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Kenya: Movin’ on up

IMG_1372Currently, I’m staying in Mbita, a small fishing community in western Nyanza province, located along Lake Victoria. Sometimes, we can see Uganda, and Tanzania is just a stone’s throw away.

I’ve been coming here for close to three years, and I’m struck at the rapidity of change here. There used to be only two ferry trips a day to Luanda Port, where you can catch a minibus to Kisumu, Nyanza’s largest city. Now, there’s not only multiple trips a day, but also two ferries, a small one and a large one.

You can also catch a ferry to neighboring Mfangano island, a small but heavily populated place which was formerly mostly isolated from the mainland.

The power still comes on and off, but blackouts are shorter and more infrequent. There are multiple places to see music now, a direct result of people having more money. Local and national acts are taking advantage of Mbita’s increased affluence.

Mirroring much of Kenya, though, construction of a few “high rise” buildings has been completed, but it’s kind of unclear as to who is going to move in. “Mbita Towers” is mostly empty.

People look better, the cars are in better shape, there are more buses going to Kisumu and Nairobi and there is a larger variety of foods and goods available at the local market. This is due in part to the semi-completion of a road connecting nearby Homa Bay to Mbita. There are still a few rough spots between, but it’s mostly passable now. Someone told me that just four years ago it took two days to get from Nairobi to here, despite there being only 400 km between them.

No doubt, this isn’t due to the good graces of any particular development project at all, but rather to the increased affluence of Kenya as a whole. Kenyatta’s government would inexplicably love to credit the Chinese, and they should be credited for constructing some of the road infrastructure, but the real credit has to be given to the development of the domestic economy and Kenya’s status as the most liberal economy in the region.

Kenyans are increasingly not only connected with the world, but also to each other. Cell phones, for example, have allowed Kenyans greater mobility so that they can take advantage of money-making opportunities elsewhere, and mobile banking allows money to flow out of Nairobi, where it was traditionally concentrated.

Kenya still ranks low on “ease of doing business” indicators, and continues to be excessively bureaucratic. New rules seem to appear each day, the goals of which are often unclear and seem to be aimed only at corrupt officials on every level of government. A recent ban on tinted windows, supposedly aimed at terrorism, and an onerous highway speed limit of 80 km/h for small trucks, billed as reducing traffic fatalities, are providing a steady source of cash for hungry highway policemen. It’s worth noting that the latter rule doesn’t apply to SUV’s, the vehicle of choice for Kenya’s elite.

Fortunately, many people simply ignore the government and carry on like it doesn’t exist. This is particularly true out here. My taxi driver completely ignored the speed rules and sped on at 120 km/h. Of course, there’s not a policeman to be seen anywhere out here outside of the the local bar at 3 p.m. The relative peace out here makes them mostly unnecessary, anyway.

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The famous “aho/baka” map of Japan.

ahobaka1Japan, despite the refined image it traditionally likes to present to the world, has no shortage of words with which to call people stupid.

These words are mostly regional and the uses and nuances of calling people stupid also vary by place.

Over dinner, I was reminded of an episode of Tante Night Scoop, an investigative television program which ran throughout the 90’s. They did an exhaustive survey and mapped the locations of the common ways of calling people stupid throughout Japan.

Of interest is the centrality of the word “aho,” commonly used throughout the Kansai region of Japan (and denoted in red) and the radial spread of “baka” (denoted in blue), a word mostly associated with Tokyo and commonly found in Kanto-centric anime programs.

The map was intended as entertainment, but it has serious historical significance.

When people move, they take words with them. It would appear that people in Kansai, historically the political and economic center of Japan, had little reason to leave the region, which would explain “aho”‘s limited spread. Baka, however, can be found on both sides of Kanto, indicating that there were strong connections between the two sides, despite the distance between them.

Oddly, the other words for “stupid” occupy the same radii from Kansai indicating that certain groups of people had peculiar spatial advantages in trade, where as others did not. Though I really have no idea, I’m thinking that particular perishable products traded with Kansai might have different spoiling times necessitating particular proximities. It’s important also to note that the extreme peripheries might have been trading non-perishable resources like coal, which, though heavy, doesn’t rot.

Economics, trade and language have deep links. English wouldn’t exist without it, and the many forms of English spoken throughout the world have been influenced by the multitude of groups of people who chose to speak it to facilitate trade.

OK, enough for now and back to Kenya.

Odd claims that biofuels were responsible for skyrocketing commodity prices

The blog Uneasymoney, posted an article this morning claiming that policies which encouraged the production of biofuels was responsible for the crazy run in commodity prices throughout the 2000’s and was ultimately responsible for the 2007/2008 crash.

The post refers to an article in the Journal of Economic Perspectives, which I am reading now but the results of which are summed up here:

the research of Wright et al. shows definitively that the runup in commodities prices after 2005 was driven by a concerted policy of intervention in commodities markets, with the fervent support of many faux free-market conservatives serving the interests of big donors, aimed at substituting biofuels for fossil fuels by mandating the use of biofuels like ethanol.

And then:

What does this have to do with the financial crisis of 2008? Simple. ..the Federal Open Market Committee, after reducing its Fed Funds target rates to 2% in March 2008 in the early stages of the downturn that started in December 2007, refused for seven months to further reduce the Fed Funds target because the Fed, disregarding or unaware of a rapidly worsening contraction in output and employment in the third quarter of 2008. Why did the Fed ignore or overlook a rapidly worsening economy for most of 2008 — even for three full weeks after the Lehman debacle? Because the Fed was focused like a laser on rapidly rising commodities prices, fearing that inflation expectations were about to become unanchored – even as inflation expectations were collapsing in the summer of 2008. But now, thanks to Wright et al., we know that rising commodities prices had nothing to do with monetary policy, but were caused by an ethanol mandate that enjoyed the bipartisan support of the Bush administration, Congressional Democrats and Congressional Republicans. Ah the joy of bipartisanship.

