Thursday, June 23, 2011

Eradicating poverty and the Buddhist dilemma: An Interview with Dean Karlan

Financial Access Initiative Blog

More than Good Intentions Book CoverIs there a sure-fire solution to eradicating global poverty? The experts generally fall into two camps: those who believe what is needed is more money in more places; and those who think that too much has already been spent too inefficiently and ineffectively, requiring a new and smarter approach to aid. Hence the Buddhist dilemma that Dean Karlan and Jacob Appel allude to in the introduction to their new book, More Than Good Intentions: How a New Economics Is Helping to Solve Global Poverty. Karlan, a development economist at Yale and co-founder of FAI, and Appel, a researcher at Innovations for Poverty Action, founded by Karlan, argue that there is a third way ---combining behavioral economics with rigorous evaluation. Their new book takes readers around the globe –where economic theory collides with real life – and offers a new way to understand what is working (and not working) in the fight to reduce poverty. FAI talks to Dean Karlan.


Solving poverty—checking your preconceptions at the door

FAI: Millions of dollars have been spent at alleviating or eradicating poverty. What's wrong with what we've been doing? Why hasn't it been working, or has it been working?
Dean Karlan (DK): So, Some of it has been working, some of it has not –and I think what has been wrong is that it's not always easy to just intuit whether something is working or not – it's not a matter of whether it sounds good. There's lot of things sound good and then turn out to have some unintended consequence that just aren't as good as we thought they were. And there are some things that are frankly kind of boring that we never would have thought have the impacts they do, but yet they do.

FAI: Can you give an example?
DK: Savings accounts I think is actually one of those things that for some reason did not hold the lure of credit in terms of the rhetoric, in terms of the popular attention to it, and I think it didn't because of one simple erroneous fact that people would throw out which is to say if you're poor, it means you don't have any money. When you take that very simplistic view of the world you just categorically dismiss savings as not possibly a good intervention for helping somebody build up money to invest in your enterprise. Clearly the issue is to give them outside capital to make it work. What is striking is that when we look at actual studies we can see that even when people are poor, they do save.  They just don't have very good savings products, but when savings products are introduced, money accumulates. It's not to say they weren't poor, but it means that none of this categorical 'they're poor, thus they don't have money, thus we have to lend them money' is just the wrong way of thinking.

FAI: So it's about preconceptions?
DK: It's about checking your preconceptions at the door, it's about saying 'you know, I got ideas, I have gut, I have heart, but at the end of the day I want facts – I want to find out, is this right is that not?' It doesn't mean we can't all have our opinion going in, but let's be careful about what we're assuming to be true and we actually have evidence of.

The Last Mile Problem

FAI: Tell us about a study that used randomized control trials—the research methodology used in medicine to test the effects of drugs before they are made widely available, and currently used widely to evaluate the effectiveness of programs or particular interventions—to show us something surprising.
DK: So, one of the lessons that we saw in the study in South Africa had to do with how loans were marketed and there's some lessons I'll come to in a second about behavioral economics, but I think the overarching point is that whenever we talk about poverty levels, and this is one of the things we talk about in the book, there's this thing called the last mile problem. And the last mile problem refers to the idea that we have the idea, we have the technology, and that often times we'll talk about development aid, we stop there and just assume, well, of course if it's good people will want it. But in fact we do have to sell things. Even if we're giving out bed mats, we do have to sell them. Even if we're giving out some new technology for clean water, we have to sell it. And, just because it's in the realm of aid, doesn't mean we can throw the marketing out the door, in fact there is a lot we can work on. So we took this lender in South Africa, which was doing these loans, which turned out to have a huge positive benefit. We wanted to find out, how important is the interest rate, and we wanted to test out how important that is compared to more Madison Avenue-style marketing.

So, we tried sex basically. We put pictures of pretty women on the letters that were sent out to individuals to solicit loans to them and we found, that, to men, getting a photo of a pretty woman on the letter was just as effective in getting them to borrow as dropping the interest rate by 30%, so a huge effect. Now, some people are not surprised at this outcome, this is why we know sex sells. But, being able to see the relative magnitudes of price is a very shocking thing. We expected it to work, but I did not expect it to work that well compared to price, and it just reinforces the idea that we need to understand more about the human psyche and the individual decision making process when we're working on economic development aid. And that doesn't always mean sell things based on the way we designed them to have their positive impact. That's not always the way you have to think, you have to think in some situations like a Madison Avenue expert and ask yourself 'what are the factors that influence whether someone buys it and uses it or accepts it and uses it?' And lets review that and make sure we're employing those kinds of best practices. And in a lot of the situations we don't necessarily know the right answer and that's where we also set up careful randomized tests that help understand, 'What is the right way of marketing a product? What is the right way of marketing a service?' Even if it's for free, this still applies to the non-profit sector the same way it applies to the for-profit sector.

