The Physics of Poverty

Microfinance: Time to move towards financial inclusion

2012-02-08T22:55:00.000-08:00

As printed in the Economic Times

The numbers that describe India's economy are mindboggling. Just one-tenth of the population participates in the formal economy. Of these, only about 35 million pay taxes. That's less than 3%.

No wonder then that our economy produced a GDP of only $1.42 trillion at last count, about the same as that of the city of Tokyo which has a population of 35 million. There are simply too few producing value and wealth in India and so there is not enough to go around.

The financial inclusion agenda so far has been largely focused on redistribution of wealth while what is required is inclusion in the creation of wealth. Financial inclusion so far has meant debt distribution and nofrills bank accounts.

Microfinance has been one major channel of debt distribution to the poor. While the original assumption was that these loans were for investment in micro enterprise, the Malegam committee report in 2010 indicates that 75% of the loans went towards consumption. Contrast this with the distribution of bank debt in India where less than 20% were consumer loans.

Debt on its own does not grow economies. This begs the question: what kind of financial inclusion agenda can enable participation of the greater population in the economy as wealth creators ? When the wealth and therefore total credit in the system is limited - and it is - it is most effective when it can be directed towards innovation and productive output.

Money is a catalyst of progress but only when placed in the context of the right reaction. In the informal sector this means directing it towards the genuine microentrepreneur , not just any self-employed person. Here's why: in developed countries only 6-7 % of employed adults are entrepreneurs compared to developing countries like India where it is between 30% and 45%.

Developed economies are characterised by larger enterprises that take advantage of division of labour, specialisation and economies of scale. These synergies allow each participating individual to create more wealth such that revenues and even income per employee are far greater than what a comparable micro enterprise can achieve. The current model of microfinance lending focuses largely on two aspects: reducing the cost of lending and ensuring responsible repayment by using a group lending model with a peer pressure element.

Unlike the formal economy where businesses are registered and documented, there are no records in the cash economy that can be used to evaluate business intent, asset ownership or track record. Consequently, the microfinance strategy has been to cast a wide net treating every borrower virtually the same. Those who are more successful are constrained in their access to credit by the lesser needs of the group.

Furthermore, regulation caps their access to credit at Rs 50,000 with no easy passage into mainstream banking products. Microfinance lending in India is directed almost entirely at women. This has its benefits in empowering women in the management of household finances. In many parts of India men are thought to squander money more readily on vices while women tend to spend more responsibly for the family.

On the other hand, while some women are genuine entrepreneurs , many more of the entrepreneurs with the ability to scale are men. This is for the simple reason that historically and culturally men tend to have higher mobility and therefore access to markets. They should not be excluded. Mature microfinance clients represent a pool of creditworthy customers who could transition into the banking system. However there is no mechanism for such a transition.

MFIs, while having no incentive to pass them along to the bank, also cannot offer them expanded credit. This can only be remedied if there is a progression of products for the microentrepreneur from a microfinance group loan to individual business loans that expand to meet their growth needs. This is best done if there is a close relationship between banks and MFIs where there is a sharing of customer credit history and profile data.

Banks might set up or acquire as subsidiaries MFIs that operate as lower cost, outreach operations, sifting out the entrepreneurs from the consumers. The microfinance model itself needs to become more effective at identifying microentrepreneurs and micro enterprise risk. This could be done with approaches that understand the psychometric and behavioural profiles of entrepreneurs. It is when the potential of entrepreneurship among the other 1.1 billion is unlocked that the rest of the country can be productively engaged and therefore financially included.

Scrap the MBA

2011-12-28T01:37:00.000-08:00

Part of the Big Ideas Series for The Smart CEO

What we need are Masters in Enterprise Building (MEBs)

Ask MBA (Masters in Business Administration) students what they want to do after they graduate and the answer is usually a variant of ‘Get a good job’. A good job, they will explain to you, is a job with a good salary, good personal growth opportunities, good work environment and good facilities. Large multi-national corporations will top that list. At the recent IIM-A Confluence, Satish Pradhan, executive vice-president, Tata Group likened business school placements to the Pushkar Mela. wherecandidates, like camels, are dressed up, paraded and sold to the highest bidder. . A student countered that they were ‘trained’ to find jobs.

What’s wrong with that, you might ask. For a country, where less than 10 per cent is employed in the formal economy and where the college capacity extends to less than 7 per cent of the potential college age population, access to a higher degree like an MBA is competitive and coveted. It is natural then that people see this as a rite of passage to personal financial success.

But consider this: banks are reporting higher defaults from industry and India’s growth forecasts have been downgraded from 8.5 per cent to 7 per cent. We are hitting a wall. Financial wizardry might prop things up in the short term but for real growth we need to get back to basics. And the absolute basics are that it is the innovation, ingenuity and organisation of people that can ultimately produce the growth and value that is essential for a healthier more inclusive society. It is the very people who are educated, who have to step up to the plate. And the MBA is failing us.

The Merriam-Webster dictionary defines business as a commercial or mercantile activity engaged in as a means of livelihood; also as dealings or transactions especially of an economic nature. Administration is simply the performance of executive duties. Masters in administering business or people performing executive duties pertaining to economic transactions for the sake of their own livelihood are not what we need. Scrap the MBA. What we need are Masters of Enterprise Building (MEBs). This is fundamentally different.
The dictionary defines enterprise as
1. a project or undertaking that is especially difficult, complicated, or risky
2. readiness to engage in daring or difficult action and
3. a systematic purposeful activity.
Building is the art of assembling materials into a structure.

When you say someone is enterprising, you mean something entirely different than when you say someone is good at business. Building is entirely different from administering. Semantics matter. What you call it subtly primes the way you think about it, how you relate yourself to it and ultimately what you will do with it. Simply changing the name of the program from MBA to MEB would force a complete rethinking of curriculum and the perception among students of what one is expected to do with the degree.

We live in a time and place with extraordinary challenges, both internally and globally, and nowhere in India is it simply ‘business as usual’. We operate in an unpredictable political environment where local governments can derail industry at the drop of a hat. We operate in an unpredictable economic environment where global competition and crisis inevitably rock our markets in broad sweeps in ways we cannot anticipate. We operate in severely resource constrained circumstances where basic services like power, water supply and communication cannot be taken for granted. We operate in an ecosystem of extraordinary culture and language diversity where chasms are wide. We operate in an ecosystem that is poorly educated and with few people operating in large scale formal structures. We have to go beyond administering and managing businesses to building enterprises with agility and ingenuity.

Instead of courses like Financial Reporting & Analysis, Financial Markets, Marketing and Microeconomics which are typically core courses of the MBA curriculum, the MEB would have courses like:

Economic and Geopolitical Environment: An understanding of the macroeconomic and geopolitical structure within which we operate and the role of enterprise in its ultimate transformation.

Operating in unpredictable environments: A series of case studies of industries that have gone through dramatic shifts due to large policy changes and changes in regulation (like licensing in Telecom and regulation in Microfinance arising out of the Andhra Pradesh ordinance) and of companies that have survived incidents of geopolitical instability such as riots and bombing (like the Mumbai hotel industry post 26/11).

Building effective organisation structures: An exploration of models and frameworks for scalable organisational structures. In India, over 40 per cent of employed adults are self-employed operating in microstructures of 1 – 3 people with extremely low revenue per person. In contrast, developed nations have fewer entrepreneurs (6 per cent – 7 per cent), who are more likely to create large organisational structures that can engage more people productively and result in multiplicative benefits of scale that becomes evident in increasing revenue per employee. Who does this best and how did they do it?

Other course topics might cover Integrating people into the formal economy which would follow the challenges of companies in bringing in people hitherto employed in the informal sector into a corporate structure, and Planning and execution under resource constrained circumstances – clever ways to make more from less.

I am certain that when you are acutely aware of the macro context in which you operate and are primed to understand and focus on the challenges of building, you will approach your career with a greater sense of outwardly focused responsibility and enterprise. When you ask an MEB what they want to do after they graduate, I would bet that they would be more likely to be looking for the right challenge and responsibility to be enterprising and build something. This might lead to the same job but with a whole different attitude where salary will be a by-product and not the Holy Grail itself.

And if we are successful the result is faster and increasingly inclusive economic growth. And that means better jobs and higher salaries for everyone.

Cityscape

2011-12-28T01:33:00.000-08:00

As posted on YourStory.in

There is a certain romanticism that we all carry about rural living. For many of us it represents the simple life, a place where you go when you need to slow down and not do much. And it is precisely that. The world’s relentless march forward occurs in the cities. Almost three quarters of the world’s productive output, its GDP, comes from its cities. There are simple reasons for this. When we cluster closer together into large agglomerations it brings us close to resources and information. City living is more expensive because we are willing to pay more for the choice and opportunity that this results in. For the entrepreneur, it allows you to access the resources you need quickly and efficiently from legal to administrative to people and gives you rapid access to a larger market. For the job seeker, thriving entrepreneurship means more jobs, more choice of jobs and therefore an implicit safety net that if one job doesn’t work out there are other jobs to be found. For the consumer it means more products available just outside your doorstep. There is immense value in all this.

But simple agglomeration is not all it’s about. There are so many elements to a thriving city. One of the advantages of people living in close proximity is that resources can be distributed efficiently. Geoffrey West and his colleagues for instance have studied cities in the United States and quantify how much electrical cable and pipe you need to reach power and water to people. They show that as city density increases, the kilometres of wire and pipes decreases in sublinear fashion allowing tremendous cost efficiency. Much more so if you bother to plan this. I recently met a former Chennaiite who works with a geospatial analysis company in the United States mapping city water pipes and modelling their flow. All this so it could be made more efficient and faults could be rapidly detected and repaired. Thambi, the Chennai water department told him when he went to meet them, this is very nice but what can we do with this here?

Then there is another extraordinarily important element of how new migrants to a city are integrated. How easy it is to connect yourself when you get there – first to the wiring of electricity, telephone, water, gas and sewage and then to information about the cities resources. Can you arrive and just plug-in and play or do you wander around lost for days standing in unproductive lines? Can you easily find the resources you need or do you wander around alleyways searching for products and services? In cities, if you calculated travel distance to resources I imagine you would come up with extraordinary non-linear benefits as well, particularly if information were well organized and transport was efficient. And if people could plug and play quickly, they can move quickly and efficiently to productivity.

In the world there are cities operating smoothly like a fit organism with strong circulation and fast nervous signalling allowing fast thinking and strong and quick responsiveness. And then there are disorganized dense masses of humanity that operate like broken creatures, frequently suffering from functional paralysis due to a breakdown in the supply of critical elements – like an organism suffering frequent heart attacks and strokes.

Here in India, I wonder about the future of our cities as roads are increasingly choked and infrastructure is not well planned and unable to reconfigure to changing needs. In my crystal ball there are two things that I see: a migration of people to the more planned cities that are popping up on the outskirts of today’s big urban masses and new agglomerations emerging out of our rural landscape. With 700 million people now living in small fragmented rural communities, if we are able to make good on an agenda of inclusion, bringing knowledge, information and capital into these areas, we will find scattered villages slowly clustering together to become towns and then cities as people move to take advantage of the benefits of proximity. I’m betting that our urban landscape will reconfigure faster than we imagine.

Happy Nation

2011-12-28T01:20:00.000-08:00

As posted on YourStory.in

Many CEOs and HR folk will tell you that happy people make for more productive employees. In fact there are even studies that demonstrate that when you are happy you are more productive. Therefore, the reasoning goes, it is important for companies to make employees happy so that they will be productive. Some even go so far as to say employees first, customers second. An article in the recent issue of Outlook on happiness made me wonder if they haven’t got it all backwards.

The article reported on a survey of happiness among some 2000 people across India. In it they asked people questions about whether they were happy, what made them happy, and who they thought were the happiest people. What made people happiest was optimism about the future, followed by feeling fit and work success. Also, a sense of purpose. According to people’s perception, the happiest people were successful industrialists, doctors and politicians while the least happy were people doing nothing followed by housewives and bureaucrats. And the top three ways to get happy according to these folks were getting together with friends, meditating and working hard. Yes, working hard. So if we put all this together it is saying something. That at least here, today in India, presumably among English speaking folk, we are deriving our happiness from purposeful accomplishment, and that staying fit and working hard are paths to this. This is good news and bad news for the country.

The good news is that happiness is not at cross purposes with productivity and progress but rather can be deeply connected to it. The excitement that we are as a country accomplishing something has been palpable in India the last decade and this is not surprising. There is headiness about being able to declare yourself globally competitive in different areas, about being able to be part of something growing and changing in a positive direction. That headiness is happiness. So it seems to be that it is not happiness that makes you productive but productive accomplishment that makes you happy.

The bad news is that only 100 million Indians are employed in the formal economy and even have a shot at being part of this heady wave of growth and progress and the happiness that follows it. We are a country where almost a billion people fall into the category of not doing much beyond a subsistence context, and as Ruchir Joshi says in his article in Outlook, we used to think that rural people were happy because of their ‘pure’ and ‘simple life’, but today only the insane think that. This would suggest that we are probably a pretty unhappy nation in the aggregate and the rapidly rising crime statistics seem to support this. Across the country violent crime has grown about three fold since the 1950s, that’s way faster than the population. And this is by no means an urban phenomenon. In my own work we constantly encounter rural violence and have had to abandon field activities at least a few times in the past year due to village fights and murders.

There is a lesson in this though. If we are aiming to be a really happy nation, then the solution is not in redistributing or distributing money but in creating frameworks that enable more people to experience productive accomplishment. To be happy we need to focus on enabling productivity rather than alleviating poverty.

One World, One (Giant) Language

2011-11-07T07:28:00.000-08:00

As posted on yourstory.in

Take a risk. Use your imagination. Transform your world.

Try to say this in any Indian language. I challenge you. You will fall short. Short on comparable, easily accessible vocabulary, short on that easy feel of flow and short on memories of when you last heard something like it said. English is the language of progress and possibility. English is the language of technology. English is the language of change.

To be progressive, therefore, one of the most powerful things we can do in this country is make English mandatory curriculum in every school, and then in the next generation just switch to English as the sole medium of instruction. One world. One language.

OK, I hear the critics. Some of our languages are so beautiful. So much of our culture will be lost. Then quick, start translating. English is one of the fastest growing languages in human history. According to the Global Language Monitor, the number of English speakers has grown from 250 million in 1960 to some 1.53 billion today. In China alone there are apparently now 250 million English speakers. In India, 100 million.

But more significantly, consider this. From roughly half a million words in the English language in 1960, today English has over one million words. And, currently, a new word is added to the language every 98 minutes. That’s about 15 new words a day. To qualify as an ‘English’ word it must be appear in a consistent context in English books and articles some large enough number of times with some criteria of geographic breadth. Both Google and the Global Language Monitor have their own counting algorithms. The growing and evolving feature of the English language therefore allows us to carry with us those words and phrases from our own languages for which we cannot find ‘English’ equivalents that give us the same nuanced feel.

Now, most human beings apparently have a vocabulary between 10,000 and 50,000 words. Only a small number of overzealous linguists can claim vocabularies upwards of 200,000. On the other hand, there are supposedly less than 2000 words that we use every day. The most recognized English word on the planet is OK. So what this means is that all of us English speakers get the benefit of a common linguistic structure and a handful of daily words so we can basically understand and transact with one another, but then diverge in our other vocabulary. Someday how widely you can communicate will no longer depend on how many languages you know but how many words you know. And this will be richer than having multiple languages because the richness of language comes from use. It comes from words traveling among people and building common memories and associations.

So, the one millionth English word, which was announced on June 10 of 2009, was Web 2.0 which means “the next generation of the world wide web”. Coming in right behind at 1 million and 1 was Jai Ho! which means in the new English dictionary “accomplishment” or “victory”.

So,

Take a risk. Use your imagination. Transform your world. Jai Ho!

Cigarettes and Swans

2011-11-07T07:19:00.000-08:00

As posted on yourstory.in

In my last post, I mused about who actually knows what something is worth? Beyond survival, ‘value’ is simply collective perception, a construct of our collective mind. So what do we mean when we talk of ‘value’? What is our mind ‘valuing’ and for what purpose? For an entrepreneur this is a fundamentally important question. On a very simple level you could claim to be creating value so long as someone sees it as valuable enough to pay money for it. However, there are people willing to pay money for all sorts of destructive things like drugs and cigarettes and exorbitant amounts of money for completely worthless things like crystal swans. Of course that is my value judgement I’m imposing on it. I have friends that would argue me down that the drugs help their creative process and the cigarette smoking calms them and helps them be more productive. And as for silly looking crystal swans – some people derive happiness from having them perched on a shelf in their house. However, on the other hand, if you ask a large room full of people to name products that are of fundamental value to society, they will disproportionately name a few – two wheelers, mobile phones and internet access are ones that come up frequently.

In this are clues to the factors that define a more intrinsic value. We all see fundamental value in anything that enhances our capability. And this is not trivial. It is ultimately capability for survival, the need for which is implicit in the definition of life. We don’t use these every day for our immediate survival but if we have fast access to information, communication and mobility, we are better positioned to survive a number of possible calamities and disasters, if and when they do occur. Progress is about enhancing our capability and making it better, faster, cheaper and therefore more accessible. But what about all the other stuff – the drugs, cigarettes and swans?

