of California Community Foundations (May 18, San Diego) I"ll only be at ONEF Tuesday afternoon and Wednesday morning. That said, I'm excited to share what I learn and what this incredible portfolio of organizations will be discussing. This is a first for me - blogging from a funders' meeting of their partners. In ON's case the portfolio includes nonprofit and commercial enterprises, funded with both grants and investment dollars. The network is both a foundation and an LLC investment company working deliberately and directly across sectors to make social change. I expect plenty of food for the future. If you have questions or thoughts for the companies in the portfolio let me know in the comments - if I can ask them I will.

4) On June 6-7 I'll be speaking at the Personal Democracy Forum.
I am jazzed about this - this is an event I've longed to be a part of. I'll be talking about Open Philanthropy - how foundations/nonprofits can unlock their repositories of data the way the #OpenGov movement has done with public sector data. The information gathered in, created by and used in philanthropy are key resources for social good. We are, can, and should be sharing it more as part of our efforts to improve society.

Another one of the (incredible line up of) speakers at the event this year is Jay Rosen from NYU. I saw this exchange on Twitter yesterday (Read the bottom first, from the staff of the PdF conference, then Jay's response is on top):



I thought to myself, "Yep, this is how ideas move these days. Public discussions to conferences to audiences to speakers to outsiders to insiders and connecting discussions across time and space - they are all weaving together."



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Being the Only B

SSIR Articles
Being the only one of something—whatever that something is—generally has one of two results. Either it makes you hot stuff or it backfires. In business, you hope for the first. It's supply and demand at its finest: Less of you increases the desire for you. But move away from theory and into practice, and real life may not always work that way. Sometimes being the only one of something means that fewer people understand you or realize what you truly have to offer. Instead of becoming rare, you become an anomaly—the product people aren't quite sure what to do with, an outcast. I am the owner of In Every Language, Kentucky's only certified B Corporation. Not only are we the only B in Kentucky, which means we've been certified as a socially responsible business, we're the only B in our industry. So if anybody understands what it's like to be the only one of something in business, it's me. Even before certification, In Every Language was a social enterprise. Based in Louisville, Ky., In Every Language provides translating, interpreting, and other language services to…
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