Trade-offs

FAI: A lot of the solutions discussed in your book are about how small changes can make big differences. But others argue that you need big changes (i.e. better regulation) to really make an impact. Is there a fear that focusing on what you can measure could take a focus off of big things you can't measure easily?
DK: So, great question, the way I think about this is as follows. Suppose that we wanted to increase savings, or increase school attendance. Let's go with the increase in school attendance. Innovations for Poverty Action tested about seven or eight different methods and plus we've collected information from other groups that have done randomized trials on how to improve school attendance. And, when you think about it as a cost effectiveness mechanism:  for the next million dollars, how many years of extra education will you generate? The single most cost effective method was de-worming school children. Children in sub-Saharan Africa are tested for worms. You give them a pill, the worms go out, it makes them healthier, they grow more, they were able to pay attention, cognitive as well as physical well-being goes up. And, with that they go to school. In a long-term study, they followed the children for ten years, they also found that their income was higher.

Now, let's suppose for a second that school attendance is 70% and doing this intervention which is really cheap, only $.20 per kid, was the single smartest way to spend the next 20 cents. So let's say that got the 70% school attendance, and I don't know the exact number, so let's just assume it gets it to 75%, that's great, that's the single best way to get from 70 to 75. If your goal is to get to 90, you've got 15% to go, so that doesn't mean just do deworming three more times, right, the worms are gone, you have to go to the next best alternative and that's part of the challenge, right? We think on the margins, but you also have to add it up. So we want to know what the best next thing to do. But once that's done, what's the next after that, and what's the next after that. And we do care about the total and it's important to not lose sight of that ultimate goal. There will come a point where we start trading off, though, school attendance for health clinics, for roads, and other things and we do ultimately have to make those types of tradeoffs too. We might find that getting school attendance to 90% is not tenable and we have to give up too many hospitals in order to do that.  We have to give up too many roads to do that. Life is full of trade-offs and the dollar cannot go to two things at once.

Microfinance and Measuring Impact

FAI: You spend some time in this book is looking at microfinance or microcredit programs, yet you acknowledge that your results haven't shown us the kind of impacts we expected. What do you take away from that, what does it mean?
DK: I have two main take-aways from it. One is that the results are not as high as the strongest advocates put forward, but there are still some positives, there were some benefits that people received from getting access to the credit. I think the main thing to realize is that the reason it's been oversold is partly because it has been telling the story of entrepreneurial credit, and the reality is that not everybody is an entrepreneur, not everybody needs access to credit for entrepreneurial purposes.  By focusing strictly on entrepreneurial credit, we've been missing out not only on some of the other uses that could be beneficial but we've also been missing out on some of the outcome measures that we should care about.

The second lesson I think that I've seen from this is to think harder about the way we design credit products. We maybe need to think more about flexible credit products or products that are targeted at different groups of people in order to expand the way the credit can be used.

Looking Forward

FAI: What areas of research are currently exciting you? Where do you think the most interesting work is happening?
DK: So, I think some of the most interesting work as I see it has to do with how we want to think about the portfolio. Rather than just thinking about credit products, and savings products, how we want to think about helping individuals, giving them a healthy portfolio of credit and savings, ideally not at the same time, you know, not where you're borrowing at 20% and saving at 2% and doing this at exactly the same time. I want to work with financial institutions that are thinking about the whole picture for individuals and understand how best to guide them to the right decision at the right point in their life.

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Africa is a country

Aid Thoughts

No this post isn't about the excellent blog, it's about yet another shoes-for-Africa initiative. I really hate going back to this, but the map on their site is making my eyes bleed, and the only way to stop the pain is to share it with others:

Hat tip to Texas in Africa

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Contrasting Two E-payment Success Stories: PayPal and M-PESA

Financial Access Initiative Blog

PayPal and M-PESA are two major successes stories, each an example of new e-payments systems taking root in the last decade. The early development of PayPal is described vividly by an insider in PayPal Wars, and my colleague Dan Radcliffe and I have attempted to categorize the reasons behind M-PESA's success in a World Bank case study. Their design and contexts are vastly different –developed versus developing countries, banked versus unbanked customer segments, e-commerce versus remittance applications— but they share two major similarities.

The first similarity is that they both had a very specific function and powerfully targeted the proposition. At PayPal's inception, the main case was thought to be P2P (person to person) payments, with the typical scenario being friends settling the dinner tab with each other (one person puts the meal on their credit card, the others just email him their share of the bill). Then PayPal discovered that its service was being used to pay for goods on online auctions, of which eBay was the market leader. PayPal recognized that eBay had the capacity to drive viral growth, since a few thousand sellers advertising the availability of PayPal payments could promote the service with millions of buyers. PayPal was therefore able to devote all their marketing and product development efforts to make business easier for eBay sellers, a nicely compact set of super-users with defined needs. PayPal positioned itself as the friend of the micro-seller.