The other stuff is more tricky. The brain is capable of creating constructs that extend beyond the moment. So at any given time we are constantly making trade-offs of a ‘feeling’ of well being in the present for the promise of well being in the future. We all implicitly discount time differently and do so differently at different times. The more distressed we are, the more we might value the now over the future – the drug high or the cigarette calm. And as for the swan, there are those things that feed indirectly into our sense of well being – our position relative to others in society. An expensive crystal swan might sit on a shelf as a subtle and almost subconscious symbol of the prosperity of a household and therefore the marriage value of progeny. Or it may be a symbol of accession into a class of society that affords certain social privileges. These are extraordinarily relative value perceptions. No one would pay tens of thousands of rupees for a small crystal swan unless they had a complex set of associations tied to it that were formed from numerous interactions.

So while some things have more fundamental and universal value propositions, for most things, value has to be defined not just by product but by the who, why and when behind the value constructs. Who would ‘value’ it and under what circumstances and why?

What is it worth?

2011-10-10T09:09:00.000-07:00

In 1989 as a 17 year old college student I had a childish view of what it took to get by in the world. Foolishly, I thought that $150 (7,500 Rs.) was sufficient to spend a month in Greece (it was my own hard earned money and seemed a lot to me at the time). $150, I found out, is not a lot of money. It worked out to about $5 a day. In purchasing power parity terms it was somewhere below $2 a day in an India. What followed was hardly a sightseeing tour but an exercise in subsistence living. For $1 there were hostels that would let you roll out your sleeping bag on their roof. If it rained they would accommodate you in the corridors by the bathrooms. In Athens I could not afford the entrance fee to the Acropolis but discovered that if you climb the hill from behind the Plaka you can scale the wall and see it for free. On my budget bus travel was wildly expensive but if I spent long enough it was somewhat easy to hitch a relatively trustworthy ride. I had to save most of the money for food. On most days I used to buy a loaf of bread, a piece of cheese and a tomato and stretch it out for the day.

For me it was a game, an experiment, but half the world lives in this kind of subsistence paradigm. In rural India, according to the NSSO studies, people use 50 to 70% of their income to buy food, to fuel the survival of the body. My statistics were virtually identical. Aggregated over time about 60% of my daily expenditure was for food. 30% for shelter. The remaining 10% for transport and for one 30 second phone call to my parents from a post office in Thessaloniki (Of course I’m fine, see you in a few weeks. Where am I? What does it matter? OK.. OK..don’t shout, I’m in Thessaloniki). A good part of my day was spent comparing the size and price of loaves of bread and pieces of cheese. Excuse me, please can I have that one instead? (It looks just a tiny bit bigger). At the end of the day I was always a bit hungry so I had an acute sense for the caloric value I needed to derive from the money. Under these constrained circumstances my value judgements were very self-centred and tangible. ‘Value’ was almost entirely a calorie conversion.

When we operate in surplus of subsistence, however, there is a fundamental transition in our valuation paradigms.

Beyond the subsistence paradigm our perceived value becomes increasingly relative and not absolute. What I pay for anything has very little to do with my survival needs. It has everything to do with what other people think and get. Value judgement is no longer individual. It is a complex collective determination. You’ll pay what you think is reasonable by market perception. How much did you get your TV for? OK Sounds about right. You’re happy with what you paid for something until someone has paid less. You’re happy with what you got paid for something until you find out someone got paid more for the same thing. Job seekers set their salary benchmarks based on what their classmates are getting paid, or at least what they think their classmates are getting paid. It rarely has anything to do with an absolute ‘value’ of what they produce. The more geographically extensive the market, the less efficient the information of what others think. Who actually knows what someone or something is worth?

If, beyond survival, ‘value’ is simply collective perception, a construct of our collective mind what do we mean when we talk of creating ‘value’? Is it about enhancing our capabilities of survival? Of our perceived happiness? What is your value paradigm? How do you know what something is ‘worth’?

Relationships Not Productivity?

2011-09-26T06:28:00.000-07:00

As posted on yourstory.in

Some weeks ago I received a rather acerbic email from a reader lambasting me for my relentless focus on productivity. Life is not just about productivity, he said. It is about relationships. Have I thought about this? Maybe people don’t want to be working day in and day out in factories or offices. People derive happiness from relationships not money and being poor doesn’t mean being unhappy. Our country will suffer because of people like me who come with western ideas to spoil the fabric of our society. And as I have come to realize, this particular reader’s opinion is a fairly common one.

Last week I was going through the Kerala backwaters in a small boat with my kids and I almost could see his point. Life expectancy in Kerala is 78 compared to the 55-65 range in the rest of the country. Literacy is 100%. The villages we passed were clean and beautiful. What is it you would want to change about this scene? Is there some burning need for ‘progress’ here?

The people in the villages sat in front of their houses watching us go by. As we came back around a few hours later, the same people, still there, smiled and waved to us. I wondered what it would be like to live that life, sitting for hours every day, chatting with your friends and watching boats go by. And here is my answer – for many it would be boring and unsatisfactory because the human mind has the intrinsic property of seeking out novelty. To live in the same paradigm day after day, year after year, leaves little to talk about. Should the fabric of our society be idle minds? Even in these villages in Kerala with good health and fish, fruit and grain within arm’s reach there is urban migration. Few people go the other way.

When I talk about productivity it is not about mindlessly pursuing money but about engaging in creating and producing new value for the greater benefit of society. What is of ‘value’ is certainly debatable but what matters for the individual is if they feel what they are doing has value. There is pride and satisfaction in a valuable job well done – no matter at what level. And relationships are fundamental in this endeavour because we can create more together than each individually. In a productive society relationships don’t have to be less important but simply different in character. There is pleasure and happiness in productive relationships – the coming together of people to create value for society.

In India family relationships have long been designed to maintain wealth within a family and community and to provide a safety net for the many unemployed. However if more people were productively engaged in creating value, then resources would expand and societal relationships would reconfigure naturally. For people like my cook who supports his family, his brother’s family and his parents, I imagine this might be a relief. And his unemployed brother might actually be happier having a job than not. These relationships may actually be more enjoyable and less stressful. For the people who spend their days sitting in the beautiful backwaters of Kerala watching the world go by, they might just find a different kind of pleasure in doing something more. At least they would have more to talk about with their friends.

So while the pursuit of money or material gain for its own sake may not be the path to happiness, being productively engaged and valuable to society might do a better job. And if this is a western idea, so be it. A good idea is a good idea, wherever it’s from.

The Glitter of Gold

2011-09-12T08:11:00.000-07:00

A couple weeks ago my newly married maid came asking me for a loan to pay the rental deposit on her flat. I knew she had saved up much more than the amount she needed so I asked her what she had done with the money. She told me she had bought gold jewellery with it.

With all of it? I asked her. Why did you do that when you knew full well you had this expense coming up?

I had to she said, without gold they won’t let you get married.

Who is ‘they’? I inquired.

Everyone, she told me. All my relatives in my village

At the time I told her she was foolish. Now I’m not so sure.

Back in the old days money used to be linked to something of physical utility – typically gold. For every note issued, the government maintained gold bars of equivalent ‘value’. Today money is delinked from anything of actual physical utility. It is simply a piece of paper that we place implicit faith in. A piece of paper that we hope we are collectively making good on by creating adequate value to justify its printing. (For more about this read my earlier post Of Mind and Money). While the Governments have left behind the gold standard, Indians have not. India has the largest privately held gold in the world. And the rural poor, at least in Tamil Nadu, maintain a far greater fraction of their wealth in gold than the rest of us. This seems to suggest to me that they don’t have quite the implicit faith in our money system as we do.

One big reason to keep gold rather than money, my maid and others from the villages tell me, is that paper money can just slip through your fingers. You will spend it on unnecessary things. In the case of Gold, you will think properly about what you need it for. When you finally go to sell it or pawn it, you will do it only for good reason. The easier it is to spend money, the more foolish uses we find for it. The more foolishly we spend money, the less real value we create and the worse off we all are collectively. Somehow they know this better than financiers and governments. Many governments try to spur growth is by increasing the money available for spending. But if more money means more spending on silly things, then it is simply pumping up the economy with hot air.

Gold is not the only indication of the lack of participation by the poor in the government’s monetary system. Recently I met a woman who has developed a micronutrient fortified salt that she wants to market in rural areas. I asked her about the cost and how much more it would be priced relative to regular salt. She was in a bit of a dilemma. It was not the relatively lower price of regular salt that was the problem. Most of the rural poor did not ‘buy’ salt. Salt is still a bartered commodity. They will generally exchange cereal, rice, fruit and other such things for salt. This sort of exchange involves an agreement of value largely between two people that could change circumstantially. Paper money is reserved largely for purchases of urban factory products. The highly individual value exchange in barter is extremely different from the pricing set by collective markets.

Bottom line, the economic and financial systems of the rural poor are entirely distinct in character from the government prescribed monetary system we subscribe to. It needs a whole different perspective of analysis and understanding.

What do you know about village life?

2011-08-29T07:27:00.000-07:00

As posted on yourstory.in

A couple weeks ago we surveyed readers like you to see what your perceptions were of rural India with regards to mobility and connectivity. We also wanted to get a sense for how different your own behaviour and access is from the villagers. We asked you to guess different parameters about infrastructure and behaviours in the region of Vadipatti (i.e. Vadipatti Taluk excluding the town) which is in central Tamil Nadu. Whoah! you guys were way off. Most of you guessed that the villagers had less access, mobility and connectivity compared to you but you just didn’t realize HOW MUCH less. Here are the results:

Who answered the surveys
125 people answered this survey online. 75% were from the major Indian cities. Of this half were from Chennai which is the closest major city to Vadipatti Taluk and the rest spread out across Bangalore, Delhi and Mumbai. 10% were from Western Europe and the United States and 5% were from small towns in India. In Vadipatti we surveyed 1000 people across 125 villages of which 540 were entrepreneurs running a business.

The results

Excluding the town of Vadipatti there are 10 petrol bunks in Vadipatti Taluk which is 1 per 20 to 25 square km. Most of you underestimated the number of petrol bunks. Your median guestimate was 3 petrol bunks and average was 7. A large number of you guessed that your city had 100 Petrol Pumps (Median value). Your average guestimate was 340. For Chennai for instance, which is 164 sq km your median guess is that there is 1 per 1.6 sq km which is around 15 times the density. This means a villager in Vadipatti Taluk has to travel about 15 times as far as you do to get petrol.

Excluding the town of Vadipatti, on average, a person has to wait 3 hours for a bus (This assumes a 12 hour wait for villages with no bus service). If we exclude villages with no bus, the wait is 2 hours. Most of you grossly overestimated the bus frequency. A large number of you estimated that a villager in Vadipatti has to wait 30 minutes (the median). The average guestimate was 60 minutes. Most of you reported having to wait 10 minutes (median) with an average of 12 minutes for public transport. This means a villager in Vadipatti Taluk has to wait 18 times as long as you do for public transport.

So how often does a village entrepreneur travel beyond a 5 km radius? Many of you guestimated that they leave once in three days (median 10 times a month) while the average of the guestimates was once in two days (15 times a month). In fact, entrepreneurs, on average, ventured 5 km beyond their village only once in a month. When we talked to non-entrepreneurs, we found that only 8% had travelled beyond 5 km in the last six months putting the average at well under once in 2 months. So you grossly overestimated (by over 15 times) the physical mobility of the average villager. On the other hand you all reported travelling beyond 5 km from your home at least every day. The median response was 30 times in a month and the average 34 times a month. This means that a villager in Vadipatti travels beyond 5 km 30 to 60 times a month less than you do.

We also asked about tower coverage and call patterns and the results are similar. Like petrol bunks, you underestimated the cell phone tower coverage. In fact Vadipatti has almost complete coverage (>90%) as do your cities. And, while you reported making in the range of 10 to 15 calls per day, you guessed that they were making about 5 calls. The truth however is that it is more in the range of 1 or less, counting those who don’t have a phone and make any calls.

We will tell you more about their connectivity later. In terms of your mobility, however, I would venture to guess that if you had to wait 18 times as long for a bus or had to travel 20 km to get petrol, you would leave the vicinity of your home a lot less often.

From Subsistence to Suprasistence

2011-08-16T04:14:00.000-07:00

As posted on yourstory.in

Over half the world simply subsists – caught in a cycle of supporting ones immediate survival. More than half of India is a subsistence economy. The word subsistence is a derivative of the word ‘exist’ which comes from the Latin word existere meaning ‘to emerge’ or ‘to be’. But what does it really mean to subsist? Typically it is thought of in terms of poverty – some amount of money that people earn - but to me it is not equivalent – I think it is better defined in terms of an energy use cycle.

Here’s what I mean. In rural India, according to the NSSO studies, people use 50% to 70% of their income to buy food which means the majority of expenditure goes towards fueling the survival of the body. Compare this to the United States where it is around 20%. Similarly, an NCAER survey in the late 1970s showed that around 90% of fuel consumption in rural areas in India is used for cooking. I assume it’s improved now but venture to guess that it’s probably still in the range of 70% or more. In the United States only 15% of household energy consumption is for the kitchen. Furthermore, fuel consumption in rural India is still largely biomass – firewood ranks highest followed by dung and crop residue. An NIC report (I’m not sure which year) estimated that 89 million households spend 31 billion hours annually in biofuel gathering. That’s a lot of time. The subsistence cycle is thus to eat to sustain the body, use the energy to gather fuel and tend to the fields and livestock and then use the energy from these efforts to once again fuel the body. Petroleum, electricity and LPG together are minimally used not because of availability but because they must be paid for with money rather than time. And in this is an implicit judgement of human worth – that its value is little more than the kCalories expended per unit time to gather fuel or transform food on the cooking stove.

So what is the opposite of subsistence? What happens when you break out? I couldn’t find a term so I coined one: Suprasistence. The prefix ‘sub-‘ means below the opposite of which is ‘Supra- ‘ which is above. I define suprasist as creating value well beyond oneself, representing the capacity of the human brain to envision survival on larger scales in space (beyond family and community) and time (over many lifetimes) and to build new paradigms to enable this. The fuel of suprasistence is different. It is not food or fossil fuels but knowledge and information – a more complex form of energy. And the outputs cannot be measured in kilo calories or joules as in a simple transformation of matter. Rather its output is the creation of structure where there was none. It is entrepreneurship and innovation.

From subsistence to suprasistence is therefore not just a continuum in simple energy use. Food intake (one kind of simple energy) is a little different but not that different for people who subsist or suprasist. Fuel energy use is different but only to a point. Much of fuel consumption in developed economies goes towards maintaining environment (heating and cooling), and for transportation and more recently for electronic devices that enhance the flow of more complex energy – information and knowledge. However innovation is not simply a function of how much energy you spend on running your computer or ipad. The relationship between information input and creating new paradigms of structure and innovation is murky and not well understood. However, I imagine, if one were able to characterize it we would find that suprasistence is characterized by something qualitatively different than subsistence (for the physicists out there - a bifurcation in the system dynamics). These two ends of existence don’t operate on the basis of the same parameters. This is also why innovation is so hard to come by in subsistence economies.

Imagine however, instead of a world where most subsist, many exist and a few suprasist, if it were the other way around...

What do you know about rural India?

2011-08-08T05:24:00.001-07:00

****This survey is now closed******
We have some interesting results that will be officially announced in a ten days or so and not on the 15th as previously promised.
******************************************************

Think you know what rural India is really like? We are doing a short quiz to understand your perception of rural India and to get some information about your ecosystem that we will use as comparison. The survey will take you about 2 minutes and we will post the results next week along with what the real numbers look like.

Take the quiz!*

Please do take 2 minutes to participate!

*For folks outside of India - 'Petrol Bunk' is India speak for 'Gas Station'.

A Different Species

2011-08-01T02:36:00.000-07:00

There is this strange sense of duality that India seems to bring upon you. On one hand there is this feeling of being on the cusp of something extraordinary. The giddy experience of watching something once so far removed from the developed world morph so rapidly and palpably into a modern society. The sense of possibility, the sense that something big is about to happen is now regular dinner party conversation.

The journey of one generation to the next has been so fast that parents often have little context for the lives of their children. Particularly for the lives of the children who have been abroad and returned speaking, dressing and acting differently. This new India is English speaking, moves easily from one city to another, sometimes one country to another. It is hyperconnected and watches all the same TV shows as the rest of the English speaking world, hears the same news, and eats burgers and chicken nuggets almost as often as dhal and rice. This is more significant than you might think. “You know”, a friend tells me at dinner last week, “when I was young when we met kids who had grown up abroad we never knew what to talk about. We used to feel so awkward – they watched shows you never heard of, ate things you never heard of and talked about things you never heard of and had an accent you could never understand”. “But now it’s so different”, she says “recently my kids met some kids that had grown up in Singapore and the US and they got on immediately playing games with the same characters and constructs”. There is the feeling that we are increasingly becoming one world. Another friend who runs a global business and has lived in London, New York and Moscow has decided to now base out of India because its “here that its happening now and you want your children to understand it”. It’s easy to go to the US or Europe and get into the system in a few years, but to understand India is much harder, he contends.

So true.

And not least because there is the rest of India that evokes an uneasy fear. The thick mass of humanity that operates in a realm that is unaccounted and off grid, swarming every available space. They are unaware of the internet, speak no English and hold an entirely different world view. Almost like a different species. Literally.

