Archive for April, 2008

What it’s all about

April 30, 2008

Following up Sam’s somewhat pessimistic picture of entrepreneurship in Latin America, I want to bring forward a ray of sunlight.

I recently attended Endeavor’s International Selection Panel in Mexico City. Every year Endeavor hosts a panel where the top emerging market entrepreneurs pitch their businesses to Endeavor’s advisory board — big shot CEOs, VCs, etc — in the hopes of getting the “Endeavor Entrepreneur” title and associated benefits. Endeavor looks for entrepreneurs with small companies (~ $5-10 million revenue) with the potential to 1) scale over $100 million and 2) have the role-model potential to inspire a new generation of entrepreneurs. Interestingly Endeavor sponsors the entrepreneur, and not the company itself.

Needless to say, the experience was incredible.

I want to describe one entrepreneur who was a double-whammy: Both fitting perfectly into Endeavor’s portfolio and also embodying the ideas presented in CK Prahalad’s Fortune at the Bottom of the Pyramid (a must read for all development fans with a business bent).

Carlos Augusto Ledono, a 31-year old native of Medellin Columbia,  took note of the dreams of the lower and lower-middle class residents of his community  to go on “vacation” — something previously out of reach for them. Wanting to make vacations affordable for all, he started TVG and has since built a company with hundreds of employees. Through private plane charters, clever use of off-season hotel capacity and (importantly) a pay-as-you-go payment model, he is providing a unique service specifically tailored to the needs of the lower class . Clients pay $20-30 per month until they have deposited enough to go on the trip (about $350 total) and deal mainly through door-to-door salespeople. And this is not a charity —  Carlos is making good money and building a formidable business.

TVG shares a couple of properties in common with other case studies in Fortune at the Bottom of the Pyramid:

– Creatively tailoring a product specifically to the needs of the poor
– Providing a once unavailable service through a local and scalable sales channel
– Not having to sacrifice financial returns to do so

Unlike other examples in Fortune at the Bottom of the Pyramid, I wouldn’t classify this as poverty alleviation. But choice is dignity. And that is something very worthy.

The economist in me is angry…

April 30, 2008

over obviously stupid water policy! The picture below is a household water tank, an all too common fixture on private properties throughout Nicaragua.

Depending on your neighborhood in Nicaragua, you’re pipes are likely to go dry for 10+ hours per day because there is not enough water for continuous service. Sometimes the dry periods follow a fixed schedule, but sometimes the dry times are random… for example when you’re coming back from a sweaty jog and you need to get ready for work.

I hired a maid to clean my house (which does not have a tank), and the first thing she did was to fill used containers (gallon jugs, bottles, etc) with water. Seemed like odd behaviour until I experienced an unexpected dry spell and needed the water to bathe.

Dry pipes make bad policy for several reasons:

  • Encourages a water tank “arms race,” in which people put effort into privately hoarding water
  • Leaves no incentive to save water while pipes are wet, which would allow more consistent water service
  • Denies consumers water even if they desperately need it (Just burned my finger! Need to shower before work!)

Note that if everyone had water tanks, making the pipes go dry would have no effect on saving water until at least some people’s tanks ran out. So dry spells would have to be longer and people would buy bigger tanks and dry spells would have to be longer still.

Better policy would be to raise the price of water, so that everyone thinks twice before letting it run. Revenues can be plowed into water investment. To protect poor people, water could be priced differently in disadvantaged neighborhoods (the cable company and the electricity company already do this in Nicaragua). The effect on farming should also be considered and policy perhaps modified appropriately.

The principle is clear: dry pipes make bad policy. Phil should write a haiku about market clearing prices.

Update:

David Zetland, Water Economist and author of Aguanomics, has provided more analysis on my post:

  • He describes possible causes of the water shortages
  • He suggests an alternate solution to protecting the poor against increasing prices

On the second point, while I suggested different prices in different neighborhoods, he suggests allocating a certain quantity of cheap water to each individual, with a sharply increasing price after the cheap water is consumed. That solution was the topic of his dissertation research.

