How Cities Aid Ambition

I have kept this interesting piece on my browser for about a week now and just got to read through it a short while ago. It reminds me of the thinking on whether culture determine entrepreneurship or economic development. Coming to the article, the author who is obviously well-travelled across major European and north America cities, presents a very incisive understanding of the city-level culture and how this shapes the dominant professional clusters.

Worthy of reading for oneself, I am still struck by the keenness of the author in assessing what a city is bound to be best at and the distinctions drawn between cities in California, Cambridge (US),New York and Paris. Whether one agrees with the fact that Cambridge has cut for itself a niche in producing ideas on account of the existence of the "Intellectual Hub" while New York is best at cultivating interest in personal grooming and financial power, is less important than the ability to divide cities and make a coherent case for what they represent.

In all the most potent statement is the contrast between New York and Silicon Valley as it presents the central thesis of the article. Cities truly speak for something that every curious traveller should try to figure out. Here is the bold claim:

"Power matters in New York too of course, but New York is pretty impressed by a billion dollars even if you merely inherited it. In Silicon Valley no one would care except a few real estate agents. What matters in Silicon Valley is how much effect you have on the world. The reason people there care about Larry and Sergey is not their wealth but the fact that they control Google, which affects practically everyone."


HT: Ben Casnocha

Dont Cap Interest Rates for Micro-Loans

In earlier blog posts here and here, I examined the overall merits of micro-loans as a mechanism for defeating poverty. My argument then was that micro-loans are useful especially reducing the coercion and extortion of loans sharks because they provide a structured way for poorer people to acquire credit and to make repayments. At the same time, it is clear that for all power in social transformation, it is not a panacea to poverty because of the fact that most creditors run similar businesses based on labor intensive activities.

One known feature of most micro-loans schemes is that the interest rates payable on the loans are sometimes higher than what obtains in the formal banking system. Meddlesome politicians in India have therefore chosen to intervene by arguing for a cap in the interest rates charged by micro-loans institutions. As this article in the Economist states, the populist argument is that these institutions exploit borrowers because of the interest rates. My libertarian orientation aside, I am wondering what these public officials think the alternative interest rates would be and whether it is even right to compare interest rates between conventional banks and institutions that provide micro-loans.

Granted that insufficient understanding has never prevented many politicians from pronouncing themselves on an issue, one wonders why they would not urge their constituents to go for loans from the conventional banks that charge lower rates and leave micro-loans institutions alone. In my view, for as long as these loans are available as an alternative to loan sharks, many more households will opt for them.

Quoting Leo Tolstoy

"The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear o the most intelligent man if he is firmly persuaded that he knows already, without a shadow of doubt, what is laid before him." Leo Tolstoy

This quote appears as a prefatory idea in the book recently published by Michael Lewis and it struck me as oh, so true. To my mind it alerts to the need for an open mind and a reflection based of evidence as opposed to ideology, political bias or any form of partisanship. Show me very clever people and one can often find that in at least one instance, they have failed to heed Tolstoy and yet still believe in the rightness of their cause or feeling. And this goes beyond partisan politics and even to sports and academia.

Does Electronic Money Have a Future?

Conventional wisdom holds that mobile telephony and related gadgets will form the entry point for low income countries to enter into and expand the digital economy. It is true that usage of mobile telephony in developing countries has developed so phenomenally and surprised many business analysts. indeed, with the exception of radios, I consider mobile telephony as the second most ubiquitous piece of electronic gadgets in most households in developing countries. Mobile phone service providers are now on the frontiers of innovation in these countries as they try to leverage on the largest networks available in order to provide other services.

One of these services is the M-Pesa service featured in the BBC news item that is available in Kenya that pioneered the use of mobile telephone platforms for the transfer of money and completion of payments. Essentially, the service relies on text messaging to allow payments to be made by one subscriber to another and is convenient for traders and people who wish to transfer money. It is unlikely that electronic transfers will altogether replace cash transactions soon because mobile telephony is not yet universal in many low income countries. Despite it wide acceptance, it is highly likely that claims such as use of electronic wallets to pay dowry are anecdotal. However, it is clear that further inovation will follow because every mobile network operator is developing a competing device. Of interest to me would be what innovations follow from creating the ability to transfer funds across networks.

Rerunning Formula 1 2008 On 2010 Scoring System

While writing the last blog post, I made reference to the continuing tinkering with the points scoring system in Formula 1 races. It argued that the more recent changes does not seem to make a difference to the outcome of the championship. Towards the end, the blog post stated that given the fact that the 2008 Championship also went down to the very last lap of the race, it is possible that the scoring system adopted in 2010 would yield a different winner. Concerned that I may have overstated, I went to the Formula 1 results archive to test that claim. The simple test involved ranking the championship winner and all other drivers who won at least one race in that year by using the 2010 scoring format.

The table on the above shows the finishing position of each of the seven drivers on the columns for each of the 18 races of that season, with the zeroes as code for drivers that did not finish that race. Clearly, I was mistaken to think that the championship results would have favored Felipe Massa due to his having won more races than Lewis Hamilton.  It remains that while the finish was still very close and was determined by that last race, Lewis Hamilton would still have been the championship winner. Truly, the scoring system requires massive tinkering to generate the excitement that Formula 1 bosses seem to think is lacking.