There are two ways in which the concept of species has been thought of. One view, which is in morphological terms, holds that members of a species are individuals that look similar to one another. The more widely accepted view, which is in biological terms, holds that a species is a group of actually or potentially interbreeding individuals who are reproductively isolated from other such groups. The process of speciation occurs slowly over time as one interbreeding group separates into two groups with an increasing rarity of interbreeding. While we typically think of this as occurring in the context of ‘postzygotic’ reproductive viability – or the failure to conceive viable offspring due to genetic differences that arise, speciation often arises because of ‘prezygotic’ isolating mechanisms – conditions that prevent the attempt to interbreed. In nature these can be due to groups occupying different habitats or engaging in distinct courtship and mating rituals.

As one group of India changes so rapidly leaving behind the other on its slow journey (The internet is now even changing our brains, research says), the reproductive barriers are becoming a gaping chasm where interbreeding is increasingly rare and each group is more easily distinguished by visual cues – the clothes they wear and the habitats where they are seen. So much so that our mobile, connected group even has a name to refer to the other – we call them the Aam Aadmi - and we all understand. What will we be as a country and a planet when the process of speciation is complete? When the dichotomy that India carries is as large as it can ever be? It’s a thought experiment that would be an interesting theme for a film, I imagine.

Productivity Line

2011-07-17T23:20:00.000-07:00

When tackling any sort of problem, it matters immensely how you frame it. The construct and language you use to describe the problem will inevitably direct and guide how you formulate solutions. Let’s take a look at the economic topography of the world – there are places where a great deal of innovative products and services are created that many have access to and other places where much less is created and fewer people have access to the little there is. The medium of exchange for these goods and services being money, the issue of this global inequity among human beings has been constructed in the context of money. It has been framed as an issue of ‘poverty’, the lack of money and therefore the ability to acquire. With this framework lack of money becomes the central issue and we draw ‘poverty lines’ – how much money is reasonable to have and formulate solutions that focus on how to redistribute money and give people ability to acquire.

What if instead we had framed the issue in the context of productivity – in terms of what you give or create and not what you take or acquire? Then instead of looking at the world and wondering why so many people are able to acquire so little, we would ask why so many are able to create so little and why we are so grossly lopsided in terms of productivity. Instead of seeing people as lacking enough money to be above some poverty line we would look at it in terms of people lacking in ability to be above a productivity line. If we saw it this way we would construct our solutions profoundly differently. Rather than focusing on money – which is simply a token of exchange – we would be forced to focus on human capability and the conditions that drive it.

So let’s examine one of our primary solutions to the larger inequity in the context of productivity. If we looked at it this way rather than the context of poverty, would we still do it? Would we do it the same way? Let’s take NREGA – the National Rural Employment Guarantee Act. Its goal is to reduce poverty by providing livelihood security. The government site that tracks this provides details on how many persondays of work was done and how much was distributed in ‘wages’. It is however extraordinarily difficult to actually find a list of what was created with this scheme – if there is one at all. Rather the first link on the main page under ‘What’s new’ brings up a pdf of a letter to the Principal Secretaries of all States from the Joint Secretary Mr. DK Jain asking them to take the necessary action to produce photographs with latitude and longitude of ‘works’ done to ensure, no doubt, that wages were not handed out without some sweat. At least wages should be given out for digging ditches, moving dirt from one place to another and other equally extraordinary things even if they have no real purpose (check out the picture on the site). Has it succeeded? Well, if the measure is in wages – income - then perhaps it has.

On the other hand, if we were to evaluate this in terms of productivity, we would need to report first and foremost what was created with the money. What was produced and what was the per person productivity? This means that we cannot get away easily by simply pointing to ‘wages’ and ‘income’ as measures of success. We would need to get in there and debate and figure out first how we would measure productivity and output and then track this. And to get a decent outcome we would have work harder to figure out how to drive productive output. We couldn’t just be lazy and let people do anything they can think of to work up a sweat, however useless. If we need people to cross a productivity line, it is a whole different ball game.

Think about our other approaches - subsidies, foreign aid, microfinance, government spending - and you will see the subtle differences in approach that would emerge. So let’s forget about the poverty line and figure out how to construct a productivity line. What do you say?

Microfinance 2.0

2011-07-17T23:13:00.000-07:00

As published in The Smart CEO as part of the 'Big Ideas' series

The last decade has seen a sensational rise and fall of microfinance in India. After the crisis in Andhra Pradesh (AP) that claimed debt related suicides on account of exorbitant interest rates and high pressure collection tactics, the Reserve Bank of India (RBI) has finally put in place regulations based on the recommendations of the Malegam committee. With massive defaults to contend with and the new regulation that places caps on the rates and spreads, the industry is struggling to find its feet again. Many of the less efficient players are out of luck and out of business. Others are tightening their belts and getting more efficient in their operations. But, is microfinance 2.0 just about process efficiency? Or can it be something greater?

Where it began

Let’s start with the premise of microfinance and what it started out trying to solve over a decade ago. Back in the ‘70s and ‘80s, microfinance- ‘small loans to the poor’ - was the domain of the banking sector. First, the only reason they were lending was because it was the government mandate. The loans were so small that given the cost of servicing them, it was a losing proposition to begin with. To make matters worse, banks ended up with massive defaults, sometimes even up to 40 per cent. And when the borrower can provide no collateral and has no identification, how do you go after him? He can simply disappear and even if you find him there’s no guarantee you’ll get anything back.

The microfinance industry in India began to take shape in the early ‘90s as banks pulled back from this customer segment, licking their wounds. The problem ‘microfinanciers’ stepped in to solve was to find a way to make credit available to the poor on large scale in a viable way. This meant finding cheaper ways of delivering credit and mechanisms to ensure repayment. On these counts the industry has had some fair success and some failure. The group lending model where members guaranteed one another’s loans created peer pressure that ensured higher repayment rates than the banking sector ever achieved. Also, the new ‘microfinance’ focused on women who turned out to be more reliable in the group dynamic. Further, many microfinanciers dared to lend at rates almost three to four times what their banking predecessors had and found that there was easy uptake in the market. This meant much larger spreads than the banking industry had ever enjoyed. This made not only for viable lending, but for a highly profitable business model. It was certainly not cheaper credit, but it worked.

Into a crisis

So, how did it go wrong? As investors and financiers flocked to the market to lay claim to their share of a high margin business, credit became an easy commodity. In some markets, like in AP, where most of the large players began, loans were easy to come by and people began to borrow well beyond their means. The peer pressure that worked so well when credit was scarce began to break down. Borrowers could default on one loan and still access credit from another lender. And the consequences to the defaulters? Nagging loan officers standing at their doorstep hurling threats. Pressure began to build in the system and the crisis began.

Moving ahead

But, what now? With the caps on interest rates and spreads, only those who can service loans viably at lower costs can survive. This will force greater operational efficiency in the model and borrowers will get credit at more reasonable rates. In the short term, credit supply to the poor will shrink which will reinforce the peer pressure. And there will be more measured, responsible growth. But, this isn’t just what all the fuss was about. The fame of microfinance wasn’t simply that it could make profit by lending to the poor. It was that this credit supply was touted as a path out of poverty. The question is, was it? And if it wasn’t, can it be?

According to the Malegam committee report only about 20 per cent of the microfinance loans were used for income generating purpose, i.e. invested in a business. However, it is not known how many of those businesses did well and how many lost money. In our own studies at Madura Microfinance Ltd., we have found that many of these businesses are not successful. In this context much of the discussion around microfinance has been about how to help turn the poor into successful entrepreneurs through training and other means. However, while this is a necessary endeavour of the country, I would argue that it is not the job of microfinance.

A new model

So, what should microfinance 2.0 look like? The role of capital markets in general has never been to create entrepreneurs, but to find those who are, assess their potential for success and provide the capital to make it possible. It is when the banking system has been most successful at this that it is most beneficial to an economy. I would argue therefore that microfinance 2.0 should be about this as well - to not just get efficient at providing credit to anyone that is poor but to transition to identifying and financing genuine microentrepreneurs with the highest chance of success or conversely, the lowest risk of failure. This is no easy task however, but not impossible. Microentrepreneurs operate in a cash economy where nothing is registered and documented. There are no books to audit. How then can you figure out if they are genuine and if they can be successful? Traditional methods of risk assessment simply won’t work. Rather, we need a different approach, one that builds profiles of success that are easily measurable and can be translated into effective risk assessment tools.

With microentrepreneurs, particularly ones in rural ecosystems, there are three key aspects to risk: the first is ecosystem risk -what environment do they operate in? Do they have access to electricity, transportation and communication? These factors play enormously into the possibilities for entrepreneurial success. Imagine being in an isolated village where there is no way to transport your goods outside. Your market is then restricted to the limited population of your immediate surroundings. For the rural poor, this is far greater a risk factor than any other. The second source of risk is business risk: what kind of business are they operating and how do ecosystem and individual risk parameters relate to their specific choice of business? For example, business risk for perishable goods is more sensitive to transportation frequency. The third source of risk is individual risk; not just parameters like literacy and education, but their profiles of social behaviour. Do they venture outside their village often? Have contacts in neighboring towns or villages? Have a cell phone that they use for business purpose? Read the newspaper? All of these factors determine how they will behave as entrepreneurs. The smaller their social and information networks, the fewer opportunities they encounter. Building these tools requires some analytical rigour. However, this is the age of analytics and this is where I believe the sector needs to head.

The better we get at finding and funding the entrepreneurs with the greatest potential for success, the greater the return for every rupee – for the financiers, for the poor and for the country at large.

Gross Domestic Poverty

2011-07-04T08:36:00.001-07:00

As posted on yourstory.in

For those of us with a memory of India in the 1980s and before there is no doubt at all that this is a country moving forward economically. From my schooldays when there were only two or three sub-standard brands of everything from soft drinks to soap to chocolate to cars, today’s India is remarkably different. It’s not just that there is every major brand available today. There is construction everywhere and sleek glass buildings are slowly but surely replacing old concrete structures. And there is a palpable feeling of change and a growing national pride. Incredible India. Every so often I get caught up in it and then I look at the numbers and I realize how easily we can distort our self-perception.

Here are the facts. India and China are often compared as the Asian giants, both with over a billion people. But China’s economy is three times as big as India’s – a GDP of 5 trillion US dollars compared to India’s meagre 1.4. According to the Global Language Monitor, The Rise of China has been the most frequent news story for over a decade across over 75000 print and electronic media publications. India doesn’t feature among even the top 20. For further perspective, Tokyo, which is the largest city economy in the world, has an economy the same size as India – 1.4 trillion. Tokyo has only 13 million people though, which means that they are pretty hard at work there. About a third of them are either kids or old folk which leaves about 8.5 million people out there getting it done each day, producing an output as large as our entire country.

Take a look at how GDP is calculated: India uses the expenditure method which is consumption + investment + (government spending) + (exports-imports). I’m most comfortable with the consumption and the export/import parts because I think people and businesses, especially in India, are pretty good at only buying and selling at prices they think reflect the value of the purchase or sale. The investment part is OK too but there is a bit of speculation about future productivity embedded in that. It’s the government spending that I would heavily discount. All the siphoned off money goes back into the economy as consumption I would think. But really, I can’t imagine that the government spend on the damn ditch outside my house that was dug for no apparent reason and never got filled back up was worth what they paid for it (sorry I got a little riled up there). And I’m pretty sure that like this, a large portion of the 27.2% of GDP that the Government expenditure accounts for, does not reflect any real productive value. So all in all, I’d peg the Indian economy as smaller than Tokyo's.

Japan as a whole isn’t nearly as productive as Tokyo though. Tokyo is 10% of Japan’s population but produces 30% of its output. Similarly, Los Angeles accounts for 40% of the economy of the US state of California, which is roughly the same physical area as Japan. That large cities are far more productive per capita is no mystery. The density of cities allows for all sorts of efficiencies. It’s a whole lot easier to be productive in a city where the ecosystem allows you to do things faster and more easily – from hopping on frequent public transportation to finding any product or service you need to get your job done. Urbanization has enormous economic benefit. On the other hand, I shudder to think what a single massive earthquake right in the middle of Tokyo or LA would do – and both are earthquake prone. Such a tight geographic concentration of productivity has its enormous benefits but immense risks. In India the GDP (for all its meagreness) is far more evenly distributed with 50% coming from its six major cities in a fairly even manner.

With 70% of our population in villages though, the challenge is to figure out how to enable circumstances of greater productivity for a distributed population. But just imagine, if every one of our working age population was as productive as the average Tokyoite, India’s economy would be 129 trillion, which is almost twice the entire world economy today.

Like a Diamond

2011-06-20T00:14:00.000-07:00

As posted on yourstory.in

About 200 years ago it was discovered that diamond, like graphite, was made entirely of carbon. One brilliantly reflective, the other black; one hard, the other soft. How was it possible that two things with properties so contrasted could be made of the same thing? With this discovery came an extraordinary insight: what mattered was not the element itself, for the single carbon atom in isolation had no particular properties. What mattered was the bond structure.

So what does this mean? A chemical bond is simply a probability of how much time electrons from one atom spend hanging around in the space of another. In the case of the diamond the carbon atoms are strongly bonded to each of their four closest neighbours giving it the property of hardness. And so closely engaged are these atoms that when light energy enters it is not welcomed and it bounces around simply leaving the system giving it its reflective sparkle. In contrast, in graphite the carbon atoms are not all tightly bonded but rather some of them associate with one another in more fluid nature giving it softness and the ability to accept or absorb light energy to make it its own.

Atoms are simple entities so the numbers of possible bonds are few and yet the possible outcomes can be as starkly different as night and day. We humans on the other hand are complex aggregations of atoms into macromolecules which in turn combine to form cells which in turn combine to form organs. At each level the elements of the system bond with a new order of complexity. The myriad of human bonds far outnumber the mere handful that atoms are capable of. But the principles are similar. When we are born, each of us on our own, we have few properties of personality and culture - rather these properties are descriptions of how we interact with one another and not properties of ourselves in isolation. The outcomes of society, therefore, like the properties of matter are the manifestations of our bonds or interactions with one another.

And what are the bonds of rural India like? Take P.Manikantan from Vadipatti in Tamil Nadu. He has lived in the same village since birth and works as a Panchayat clerk. He interacts with only about 25 people, mostly his immediate neighbours. The last time he ventured beyond 2 km from his village was over a year ago, and that was a rare occasion. He has a phone but he mainly uses it as an alarm clock, calculator and camera. He only makes a few calls a year. And when asked what he’d like to achieve in the next five years, he shrugs. He doesn’t know. His bonds are few and strong as are the others in the village. It is slow to change, difficult to reconfigure. Hard like a diamond. And what happens to the energy in the system? Money for instance, is a proxy for energy, carrying the potential to change something. When it comes into his hands he uses it for his immediate purchases. It bounces around in the village from hand to hand – tea shop owner to shopkeeper – until it exits the system, as payment for a product or service from outside his village. It is not absorbed. Not used to create something new that stands as an emblem of new capability in the village. If we could see the village the way we look at matter, we would see it reflect rather than absorb the energy. Like a Diamond.

To change such a rigid structure is not easy and yet it is not impossible. The challenge is to lose our enamour with the sparkle and find a way to reconfigure the bonds of society to make them more fluid and varied so that information flows more freely and energy is absorbed for productive purpose.

Diamonds, contrary to popular belief, may not be forever.

Learning to Organize

2011-06-06T18:19:00.000-07:00

Back in 1996 when I was in business school we used to sit around and make fun of our organizational behaviour classes. Soft stuff. Not hard core like finance. Now I know better. Finance is the easy stuff. Organizational behaviour on the other hand is complex and can profoundly change socital outcomes.

So what is organizational behaviour about? If you really think about it, it’s about how human beings come together to share their knowledge and abilities to create, build and get things done. And why should we do this? Because when it is done well, the outcome can be far greater than the sum of the parts.

Paradigms of progress are exemplified by large scale organization. In the United States and most European countries, for instance, somewhere between 5 and 10% of working adults are entrepreneurs. In India it is almost 50%. What that means is that entrepreneurship in the developed world results in larger scale, more people coming together to get it done. Indian entrepreneurs, on the other hand, tend to operate in structures of 1 to 3 people. There are probably a great many reasons for this. Not least that most Indian entrepreneurs operate in micro scale markets – village communities of hardly a few thousand people that don’t provide an opportunity for scale. Yet I believe there is more to it than this. Organization, even in small communities, can accomplish a great deal of efficiency – not just in terms of enterprise but in terms of public good. Organization is not just about a formal structure or hierarchy but about how we negotiate among each other in everyday situations – getting on a bus for instance. Do we all rush to crowd the entrance or stand in line?

So why are societies so different in how they organize? The more I observe the more I am convinced that the ability to organize is not an innate human trait. Rather, I believe, organizational structures are innovations that are then taught and spread. Some become viral and some die out in the same way as products do.

This struck me first as we followed the way our Self Help Group borrowers – illiterate and semi-literate women – responded to some simple exercises in our ‘mini MBA’ program. This is a video based training program that brings business education to the poor that has been developed in collaboration with Dr. Madhu Viswanathan at University of Illinois at Urbana Champagne and his Marketplace Literacy initiative. They tested with two different groups - one that was reasonably educated (10th or 12th grade) and one that was largely illiterate, and came back with some very interesting learnings. Here's one: There are a couple places where the video instructor asks them to pause the video, organize into groups of three or four and talk about some particular question or topic. The groups, particularly the more illiterate group were unable to carry out this instruction of organizing into groups. It had to be demonstrated explicitly before they were able to execute this simple organization.