This is similar to the "send money home" positioning of M-PESA. M-PESA too started with a fairly generic payments proposition, but identified a sub-segment of users to whom this was going to solve the biggest problems. These were people looking for cheap and secure ways to remit money to family and friends.  M-PESA counted on them to drive the growth of the system virally with payment recipients.

In the case of PayPal, eBay sellers had a much larger leverage or viral effect, because for every eBay seller there may be hundreds or thousands of potential eBay buyers who will have noticed the PayPal payment option. Consequently, PayPal needed to spend a lot less on end-user marketing than Safaricom did.

On the other hand, PayPal faced a constant fight with their ecosystem host, eBay, once eBay realized that some of the value from their customers was going to PayPal. As the owner of the platform, eBay sought to derive significant advantage from integrating its own payment engine into its marketplace website. But in the end PayPal won out because they focused unrelentingly on customer growth and getting the network effects on their side before eBay could catch up. Their mad scramble for growth paid off. Ultimately PayPal knew their continued success was going to depend on eBay not shutting them out of their auction website entirely, so they sought increasingly to diversify from eBay auctions as the primary business driver, and eventually sold out to eBay.

The second similarity between PayPal and M-PESA is that both were willing to incur huge losses to get to critical mass quickly. In its first 9 months (in 2000), PayPal lost $92 million (vs. revenues of $6 million), amounting to a loss of $23 for each of the 4 million customers they acquired over the period. And over the first 18 months, PayPal accumulated $137 million in losses, or $14 for each of the 10 million customers they acquired.

PayPal's early losses were due to three factors. First, they offered a sign-up bonus of $10 (subsequently reduced to $5) to whoever referred a new customer. Referrals tended to came from eBay sellers, so they had every incentive to promote PayPal alongside their own products through eBay. eBay sellers played an equivalent promotional role as the retail agents did for M-PESA. Second, in the early days customers funded their PayPal account from their credit cards, and PayPal absorbed the merchant fees on the card. So PayPal lost money not only each time they acquired a new customer, but also each time these customers used PayPal. This cost is equivalent to the agent commissions on M-PESA deposits, reflecting the cost of funding customer accounts. Third, PayPal had escalating fraud costs, which at one point reached 2.4% of volume transacted. This was linked to the use of credit cards as a funding mechanism: fraudsters could pump money out of stolen cards through PayPal, and then the legitimate owner of the card would trigger a reversal of the charges, causing a loss for the merchant in question -- which happened to be PayPal.

A significant difference between the two, though, is that M-PESA had a workable business model from the beginning on the strength of its P2P revenue stream, whereas PayPal had to shore up their business model in the years after its launch. PayPal was willing to ramp up such losses because their number one objective was creating a large base of users to get the network effect going. After 18 months, once they had over 10 million customers and no competitor was going to catch up with them, they started focusing on how to make money, or at least not to lose so much of it. They increased revenues by creating a new kind of "premium" business account for eBay sellers, while keeping basic "consumer" accounts free. They got their super-users to start paying for their account, partly by upgrading these accounts with useful innovative features and partly by cajoling frequent users. They also contained costs by shifting the primary funding mechanism from people's credit cards (which incur merchant fees) to their bank account, from which they could transfer funds for free through the automated clearinghouse (ACH) capability. They also became better at spotting suspicious transactions and trading patterns, and were able to reduce fraud in half.

E-payment businesses are dominated by network effects (where the value of the service depend on the number of people on it) and entail two-sided markets (buyers and sellers, senders and recipients). Both PayPal and M-PESA show that success requires (1) identifying early customers with the potential to promote the service virally and (2) having sufficiently deep pockets to drive aggressive customer acquisition.

Ignacio Mas is Senior Advisor in the Financial Services for the Poor team at the Bill & Melinda Gates Foundation.
This post draws on a revised version of Scaling Mobile Money, a paper Ignacio Mas co-authored with his colleague Dan Radcliffe and which will be published by the Journal of Payments Strategy and Systems in July.

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Mostly good news for Africa's economy | Jonathan Glennie

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

Report says growth rate set to rise and continent's trade with emerging economies offers more opportunities than threats

The publication of the African Economic Outlook report (jointly published by the African Development Bank, the OECD, the UN Development Programme and the UN Economic Commission for Africa) offers an annual opportunity to review the continent's economic wellbeing. For the last few years the news has been fairly positive, and this year is no exception.

