More on money flow

When you phrase a problem in terms of variables x and y and not real world quantities it allows you to solve it objectively without bringing in preconceived notions about the variables. For this same reason it is also helpful to look analogies. So here is one:

Lets say there is a pond into which water is poured from x different sources at various rates and leaves from y different sources at various rates. How does the water level change over time? To solve the problem you need to know the rates at which water enters and leaves the pond at different places relative to one another and the initial water level. Maybe valve two shuts off when valve one opens etc.

Now instead of a pond, lets say its a village. And instead of water, lets say its money coming in as loans, salaries and business revenues and leaving as loan repayments and purchases. How does the spending power of the village change over time? When you structure the problem in this way, you can play with these rates and quantities and see what it does.

You might argue that this kind of approach obfuscates the local changes: what happened to the specific person who took *your* money? To this I say that if we care about real change, what matters is the system as a whole and not local changes. Local changes can fool you. It could well be that one person's gain is another's loss. Or consider this, in a wave, each water molecule only moves a little so if you only knew how individual molecules were moving you could well miss the tsunami.

Of course, the pond analogy leaves out one very important thing: innovation. Innovation can be a complete game changer. But more about that in another post...

What's a newspaper for?

We (Madura) recently launched a classified ad newspaper that reaches 400,000 poor rural households in Tamil Nadu. Our women borrowers can advertise their products, services and things they want to buy and sell free of charge while companies must pay. This is a hard to reach demographic that does not generally interact with print. One of our office locations used a women's day event that gathered 700 of our women borrowers to launch the paper in their area. I didn't attend this launch but our CEO reported to me that a very large number of women took the paper that was handed out and immediately used it to wrap up the snacks that were served to them.

(One useful statistic to put this in context is that about a third of our borrowers cannot read. Still....)

What's Google? Is Obama a computer program?

I am increasingly convinced that poverty is a network problem. Poor people are less connected and linked in to the rest of the world on various dimensions. The resulting information poverty results in a poverty of opportunity and therefore economic poverty and the cycle goes on. I recently did a small survey for fun where I asked about 20 women from our self help group member base that are between 5th and 8th grade educated what the following four words meant to them:

Google
Obama
Microsoft
Manmohan Singh

The majority were flumoxed by Google. No idea they said. Microsoft is a computer and Obama, is it something to do with computers? Manmohan Singh was correctly answered by a handful (6 to be exact). Others asked: Is he a Hindi film actor? cricketer?

Facebook? YouTube? I didn't bother to ask.

We don't live in the same world.

A physicists view of financial bubbles

Thought this would be interesting to all of you folks who are interested in making sense of the recent financial crisis (and/or trying to figure out if there is a microfinance investing bubble in India). Physicists Didier Sornette, Ryan Woodard and some others have been working to create predictive 'bubble diagnostics'. These diagnostics are based on non linear positive feedback models that have their basis in imitative human behavior. They are running The Financial Crisis Observatory which they describe as "a scientific platform aimed at testing and quantifying rigorously, in a systematic way and on a large scale the hypothesis that financial markets exhibit a degree of inefficiency and a potential for predictability, especially during regimes when bubbles develop".

Last year they published a paper called Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis in arXiv (arXiv is a database of physics papers that is openly accessible) that is more of an essay and a pretty easy read. Some of the data that they show is quite striking. For instance, the abrupt and extraordinary divergence between wages and consumption as a percentage of GDP beginning in the '80s (figure 6 on p15), showing just how dramatically US household wealth and spending came to depend on the stock markets and not any real indicator of productivity or output.

Somehow I'm not surprised by all the bubbling. It is hard to keep focused on creating real value when paper value is so much easier to generate ....

A network view of entrepreneurship

Here is a definition of entrepreneurship that I came across in another one of Mark Granovetter's articles called The Impact of Social Structure on Economic Outcomes. He writes:

Schumpeter defined entrepreneurship as the creation of new opportunities by pulling together previously unconnected resources for a new economic purpose.