Lessons from Nicaraguan speed consulting

April 27, 2008

In a moment straight out of The Pretender, I found myself doing “speed consulting” for rural Nicaraguans. The event was hosted by a local non-profit that helps small businesses grow. Several consultants (including me) sat at different tables, and Nicaraguan entrepreneurs were assigned to us for thirty minute sessions on any business problem they might face. I saw four entrepreneurs. The first one went something like this:

“I make wooden furniture, and I’d like to export.”

I wait for a second to see if he is done. “Okay…” I wonder if the skepticism is showing on my face. “What countries do you have in mind.”

“I was thinking Central America or maybe the United States.”

“Do you want to export finished pieces or individual parts?”

“Um.., sure, both sound fine.”

This guy was lost. I gave him some perfunctory advice about certifications for exporting and building a network of buyers. However I have no confidence that he will ever export anything, because he lacked knowledge of the market, brand positioning, and relationships with buyers: his idea lacked a “why” and a “how.”

Unfortunately he was similar to other entrepreneurs who arrived to my table for “speed consulting.” I want to use his example to make several points:

  1. People can erroneously extrapolate what they currently do into new markets
  2. Nonprofits are not magical panaceas for poverty, a detail sometimes forgotten
  3. People sometimes look for the wrong advice because they look forward too many steps

1. Hasty extrapolation of current activity into new markets:

I make chairs. My earnings are limited by the volume of chairs I can sell to my principle buyer, who has a furniture stall in the local market. Therefore, I should expand to other markets, and sell my chairs to people in United States.

Wrong! Just because you sell in one part of the world, does not mean you are an efficient producer in another. Of course it is possible there are other market opportunities, but you shouldn’t assume your advantage is transferable. Someone producing low quality furniture on a small scale may be strong in the local market but will not compete with IKEA.

2. Nonprofits are not magical panaceas for poverty:

It’s also possible that something entirely different was going on. It’s possible that the man doesn’t even make furniture. Perhaps he has a cousin who once received a scholarship from a nonprofit. So logic starts to form: nonprofits help people; I am a person; this nonprofit can help me.

This nonprofit advertizes support for people to build thriving businesses. “”Transform your business,” says the flier. So the man shows up and plays along: he invents a challenge – he wants to export furniture. He waits to see if he may get something out of it. Of course he will not, because this man doesn’t fit the profile for which the nonprofit was created.

Suppose you don’t have a house. A hardware store can help with this problem if you are building a house and you want to trade money for tools. If you don’t fit this specific profile, a hardware store will not help you with your problem. People don’t always look at nonprofits like hardware stores, though they are similar, offering only a small subset of solutions to a subset of targeted people.

Hardware stores don’t advertise support for people without houses. They advertise tools for money. Sometimes nonprofits, in all their idealistic zeal, promise a panacea benefits to anyone who participates in their programs. Nonprofits should be careful to advertise specific services. Otherwise they get unfocused traffic of people who don’t fit their targeted profile.

3. People seek the wrong advice:

A last possibility is that the furniture maker does have the ambition to export furniture, but is currently far away from realizing that goal. When I was a senior in college, I wanted to be an entrepreneur. I had several underdeveloped business ideas, and I wince to think back on asking contacts for advice. My ideas satisfied my concept of being an entrepreneur, but were not based on actual knowledge of people’s needs and production opportunities: the ideas lacked a “why” and a “how.”

Of course there is nothing wrong with dreaming to be an entrepreneur or dreaming to export furniture. The problem was how we were were seeking advice. I wanted businessmen to wave a magic wand and ordain me into entrepreneurial success. This man wanted me to wave my wand and reveal how one can export furniture. However he needed more familiarity with local and foreign markets and a strategy to add value. He should have asked less ambitious questions: how to learn more about furniture production; how to make contacts with different types of buyers and understand their needs; how to learn from the most successful producers in the market.

I would not have been able to provide all the answers, but a discussion with this frame would have been more productive. There’s nothing wrong with dreaming. However when seeking advice, consider whether you are in a strong position to discuss the end-state of the dream, or whether you should be looking for tips on getting training and knowledge.

