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Why can’t Africa grow?

I’m reading an article on African firms and why they don’t seem to grow.

There is an urgent need for job creation in Africa yet something seems to be stunting firm growth. This column shows that African firms are about 20% smaller than their counterparts in other locations. It suggests small firms put the brake on growth as the burden of dealing with government and labour costs may increase with size, or perhaps as they start facing trust issues between managers and workers.

Wow. This pretty much sums it up. African business can’t grow because of onerous regulation, corruption and a general problem of too many people wanting too much of the pie.

I wondered for a while why ladies selling bags of rice, for example, might choose to sell the same rice right next to one another for the exact same price to the exact same market. All of them would make much more money and market prices would be much lower and more competitive if a few of them would band together and form multi-lady shops. I thought it might be because the ladies don’t trust one another to enter such a relationship, but I’m thinking that raising the profile of an enterprise might invite all kinds of new and expensive problems. It still might be true that the ladies don’t trust one another, however.

The overall price level in Africa could also be a factor in determining the size of firms (Gelb et al. 2013). Relative to low-income comparators like Bangladesh, Vietnam and also India, African countries are considerably more costly. In absolute terms, and excluding South Africa as a middle-income country, the average purchasing power parity for a sample of African countries is about 20% higher than the average for the four poorest comparators (Bangladesh, Indonesia, Philippines and Vietnam). Africa’s higher costs may result in a lower level of competitiveness and consequently, in a distribution of firms that is different (smaller) than distributions in other countries. African firms may also face a steeper labour cost curve; as firms become larger and more productive, their labour costs increase more in other regions of the world.

Africa is just about one of the most expensive places to do just about anything, simply because you have to do and provide so much on your own. Our research activities come at incredible expense despite the fact that labor is far, far cheaper. If you need power, you have to figure a way to deliver it yourself. If you need skills, you have to pay to train up people to perform the duties you need. If you need supplies, you have to order them from overseas since very little of what you need is manufactured on the continent.

Next, I’m looking at the graphic below and seeing that Africa only spends about .8% of all worldwide R&D dollars, despite housing a sixth of the world’s population and even including South and North Africa.

RD

Cell phone banking in Kenya protects public health

MPESAIt’s rare that I read an academic paper I can get really, really excited about, but this is one of them.

Researchers at Georgetown and MIT have shown that transactions over M-PESA, an African phone banking service can help struggling households when faced with a sudden illness, weather event or economic shock.

We explore the impact of reduced transaction costs on risk sharing by estimating the effects of a mobile money innovation on consumption. In our panel sample, adoption of the innovation increased from 43 to 70 percent. We find that, while shocks reduce consumption by 7 percent for nonusers, the consumption of user households is unaffected. The mechanisms underlying these consumption effects are increases in remittances received and the diversity of senders. We report robustness checks supporting these results and use the four-fold expansion of the mobile money agent network as a source of exogenous variation in access to the innovation.

M-PESA is a cel phone based banking system which allows users to send and receive money to friends and family. Transactions can be small; most users are transferring less than $10 at a time. Users are charge about $.40 to transfer money and a percentage to withdraw. It is free to deposit money into the system.

Anyone can be an M-PESA agent. Starting an M-PESA business requires only a small investment so that even extremely rural areas have access to the system. Agents receive a percentage of transaction costs, and often piggy back it onto existing enterprises such as grocery stores and mobile phone shops. M-PESA not only provides a needed service, but has also created profitable business opportunities for people even in isolated rural areas.

The system is wildly popular. Africans are extremely mobile but maintain deep friend and family networks often spread out over wide distances. When a person has trouble, he or she will often turn to family and friends for financial help.

Previously, people would send money by getting on a bus and travelling, or by sending it with friends who might be going to a particular destination. Transportation costs are high ($5 to go a distance of 200km) and often outweigh the amount to be sent. Sending money by hand also incurred risks of loss to theft and misuse.

The number of M-PESA users has skyrocketed since its introduction in 2007. Nearly all adults in Kenya have access to a cel phone now, and the number of M-PESA users is now 70% of all mobile phone users.

Shocks due to illness or negative weather events such as drought can be devastating for a poor household. A single bout of malaria could set a family back as much as a month’s income or more. When poor households lose money, they don’t get it back and successive events can quickly pile up so much so that families will often wait until illness has become too severe to effectively treat.

Jack and Suri, the researchers who conducted the study found that illness shocks can reduce a households consumption by at least 7%. An average household only consumes around $900 a year, nearly half of which is for food. A 7% reduction in consumption could mean that households will simply eat less given a sudden negative event.

M-PESA users, however, experience no reduction in consumption given a sudden health or economic event. Presumably, the ability to transfer money quickly over long distances provides insurance against disaster. Mutual reciprocation allows the system to effectively function to protect against financial disaster.