As I observe my kids watching western videos I realize how much these shows teach kids how to organize – from the very simple organization of standing in line rather than all making a mad dash together to forming and working in groups. Consciously or unconsciously these become part of curriculum and perpetuate. The challenge thus lies in finding those organizational structures that can be productive in the Indian context and perpetuating those.

Cumulative Advantage

2011-05-20T14:25:00.000-07:00

(As published on yourstory.in)

The attraction of the United States for immigrants has been the hope of social mobility. That with some hard work and good ideas you have a shot at a better economic life. In India social mobility is far more elusive. For a long time there was little expectation of it. People knew and accepted their place. Today something is changing. Hopes are emerging. Aspirations are rising. But what does it take to create conditions that allow social mobility? Why is it so hard the world over to achieve and hold on to?

Our biology and natural social structure works against social mobility. For starters, we generally pass on our wealth to our children rather than to society at large. In India a little over 80% of the rupee billionaires inherited their billionaire status (compared to 20% in the United States). But that’s only a small part. What we do for our children runs far beyond simply passing on wealth. More than any other species, we humans spend inordinate time and effort raising our young, struggling for 20+ years over where to live, school choices and how to get our kids to behave properly. And what we are doing is essentially working hard to integrate them into society – linking them into social networks as well as knowledge and information networks. Our children inherit not just wealth but relationships and access.
When we are wealthy, these relationships tend to be far more economically valuable. They are relationships typically to others who are similarly wealthy and most likely hold keys to opportunities such as jobs, business deals and large bank loans. And they are often relationships that come with social capital accumulated over generations. “You are so-and-so’s son? Please come in, I knew your father and grandfather very well.” We also pass on behaviours that signal our social standing. “You talk just like your father. Please come. What can I do for you?”. So also when we choose a more expensive “better” school we also place our children in social networks of higher economic value. “Hey, meet my friend. He’s also IIM-Microsoft.”

In our generational effort to ensure the success of our DNA we offer up our cumulative social capital to our children. For some of us this is a cumulative advantage. And in India, like nowhere else, we have had a deep seeded respect for the entitlement of accumulated social capital as part of a natural social order. As a nation we have transferred our allegiance and loyalties from generation to generation of political and business dynasties with ease.

For most, however, it is a cumulative disadvantage. There are few relatively wealthy in India - hardly a few percent. This means that entry into this world is extraordinarily hard for the poor. They are unlikely to know people in these networks and rather have economically disadvantaged relationships. “I don’t have a job myself. How can I help you?” Nor do they have the information networks that would lead them easily to larger opportunities. This means that the rich have a terrifically easier time getting richer than the poor. Social network scientists have been building models of this under various names such as ‘preferential attachment [into the social network]’ and ‘cumulative advantage’. In these models, with each generation, people grow wealthier with a probability that depends on ‘who’ they are connected to or how much social capital they have to start with. No surprise that these models produce results of wealth distribution and social mobility (or lack thereof) that can be highly similar to empirical measurement – highly skewed distributions where most of the wealth is held by a few for many generations.

Yet it is not economic inequality that bothers most. What troubles young aspirants more is when there is little hope of socioeconomic movement, of social mobility. It’s OK if only a few are rich if I feel empowered enough to have a shot of getting there myself. So what are the keys of social mobility? We can’t change the way we inherit wealth and relationships unless we dramatically change our social structure away from family units. But we can find ways of creating more equitable access to knowledge and information to make good on the hopes and dreams of a new generation.

Branded by Poverty

2011-04-27T03:07:00.000-07:00

(As posted on yourstory.in and in SmartCEO under the title 'Brands for People, not Poverty')

Over the last ten years, with the publishing of CK Prahalad’s book The Fortune at the Bottom of the Pyramid and with inclusion gaining ground as a national buzz word, companies have been looking in larger numbers at rural markets for all sorts of products. Yet for every success in rural India, the marketplace is littered with many, many failures. What has been the problem?

From my vantage point inside a company that operates predominantly in villages, I have a first-hand view. Not a week goes by when we are not introduced to a company with a product opportunity that they would like us to help them market in rural areas. It is an innovative product they tell us, specifically designed to solve a problem, meet an urgent need. And it is affordable. Shouldn’t that be enough? People from the villages should flock to it.

Obviously, we presume, when money is scarce, it becomes the defining factor. Poor people need something low cost that ‘fixes’ an aspect of their problem of poverty. After all, wasn’t Maslow right when he so elegantly constructed his hierarchy of needs? When you are poor, your entire focus is around tending to your basic physiological needs for food, clothing and shelter, followed by your needs for health and safety. Until you have fulfilled these, you can’t move on to greater pursuits or aspirations.

Five years ago I believed that. After all, I had firsthand experience to know so. On a trip in west Africa from Dakar to Timbuktu by road I had eaten millet sauce and rice for weeks and been stranded on the roadside without food as our van driver vanished for 36 hours on foot to fetch a bucket of muddy water for the radiator. There was nothing anywhere in sight but an old lady selling a bitter root. I could think of nothing but food. Nothing mattered more than getting food. It consumed me completely. I had crashed to the bottom of the hierarchy of needs.

Now, after five years of working in rural India, I know better (and it is not surprising that Maslow has never been proved right). There is the young man who would rather skip dinner so he can afford a cinema ticket. After all, what is life without some song and dance? The woman who takes in and raises orphans, even though she has so little herself. After all, what is a life without love and compassion? The couple that would rather wait and save for three years to afford the ‘right’ kind of floor tiles than construct with the low cost kind. After all, it still has to look good and it matters a lot what the neighbours think. And then there are some of our microfinance borrowers who choose to work in our part time field jobs because they feel it gives them a sense of fulfilment. After all, it matters what job you do and how you feel about it. Ask any of these folk to tell you about themselves and they certainly won’t begin with their income. They will define themselves in terms of their unique hopes and dreams, their personalities, preferences and lifestyle.

And yet even as marketers segment away the urban population by lifestyle, preferences, and a host of psychographic and social characteristics, rural folk are defined entirely by their poverty - all 700 million of them. They are simply ‘the bottom of the pyramid’ or ‘BoP’ as it has become fashionable to call them (It’s not a pyramid, but that’s a different story). Price is important. But to the marketer who recognizes their humanity - the breadth of their dreams and aspirations, of their interests, lifestyles, behaviours, habits and psychographic characteristics, there will be success. You cannot simply brand by poverty.

And in retrospect, thinking back to my days in West Africa, I remember that all it took was a few dusty packs of Nutella in a small shop, packaged over ten years ago to make me forget about food and begin dreaming again.

Wikiwhat?

2011-04-10T23:50:00.000-07:00

As posted on yourStory.in

The greatest differentiator of humans and our triumph as the alpha species on the planet has been our increasing ability to record and share our collective knowledge. With this ability, each new generation, rather than reinventing the wheel, can stand firmly on the shoulders of those before to reach further. Today with the internet we can do this better, faster and among more people than ever before. Wikipedia is an incredible example of this. Today Wikipedia has over 15 million articles contributed by several hundreds of thousands of people and is one of the largest and most actively accessed public repository of human knowledge. These articles are in 281 different languages. Yet almost 30% are in a single language – English. No surprise. The top ten languages – all western European with the exception of Japanese and Russian, account for almost 70%. I’m still not surprised.

I scroll down the list of languages on Wikipedia, sorted by their article count, searching for Indian languages. Right away I pass Chinese (Mandarin) at number 12. With about 331,000 articles it is just close to 10% of English. But 12 is not a bad rank. I keep going expecting to find Hindi and Tamil in close succession....I see Ukranian (15), Vietnamese (17), Indonesian (21), Arabic (25), Lithuanian (28)..Volapuk (31)... I’ve never even heard of Volapuk. I click the link.

Volapuk is a constructed language, Wikipedia tells me, created in 1879–1880 by Johann Martin Schleyer, a Roman Catholic priest in Baden, Germany. Schleyer felt that God had told him in a dream to create an international language....... In 2000, it was estimated that there were 20–30 Volapük speakers in the world

How is it even possible that Volapuk is ahead of Hindi, a language with some 250 million native speakers? I keep going... Waray-waray (36), Croatian (37) and then finally, there it is: Hindi at 38 with about 90,000 articles. I breathe a sigh of relief. At least it’s there. Telugu comes in next at 53 with 47,658 articles, Marathi at 61 with 33,270 articles and Tamil at 68 with 30,082. In between are whole bunches of language I have never heard of.

I'm not just surprised, I'm shocked! The Hindi Wikipedia is only 25% of Chinese. But I suppose I expected the Chinese to be ahead. What troubles me more are comparisons like these: Vietnam has a population equivalent to Andhra Pradesh (almost 80 million) and only slightly above Tamil Nadu (about 65 million) and a per capita GDP equivalent to India, but 5 to 8 times as many Vietnamese Wikipedia articles. And while there are about 200,000 Vietnamese Wikipedia users, there are only roughly 20,000 or 10% as many Telugu Wikipedia users, equivalent to just .02% of the Telugu speaking population. The fraction of Hindi speakers on Hindi Wikipedia is even lower. Yet there are an estimated 100 million internet users in India. That’s about roughly equivalent to the estimated English speakers. So by my best guess, the two – internet users and English speakers - probably overlap almost completely. The other 90% are shut out of an enormous knowledge base. We are more divided a country than I had imagined.

I probe further. For Hindi and Tamil about half of the content or edits are contributed by a handful of people – four or five to be precise (I didn’t check out the other Indian languages). This is a tenuous link between a knowledge repository of enormous value and potentially hundreds of millions of people. It is disconcerting.

The promise of the internet is the ability to deliver relevant knowledge and information fast. So as we get excited about the extraordinary potential of the Internet to change this country, we have to ask: what’s on offer on the internet for the 90% of India that don’t speak English? When Gulshan from Baganwala and Munnuswamy from Usilampatti log on for the first time bright eyed with anticipation of a great new world of knowledge they will be sorely disappointed.

For the first time it strikes me that to deliver the promise of the internet in India, broadband penetration is not the biggest barrier. The barrier is far greater. It is language.

Hear Ye! Hear Ye!

2011-04-02T03:41:00.000-07:00

As posted on yourstory.in (yes, it is adapted from an earlier post with the same title)

For tens of thousands of years of human history the world over looked like our village landscape - no running water, no electricity, no cars, no phones, no printing press and low literacy. You have to wonder then how all of a sudden some parts of the world experienced an explosion in innovation and enterprise over the short span of a few hundred years to bring this all about. What was the driver? Surely it didn’t happen because of a king handing out gold coins or jewels from his coffers to the peasants (‘financial inclusion’?).

Some time ago I was lamenting the difficulty of getting new product information to people who live in the villages – no phone, poor road connectivity - and my husband very helpfully offered up that it sounds like we need to have heralds, messengers and town criers like they did in medieval Europe. That got me thinking.

A little bit of scouting turned up that in medieval Europe, messengers were hard-working, talented folk. They had to be excellent horsemen, able to travel up to 100 km in a day, skilled topographers able to navigate unmapped terrain and talented communicators; a tough combination. These were prestigious jobs, well paid and protected by official decree. ‘Don’t shoot the messenger’ was in fact law. And it wasn’t just the Royal government that employed messengers. Businesses employed them as well. Interfacing with the far traveling messengers were the town-criers, who shouted out news on everything from wars, taxes and jobs to local markets and events. What struck me was that in England and some other parts of Europe, Town Criers were a government position, appointed by the Mayor of each town, to keep the citizens informed of matters of both national and local importance. In fact, interfering with a Town Crier in the execution of his duty was once a serious offense. The British Empire apparently took the job of spreading news and information very seriously. It strikes me what an extraordinarily powerful system this was and I would be willing to wager that the rise of civilizations and the spread of empires were closely correlated to faster mechanisms of information flow.

I started to look back in history a little – what about the Ancient Greek and Roman empires? The Olympic marathon itself is a tribute to the system of message runners. Indeed, the first evidence of such messengers is from Ancient Greece in 500 BC. As the legend goes, Pheidippides, a Greek runner, ran all day and night from Marathon to Athens (the terrain was too tough on horses) to deliver the message of victory against the Persians, dropping dead of exhaustion as soon as his message was delivered. “No finer way to die” it was declared. Running messages was a highly prestigious, respected position. Information was King, literally. And the Persians? Even as they clashed with the Greeks they were at their peak and had expanded their empire widely. As early as 500 BC Cyrus the Great, and then Darius, extended the road network and set up the first postal system, posting stations where new men and fresh horses would be available at any moment to carry a message further on. Information traveled at the fastest documented speeds of the time – up to 350 km a day. In the 1800s the Pony Express of the United States set up the fastest postal system from coast to coast that operated year round, come rain or snow, paying its horsemen 25 times that of an unskilled labourer.

When the messenger got paid so handsomely and so much importance and emphasis was placed on information flow in the west, it is no surprise that it gave way to the subsequent innovations of things like the printing press, the telegraph and ultimately modern telecommunications. Here in rural India finding out what’s up in the next town or anywhere else is clearly not an organized priority, neither of the people themselves nor of the government. Imagine if there was a way for people to know what was up! That’s really powerful for enterprise, for collaboration, for progress. So instead of financial inclusion, I think the new mantra should be information inclusion.

Who cares about the average income!

2011-03-22T21:04:00.000-07:00

as posted on yourstory.in

Apparently this last year the per capita income of Indians increased to Rs. 46,492 per year. That’s Rs. 3874 ($85) per month. Glory days! The ‘average’ Indian is no longer living in ‘poverty’. But really, per capita income is an average and who cares about the average income when the average Indian hardly exists. The distribution of income is highly skewed and looks like this (see my last related post ‘It’s not a pyramid’). You can see where that places the average.

Yet when we think of an average we make certain assumptions about the spread or distribution of the values that go into this number. If you say the average height of people in India is around 5’ 5” with a standard deviation of 5”, it’s pretty intuitive what that means – that when you arrive in India you will find most people around 5’5” with about 5 inches variation this way and that. In large part it means that we all look similar and can fit in the same seats, sleep on the same size beds and fit through the same doorways. So if we hear that the average height of Indians has increased, we think immediately that we are collectively growing taller as a population and not that a small group of freak giants suddenly emerged. Similarly, reports of an increase in the average income suggest to us that we are collectively better off. Are we?

Now instead, imagine if the distribution of heights was not a bell curve but looked like the distribution of income in the picture above. What this would mean is that most people are less than a foot tall (at the base) while a few are absolutely enormous giants of 50 to 100 feet (in the point) with the rest somewhere in between. In this scenario there is no one size fits all and it would be impossible for a randomly selected group to be comfortable sitting at the same sized table. The enormous giants the height of multi-storey apartment buildings would have to live in a different sort of world of much larger proportion where they could barely see the underfoot base scurrying around lest they get unwittingly crushed. The average height in this distribution would still be around 5’5” but knowing this average, and even the standard deviation, would be completely uninformative. A single giant of 100’ might raise the average by a few feet. Similarly a single person with an annual income of 2.5 Crores among a million people earning just Rs.21,500 per year (below that arbitrary poverty line of $2/day) would give you that per capita income figure of Rs. 46,492.

So if you knew nothing about India and you wondered what single number would best prepare you for the economic landscape, average or per capita income is really quite uninformative. Rather If you knew the exponent that described how fast the point tapers, or better still, had a good visual of the distribution, you would come prepared to find Mukesh Ambani in a 27 storey house on Altamount road surrounded by millions of abysmally poor people with barely a roof over their heads (and some of everything in between).

Really, who cares about the average income!

It's not a pyramid!

2011-02-27T23:23:00.000-08:00

As posted on yourstory.in

CK Prahalad’s book ‘The Fortune at the Bottom of the Pyramid’ firmly established our visual impression of the world’s economic landscape as a pyramid. So much so that ‘Bottom of the Pyramid’ or ‘BoP’ has become part of daily lingo. Except it’s not a pyramid. A 3D visualization of how income or wealth is distributed in most countries, including India, looks nothing like a pyramid. It looks like this:

So what’s in an image? A lot actually. There’s a reason for the saying ‘an image is worth a thousand words’. The pyramid suggests to us that the problem of poverty is a lot less dramatic than it actually is. The real picture presents a problem of far greater magnitude than we might ever have imagined. If you are seeking the fortune at the bottom, you might think that this suggests a far larger fortune – a bigger market. However, when you consider that the total amount of money in the system is controlled, it means that that as you get down towards the bottom, wealth becomes increasingly stretched thin across much larger segments of humanity. Maybe not as glinting and magnificent a fortune after all.

With our mind focused on a pyramid, we also imagine that we can conquer it by spreading our fortunes, by a trickle-down effect. The base of a pyramid is not so daunting. But when we consider that in India, with a billion people, that only around 40 million or 4% pay taxes – that’s people earning more than 1.6 lakh (about $3500) a year and visualize that relationship, it is almost cause for panic. A trickle down is not good enough and 4% can’t possibly lift the rest. The real picture is more likely to make us sit up and recognize the need not for a top down approach but rather a bottom up ground swell.