Conclusions:

Speed consulting wasn’t that useful. I didn’t advise people with immediately feasible projects, and I didn’t locate entrepreneurs who can benefit from other services offered by the hosting nonprofit.

Development is hard! But it’s a worthy goal, and the effort continues…

Not so fast Web 2.0 …

April 25, 2008

Web 2.0, we’ve come a long way. From Zuckerberg, to Yalestation Degrees (remember that?) to that kid Zuckerberg ripped off — it’s been a wild ride.

Remember when The Wall first appeared? When you had a Friendster account? When you first picked a book based only on Amazon user reviews? And now look:

1) I can follow my social network through a screensaver.
2) I can design my own youtube
2) I can Twitter my Flikr while friendfeeding my RSSed Facebook mini-feed … all through an open-sourced SMS picture messaging application platform! (Invite only, of course)

It’s time. Let’s put this baby to bed. Bring on Web 3.0. Right…?

Not so fast kiddos. I think we still have some work to do. Web 2.0

What I can’t easily and reliably do with Web 2.0

1) Publish/find an aggregated web presence: Consider your web presence: There’s your random high school awards, your various social networking profiles (how did I get on 4 of them?), a couple blogs (some/all dead), website comments, that gag wikipedia article, and youtube videos all scattered throughout the web. A half-hour on Google can piece this all together, but shouldn’t there be an easier way? Not only should the narcisist in me be able to publish (and account for) my aggregated web presence, but the stalker in me should be able to do the same for anyone else. In terms of the technology this is probably not too hard for Boutros Boutros Ghalii. Tougher for John Smith.

2) Expand my real-life social network: Wasn’t this the point of social networking to begin with? I’ve asked several people whether they’ve forged a flesh-and-blood friendship through an online resource . Save the online daters, the answer always NADA . Social networks are good at helping maintain existing friendships, but no one has invented a compelling way of meeting new people online. In theory, all you need is there. What’s missing is purely cultural.

3) Easily create and participate in micro networks: A social universe consists of a series of overlapping micro networks. Not only does one interact differently with classmates, co-workers and friends, but the overlap in the group further complicates the issue. The current popular social networks are blunt objects. The micro network has yet to be successfully replicated and reinforced online. I want to interact in a diffrent way online with my family, my best friends, and people who I peripherally know. This is all about low-maintenance customization and automated recognition of strength/type of social bonds.

4) It’s X-night and I don’t have plans/people. Some nights I have something cool to do, but lack the right people to do it with (and they don’t necessarily have to be people I already know). Other nights, there are the right people but nothing cool to do. We have demand. We have supply. There’s no good way to facilitate the transaction.

The problem I see with Web 2.0 is that everyone is so focused on the technology and no one is thinking enough about encouraging people to interact in a way that brings out the true value out of the technology. The technology already exists to do all of the above. Someone needs to move the culture. My Web 2.0 start-up sounds like this: “I’m going to use the same old platforms that have been perfectly sufficient since 2006, but try to change people’s mindsets and usage patterns.”

Then let’s bring on Web 3.0.

Got shovel: Keep digging hole

April 24, 2008

Update: Molly rose to the challenge and provided this gem.

The taxi driver
Charges me double.  Sucks for
Producer surplus.

I’m truly ashamed to say, but I wrote more Haikus in praise of the free market.

Progress for Solow
Technology and labor
Period. The end.

Dave Ricardo says:
“Compare advantageously,
Stop crying Detroit”

Econ in four words:
Government schmovernment, save….
Externalities

Prediction markets and Democratic carnage

April 23, 2008

Prediction markets predict non-financial outcomes, such as terrorist attacks, political events, and elections. They are based on “futures,” or contracts whereby one party agrees to pay the other party a certain quantity of money if a specified event happens. It’s basically interactive gambling on world events.

The University of Iowa has set up a market to predict United States presidential election outcomes. Go put your money down and try your luck.