This has incredible implications for public health. Financial concerns are an incredible barrier to insuring prompt and effective treatment for diseases such as malaria, diarrheal disease and respiratory infections. An efficient system of moving money creates a broader social insurance scheme, protecting the public against the worst and, hopefully, reducing costly advanced treatments and mortality.

M-PESA is a private sector entity, which was never intended as a public health intervention. However, in an area where public sector health delivery is inefficient, underfunded and most broken, a private sector banking initiative could help bolster availability of life saving drugs (for example) by insuring a consistent flow of money. Shops in extremely isolated rural areas will be more likely to stock malaria drugs if they know that customers have the means to pay for them.

This also has incredible implications for development. One of the pillars of the Millennium Development Goals and the recent Rio+20 Conference on Sustainable Development is to insure that the basic health needs of the poorest people on the planet are met. This cannot happen without addressing the greater problem of financial stability of poor households, which requires the participation of the private sector. Covering basic issues of financial movement, security and access to funds by isolated households is a major step to not only helping households which are disproportionately impacted by health and weather events, but also allows flow of cash to poor regions, bolstering local economies.

Today’s Reads

Lacking anything constructive to write about, I thought I’d list what’s been on my reading list today.

First was an article from the Guardian reporting on Mark Zuckerberg’s statements that internet connectivity is a “human right.”

I’m not sure we should go so far as to classify connectivity as a “human right,” given that there are other things like food, security, education and health care that many people around the world don’t have access to, but I do agree that communications are essential for all four. Anti-tech folks will, of course, be annoyed but fortunately powerless. Communications development in Sub Saharan Africa, fueled by intense and enthusiastic demand, is nothing short of impressive. It’s hard to measure, but from a recent survey I performed in Kenya, it would seem that people on the ground are enthusiastic about the technology.

Second was an article on cancer meds in India in the NYT. Drug makers are apparently worried that India will flour patent laws and produce expensive cancer drugs cheaply, pricing out US and European markets. I’m encouraged that anyone at all is talking of cancer in a developing country.

India, no stranger to ignoring onerous patent restrictions on meds, is right to move against the hard-headed pharma industry. While the noted concerns of drug makers are certainly legitimate, there have to be ways to accommodate demand in developing countries while still insuring profitable domestic and international enterprises. If they can’t think of a way to do it, they aren’t thinking hard enough.

Third was an article on GMOs from Henry Miller a molecular biologist at Stanford on the unreasonable hysteria surrounding genetically modified foods.

While it is right to be concerned about the safety of new technologies, the attention and regulatory backlash against GMOs is disproportionate. It is akin to a bizarre witch-hunt or maybe a good Christian book burning. I’m sure that many would not agree with Dr. Miller’s position but I found it to be an interesting article.

But then, maybe he’s just a paid stooge of Monsanto and we really all are slowly dying from “GMO poisoning”. It’s certainly possible; the credibility of academics is being called into question over connections with Wall Street. I’m interested in reading the work of the two academics interviewed here, which argues that price increases in commodities throughout the 00’s had little to do with speculation.

Just as I’m not an expert on biotech, I’m also not an expert on finance but the data shows that price increases seem to be slowing as regulation to control commodity futures speculation has been in the works.

The Ninth Millennium Development Goal: Business Development?

7_MDG_IconsLast night I was reading up Japan’s road to industrialization. Specifically, I was learning how it went from a backwards set of earthquake prone islands in 1868 to one of the most powerful economies on the planet.

In 1900, the average Japanese person could expect to live to be about 44 years old, which is almost the same as a Malawian, both in 1900 and in 2013. However, a Japanese person in 2013 can expect to live to be more than 80 years old.

How did it do this? Ignoring the complexities and numerous details, Japan developed because it recognized early on that it had to develop its business sector. Development can’t occur without livelihoods and livelihoods come from cash producing jobs.

For example, following the Meiji restoration, Japan developed a system of land taxation, took the funds and invested them into buying second hand sewing machines from Europe. Rather than aiming for labor saving technologies, Japan aimed for labor intensive, individual sewing machines so that it could leverage as many people as possible. What it lacked in economic resources, it made up for in hands. Japan in the 1920’s then became a major exporter of textiles to Europe.

Japan didn’t stop there. Out of its land taxation system, it also made sure that capital was available for merchants wishing to diversify their businesses and encouraged farmers to convert their crops into products. A soy farmer can process his output into tofu and soy sauce. Similarly, a rice farmer can manufacture sake and sell it.

I am looking at the UN’s Millennium Development Goals:

Eradicating extreme poverty and hunger
Achieving universal primary education
Promoting gender equality and empowering women
Reducing child mortality rates
Improving maternal health
Combating HIV/AIDS, malaria, and other diseases
Ensuring environmental sustainability
Developing a global partnership for development

Out of eight goals, not a single one focuses on private sector development and entrepreneurship, which is arguably, if the cases of Japan and Korea are to be applicable to the African context, the key to consistent economic growth.