Can the real picture help us with a solution?

As a scientist, when you are trying to understand how a system works, the first thing you might want to do is plot the distribution of how stuff accumulates across elements of the system; in this case how wealth accumulates across people. Distributions with long tails like this (or in the visualization above, a long tapering point) typically fall out of interconnected systems where there is dynamic flow, here flow of money. The more stretched the tail or the point, the larger the system and overall degree of interconnectivity. In social systems, science is increasingly showing that the degree of interconnectivity in the point and the speed of dynamics are far higher than the base. This would result in the point stretching further away from the base as the rich get richer faster than the poor get richer. This makes sense when you consider that the wealthy are more connected and therefore hear about information and opportunities at a much faster rate allowing them to act faster and thereby progress faster. The pyramid gives you a false impression of static stability and of strength. The real picture is more like a free vortex – where the point swirls faster pulling further and further away from the slow moving base or outer disc. A more dynamic and precarious kind of scenario.

So if we are looking for keys to a bottom up groundswell, it is about changing the dynamics at the base or disc. Changing the degree of interconnectedness and rate of flow – flow of goods and more significantly, flow of information and ideas, to enable bottom up innovation and change.

Instead of Bottom of the Pyramid, might I suggest Disc of the Vortex? DoV has a certain ring to it, I think.

When there are no words...

2011-02-14T08:00:00.000-08:00

A couple weeks ago at an internal strategy meeting at Madura we were talking about the connotations of the word ‘transformation’. Transformation meant change that was dramatic and rapid, not slow and gradual. To transform, we agreed, required taking bold risks, a leap of faith. How do we say this in Tamil? I asked. We work largely in the South Indian State of Tamil Nadu and the room had at least 25 native Tamil speakers. There was a moment of silence and then arguments erupted, online dictionaries were consulted. There was no equivalent word in Tamil for transformation. No equivalent word for risk. No comparable idiom to a leap of faith. It took several sentences to explain each word.

For all the richness of the Tamil language along other dimensions, the closest word for ‘transformation’ was urumaatram, which means, more specifically, physical change. Yet as English speakers we all know implicitly that the connotation of transformation is positive, for instance in the contexts of socioeconomic transformation or business transformation. The Tamil translation does not carry that implicit connotation. According to the Tamil dictionaries risk was explained with words that more specifically meant dangers or obstacles. The English dictionaries do list these same words as synonyms, but also positive ones like ‘possibilities’. In English we see risk with an element of positivity, even excitement, because it also carries with it, well, possibilities. The closest Tamil equivalents were implicitly negative and carried a sense of foreboding. Hindi does better with these words but I suspect many Indian languages are similar.

With a largely Tamil speaking work force and a transformation agenda, I have to wonder - how do we even explain to our employees in positive terms what we are taking on when there are no words?

Language evolves as a reflection of culture, of conversations. When something is important and talked about often, a great many new words creep in to the language to describe it, each a little different, to reflect the various nuances of a similar concept. The Masai tribe of Kenya for instance, have many words to describe cow horns, because they are so important to their livelihood and diverse in their use.

Conversely, culture is constrained by the language available to us. If there are no words to describe something, we are less likely to think about it, talk about it and hear about it. And if we are less likely to think, talk and hear about something, we are far less likely to act accordingly. In this case, take risks or a leap of faith. No wonder then that people say that you are a different person in each language you speak. And so also, learning a new language can expand the possibilities of your mind.

For widespread transformation to occur, the words of transformation must be ubiquitous and common, part of the collective psyche. So what do you do when there are no words? We have to invent them or borrow them from another language and find ways to infect conversations with them. I would venture to bet that if we were to take every language and count up the occurrence of these words of progress and transformation in daily conversation, this would correlate to measures of actual innovation and progress. Simply having the words circulating often in conversation, I believe, may be half the battle.

Evaluating Social Impact

2011-02-06T09:20:00.000-08:00

(As posted on YourStory.in)

For people engaged in the social entrepreneurship space, one of the most difficult questions is how to measure the positive social impact you make. How do you know you’re doing net social good?

What we typically do is assume that our product has intrinsic positive social value and so simply measure how many people have used our product or service. Then we make grand statements like ‘We have positively touched a million lives’. For some products this might be all it takes. Take d.light, for instance, a solar alternative to kerosene lamps that is cheaper, brighter and healthier. A simple count of product sales would be a pretty good indicator. For many other products and services though it is far more ambiguous. Microfinance, pharmaceuticals, health services, education. All of these have great potential for good but also for abuse, misuse or mistakes. Each instance of use is not always a net positive; a borrower who drinks away a loan, a person who commits suicide with an overdose of painkiler, a person who gets wrong medical advice resulting in a worsening of their condition. In some cases, the net positive impact is highly debated. Are people really better off if they took a loan? If they underwent a particular treatment? Took a particular course?

Let’s take microfinance as an example, for two reasons: first, I know it well and second, it’s attracted a great deal of attention from academics, mainly developmental economists, interested in evaluating its impact. Ideally you want a social impact measure that can be diagnostic (am I having net positive impact?) and also prescriptive (what should I do differently if I’m not?). Economists will typically evaluate whether a group that received microfinance (the intervention group) did better than the group that did not (the control group). As a scientist I have a list of quibbles with the methodologies and value of such studies.

First, to be meaningful comparison, a ‘control’ group must be independent of the intervention group. In society, which by definition is an interconnected system, this is virtually impossible. For example, let’s say the people who received microfinance in the village used the money to buy goods from the people who didn’t. It’s not impossible that this could result in the 'control group' getting richer because they could sell more. Compared to them, the microfinance takers could then look poorer because, while they may also have had some business benefit, they had to pay back their loan with interest to the lender too. Recognizing these ‘network’ effects, if you instead decide to move your control group to a distant location, this raises another set of issues – the more distant you go, the more differences in the way the people will behave and therefore make use of their money.

Second, society is not static but evolves over time. This means that the impact you find that microfinance has today (network effects notwithstanding) is completely irrelevant to tomorrow and therefore cannot be prescriptive. For example, if you did the study in a village before the bus service began, borrowers would have had very little opportunity to access larger markets and the loan would have been unproductive. After the bus, it could all change.

So as a microfinance company interested in understanding social impact in a diagnostic and prescriptive way, what are we to do? My view is that instead of focusing on the net outcome of product with pointless retrospective social impact evaluations, we should focus on understanding the drivers of positive use of the product. What kind of village ecosystem is best suited for microfinance? What profile of student or community does best with this kind of education? What kind of patient profile will respond best to this treatment? It’s these kinds of insights that are prospective and help us get better.

Social Entrepreneurship? Really?

2011-02-01T02:36:00.000-08:00

(As on YourStory.in)

Social Entrepreneurship is the new buzz word in India and marks a shift in thinking away from non-profit models to market based solutions that can operate at large scale and therefore create social value more systemically.

But what puts the ‘social’ in social entrepreneurship? We all have a notion that it means starting a business that does good for less fortunate folk. So we commonly think of a social entrepreneur as someone who is addressing a low income market with a product that can raise standard of living, either by providing greater opportunity or convenience. However, as I have discovered over the past five years, simply product and market are not sufficient.

Microfinance, for instance, provides a very interesting, and particularly sticky example. The product – basically money – has tremendous potential. Great things have been done with money. You need it for virtually everything. Poor people, by definition, have less of it and therefore want it. It seems simple enough. However, like many products, it can only deliver on its potential if the person who buys the product knows how to use it and is able to use it productively. Figuring out who is able to use it productively is no simple task.

The social value of microfinance is also highly contextual and it’s not always easy to know where the context is right. For instance a village may not have sufficient relationships with larger marketplaces, so good ideas may never pan out. So the product could have social value but it depends where you sell it and who you sell it to.

How much you sell also matters a lot. More is not always better. Just like a drug that treats a disease, there is a dose response curve. Up to a point you have increasing benefits and then the side effects take over as the drug exerts toxic effects.

If you think about money at a systemic level, you realize that the impact depends not just on what the person you lend to creates, but where the money goes. For example, when a local moneylender lends the money, even if he charges greater interest, he actually spends his profits in the same community and therefore supports that local economy. When a corporate microfinance company lends, it takes back the money and it may go out as dividends to international investors. The problem is not simple.

As for-profit enterprise, we can also create, or fail to create, social impact by virtue of numerous micro decisions that are made at every level in the organization. In microfinance, for instance, it matters how each field staff interacts with customers. Value can dissipate if the interaction is not right. And if you are unable to meld your business metrics with measures of social value, it is easy to lose your way.

Over the past several years I have therefore come to think of ‘social’ entrepreneurship not simply as a business that creates more equitable access to a good or service, but an effort in solving large scale systems problems. Adding the ‘social’ to entrepreneurship is to take on a far greater challenge – a challenge to solve a problem, but often one we don’t fully understand. This means we need to be constantly innovating R&D organizations. Like a drug company that puts out treatments for disease, your first product may purely treat symptoms and roll in the money, but your labs are still looking for the cure.

So, don’t just tack the ‘social’ onto entrepreneurship because your intention is good and your customer is barefoot. To be genuine to the promise of social entrepreneurship, we must constantly seek deeper understanding of the problem we are trying to solve, build our enterprises to be thinking, values driven entities and strive to find ways that meld our social and business agendas so that they are synergistic and not at loggerheads with one another. It is a lot harder than simply building a scalable, profitable business.

Caps, Drugs and Microfinance

2011-01-24T02:07:00.000-08:00

(as posted on YourStory.in)

Of all the arguments I have heard in support of rapidly scaling microfinance the one I have heard the most is that there is huge demand for money among the poor. Of course there is huge demand. The less you have of it, the more desperately you need it – to tide over the pain and struggle of every day. The next meal, school fees, doctor fees, a pair of shoes, a movie to escape from reality, a drink or two to forget. It’s a painkiller.

When you’re in severe pain, you need a painkiller. What you care about is relieving the pain now. Today. When you are in desperate need of money you don’t have, and it is dangled in front of you, you will take it. But painkillers are insidious.

A friend of mine in the USA once began taking the painkiller Vicodin for severe chronic back pain. Having had a small back problem myself once, I know the pain can be paralyzing and nothing else matters but getting rid of it right then. He took only what the doctor had prescribed for him and for a few weeks it worked. But over time, the effects began to wear off sooner. So he began taking his next dose a little sooner. Before he knew it, he had used up his entire prescription a few weeks too soon. His doctor refused to give him a new one so he went to another doctor. And then another. Then to anyone else who might have a supply. When he didn’t have it he was unable to sleep. He had night sweats, his heart rate often went up, he had episodes of trembling and he went into depression. It was unbearable. He was fortunate to get help. Some painkiller addicts commit suicide. Overdose is also common and can lead to death. In the United States, there are over 400 documented deaths a year resulting from painkiller overdose.

Addiction is not the norm though. The people who are likely to get addicted to painkillers are those that have prolonged and severe pain. Not those with a short lived problem. There are also certain personality types that are more prone to addiction and irresponsible behaviour. So also for microfinance. The people who are poorer need it more desperately and borrowed money goes in just tiding over day to day expenses. Once spent, it is harder to pay back on time. Moreover, once you have a brief alleviation of pain – being able to pay for a doctor when your child is sick, or even being able to buy a tasty sweet to add to your meal - it is hard to go back. There is no alternative but to get more money by taking more debt. When you have mounting debt burdens that mean higher repayments and when you can’t get the next dose of debt soon enough to tide you over, the withdrawal can be almost the same as withdrawal from painkillers – insomnia, trembling, elevated heart rate and depression. Sometimes suicide.

So who’s to blame for the suicides? The microfinance lenders? The desperate or sometimes irresponsible borrowers? What is the right balance between justifiable borrower need and abuse? Like pain level which is highly subjective and can only be judged by what the patient reports, the need for money and ability to make use of it productively is also based on highly subjective self reported information. Who’s to know for sure? How do you dose appropriately?

The Malegam Panel report is just out with a host of recommendations for how to regulate the microfinance industry to put an end to practices of abuse and misuse. Cap the maximum spread so that profits are limited, cap the maximum interest rate, cap the maximum loan amount that can be given to any individual, cap the number of microfinance institutions that can lend to any individual, cap the fraction of loans that can be given for any particular purpose. But is capping the answer? What about a commitment to patient education? A requirement for lenders to provide not just complete and transparent information on the dosing (here the effective interest rates and costs) but also the risks presented in an easy to understand way? A public awareness campaign to communicate the risks and benefits of borrowing? An investment in financial management counseling for borrowers?

Instead of caps that curtail the abuse but also the benefits, what about finding ways to give the power to the people.

A Culture of Progress?

2011-01-17T07:49:00.000-08:00

(As posted on YourStory.in, adapted from my earlier post 'Culture and Progress')

As I write this column Pongal is being celebrated with fervour around Chennai. Pongal is a giving of thanks for the harvest, a celebration of the cow and a renewal of hope. For most of India this is not an abstract symbolism of a bygone way of life but anchored in a day to day reality. Yet I wonder about the joy of Pongal when crop yields are among the lowest in the world, our milk yields lag most Asian countries and farmer suicides are constantly in the news.

Where does the hope come from? On the first day of Pongal – Bhogi Pongal - it comes from worshiping Indira in the hope that it will bring good rains in the next year. The second day it comes from the worship of Surya for an abundance of crop and the third day is a dedication to the cow that gives so much of itself. And then of course let’s not forget the hope of the free Pongal bags and bonuses given out by the State government. After thousands of years of these prayers, and decades of government freebies, it appears to me that altogether this strategy is just not working.

When my father was alive, long before I got involved in microfinance, I would accompany him at times to the villages where he would gather people just to share his point of view. As a child my father spent his holidays in his native village. He was also the first of his family to travel to the United States for graduate study. The contrast gripped him. He would tell the villagers about the American pilgrims and how they got together and took responsibility for their own progress. How they built and ran their own schools and hospitals. They didn’t wait for the Gods, or the government.

So in 2003 my father started a project he called ‘Village Mission’, the idea being to galvanise villages to take responsibility for their own progress by providing seed grants and management guidance for services (such as a small clinic and vocational training centre) that they would run in an operationally sustainable way. The economics worked out on paper. When I inherited these projects in 2004 I spent hours in the two villages where the pilot was in progress talking with the village head and various key people. Yet they would not take responsibility for it, even though they all agreed that these were essential for the village and had come up with their wish list themselves. ‘You build and run it.’ they would tell me. ‘Our people will worship you as a God.’ The pilot failed.

In thinking about this failure I realize it’s not that people are lazy but that so much of our cultural ethos as a country is built around waiting for God and government. At the extremes our village folk take vows of hardship and expend tremendous energy in the desperate hope that their wish will be granted; going so far as to roll in the hot sun for hours or put hooks in their backs and drag stuff around. No surprise when our mythology and tales revolve around elusive Gods granting boons for sacrifice and penance. And our news revolves frequently around announcements of government subsidies and freebies.

Contrast that to the classic Americana that carries the legacy of the pilgrims. Bob the Builder exhorting to eager toddlers ‘Can we build it? Yes we can! Can we fix it? Yes we can!’, and past President John F. Kennedy urging its citizens to ‘Ask not what your country can do for you, but what you can do for your country’.

Culture matters. It’s what determines the nature of conversations that take place and what gets done – the system dynamics. And the jury is out; a culture of waiting for God and government is not a culture of progress.

So maybe it’s time to change our stories and create more role models of progress. And instead of a frenzied worship for rain and good yield and a celebration of the fruits of our physical labour, perhaps it’s time to begin celebrating the fruits of our minds.

Go on. Innovate!

2011-01-10T09:52:00.000-08:00

(as posted at YourStory.in)

You’d think that with almost a billion people out there in the rural areas that there would be amazing innovations to be found there every day. But there aren’t. Search as we might innovation is hard to come by. Implicit in the definition of innovation is change, but the village ethos is about tradition. It’s about holding on to age old practices. Walk into a village and life looks almost the way it did hundreds of years ago. In my column last week I talked about celebrating human innovation. Why is there so little of it? Take a look at what India looks like from the sky, ask people a few questions and the answer is quite obvious really.

Most of India looks like this.

Tiny settlements of a hundred or fewer households smattering the landscape. Talk to their inhabitants and they will tell you that they rarely leave their little village cluster. Maybe once a year on a temple pilgrimage. Business is largely local. Hardly a percent or two trek to the towns and cities to transact business. Most of the people they know are right there so they are not sure who they would call on a phone (though they think it would be nice to have one). They don’t read much. Newspapers are for wrapping food.

I give a village group a list of words and ask what the words mean to them:

Obama. ‘Something to do with computers?’ one answers. Giggles. Shrugs.

Google? They shake their heads.

Why should it matter? The edge of the world is a walk away. 5 kms to be precise. It’s where most end their excursions, in an ecosystem of less than 5000 people; the population of one high rise block in Mumbai.

So what? Surely these village folk are just as intelligent. Surely they should be able to innovate. Certainly they should and the reason they don’t is quite simple. The mind is an open system and needs new, diverse material to work with. The more different the things you know, the more ways you can put things together to come up with something altogether new. That’s innovation. Like combining European Broccoli and Chinese Kale to produce the highly nutritious and tasty Broccolini. You have to have known about both vegetables to come up with the hybrid. You don’t create it out of thin air.