You can infer probabilities of real occurrences based on the market prices of these contracts, and I love checking on the latest market quotes. I could watch hours of mind-numbingly boring CNN and decide how the Dems and Republicans are doing, or I could just check the market. It’s like polling the audience on Who Wants to be a Millionaire – people in groups tend to be accurate.

So what does the market say? We’ve all read that the Democrats are squandering their election chances with bickering and negative politics, and that McCain has grown stronger as a consequence. The market agrees. The implied probability of Democratic victory in the October election (whoever the nominee may be) has decreased significantly over the past several months:

 

The 8% slide from 64% to 56% doesn’t seem like much, but it is actually quite large given the importance of this event.

At 56%, the Democrats still have a good chance for the White House. In case you were wondering, Obama currently has 79% chance to get the nomination over Clinton, which was basically not moved by the PA primary.

Do these prices seem right to you? Would you buy the Dems at 56% odds? How about Obama as the Nominee at 79%?

The olive branch

April 23, 2008

The Free Market has taken a bit of a beating at the hands of Sam. A jab here. A knee to the groin here. Eye gouging here. Kicking while down here.

As a conciliatory gesture from more tolerant half of The Hand, I thought I’d write a few haikus to try to make amends.

True – some lose out (big)
But you are best for the whole
Fuck moral hazard*

Hayek had it right
How do we allocate shit
Without price guidance

Supply and demand
You have but one small failure
Clear the love market

* Last line ripped from Tom’s outbox.

Trust me on this

April 21, 2008

If you are not reading at least 5 blogs regularly you are missing out.

If you do not have an RSS reader, go and get one right now.

If you have a Blackberry / Smartphone pick up Viigo and link it to your brand-new RSS reader.

Good places to start below

Development/BOP:

Chris Blattman and Next Billion

Economists

Marginal Revolution and Becker Posner and Dani Rodrik

Tech

Tech Crunch and Robert Scoble

General/gossip

Seth Godin and Ivygate

And don’t be selfish, send me your favorites.

Catholicism: opportunities in the market

April 21, 2008

With the Pope wrapping up his U.S. tour, The Invisible Hand reviews business practices of the Roman Catholic Church. The conclusion: there is low hanging fruit in the market that top management probably doesn’t see.

1. Introduce of new products: Jesus Christ is classic, but we need something new and different. We need a new Mother Teresa. Get a marketing team on it.

2. Innovate payment technologies: Nobody carries cash. How about credit cards for church donations? If it catches, you could forge a strategic partnership with American Express to introduce the Jesus Card (triple points on Sundays). People could have different color cards for different levels of yearly donations (e.g. Gold, Frankincense, Myrrh, and Jesus-blood red).

3. Consider strategic acquisition: Mormons were embarrassed by backlash against Mitt Romney for his Mormon faith. Brand may currently be undervalued. Mormon Church is dominant player in Utah, an extremely faithful market. The Pope should be in talks with top Mormon leadership about an alliance or outright acquisition.

4. China is the future: The market is huge and unsaturated. The Pope should be visiting China, not the United States. Coca Cola and Google know how to play ball with the Chinese; the Catholics should wise up.

5. Tweak recruiting strategies: Requiring abstinence for top leadership ensures a high loyalty, but turns away talented leaders. It has also caused child molestation, a drag on the Catholic brand.

No better forum to say this

April 21, 2008

Best part about living alone: Doing everything naked.

Worst part about living alone: Doing everything naked, alone.

(I miss you Santi and Max)

Perplexed: The “organic” movement

April 18, 2008

Update: Fantastic responses from Nic, Sam and Catherine in the comments section. Check them out.

I don’t want this to be a critique.

Nonetheless it is probably going to sound that way. I’m just struggling to understand what the “organic” movement is actually all about — what are its goals, values and core principles? The movement seems to be defined by a hodgepodge of discordant elements, some relating to the environment, some relating to local communities and some related to “natural” production techniques.

Here is one definition of organic food from the Organic Trade Association (with no shortage of words and commas):

Organic refers to the way agricultural products—food and fiber—are grown and processed. Organic food production is based on a system of farming that maintains and replenishes soil fertility without the use of toxic and persistent pesticides and fertilizers. Organic foods are minimally processed without artificial ingredients, preservatives, or irradiation to maintain the integrity of the food.