So then, what I’m gathering here is that the Fed was obsessive about commodity prices fearing inflation, despite the fact that the Fed was in no position to influence commodities markets. This distracted the Fed from focusing on the real causes of the crash and the Lehman disaster, making a bad situation worse.

I’m not sure that this correctly connects the dots, given that there is little evidence that the run in commodity prices had anything to do with biofuels. Even as biofuel consumption increased throughout the 00’s, overall production of corn and yield per acre also increased. Assuming that commodity prices are in part dictated by supply, I would (from an armchair economist perspective) assume that prices should remain somewhat constant.

I’m interested to see that the article disregards financialization of commodities, following a loosening of rules of speculation on ag products in the 90’s and the move toward commodities following the equity bust of 2000 as not being a major factor in the rise in corn prices. This is particularly strange when we consider that non-energy commodities also exhibited rapid price increases and violent fluctuations throughout the 00’s. I fail to see how energy policy could result in increases and volatility in, for example, copper.

It’s a tempting thesis, and made more tempting by the explicit identification of individuals who suggested and implemented such policy, but not one borne out by the data, in my limited, amateurish opinion. The list of potential factors which influenced the run in commodities is a long and confusing one (climate change, increased demand from China and India, global instability, etc. etc.), but I don’t think that the effect of Wall Street greed can be discounted as a major determinant. Interestingly, despite the overall themes of the paper, the author does a poor job of discounting the effect of financialization in the creating of commodity price bubbles.

In reading this paper now, I’m somewhat confused. On the one hand, he confirms many of my initial suspicions that the rising price of food is unrelated to supply and demand factors as growth of both supply and demand were more or less constant, despite localized climate shocks. On the other, he seems to blame a rise in prices during the crash to a shift in energy policy toward biofuels, while overlooking that commodities were already volatile and rising, beginning with the crash of the tech bubble in 2000. I am thining that much of the rise in commodities during 2007/8 was due to panicky speculation as real estate markets tumbled, not to any change in energy policy. Certainly, it may be the case the the policy influence traders to try to exploit potential areas of growth, but it’s hard, then, to discount the effect of financial speculation in commodities outright.

I can at least agree with this:

The rises in food prices since 2004 have generated huge wealth transfers global landholders, agricultural input suppliers, and biofuels producers. The losers lobal landholders, agricultural input suppliers, and biofuels producers. The losers have been net consumers of food, including large numbers of the world’s poorest ave been net consumers of food, including large numbers of the world’s poorest peoples.

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.

What Determines the Price of Goods in African Markets?

DSC_0443I’m gearing up to write a paper on pricing of malaria drugs in private drug shops in Sub-Saharan Africa so the question is on my mind.

We know that things in shops aren’t free; there is a certain amount of cash money to be paid. However, even in rich, well studied America, the mechanics which determine how retailers set their retail prices remains somewhat mysterious.

Common wisdom (assuming that neo-classical economics can be consider as such) would suggest that prices are the result of a balance between supply and demand. Customers and retailers weigh out each other’s needs and assets and an equilibrium arises. The trouble with this thinking is that it assumes that customers and retailers operate with perfect information about markets on all the products and services available. It assumes that customers (and retailers) weigh out prices when deciding where to purchase an item.

An example, when people choose a bar they rarely consider the price of the drink. They have a fixed amount of money they are willing to part with, but the drinking, the establishment and the people they meet all take priority over the individual prices of the drinks. As Robert Nielsen noted in a recent blog post, bars don’t charge more when demand goes up at night and one the weekends, and don’t normally charge less when the place is empty (outside of happy hours).

My epiphany came to me as I was wedged at the bar where I had been waiting for half an hour trying to order a drink during Black Monday. Why didn’t the student bar just raise its prices to deal with the excess demand which they knew would occur (as it did every year)? Why did they opt for an option that any first year economics student is taught is highly inefficient?

The explanation could be that there is a price that customers expect to pay for a good or a service and retailers, worried only about percentage profit margins on individual goods rather than the business as a whole, are inflexible when assigning prices, ignoring methods which might efficiently react to market pressures.

But, really, nobody knows for sure. Whatever the method behind the madness is, the story isn’t simple and not many people agree on much.

In African markets, the factors which contribute to pricing are even more vague, mostly because people haven’t really looked at it. Anyone who has been to Africa knows how the informal sector works. Lots of people sell the same things for the same price right next to each other. For example, it’s not uncommon to see 50 people selling the same rice next to each other for the same prices. There’s so many retailers and so few customers, that is is improbable that anyone is making any money at all.

Worse yet, African retailers are hesitant to introduce measures which would increase efficiency, such combining shops. A sole proprietor loses business when away from the shop. Two proprietors can take shifts, allowing one to take care of daily business while still making money. They can combine capital to obtain a wide variety of products. Better yet, partnered shops can take advantage of bulk discounts, possibly passing savings on to customers and remain competitive.

The result is that this hyper-competition and inefficiency is potentially raising prices for customers. Increased market efficiency would allow for lower pricing, allowing customers to buy a wider variety of goods and still cover expenditures like school fees and health care. It’s possible that overall market inefficiency is complicating public health efforts to control and prevent disease and death through a lack of disposable income and even through exorbitant prices for drugs.

But, again, this assumes we know anything about pricing, which we don’t. Un-cracking this nut could help save some lives.

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