There is little diversity in a small community, where everyone knows everyone and everyone knows what everyone else knows. There is rarely fresh input to the mind to trigger fresh thoughts, new pathways, new constructs. And significantly, when you live in a small closed knit community like a village, there is a stronger force to conform, for everyone to agree. Nothing worse than conflict with the neighbors that you have to bear day after day, year after year. Such conformity and the ensuing groupthink are not fertile grounds for innovation.

So when YourStory asked me what key areas I would watch out for in the social entrepreneurship space in 2011, my answer was digital information products on mobile and other media that connect and promote interaction across geographies. That’s a big part of what we’re betting on at Madura. I envision a more fluid ecosystem where people and information move freely among these small isolated communities spreading thoughts and ideas, igniting debates, facilitating more vibrant trade and exchange and in the process sparking innovation.

Put yourself in situations where you meet, hear and interact with different kinds of people with different experiences, knowledge and ways of thinking and you might just find that it makes you a lot more innovative than you thought you were!

The Decade of the Cow

2011-01-03T03:22:00.000-08:00

According to the microfinance calendar, the last ten years were the decade of the cow. We celebrated the cow as the path out of poverty. At Madura we even benchmarked the loan amount to the cost of a cow. What good is a loan if it’s not even enough to buy a cow? And so over the last decade the microfinance industry has supported the purchase of millions of cows across the country. Millions of scrawny cows with poor yield it turns out; a hallmark of the inefficiency of microenterprise. I for one am glad to be past the decade of the cow and am excited and hopeful that this decade we will do away with celebrating cows - and pigs and goats and chickens and antiquated sewing machines and cottage industries - and celebrate instead the human being and its capacity for extraordinary innovation.

India has been built on a romanticised notion that small is beautiful. The spinning wheel became the symbol of a self-reliant India. Each of us independent, spinning our own yarn and milking our own cow. Yet such self-reliant independence is the very antithesis of progress. By the time we have each woken up, milked the cow, cleaned the cowshed, and sat down to spin enough yarn just so that we can finally make one new set of clothing to replace the one that is fraying, the light is fading. It’s time to cook and eat dinner and go to bed so we can wake up and start the routine again. No time for anything else. No time to think.

Progress is about interdependence and not independence. It is about the ability to organize ourselves into groups to accomplish more than any one of us could on our own. It is about each of us specializing in our knowledge and function and coming together to create something more than the sum of the parts. We lose our self-sufficiency, our ability to survive independently in the woods. But we gain by being part of something bigger, something extraordinary. It’s not so different from life itself – from self-reliant single celled ‘micro’ organisms like bacteria have evolved aggregates of cells with specialized function that together make organisms of extraordinary capability. The cells of the organism cannot survive on their own very well, but they play a part in something much more significant.

A hallmark of poverty is a lack of functional specialization and organization. Poverty is largely characterized by people engaged in self-reliant, independent methods of livelihood where cooperation and organization rarely extends beyond the immediate family. It is characterized by people engaged in enterprise that requires little specialized knowledge and is therefore easy to replicate. It is characterized by people engaged in enterprise too small or ‘micro’ to enjoy economies of scale. Indeed, even biological organisms gain efficiency with scale, larger organisms require less metabolic energy per unit mass than smaller ones. Most significantly however, is that the backbreaking effort of self-reliance leaves little time for innovation. And so also it is only larger organisms with cells specialized into organs that have the capacity for thought.

In the new modern India we are slowly shedding our Gandhian ideals of self-reliance and scale has become the mantra. I applaud this. However, our view of scale has been unidirectional. Large urban corporations serving the poor masses. Yet when these urban corporates constitute such a small fraction of the population it is horribly limiting in its scope. What if instead we could find mechanisms that catalyze functional specialization and organization among the hundreds of millions of individual cow keepers? Maybe then larger organizations will begin to emerge from the most surprising places and in numbers we could never before fathom. Tall order you might think, but I am convinced that with our understanding of how large scale interconnected systems function, together we might just be able to crack this. More about this to come in the following weeks.

Potential Money

2010-12-26T20:59:00.000-08:00

Last week I wrote about fiat money, and its fantastical symbolic value based purely on a collective faith in our ability to create value – a faith in the human mind. Without any intrinsic value, money can only realize value by interacting with the human mind. So how can we think about this in a more formal way?

To me money is a kind of meta-energy. In physics, energy is defined as the capacity to do work or effect a change – a change in position or form. This is a fairly simple analogy since money can be used to build, distribute and reshape our environment in so many ways. When we lend or invest money, it is largely for this potential. The key word here though is ‘potential’.

The potential energy of a system is typically defined in terms of the relative position of its components – the structural arrangement of a mass or object within a force field. Take for instance the potential energy of a ball that is held at the top of a very steep hill. Its potential energy is not simply its mass but is the product of its mass, the force of the gravitational field and its height or distance from the surface (m x g x h). Place the same ball on the same hill on the moon and its potential energy is immediately less. Out there in space, out of the influence of the gravitational fields, the ball has virtually no potential energy at all.

Money, it occurs to me, is not that different.

The potential energy held in money is not simply its denomination (which would be analogous to mass) but a product of its mass and parameters governing the strength or innovation of the mind to which it is associated (let’s call it mind field, analogous to the gravitational field). Money out of the influence of mind or in a weak mind field similarly lacks potential energy.

And then of course, converting potential energy to kinetic energy is no simple task in the real world, particularly in systems with multiple interacting forces. At the top of the hill the potential energy of the ball is greatest. When we place the ball there we imagine it can race down with great speed, accelerating according to Newton’s laws of motion. It will roll perfectly to rest at its destination realizing every bit of its potential energy as kinetic energy. Remember that kinetic energy is about motion, about the doing of things and the conversion of possibility into reality. It is a function of velocity. With these idealistic hopes we remove the force preventing the ball from rolling and set it in motion. It rolls down chafing against the rough side of the hill (we forgot all about factoring in the friction into our calculation) and much of the potential energy dissipates as heat rather than driving the ball to greater speeds.

And abruptly we may find it stuck on a rock (no one told us that there were rocks in the way!), still holding some potential energy but blocked by a counter force that will forever prevent it from being realized. Not so different from our own entrepreneurial struggles. Like a mass that holds no weight in the absence of gravity the declared denomination of the money we take as entrepreneurs holds no weight in the absence of the innovation of our mind. And its potential energy can only be realized as progress by a favourable interaction with the structural arrangement of the intervening space, the ecosystem in which we attempt to play out our ideas.

So just like the mass of the ball is only one element in the equation of its potential, money is only one element in the equation of progress, an equation that is the product of money and mind and not simply the sum.

Of Mind and Money

2010-12-21T08:03:00.000-08:00

Ever since I found myself unwittingly heading a microfinance institution I have had money on my mind. Not so much how to make more of it, but what it means. It’s such a critical component of so many human interactions, so caught up in so many aspects of our psyche and so baffling in its complexity. It can make and break bonds in human systems, foster marriages, alliances and enterprise, or bring them down. Or it can vanish in slow trickles, dissipating into a vast ocean, leaving behind a pile of random stuff as a reminder that it passed through.

But what is money? Money the way it was first conceived several thousands of years ago is easy to understand. It was a mechanism for simplifying exchange, making it easy for two people who did not have a fair trade of goods (I have something you want but you have nothing I want to give me in return) or had a mismatched timing of goods (my wheat has harvested now but you won’t have your strawberries until the winter) to transact by way of some third product that was not easily destroyed and had widespread utility. This kind of ‘commodity’ money – like salt for instance - had intrinsic value, it was something everyone needed. As it morphed to metal for the convenience of portability, it still mirrored its melt value or its utility as a standalone product. It did not matter if you ‘counterfeited’ it because it was worth simply its utility and the effort of mining it. But metal is still heavy and inconvenient to port so then there came notes, pieces of paper that represented some amount of metal, typically gold, that was held somewhere safe. Not too different, but with a faith in the issuing party that you could exchange the piece of paper for metal – a material of real value and utility.

And then, over the last fifty years it has morphed ubiquitously into ‘fiat’ money, delinked from anything of real physical value so that any amount of it can be made without restraint. Nothing but a piece of paper with symbolic value in which we place implicit faith. But faith in what and why? The word ‘fiat’ in Latin means ‘Let it be done’. To me, this represents a faith in the human spirit. It is an implicit belief that we can create more value by our ability to morph matter and to transform our world than we could gather up in raw material from it. In this sense, how much money we should have in the system should be driven by our best judgment of how much value we can create. Misjudgment can be devastating and collapse nations. It is an extraordinary transition from linking our currency to something of inherent physical value, to linking it instead to the human mind. Fiat money is worthless unless the minds that encounter it are able to make good on our collective faith to ‘Let it be done’. And if money is worthless without mind, should we really define poverty in terms of money or in terms of the potential of mind? Or a combination of both?

And what is it that defines the potential of mind? No mind acts in isolation of society at large. We are a complex interacting network each with our different knowledge and circumstances, different perceptions and value judgments. As money flows among us, enabling, facilitating and catalyzing our struggle to make good on this faith, it is no wonder that it is so deeply caught up in our psyche and our judgment of ourselves and the world. Our collective faith in fiat money ties us together into a common system rather than isolating us as individuals. To understand poverty and progress, therefore, we must understand the flow of money among us and its relationship to mind - how we make our judgments of value individually and collectively. Over the next few weeks my column will focus on my thoughts about this.

Money, it’s not so simple. Think about it.

Physics of Poverty at YourStory.in

2010-12-18T20:48:00.000-08:00

I am now writing a weekly column for YourStory (www.yourstory.in), also called Physics of Poverty that will post every Monday. Some things taken from what I have already written here but also some new stuff. I will start posting the column here as well. Here is the first post that appeared last week.

What is the question?

Physics of Poverty series by Dr. Tara Thiagarajan, chairperson, Madura Microfinance Ltd.

Alright, I’ll come right out and say it. Microfinance has done very little to alleviate poverty. Practically speaking, even after five loan cycles, virtually all of our borrowers are still poor—poor enough to be eligible for yet another microfinance loan.

The premise of microfinance has been that giving poor people a loan is all they need in order to get out of poverty. This presumes that simply giving someone money will first turn them into an entrepreneur, and that once they are thus transformed, that their entrepreneurial abilities will far exceed that of even the most educated entrepreneurs who fail more often than they succeed. This premise makes light of the difficulties of entrepreneurship and of the greater problem of the impoverished ecosystem within which the poor operate. On the other hand, in poor rural areas, where employment opportunities are few and most of India’s poverty is thus concentrated, effective entrepreneurship is a crucial component of progress. So how else to catalyze entrepreneurship but through microfinance? What about those pictures of Rajalakshmi and Kannamma smiling broadly alongside their cowshed and petty shop, the poster women of microfinance success? Surely there is something to that? There is a little. But that’s just it. It’s a little, very little.

There are without doubt some people who take a loan and take steps up the economic ladder. But they are a minority, and they are baby steps. Many don’t even try (a recent market research study we did turned up that a disconcerting percentage of our borrowers spend most of their day watching TV or ‘taking rest’) and many fail.

Our typical borrower

A typical borrower-entrepreneur

A microfinance success story

Those who do succeed do so within the subsistence context, even if they may have managed to cross the arbitrary (and therefore meaningless) poverty line. Even at the pinnacle of their success, I wouldn’t want to trade places with them and neither would you. So by glorifying that as success, we are simply setting the bar far too low and lowering our chance of finding real solutions for real progress. By real progress I mean where the majority of the world’s population is engaged at a level that is actually meaningful by a single global standard.

So in the wake of the microfinance media melee, I think it’s time we went beyond and changed the conversation and the debate to address the real questions that were the whole point to begin with (weren’t they?): What are the fundamental drivers of societal progress? Why have some sectors of society progressed rapidly while others have not? And what can we do to turn a system from poverty to progress? To answer this we first need to define progress. To me progress is not about money, it’s about innovations that change the way we live. Efficient distribution of resources gives us incremental benefit but it’s innovation that fundamentally raises our capabilities and standards of living. Case in point, two hundred years ago, even the best of Kings and Emperors with all their wealth could not raise health standards beyond the medical capability of the day and had to sweat it out without ACs in the summertime. With over 6 billion people on the planet, why are there so few microsocieties that come up with all the innovations? What if a few more billion joined in? What if instead of using microfinance loans for another cow or chicken or sewing machine that millions of people invested in new innovative businesses and approaches? What if?

So if the fundamental driver is innovation, then what are the circumstances and conditions of human systems that drive it? It turns out that science might be on to some interesting answers and approaches. Complex systems scientists (largely mathematicians and physicists turned social scientists) are beginning to discover how structures and dynamics of human systems impact their outcomes. This column will be about sharing the insights of complex systems science in the context of what we can do about poverty, and the understanding we are building at Madura of the relationship between human network structure and economic outcome in order to evolve more intelligent for-profit, rapidly scalable products that facilitate changes in system structure and therefore systemic progress.

Hear Ye! Hear Ye!

2010-12-11T11:49:00.000-08:00

One of the greatest challenges our rural folk face is a lack of access to information about markets - not just distant markets but neighbouring markets as well. Few of them read and our research has shown that they don’t tend to travel beyond a few kms for commerce (see my earlier post Do not disturb). When they do travel longer distances it’s primarily to visit temples on pilgrimage. Consequently, many of them claim that they don’t need a phone because everyone they know and interact with lives close by. I was lamenting the difficulty of getting new product information to people who live in these circumstances and my husband very helpfully offered up that it sounds like we need to have heralds or messengers and town criers like they did in medieval Europe. That got me thinking and I started to read about these roles. I think he was on to something.

A little bit of scouting history turned up that in medieval Europe, messengers were hard-working, talented folk. They had to be excellent horsemen, able to travel up to 100 km in a day, skilled topographers able to navigate unmapped terrain and talented communicators; a tough combination. Heralds and messengers were prestigious jobs, well paid and protected by official decree. ‘Don’t shoot the messenger’ was in fact law. And it wasn’t just the Royal government that employed messengers. Wealthy families and businesses employed them as well. Interfacing with the far traveling messengers were the town-criers, who shouted out news on everything from wars, taxes and jobs to local markets and events; even lost dogs. What struck me was that in England and some other parts of Europe, Town Criers were a government position, appointed by the Mayor of each town, to keep the citizens informed of matters of both national and local importance. In fact, interfering with a Town Crier in the execution of his duty was once a serious offense. The British Empire apparently took the job of spreading news and information very seriously. It strikes me what an extraordinarily powerful system this was and I would be willing to wager that the rise of civilizations and the spread of empires were closely correlated to faster mechanisms for information flow.

I started to look back in history a little – what about the Ancient Greek and Roman empires? The Olympic marathon itself is a tribute to the system of message runners. Indeed, the first evidence of such messengers is from Ancient Greece around 500 BC, and continued into the Roman empire. As the legend goes, Pheidippides, a Greek runner, ran all day and night from Marathon to Athens (the terrain was too tough on horses) to deliver the message of victory against the Persians, dropping dead of exhaustion as soon as his message was delivered. “No finer way to die” it was declared. Running messages was a highly prestigious, respected position. No easy job but invaluable. Information was King, literally. And the Persians? Even as they clashed with the Greeks they were at their peak and had expanded their empire widely. As early as 500 BC Cyrus the Great, and then Darius, extended the road network and set up the first postal system, posting stations where new men and fresh horses would be available at any moment to carry a message further on. Information traveled at the fastest documented speeds of the time – up to 200 miles (320 km) a day.

My husband has been reading over my shoulder. You can’t leave out the Pony Express he says. Of course not, I say (Umm, what’s that exactly?). It was a fast mail service across the United States in the 1800s, a commercial undertaking of massive proportion. 157 stations placed at intervals of about 10 miles - the maximum distance a horse could gallop, allowed the rider to change to a new horse at each station, crashing the time it took to get across the United States to ten days. Riders were apparently paid $25 per week compared to the $1 per week you got for unskilled work. Clearly they understood the value in speed of information.

I have not come across any historical evidence of official, full-time messengers in India. Besides, here in South India and many other parts, people were certainly never known for their horsemanship. And today, finding out what’s up in the next town is clearly not an organized priority. Now of course there is TV, but TV does not cover news of very local importance such as a lost cow, a job in the next village or your next village neighbors new cool idea.

That said, it is unlikely that horseback messengers and town criers did not exist in the kingdoms that were once India. Still, from what I gather it was probably not as prestigious, organized and granted as high a stature. And it might still be useful, particularly in the village context where literacy is low. Indeed it seems as though in the last fifty years, some communities here have picked up on it. Only thing, it’s not granted nearly its due importance and value.

Creating Social Value

2010-11-27T00:50:00.000-08:00

We just sponsored Sociopreneurship 2010, an event that brought together social investors, industry experts and the media for panel discussions and also recognised and showcased social innovations and entrepreneurs. This event is timely in a country like India and is a mark of the shift in thinking away from non-profit models to market based solutions that can operate at large scale and therefore create social value more systemically.