Formula 1: Fixing An Unbroken Points System

It is unlikely that any other driver will dominate the sports of Formula 1 racing as much as Michael Schumacher did. Not only did he win the highly technical event seven times, but he also retains the record for the highest number of wins for individual races. One of the more subtle indices of his dominance is the fact that the scoring system was revised by the sport's administrators ostensibly to add to the competition.  While I have remained skeptical of these revisions that are often sold to the public as instruments to for creating more exciting competition, I have never got to compare them against one another to determine whether they do make a difference.

Michael Wallace has gone a step ahead and written a piece in Significance Magazine here in which he compares the performance of the top five drivers of 2010 against the scoring systems used in this and previous seasons.  His findings show that despite the manipulation of the scoring systems, it is clear that the result would not have changed significantly. To my mind, this shows that sometimes even the people who run sports simply go for change for change's sake. Having said that, the results would probably have been different for the 2008 season during which Felipe Massa came so close to winning the championship but lost to Lewis Hamilton.  the results would have been different considering that Massa had won more races than Hamilton who had been more consistently placed as a podium finisher.

Informal Sector Medical Practice in India

While casually reviewing a report yesterday, I learnt that many developing countries are constrained by a disproportionately large informal sector. In some countries in Africa, Latin America and Asia, It is estimated that the informal portion of the economy equates to between half and 70% of the formal GDP. What the real effects of this is on overall growth are perhaps not properly quantified but my thinking is that a large informal sector cannot be a positive economic factor for an economy.

On the other hand, my assumption has been that  a large informal sector is possible especially because of the preponderance of agriculture production and small scale trade. It appears that the informal sector is now going into other professions that have been considered a part of the formal economy such as medicine. Michael Spectre's article appearing in the New Yorker Magazine illustrates how the rise of a "medical red light district" in one of India's main cities complicated the ability to properly diagnose and render treatment for tuberculosis.

Not only is there a number of ill-educated medical practitioners but they are complimented by diagnostic centres that carry out radiological tests and quacks dispensing medicine to poor and vulnerable patients. This superstructure is supported by the perverse incentives that allow for medical practitioners who are employed in public hospitals to have other clinics to which they channel patients seeking help from the public hospitals. This elaborate scheme of brokers means that public hospitals are direct competitors for the private clinics operated by the same doctors. The effect is understandable and has devastating consequences for patients because of the clear sabotage of public facilities.

In my view, this is perfect illustration that public sector professionals are sometimes the greatest obstacles to attaining positive development outcomes. Better pay for medical practitioners may help but I doubt that the lucrative practice would stop just because the doctors have better pay per month. Being doctors who understand that incorrect dispensing of medicine leads to drug resistance shows that they are moved by economic incentives against their better judgement. Part of the solution lies in realigning those incentives to the public interest by rewarding doctors for the health outcomes that they achieve.

How Vietnam Reached Mobile Penetration of 140%

Many people claim that the huge changes that have been attributed to computers in higher income countries will only be recorded in lower income countries through mobile telephony. The main argument being that the infrastructure required to utilize the mobile telephone is developed by the network operators and often through private developers. Evidence that supports this is that many low income countries have a quantum of mobile telephones that far exceeds the penetration rate of computers hence the mobile telephone is the development tool of our time.  For many developing countries, it is often stated as a matter of pride that the penetration rates of mobile telephony has gone beyond 50% and that this is  rare and important technological feat. 

Looking that this edition of the GSM Association's newsletter, I was amazed that Vietnam has a mobile penetration rate of 140%. In spite of Vietnam's really furious pace of economic growth over the last decade, this number is still worthy of understanding especially since the profile of countries with perfect penetration at 100% is very different. To start with, they tend to be small Baltic states and northern European nations where technology development is clearly ahead. 

Like other developing nations, the high rates of mobile telephone penetration in Vietnam and other countries reflects different circumstances. Among these are that many of these countries have corporations that are uninterested in interconnection hence the tariff across networks exceeds that within networks. The clever response from users is therefore to hold multiple SIM cards in order to communicate in the cheapest way. This is confirmed by the view that a number of callers have as much as three separate numbers. Secondly, the absence of number portability means that many of the mobile telephone users are unwilling to change their numbers by migrating to another network. In some instances, reactivation of lost SIM Cards is more onerous than simply acquiring a new one and so the subscriber base is smaller than the total number of SIM cards in issue.     

Registration of Sim card ownership is ongoing in many jurisdictions including Kenya, India and other countries but Vietnam seems to be trying to limit ownership to three. It is not clear to me what this will achieve as the acquisition of SIM cards by itself does not harm to the networks or subscriber. However, the government of Vietnam, which has a hand in all the mobile networks seems to think that Sim Card ownership ought to be rationed.    

Services Can Be a Source of Growth Too

A month ago, I started reading Ha-Joon Chang's latest book that took to exploding some urban legends about capitalism. Many of the arguments that he stated therein were very sensible and largely accurate because they involve careful and non-ideological survey of how markets function and how they fail to work well enough because of political or other reasons. In a  couple of the 23 chapters, I  was not only unconvinced but also found myself taking the opposite view from this accomplished professor.  The first of those was on industrial policy and the other was the claims made that manufacturing industry is essential even for high income countries.

While he may not necessarily be one, I have earlier alluded to the manufacturing fetish that many people have and the unduly high regard that they hold for manufacturing in comparison to services. John Kay's article here provides an argument showing why the assumed superiority of manufacturing is mistaken. The argument is so cogently stated that I will not attempt a summary of it. Instead, I will say that the increasing specialization by society provides opportunity for tasks to be assigned to those most capable of doing them at the lowest cost. He also explains using simple economics language why the belief that real work must issue sweat is a relic of agricultural society.