Where is the ninth goal? Where is the goal which calls for increased access to capital for small and mid level entrepreneurs? Where is the goal that calls for an elimination of onerous export taxes and corruption which kills the ability for businesses to competitively sell their products to the rest of the world? Why is there no call for proper systems of taxation which allow domestic investment?

The goal of sustainable business development is fundamental to the success of at least each of the other eight goals. I suspect that suspicion and cynicism toward the private sector is the culprit. No doubt, this ambivalence toward business killed the Affordable Medicines Facility – malaria, a supply side subsidy intended to increase access to anti-malarial medications in small private drug shops.

Even in public health, which is supposedly focused on holistic solutions to public health problems, the issue of private sector development and the relationship of economics to human health hardly appears.

People in my field seem to be happy to stick with models of pharmaceutical solutions to health problems, delivered through publicly funded health systems. What they fail to address is how to support those public clinics and hospitals though other means than donations from first world countries.

The evidence that Africans will flourish when given appropriate amounts of capital under reasonable terms (not microfinance as it currently exists) is out there. A strategy to give money to the poor, without strings or promise to repay, conditional on a reasonable business plan found that African households will invest in tools or technology to provide them income in the long term. They find that households which enlarge their business through an influx of capital keep their kids in school longer than households which do not.

I did a small survey of business on Lake Victoria, Kenya and found that businesses’ second most common stumbling block (the first was security) was a lack of access to capital. They need money to expand. Microfinance schemes, with their very high interest rates, are not a viable option to most, though loans at more favorable terms to the right people might make a huge difference.

True development will require a dramatic shift in focus for the development world. We will have to face the reality that business is good for human health, that the negatives of entering the cash economy are small compared with the negatives of trying to fruitlessly maintain a pre-colonial lifestyle in a post-colonial world and that Africans themselves are willing to step up to the plate.

The Uncharted Land of Marketing

Juggalo.

Juggalo.

I’m back in the swing of dissertation writing and currently slogging through marketing papers. I now know more about how new products spread than I ever cared to.

First, the truth is that no one really knows why some products succeed and others don’t. As the purchasing of goods in the market done by multiple individuals whose decisions are often personal and multi-factorial, direct observation and dissection of behavior is nearly impossible.

There are some theories, though (largely from Van den Bulte, 2007). So that I don’t forget, and purely for my own benefit, here’s a breakdown:

1. People who buy early are different from those who buy late. For example, the people who sit in the cold waiting to buy the new iPhone on the day it is released are vastly different from those who wait until the price drops 6 months later. It’s hard to tell who’s smarter. Me, I like heat. (See Rogers, 2003.)

2. There are market leaders that other people like to follow. People buy products because they want to imitate others, who might mostly be those who pick up on fads early, i.e. there are “innovators” and “imitators.” People who bought to iPhone 1 (what did that look like?) early showed it to their friends, who bought one, too. (see Bass, 1969)

3. People buy products autonomously, because of influence from above, or because of peer influence. Some people buy stuff caring little for anyone else. Some people buy stuff because an authority said it was a good idea. Some people buy stuff because their friends do. (see Riesman, 1950 and Schor, 1998)

4. Purchase decisions depend on social status. Some people buy stuff because they want to emulate those higher on the social ladder than they are. Similarly, those on top buy new stuff because they don’t want to fall behind or be unseated as a high profile consumer. Some people tend to want to buy slightly more car than they can afford, so that they can feel more like those with more money than they have. The stratified nature of society, thus, perpetuates a system of striving to consume more beyond one’s means. This desire is, of course, endless. (see Simmel 1971 and Burt 1987)

5. Marketing is a two step process. Ads are only effective at influencing behavior of leaders, who, in turn influence their followers. I call this the “Economist effect.” Only a few sad people (such as myself) read the British magazine, the Economist. When the Economist endorses a Presidential candidate, it would seemingly have little effect since only about .0028% of the American populace is paying attention. However, the readership of the Economist consists of educated and well positioned people who have the capacity to influence large numbers of people who don’t read the Economist. On numbers alone, an endorsement from that newspaper would seem meaningless, but as a conduit to the less engaged, the effect could be considerable. (Fortunately, though, no one cares what I think.) (see Lazarsfeld, 1944)

6. There are risks to adopting new products, fashions, etc. Very, very poor people are very similar to very, very wealthy people in that they have nothing to lose by taking adopting new products or behaviors. Ever think about the crazy stuff that some homeless people wear? Is it any crazier than high fashion? Think of Juggalos vs. Comme de Garcons. (I don’t know anything about fashion; that was all I could come up with). People in the middle, however, have a lot to lose by dressing crazy, so they end up really boring. (see Homans, 1961)

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