When we begin to talk specifically about ‘social’ entrepreneurship though, it really begs the question: What does it mean to create social value? I think we all have a notion of what it means but when you try to define it and measure it, it gets quite murky and difficult. One fundamental implicit assumption of social value is social equity or equality of opportunity and access. In this sense we commonly think of social enterprise as an organization that addresses a low income market with a product that can raise standard of living, either by providing greater opportunity or convenience. However, as I have discovered in the past five years, simply product and market are not sufficient.

Microfinance, for instance, provides a very interesting example. The product – basically money – has tremendous potential. Great things have been done with money. You need it for virtually everything. Poor people, by definition, have less of it and therefore want it. It seems simple enough. However, like many products, it can only deliver on its potential if the person who buys the product knows how to use it and is able to use it productively. Conversely, finance has always been most impactful when it is efficiently allocated to sites of the greatest innovation or efficiency. Microfinance distributes money to the least innovative and efficient of enterprise – another cow, another sewing machine, another small shop.

So the product could have social value but it depends who you sell it to, how you sell it and how much you sell to each person. And it’s hard to figure out who is more capable of making productive use of capital, particularly in any cost effective manner. So we currently lend simply based on self-reported intent, sometimes not even that. The social value of microfinance is also highly contextual and it’s not always easy to know where the context is right. For instance a village may not have sufficient relationships with larger marketplaces to know how to leverage it, even if they could physically access it so even good ideas may never pan out.

How much you sell also matters a lot. More is not always better. Just like a drug that treats any disease, there is a dose response curve. Up to a point you have increasing benefits and then the side effects take over as the drug exerts toxic effects.

If you think about money at a systemic level, you realize that the impact depends not just on what the person you lend to creates, but where the money goes. For example, when a local moneylender lends the money, even if he charges greater interest, he actually spends his profits in the same community and therefore supports that local economy. When a corporate microfinance company lends, it takes back the money and it may go out as dividends to international investors. The problem is not simple.

So over the past several years I have come to think of social enterprise not simply as creating more equitable access to a good or service, but really an effort in solving large scale systems problems. Thus if we declare ourselves a social enterprise then I believe that we take upon ourselves a greater challenge – a challenge to solve a problem, but often one we don’t fully understand. This means we have to constantly seek deeper understanding of the problem. So to me, social enterprises, on some level should be R&D organizations. Like a drug company that puts out treatments for disease, your first product may purely treat symptoms and roll in the money, but your labs are still looking for the cure.

As for-profit enterprise, we also create, or fail to create, social impact not simply by virtue of the products we offer and the markets in which we operate but also by virtue of numerous micro decisions that are made at every level in the organization. For instance, coming back to the microfinance example, it matters how each field staff interacts with customers and value can dissipate if the interaction is not right. Thus if we declare ourselves a social enterprise then it becomes extraordinarily important to function in a values driven way, where every person acts according to implicit guidelines that are supported by the incentive systems of the company. In this context, it is also important to find ways to meld business metrics with social impact measures. If these are very separate it is easy to lose your way. This is one of the issues we discuss at length at Madura – what kind of business metrics we can track that will capture social impact and not just business profit. As our understanding evolves so do these measures.

So, in my view, if we want to be genuine to the promise of social entrepreneurship, then we need to take upon us the onus of constantly understanding and debating the problem that we are trying to solve, build our enterprises to be thinking, values driven entities and strive to find ways that meld our social and business agendas so that they are synergistic and not at loggerheads with one another. It is a lot harder than simply building a scalable business.

Do not disturb

2010-10-24T09:08:00.000-07:00

One very eye opening fact that is emerging time and again in our research is that rural microentrepreneurs access very small markets. Our first survey found that about three quarters do not buy or sell beyond a 5 km radius and only 2% venture beyond 20 km (the ‘middle men’?).

Here’s a view from Google Earth of a region of rural Tamil Nadu that is 5 km across. It has a cluster of about 12 villages with a population roughly between 4 and 5,000, typical for most of India. That’s a really small market to be limited to.

Contrast this with a view of Chennai which has 100 times that in the same area.

Unfortunately in this first survey we did, <5 km was our smallest category.
Turns out even 5 kms is way out there for most and it’s an even more fragmented market ecosystem than I ever imagined. Most don’t leave their tiny village cluster and sell only in a couple of streets. Recently on a field visit our Micromarkets product manager asked a lady why she only sold to two streets, why not go over to the next two? “There’s someone else selling there”, she told him, “One should not disturb others. You should be satisfied with what little you can get”.

It's not a pyramid!

2010-10-11T05:09:00.000-07:00

CK Prahalad’s book The Fortune at the Bottom of the Pyramid has firmly established our visual impression of how incomes are distributed as a pyramid. A strong, solid structure with the poorest at the bottom that slowly tapers, kind of holding up the apex.

In reality it looks NOTHING like a pyramid. Here’s a 3D visualization of what it looks like based on real income distributions.

Of course, if I had a lot of time on my hands I’d figure out how to plot it in 3D a lot better, maybe starting with a square shape rather than a circle so it compares better to a pyramid. But I don’t. You get the picture though. (To get more of a sense for what income distributions are like check out my earlier posts Who Cares about the Average Income and Income Distributions around the World).

Rather than put my take on the different impressions and associations you get from these pictures, I’m really curious to hear yours. What are the associations you get from this over the pyramid? I think that we need a different term to replace the ubiquitously used ‘Bottom of the Pyramid’.

Driving more productive interactions

2010-09-22T23:45:00.000-07:00

Very excited that the film Shakti Pirakkudhu (Shakti Rising) that has been in the works for three years now is finally done - this week! The goal of this film is to seed different thinking among the rural poor and raise their aspirations. We have a bunch of by invitation pre-release screenings planned around the country (India) in October and will post a schedule here soon. In the United States, the film will have its premier screening at SALTAF (South Asian Theater and Literary Arts Festival) on Nov 13 at the Smithsonian in Washington, DC.

Below is the synopsis and trailer but you can learn more from the website:
India www.shaktipirakkudhu.in USA www.shaktirising.in

Synopsis
Sundari is a young mother of two in a small village in South India. She has an opportunity to get a microfinance loan and wants to use it to start a business. Her husband is scornful of her ambitions - she has never been more than a housewife. As she struggles to find her feet in a trade, the village erupts into a flurry of politics with the arrival of a woman from the city looking to start a garment factory in the area. This is a story of a village woman trying to define what success means to her in the context of an expanding world view, and of a family struggling to find their equation at the crossroads of what is and what could be.

The Madura Experiment (more refined)

2010-09-12T10:40:00.000-07:00

It’s been a bit of a busy month for me and I haven’t had time to post. After years now of reading, surveying, observing and thinking, we (meaning Madura) are finally putting together the pieces of our socioeconomic transformation strategy. We’re taking quite a leap from the run-of-the-mill microfinance, so we’re operating like a start-up again, which is fun. But, with profits to take some chances with, so that’s even more fun. We’re looking at a massive, for profit experiment in reengineering the socioeconomic system dynamics of our members - about half a million poor women in rural Tamil Nadu, moving rapidly to a million. This involves putting in place a large scale smart phone driven data collection system, a mobile phone rollout for our members that will support a host of applications in the future, and development of a cool cutting edge network analysis platform that will allow us to track the evolution of the structure and dynamics of our member network so that we can nudge it towards a more productive trajectory of evolution. So here’s the story, (a bit of a synthesis of many of my previous posts).

Since we’re a microfinance company, we have to start there. I realize microfinance has warmed people’s hearts on a global scale with pictures of women smiling broadly and waxing on about how great life has been since they bought that cow with their loan (All they need is a loan. Sob). I’ve met a bunch of them. But honestly, I have none of that warm fuzzy feeling because the truth is that the outcomes of microenterprise (and therefore microfinance) depress me. Granted many of them may rise up to make a few cents more a day, which pushes them over the arbitrarily drawn ‘poverty line’ (I personally find the poverty line a silly measure). Still, even after years, they rarely make the leap out of the subsistence context. And honestly, I find it hard to spin glory out of these stories. If that’s success, then we’ve set the bar too low and we’re not getting anywhere. So why can’t they make the leap?

I’m probably repeating myself on multiple counts but here is the fundamental problem – the rural poor are very insular in their social groups and fragmented as a larger network. As a consequence flow of information and particularly novel information is very poor. No human being in that kind of network can amount to much. You can’t do anything about ‘it’ unless you’ve heard about ‘it’. Social network researchers have shown in many ways now that the more links there are across diverse groups, the more the innovation and economic success (See for instance: Network Diversity and Economic Development by Nathan Eagle, Michael Macy and Rob Claxton which is described here for the layperson). Conversely, the more diverse your individual connections, the more you will hear about cool new stuff (opportunities, ideas, everything really..), and the more successful you will be economically. Our rural borrowers are exactly NOT this. It’s a small world for them, but not in the “Weird how I keep bumping into my business school classmates at Heathrow airport” way. They run home based businesses (if at all), sell primarily to their neighbours, rarely travel beyond a 5 km radius and have a whole lot of issues mixing with other caste groups.

So, the goal of our big undertaking is to map their market, mobility and communication networks, get some understanding of the dynamics of information diffusion and influence and use our micromarkets and microeducation products to drive changes in the network structure and dynamics. Our micromarkets products (which will evolve to a mobile accessible information platform with some built in intelligence) will drive more long range connections in general. However our goal is to identify and find clever ways to bridge ‘structural holes’ in the network, or parts of the network that are large in their own right but highly disconnected from each other. Our microeducation products will be used to drive productive behavior such as information seeking behavior across different social and economic groups. (Products is an operative word here, everything is designed to be revenue generating, profitable and scalable). In the process we also hope to gain considerably more insight into the mechanisms of propagation of different kinds of information and ideas, and their impact on innovation and enterprise. There are lots of elements that have to come together here, but they are starting to fall delightfully into place.

So, I’ll end here with a small pitch to readers. We’d love to hear from people who want to come down and be part of the experiment as short term volunteers and such (email our recruitment manager at Madura – you’ll find the link on our Careers page). We don’t have a formal program yet but we’re putting one in place. As we work it out we would love to hear your ideas for what would be fun and exciting to do in a volunteer context. We also want to hear about cool new mobile technologies and applications and network visualization and analytic tools other people are developing (or want to develop for us).

Culture and Progress

2010-08-03T10:26:00.000-07:00

In the five years I’ve now spent working in rural Tamil Nadu, I have been frequently surprised by the level of creativity that surfaces at various events that we hold. On the other hand real progress and innovation is hard to come by. Somehow village societies don’t make the leap. My father believed that this was a consequence of attitude – the attitude of waiting around for someone from somewhere to come and do it for them, ‘it’ being everything really. He blamed it on the government programs of handing out free stuff.

As a child my father spent all his holidays in the village, shuttling between Poolankurichi, Nerkuppai and Thekkur by bullock cart. He was also the first of his family to travel to the United States for graduate study. He was fascinated with the story of the pilgrims and how they built their lives from scratch into the America that he went to. In the last ten years of his life when he took on his work in microfinance, a big part of his goal was to change mindset. Several times I accompanied him to villages where he would tell the villagers about the pilgrims and how they got together and took responsibility for their own progress. In 2002 he started a project he called ‘Village Mission’, the idea being to galvanise villages to take responsibility for their own progress by providing seed capital for services (a small clinic, vocational training, school facilities for instance) that the village would get together to build and manage.

I inherited these projects shortly after his illness in 2003. I spent hours in the two villages where the pilot was in progress talking with the village head and various key people. Yet they always fell back on the refrain of ‘Why don’t you do it for us (build it, run it, provide it all for free). Our people will worship you as a God.’ Stupidly we even gave in to some of their requests and built them some buildings (for free) but never got them to take ownership. As hard as we tried, we couldn’t get them excited about taking any stake in it – in running it or taking any responsibility for it, even though they all agreed that all of these were very necessary and useful for the village and had come up with their wish list themselves. Finally we quit. I’ve thought a lot since why we failed so miserably. I'm not convinced it has to do entirely with the government. Are they really just waiting around?

Recently I was sitting with my kids as they watched TV and it struck me that the ethos reflected in the shows is probably at the root of the difference between the American pilgrims and these village folk. Embedded in so many American kids’ shows is a theme (or even meme) of ‘Get up, get to it. You can do it.’ Take Bob the Builder, for example. It’s classic Americana. ‘Can we build it? Yes we can! Can we fix it? Yes we can!.’ Its theme is so much a part of American culture that even Obama used it for his election campaign.

Contrast that to our Amar Chitra Katha comics, now all made into animated TV cartoons. They run the frequent theme ‘For your sacrifice and penance Lord XYZ will appear before you and grant you a boon.’ This is not just TV but deeply ingrained in the psyche.

At the extremes our village folk take vows of hardship and expend tremendous energy in the desperate hope that their wish will be granted, going so far as to roll in the hot sun for hours or put hooks in their backs and drag stuff around . In a more general context, I realize that the village folk are not lazy and just waiting around. Rather I’m betting that I might have had better luck getting the village to take on some immense physical hardship as a method for bringing progress to the village rather than trying to get them to get to it and build it themselves.

Our villages need Bob the Builder! (Happy to see its now on TV here in Hindi!)

Social Impact Evaluation in Interconnected Evolving Systems

2010-07-17T21:50:00.000-07:00

Today there are many development economists that focus on social impact evaluation studies. These studies typically compare groups receiving an intervention to groups that did not. For example, did the group that received microfinance do better than the group that did not? Although they attempt to ‘control’ for variability between groups, I see some fundamental flaws in this approach. First, to be meaningful comparison, a ‘control’ group must be independent of the intervention group. In society, which by definition is an interconnected system, this is virtually impossible and you can never control this way for network effects.

For example, lets say the people who received microfinance in the village used the money to buy goods from the people who didn’t. Its not impossible that this could result in the 'control group' getting richer because they could sell more. Compared to them, the microfinance takers could then look poorer because, while they may also have overall bought and sold more, they also had to pay back their loan with interest to the lender. This is a gross and very direct example of course, and it will never be so simple to parse out the network effects. Recognizing this, if you instead decide to move your control group to a distant location this will not really solve the problem. For one thing, the more distant the ‘control’ community, the more the variability in the circumstances and the more confounding this variation can be. But more important, network effects can be far reaching and change dramatically as the size of the network changes. So physical distance does not help unless you compare two communities that are completely self contained economies (in which case they have evolved so separately and so differently that it will be a useless comparison anyway).

This brings me to a second extremely important point. Networks like society are open feedback systems that evolve continuously over time. This means that the impact you find that microfinance has today (network effects notwithstanding) is completely irrelevant to tomorrow and therefore cannot be prescriptive or even diagnostic in any way. For example, cell phone penetration and use is climbing rapidly in rural India today and dramatically changes the way people interact and transact, opening up distant markets and changing the rate at which people can buy and sell. Just imagine the impact of being able to call a buyer in the neighbouring town to coordinate an order and delivery instead of having to travel the three hour distance by bus! So if you conducted your traditional microfinance impact study today, when cell phone penetration was low, maybe it has little impact because the opportunities to interact rapidly were low and therefore business was slow. Tomorrow it may have magnificent impact as the network conditions change.
So, not to sound too harsh, but in the interest of progress, having read various social impact studies on microfinance conducted at great expense and unveiled with great fanfare, I have to say What’s the point? As a practitioner interested in seeding social progress there’s nothing whatsoever I can take from these studies. It doesn’t tell me what is wrong or what should be done right. Rather it is a flawed comparison of one slice in time.

So what’s the alternative? If we want to come up with something valuable prescriptive, what we need to do is stop wasting time with such social impact evaluations and start trying to understand the network and its evolution. What we need to do is begin asking and answering questions like these:
1) What is the topology of the transport and communication networks? How does information and trade flow in these networks? What kinds of simple changes in the network could result in nonlinear benefits for the flow of goods, money and information?
2) How do ideas and innovations diffuse in these populations? How does this compare to more advanced segments of society? What can be done to create more productive diffusion?
3) What do group dynamics look like in these groups? Can we identify aspects of culture and interaction that predict why these groups fail to organize themselves and innovate? If so, what kind of innovations can we develop that shift these behaviours towards more productive dynamics?

The Value of Money

2010-07-03T00:05:00.000-07:00

Yesterday my mother called me to say that she is taking my six year old son to see a coin collector since he has been pestering her with questions about money. Motivated by his interest in buying yet another Ben 10 toy that I won’t get for him (jet ray, shake ray, I don’t get it...), he has become a little obsessed with finding ways to get money. Who invented it? Can he invent his own money, he wants to know. Would people take his invented money? Who makes the money? Can’t he just print some out on our printer? Who decides what its worth?

So back to the coin collector. My first reaction was that it seems a little silly and boring. What’s he going to show him, some bunch of coins from around the world? So what? But then I took a look at some of the coins and turns out it’s a very fascinating lesson in the history of money that sparked some interesting breakfast conversation today. The coins are all from ancient civilizations around the world and hark back to the first invention of money. Here are some of them:

They’re not perfect in shape and are pretty crude. You could so easily counterfeit these, was my first reaction. But that’s OK, my husband said, these coins have intrinsic value. They’re worth the metal they’re made from – x grams of brass or silver for instance. So if you wanted to counterfeit them, you would have to spend the equivalent value of energy and time to mine the metal and that has worth exactly equal to its value.