Granovetter goes on to say:

One reason resources may be unconnected is that they reside in separated networks of individuals or transactions. Thus, the actor who sits astride structural holes in networks (as described in Burt, 1992) is well placed to innovate. The Norwegian anthropologist Fredrik Barth (1967) paid special attention to situations where goods traded against one another only in restricted circuits of exchange. He defined “entrepreneurship” as the ability to derive profit from breaching such previously separated spheres of exchange.

Schumpeter's is an interesting definition and now ranks as the one I like best. Most of the other definitions of entrepreneurship I have seen approach it from the point of view of the outcome (new value created through product innovation etc.) rather than the process of network reconfiguration. The process point of view is more generalizable though because most new businesses are not all that innovative in product and fail many other definitions.

Links back to my post on more connected women being more successful..

The Strength of Weak Ties

I have been thinking a lot about how to understand poverty from the point of view of the properties of the social network. In this context, I thought I would share with you a very important paper by sociologist Mark Granovetter written in 1973 called ‘The Strength of Weak Ties’ which he has more recently revisited in a new paper called ‘The Strength of Weak Ties: A Network Theory Revisited’. Here is an excerpt:

.....individuals with few weak ties will be deprived of information from distant parts of the social system and will be confined to the provincial news and views of their close friends. This deprivation will not only insulate them from the latest ideas and fashions but may put them in a disadvantaged position in the labor market, where advancement can depend, as I have documented elsewhere (1974), on knowing about appropriate job openings at just the right time. Furthermore, such individuals may be difficult to organize or integrate into political movements of any kind, since membership in movements or goal-oriented organizations typically results from being recruited by friends. While members of one or two cliques may be efficiently recruited, the problem is that, without weak ties, any momentum generated in this way does not spread beyond the clique. As a result, most of the population will be untouched. The macroscopic side of this communications argument is that social systems lacking in weak ties will be fragmented and incoherent. New ideas will spread slowly, scientific endeavors will be handicapped, and subgroups separated by race, ethnicity, geography, or other characteristics will have difficulty reaching a modus Vivendi.

I share this because villages, which are typically poor by nature, are generally insular, tending to rely much more on strong ties with very few weak ties outside their village. Given this, one strategy Madura takes as an organization is to bring in products, services and events that foster ties across villages and to the urban economy. This may all sound like common sense but what is surprising, if you get into the models and workings of networks, is just how profound the consequences of a few weak ties can be. (I've spent the last five years thinking about this mostly in the context of the brain and it is interesting to note that the cerebral cortex, the outer layer of the brain where all the high level thinking gets done, is characterized largely by weak connections).

Microfinance, money flow and social impact

The traditional thinking in microfinance is that it is a way to help people extricate themselves from the clutches of local moneylenders who charge exorbitant interest rates. As microfinance institutions, we believe, that by charging less we are doing great social service. Typically, when academics study the impact of microfinance, they look at people who have received microfinance compared to people who haven’t in order to see who is better off across various dimensions. Evidence suggests that even if individual borrowers are not actually making profits that exceed the interest charges, they might do better on other dimensions that relate to patterns of consumptions. Access to a lump sum of money at once, for instance, allows borrowers to afford goods and services they would otherwise not be able to that give them a better quality of life. However, if we really want to understand the social impact, looking at how some individuals compare to others is not sufficient. Rather we need to understand the flow of money more systemically. Here’s why:

In my view the goal is to seed systemic change. Which means the system as a whole should thrive and not just select individuals within it. If we take a village that has its own local economic ecosystem along with some bilateral trade links to the outside world and try to unravel the impact of a loan, it is not so simple. As a microfinance institution we lend urban acquired money into the village, but then we take back more than we lend in the form of interest. The money we take back goes back to the village in part as salaries to the people we employ there. The rest goes to other stuff in urban areas, maybe out to shareholders who will spend part of it in another country (like me for example - most of my money seems to go to Lufthansa). The local moneylender, on the other hand, may charge a higher interest rate, but being local will probably spend most of that income in the village supporting the overall village economy. So potentially, local lending at higher rates could be more beneficial to the village if the money is in turn spent in the village, compared to lower rates where the money leaves the village. So the impact of microfinance on the village has a lot to do with the dynamics of money flow and not just what happens to the borrower who took the loan. (See also my related post, ’Where does the money go’).