Real growth in sub-Saharan Africa is expected to rise from 5% in 2010 to 5.7% in 2011, while in north Africa, political crisis has slowed growth considerably – down from 4.7% in 2010 to a predicted 0.7% in 2011.

A range of interesting statistics and comments emerge from the report, but two points stick out for me.

First, while growth remains impressive in sub-Saharan Africa, the report's authors worry about the type of growth. Fears of "jobless growth" have dogged Africa for some time, and they are confirmed by a brief glance at the countries growing fastest. Nigeria, Angola, the Democratic Republic of the Congo and Mozambique are all heavily dependent on extractive industries, a sector that creates few jobs and has a history of fuelling conflict and increasing inequality.

The need for job-centred economic policy is dramatically demonstrated in an analysis of the Tunisian revolution, which shows that while the overall unemployment rate has remained stable – hovering around 15% since the 1980s – the percentage of graduates out of work has risen steadily, from 2.3% in 1984 to 20.3% by last year when the country erupted.

The report emphasises the difference at the macro scale between oil exporting countries, which tend to have a current account surpluses and relatively small budget deficits, and oil importing countries, where current account and budget are in serious deficit. So as oil comes on line in more African countries, including Uganda, oil revenues could, of course, give a massive boost to development.

However, there is precious little history of oil money being put to good use in Africa, where it has been more likely to line the pockets of the political elite and divert attention from sectors of the economy that directly support poverty reduction. It will be important to support the agricultural sector and small and medium-sized enterprises (SMEs), rather than be seduced by the easy money of resource extraction.

Many banks in Africa, as in developed countries, are too risk averse to lend to SMEs, preferring the safety of big business. Incentives need to be given to providing credit and financial services to smaller industries. The good news is that there is money to be made outside the extractive sector. Rising prices for agricultural goods (ie food) mean the sector is also a driver of present growth, especially in Africa's fastest growing economy, Ghana.

The second issue worth noting in this report is its focus area this year on the ever-increasing importance of the emerging powers for Africa's economic growth. The biggest players are India, Brazil, Turkey, Korea and, of course, China, which accounts for 40% of non-OECD trade with Africa. But the report is also careful to point out that 25% of African trade with non-traditional partners is with countries outside these core five. Africa's total trade has doubled in size in the last decade, and the emerging (non-OECD) partners have doubled their share in it from 23% to 39%.

The report seeks to debunk what it calls four "myths" about some negative impacts these emerging development and trading partners may be having on Africa. Some of these myths appear to be straw men, rather easy to undermine, nor should concerns about human rights and governance be downplayed, but the report paints a convincing picture of how the presence of new actors on the African continent is generally positive and complementary, the same message the IMF gave in its report on the sub-Saharan economy in October last year.

Overall, the message on emerging partners is simple and compelling – there are more opportunities than threats. I agree. In my comments at the launch, I emphasised that the most critical change brought about by the rise of the emerging powers in Africa is the way policy space has been opened up. Added to a realisation that 30 years of neoliberalism had failed, and the spectacular collapse in confidence in the west's system of economics after the financial crash, the rise of countries that do things differently – crucially, emphasising the role of the state far more in economic endeavours – has transformed the world of the possible for African governments.

As I rattled off my list of policies that were once laughed at but are now back on the table (including infant industry protection and industrial policy generally, capital controls, new forms of import substitution, even nationalisation of key industries), I looked over to my fellow panellists and saw the edifying sight of senior OECD and AfDB economists nodding with agreement at views that would have been anathema a few years ago. For all the changes in Africa, we should also be pleased about the changes taking place in these important international institutions, whose views are taken seriously by African leaders. A new generation of economists appears to be liberating itself from stagnant dogma.


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Wednesday, June 22, 2011

Holland Car-Ethiopia

Timbuktu Chronicles
HowWeMadeitInAfrica profiles the first made in Ethiopia automobile, the Holland Car founded by Tadesse Tessema in his words:
Holland Cars 'Awash Executive' model
At first the assembly plant was only able to turn out one car per day, but following additional investments and facility improvements, the company currently has the capacity to produce up to six units. Tessema wants to increase this to ten cars per day. He also has plans to go from assembling cars to manufacturing the parts as well.
All Holland Car's models are named after rivers in Ethiopia, with names such as Abay, Tekeze and Shebelle. Tessema says this is to emphasize the cars' local credentials and to foster a sense of national pride.Plans are also underway to roll-out a biogas powered car. The goal is to not only assemble the vehicle, but to also produce the gas itself. Holland Car is, however, seeking further government assistance before going into full-scale production. "From the distance we have travelled so far, we have come to the conclusion that there is nothing to hinder us from manufacturing biogas cars here in Ethiopia,"
More here


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