I’ve come across essentially four justifications for why organic food is worthwhile:

1) Organic food tastes better

2) Organic food is “natural”

3) Organic food benefits small farmers / local communities

4) Organic food is better for the environment

————————–

1) Organic food tastes better

Why is this inherently good? Goes without saying

My guess is that we are seeing correlation without actual causation here: Expensive, well-managed, carefully handled food tastes better. Organic foods tend to be all of these because of the nature of its customers (wealthy, discriminating). If there were a market for expensive, well-handled, carefully grown inorganic food it should be as good (and possibly better without the “organic” handicap limiting its production methods). There just isn’t a big market for inorganic, high quality food. If you are paying 50% mark-up you want the organic sticker.

2) Organic food is “natural”

Why is this inherently good? A little fuzzy to me what the inherent value of “natural” is or what it actually means to be “natural” but I’ll let it pass because …

… is organic food actually natural: NO!

All of our crops are Frankensteins of the field — the product of thousands of years of systematic, outdoor eugenics. There is nothing more natural about that organic tomato than there is about a Aliza Shvartz pregnancy. God/Darwin did not create the large red, organic tomato. That was the work of agri-scientists dating back to Babylon.

The organic movement seems to tolerate genetic modification, but only if done outdoors and not in a laboratory.

I’m always surprised when my iPod totting, Twittering friends turn into Luddites when confronted with a food issue. We allow technology and science to improve the production processes and quality of almost every aspect of our life. Why is the line drawn at food? What is the issue here?

3) Organic food benefits small farmers / local communities

Why is this inherently good? Stick it to Big Agra?

Your organic dollars are just as likely to go to Big Agra as that family farm in upstate NY. There is one place you can be sure they are not going though — the poorest, neediest farmers in the world. Their goods are not being marketed as “organic.”

What is the fundamental reason someone wants to support a “local” upstate NY farmer instead of another farmer in another part of the country or world? What is the principle behind this desire?

4) Organic food is better for the environment

Why is this inherently good? There are multiple aspects of this claim to consider. There are 1) carbon emissions associated with farming 2) run-off and soil erosion 3) land use and ecosystem impact.

I’m not in a good position to comment on any of these, but from what I can gather the jury is still out. Most of this comes down to the inherent tension is between conscientious use of land/resources and efficiency (organic farms yield 20% less per acre according to Wikipedia).

______________________________________

Next time I’m in the States I’m going to poll Whole Foods patrons and ask why they buy organic. Better yet, can someone try this for me? I’m truly curious what they’d say. People are clearly voting with their pocketbooks here. I’m just perplexed as to what exactly they are voting for.

Elusive social impact

April 18, 2008

Google’s corporate motto, “Don’t be evil,” is understated. It implies that doing good in the world is easy and obvious, yet missed by many of the world’s most powerful organizations. Just don’t be evil. It’s like Nike: Just do it. How obvious!

And as I read that Google is backing away from the motto, I wonder whether Google is giving itself room to be evil.

Is Google evil? Not in my opinion (or Phil’s). But some people thought so over enabling censorship in China. In the future, Google will face more tough decisions about social impact, especially on privacy, promotion of information, and anti-trust. Sometimes real economic value will be on the line over real social objections. My guess is that value will win.

The point is that the way the world works is executives are measured in dollars and cents. “Don’t be evil” is not measured. There’s no score. No success. No way to win or lose. This is a huge challenge for companies with social missions, nonprofits, and even people who just want to make a difference.

My friend volunteered to work with an NGO in a small Nicaraguan town. She moved into a house full of volunteers who were immature, lazy, and disinterested. Most were completing some kind of school requirement. One European girl was doing “social service” as a substitute for required military service in her home country. Instead she did nothing. These people should all be fired. Instead, they are a valued statistic reported to the board of directors: 10 summer volunteers! Subtext: give us more money.

NGOs and government missions (USAID anyone?) have a notorious reputation for being inefficient. It’s not because the people are different than the people who work in businesses, but because of the way the world is measured. Once dollars and cents aren’t the goal, measurement becomes fuzzy. Phil and the new class of social entrepreneurs want to change the game. The challenge is large.

Re: dual nerds and illegal math

April 16, 2008

While Phil’s inner nerds are smiling, my inner Bolshevik is going nuts about Phil’s post. Here we are

  1. Damning the man because the books are pirated and Harper Collins sees no revenue
  2. Empowering the people with education instead of the typical crap

The stars are aligned.

On a more serious note, perhaps I shouldn’t be surprised by Phil’s subway story. Santi, long-time friend of The Hand, points out:

There is clearly a market for these things… textbooks are uncommon in lower-middle-income schools, and, thus, there is a strong incentive to have a market for cheap textbooks.

Those of you who’ve never been to Mexico City should understand the subway demographic: middle and working class (no rich Mexicans). So how did pirated books come to be sold on Phil’s car? (Warning: nerdy econ analysis to follow)

There are three types of countries with respect to intellectual property (IP):

  1. Countries with no IP protection
  2. Countries with formal IP protection but also strong black markets
  3. Countries with full IP Protection

An example of the first category is Cambodia, where Susan notes that all books she saw were photocopied, even in bookstores. However most countries fall into the second category, with some protection but also black markets with no protection. Susan provides insight:

In Thailand I bought all my textbooks at a legit store… However there were also stalls selling the same titles for a whole lot less, except the books were photocopied and very low quality.

Countries like Thailand and Mexico are net consumers of IP, which suggests they should have no incentive to to respect it. But they respect IP nonetheless because of international pressure (WTO). However most of their populous can’t afford IP. So they allow a two tiered system:

  • Formal stores respecting IP for the upper middle class
  • Black markets with no IP for middle and working classes

Real stores are prohibited from pirating. However no one bothers if places like the subway are rife with pirated CDs, DVDs, apparel, and even books. Tepito, the infamous Mexico City neighborhood, is buzzing with this activity, although if you go there on a Saturday, don’t go at night, and don’t expect to see Vicente Fox’s family out buying the latest Usher album or a book on American race relations. Fox does not belong in this part of Mexico.

Hurray for illegal math on the subway. Nerds and Bolsheviks smile together.

The dual-nerds in me smile

April 16, 2008

Rarely is both the physics nerd and developmental economist nerd in me excited by the same incident. After all — there are no malarial bednet supernovas, Higgs Bosons at the bottom of the pyramid, or poverty action particle accelerators. This was truly a rare confluence of geekdom for me.

I was on the subway in Mexico City and, per the usual, someone entered the car to hawk some goods for 10 pesos (standard rate no matter what you are selling). This is often gum, music or DVDs.

The woman who entered my car in this time, however, had a stack of manuals. “Manual de Formulas Matematicas. Diez Pesos” she bellowed. My ears perked up and I had to buy one.

The manual (~8 pages) contained foundational formulas of Aritmetica, Algebra, Fisica, Quimica (organica y inorganica), Geometria y conversiones. Pretty heady stuff — and nothing that would have made any sense without the context of advanced study in those subjects.

I don’t quite know what to make of this, but there must be a market for this sort of thing (which is amazing). A couple questions pop to mind:

  • Who are the people who buy these manuals? Should we see this as encouraging?
  • What does this say about intellectual property rights in Mexico and elsewhere?
  • Why were they being sold in the subway and not at a university bookstore?

Anyone have any insight?

Vices of the market

April 15, 2008

Yesterday, I explored Huembe, a large market in the center of Managua for middle and working class Nicaraguans to buy essential goods such as food, clothes, electronics, and more. I took photos of some things I saw.

Here Nicaraguans get cheap fruits and vegetables for important vitamins:

Here they get rice and beans for carbohydrates and protein:

Here they get used books to educate their children about the world:

And here…

… poor people get poorer. I think this is sad and shouldn’t be allowed. It was jarring to see in the market next to a tortilla stand.

See our post on Banco Azteca for more perverse market energy (mis)directed at the base of the pyramid.