Our typical text book definition of money is as a store of value. In the last few years I have been thinking of money as being a proxy for potential energy that we accumulate on some level – since it provides the power to do work and reconfigure things. So that money should have intrinsic value (like metal) makes sense to me. You could actually calculate its value in units of energy, say joules. Today we have decoupled currency from any ‘actual value’ and created fiat money. Which means money is no longer linked to something with intrinsic value like gold bars. Given this, its ‘value’ can get progressively more distorted. With this disconnect it takes on a different life and dynamics that I’m still trying to get my head around.

So to my son, I have to say, ‘I have some notional answers to your questions and this is how I’m thinking about it, but in all honesty, sweetheart, I’m almost as baffled as you are. Why don’t you go ask Dad.’

'And, hey, I already told you that we are not going to buy another Ben 10 toy right now'.

Interpreting Poverty through Images

2010-06-23T11:33:00.000-07:00

Here is an interesting post that I came across.

Exploring Different Perspectives of Poverty Through Photography
by Duncan McNicholl

Some excerpts:
Many people only experience sub-Saharan Africa through photographs. The teary-eyed child in rags is familiar to all of us as the portrait of poverty charities use to communicate a hopelessness in need of our pity and charity. I reacted very strongly to these images when I returned from Africa in 2008 after a 4 month volunteer placement in Malawi, working with Engineers Without Borders Canada. I compared the images I saw to my Malawian friends – people who embodied intelligence, resilience, and compassion – and I felt lied to.

It seemed that these photos presented by development organizations and the media were deliberately providing only one perspective of rural Africans like my friends in Malawi, which was despair.

.....This photo project, which I am dubbing ‘Perspectives of Poverty’, is not to say that people do not suffer in Africa. Malawi is one of the poorest countries in the world, and we must not lose sight of the fact that millions struggle to get by. But how we interpret the lives of others is critically important since it affects how we support those struggling to overcome poverty.....

The opposite is true of microfinance. As a community it projects only the face of success, making light of the difficulty and struggle of entrepreneurship and a landscape littered with failure.

Mobile Phone Data Capture

2010-06-19T10:08:00.000-07:00

Madura is about to embark on a massive mobile phone enabled data capture exercise that will create some of the largest and most unique datasets in the world on the poor. We currently have about 160 locations that manage loan repayments through a mobile app that runs on a windows platform. We are now about to make an additional 500 of our field staff capable of capturing massive information through various mobile applications. The survey apps are being tested on these same windows phones that have worked well for us for our loan servicing needs. However, in this case, the apps are much more data intense. Consequently the phones have to work much harder, run longer, be able to withstand being dropped off the bus a couple times and have sufficient memory to store data given that network connectivity tends to be spotty. We are hoping for a 2 year life for the phones. Given the number of phones and platforms out there, choosing the right one appears to be no easy task. Anyone with experience with heavy usage of smart phones, please do tell me about it!

Engineering organizations

2010-06-14T20:14:00.001-07:00

Something that's been on my mind lately is how organizational structure influences organizational outcome. Alex (Sandy) Pentland is a really interesting guy to follow in this context and in the context of social dynamics in general. He runs the Human Dynamics lab at MIT and has created a device that can measure subconscious signals of communication (tone of voice and things like that) that can predict the quality of interactions and therefore outcome. He calls them 'Honest Signals'. Take a look at this video where he talks about them.

Is organization an innate human trait or learned?

2010-06-11T21:08:00.001-07:00

I've posted before thoughts on why the poor tend to be fragmented in their economic activity rather than organized into groups and it sparked some discussion (see Driving socioeconomic change by making women more dependent). I've been thinking now about the ability to organize in general. Our microeducation team at Madura just got back from the first pilot testing of our digital 'mini MBA' program. This is a video based training program that brings business education to the poor that has been developed in collaboration with Dr. Madhu Viswanathan at University of Illinois at Urbana Champagne and his Marketplace Literacy initiative. They tested with two different groups - one that was reasonably educated (10th or 12th grade) and one that was largely illiterate, and came back with some very interesting learnings. Here's one: There are a couple places where the video instructor asks them to pause the video, organize into groups of three or four and talk about some particular question or topic. The groups, particularly the more illiterate group were unable to carry out this instruction of organizing into groups. It had to be explained really explicitly and they are now looking at adapting the video to include a demo of how to break up into smaller groups. So, I wonder, is organization itself an innovation that we have taught rather than an inherent human trait?

Madura is looking for a postdoctoral scientist

2010-06-08T10:03:00.000-07:00

Madura is looking for a scientist who will do cool things that haven't been done before. Here's the ad:

Postdoctoral Scientist: Rural Social and Trade Networks

This is a unique position where you will reconstruct the trade and communication networks of rural South India from various large empirical data sets and make it available to the greater scientific community. Real time understanding of the social and trade network topologies and dynamics will be used to design interventions that can significantly impact the dynamics of the network as part of an ambitious large scale social experiment to bring about poverty alleviation.

The key requirements are large imagination, a strong desire to work for social change, the ability to work efficiently with large datasets in MATLAB and C and the ability to design cool GUIs that will facilitate public access to the data.

This position does carry publication potential. However the primary goal is to create understanding that can result in fast productive interventions that positively impact the standard of living.

Please submit a cover letter outlining why this interests you along with your CV to kamalesh@mmfl.in

Spread the word!

Increasing the rate at which ideas have sex?

2010-06-03T10:23:00.000-07:00

Interesting article in the WSJ by Matt Ridley called Humans: Why They Triumphed. He says:

Trade is to culture as sex is to biology. Exchange makes cultural change collective and cumulative. It becomes possible to draw upon inventions made throughout society, not just in your neighborhood. The rate of cultural and economic progress depends on the rate at which ideas are having sex.

Underlies the assumption on which we work at Madura - that poverty is an outcome of an impoverished network with slow flow of information. By increasing the rate at which people connect and interact with knowledge and information, we believe, interactions become more productive and magic will happen. In Matt Ridley's words we are facilitating trade and idea sex.

Who cares about poverty in the summertime?

2010-06-02T08:50:00.000-07:00

Apparently not too many people.

First I’ll come out and admit that I’m addicted to playing with Google trends. I find it a fascinating commentary on our collective consciousness and weirdly entertaining. So, I was looking at search trends on ‘poverty’ across the world and there are two things that I find intriguing. First, there seems to be decreasing search volumes over the past several years although there are increasing news references. This is puzzling. But more interesting was that it was oddly seasonal, dipping twice a year. Check it out:

A country by country view was revealing. The decreasing interest over time cannot be attributed to the USA but the seasonal trend is more apparent, dipping during the summertime and then again over Christmas.

I then checked out other English speaking countries. UK and Australia both had some seasonality, less apparent in the UK than Australia, and dipping at slightly different times of the year. Turns out the dips correspond to the academic calendar for each country.

I have no idea what to make of India:

But what’s up out there? Are teachers just assigning a lot of homework on poverty all over the world?

More on money flow

2010-05-27T02:12:00.000-07:00

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?

2010-05-21T14:50:00.000-07:00

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?

2010-05-17T16:13:00.000-07:00

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

2010-05-12T19:17:00.000-07:00

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

2010-05-05T11:57:00.000-07:00

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

2010-05-03T10:17:00.000-07:00

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

2010-05-01T10:39:00.000-07:00

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’).

Connected we succeed, divided we default

2010-04-26T10:43:00.000-07:00

At Madura Microfinance, one of our primary assumptions is that women who are more informed and better connected will be more successful and make more productive use of loans. So, much of our efforts are aimed at increasing networks and access to information among our members. A PhD Student from Oxford, Sangamitra Ramachander, recently studied our women’s borrower groups to see what kind of factors predicted whether a group went successfully on to the next higher level loan or would default. This is still a work in progress but there are some very interesting results. Here is one odd one that stood out to me. She found that women that travelled more frequently to neighbouring villages (but surprisingly not the nearest towns) were several times more likely to be successful rather than default. It’s not clear whether this factor is causal or the outcome of their success but it’s something worth exploring further. Possibly, women who travel more to neighbouring villages are more informed about local markets and better connected within them?

Driving socioeconomic change by making women more dependent

2010-04-19T10:28:00.000-07:00

Yes, I meant to type dependent. Here’s why.

One of the great drivers of mankind’s progress has been our ability to specialize in our knowledge and functions, organize as groups or entities that share knowledge and create amazing things that no individual could do on his or her own. Done well, the outcomes of organizations are far greater than the sum of its parts. The most awesome things that mankind has created – jet planes, space stations, the power grid, they are all borne of interconnected, highly dependent networks of people. Our (Madura’s) women micro-entrepreneurs are the antithesis of this dependence. They are highly unspecialized and operate independently (women, only because that’s who we serve, but this applies to men too). These micro-entrepreneurs strategize, produce, market, manage accounts and do everything on their own. This means that they rarely have the opportunity to benefit from the knowledge of others and rarely have the opportunity to gain deep functional expertise as they are so busy doing a little of everything. That’s a huge limitation on what they are able to achieve. It is remarkable how few of our women borrowers think to band together and create something bigger than any one of them could do alone and I often wonder why this is. Most of the women I have talked to who have grouped in twos or threes have only done so in order to pool their loans to afford an asset, not for aspirational reasons. I’ve been thinking about what drives organization in society and not coming up with a satisfying hypothesis yet. If we could figure this out, it could be very powerful. Ideas folks?

The Physics of Friendship: Do we make friendships no differently than a bunch of particles bouncing around?

2010-04-10T11:19:00.000-07:00

Here's an interesting article that I came across that surveyed 90,000 high school students to reconstruct friendship networks and then created a model of the results using knowledge of how particles in physical systems collide and interact. Haven't read the article in depth so I'm not really doing much of a job in terms of useful commentary on its merits. Just pointing it out. (The lead author on the paper though is Marta Gonzales who worked with Albert Laszlo Barabasi who wrote Linked that I posted on earlier).

The Physics of Friendship (This is an easy to read writeup on the actual paper)
By comparing people to mobile particles randomly bouncing off each other, scientists have developed a new model for social networks. The model fits with empirical data to naturally reproduce the community structure, clustering and evolution of general acquaintances and even sexual contacts.

The paper is also an example of how you can use surveys to reconstruct networks and dynamics, relevant to my previous post 'Where does the money go?' and the discussion around it. It would be interesting to see how such social networks in small villages differ from those in large cities particularly with respect to trade (as opposed to friendships). Could be quite telling about how our microentrepreneurs do business since how they bump into each other would be totally different from the way we technology enabled urban folk do.

Where does the money go?

2010-04-07T12:05:00.000-07:00

Was chatting recently with Sitabhra Sinha from the Institute of Mathematical Sciences in Chennai, India about some ideas to study the network structure and dynamics of money and information flow in rural Tamil Nadu and he passed along a bunch of papers to me. One of them was Patterns of dominant flows in the world trade web by Serrano, Boguñá and Vespignani. This mix of people from Europe and the U.S. took international trade data and reconstructed the trade network to look at imbalances between countries. They then asked where one dollar generated in any given country ends up being ‘absorbed’ or accumulated in the world. They called this the ‘dollar game’. For big consumer nations like the U.S. no surprise that a big chunk ends up in Japan and China. Where the money ends up accumulating is not completely informative about which country is better off though, since this doesn’t tell you anything about who can generate more currency to begin with. However, it did get me thinking about what it would look like to reconstruct this for rural and urban India and track where our microfinance loan money is ‘absorbed’. My guess is that the rural borrowers are net consumers and much of it ends up in Chennai or Mumbai or someplace like that rather than actually staying in the rural areas. If anyone has data to the contrary (or supporting my guess), I would love to hear about it.

Why 'physics'?

2010-04-02T00:35:00.000-07:00

Yesterday I was talking with some of my Board members and they asked ‘so what do you really mean by the physics of poverty?’ Why ‘physics’? So I thought I would do a summary post on what I mean by this.

Over the last century we have picked apart nature, broken it down into its smallest parts and found that everything is made of the same stuff. The same fundamental particles. How can a small bunch of particles give rise to all the richness of our world? These still not fully understood fundamental particles associate to form atoms which associate to form molecules which associate to form cells which associate to form organisms which associate to form societies. And on every level they produce a myriad of outcomes in matter, cells and organisms. As we are now beginning to understand, it is the nature and structure of the interaction and association that defines what it will be, not so much the intrinsic nature of the interacting element itself. So when we consider what properties we might want from a system, be it matter or society, what we need to understand is how the elements of the system interact, the structure of their connectivity and consequently how energy flows in the system. Some physicists have known this a long time, taking this approach to understanding nature under the various names of condensed matter physics, statistical mechanics and non linear dynamics.

Consider this example – like most atoms, the carbon atom does not like to be alone. It will seek out associations with other atoms. Just carbon alone, when the pressure and heat are high, will hold tightly to four others, sharing its electrons fully in covalent bonds in a rigid lattice structure that is so constrained that it is unable to interact with new forces and energies that impinge upon it. Light energy hits against the electrons and slows down but the electrons cannot absorb its energy and the light eventually bounces out. The electrons cannot travel through the system because they are locked into rigid relationships with one another that prevent them from free movement. This is a diamond, constructed under pressure, constrained, rigid and impervious. But under normal conditions of temperature and pressure the carbon atoms are more free, they don’t form as many covalent bonds, preferring along some dimensions to associate with one another in a less constrained way and are thus able to take light’s energy and make it their own, their electrons when pushed can travel through the system in a flow of electrical energy. This is graphite, free, energy rich and malleable. So whether you end up with diamond or graphite, depends not on its elements, since its elements are the same, but on the nature and structure of their associations and the freedom with which they can interact with external forces.

As we go up the hierarchy from atoms to humans, although the possible ways to interact become increasingly numerous, one can still understand the system from the point of view of the nature of associations, how it is connected and how energy flows through it. In human networks, money is a proxy for energy on some level, so is information. So why physics? Because physics is not constrained to understanding one system alone but an attempt to understand systems at all levels and the common principles that define them. It represents an understanding of complex systems on many levels that can inform our understanding of ourselves as a deeply interconnected system.

Linked: How everything is connected to everything else and what it means for business, science and everyday life

2010-03-28T23:55:00.000-07:00

This is a lazy post. I’ve wanted to write an intro to the extraordinary magic of networks but just haven’t had time to do it yet. So for now I’m going to refer you to Linked, a book by Albert-Laszlo Barabasi, which is an easy read. At least check out the intro through Amazon’s look inside feature.

Barabasi has been one of the pioneers in the study of networks, including human and cellular networks and has something to say about virtually every aspect of human networks.

The Madura Experiment

2010-03-26T23:22:00.000-07:00

Madura is a for-profit social enterprise whose core business is providing small unsecured loans to the poor. In India and around the world microfinance is very much an evolving sector. Today microfinance is practiced either for-profit or not-for-profit, each with its own unique drivers.

The prevalent for-profit approach is scale focused and profit driven. In this model the goal is to create a streamlined process for the disbursement and collection of loans that allows loans to be pushed out as rapidly as possible. Interest rates for this model generally range between 25 to 40% in India today. This is profitable business. Unfortunately it has also been widely publicized and hyped as a path out of poverty. On the positive side, it provides a conduit for more fund flow into the ‘subsistence’ economy and over time competition will result in innovations to reduce the cost of capital, and interest rates will come down. However, the social benefits are not sufficiently large or even noticeable from the outside and the social impact has been vociferously debated. In the quest for rapid growth, as people start getting multiple loan offers, a number of people who never wanted to go into debt find themselves in debt. Think of it like the temptation of getting multiple preapproved credit card offers. Yet this is not why microfinance has failed to have substantial socioeconomic impact. Rather it is because with poor knowledge levels and very limited exposure to markets and market opportunities, borrowers are not in a position to make productive and innovative use of the loans. So here one must resort to showing and glorifying as success a woman who has taken a loan of $300 and now nets an additional $10 a month, if you don’t factor in the opportunity cost of her time and labour. Personally, I find this depressing.

The model generally practiced by non-profits takes a more holistic view of the borrower. Here, recognizing the disadvantaged conditions in which the poor operate, non-profits offer loans at low interest rates that are subsidized by grants and donations. Frequently they help the borrowers set up their businesses and market their products. The focus is on ‘enterprise creation’ and they become involved in every aspect. This approach has inherent limitations in its ability to scale. It is also implicitly paternalistic. To me it’s analogous to having a protectionist government where much of the industry is nationalized and subsidized. This breeds complacence and a lack of confidence. Those of us who remember India fifteen years ago, remember a nation that felt it held a secondary place on the global stage, a nation whose leaders assumed it could not compete on a global platform and closed its doors out of fear. But we have seen in urban India what liberalization can do. When the doors are opened, information and opportunities flow more freely and people who once thought that they could not rise to a global standard now find that they can. This is a systemic change that altered the paradigm in which we, its citizens, operate, the standard to which we are held, and slowly we all rise to it.

So at Madura we are embarking on a different journey that is socially motivated but profit driven. The for-profit aspect is extremely important from the point of view of accomplishing anything with scale. In the absence of profit it will eventually fizzle out or hit a limit in its transformative potential. However, this has to encompass more than just loans and its impact has to be systemic in nature. Our belief is that the poor are not very different in the way they will respond to opportunity. However, they have to be connected in a network in which information and knowledge flows more freely so that they more rapidly encounter opportunities. Today they encounter new information and form new links or relationships at a very slow rate. The challenge is to speed this up. The belief is that with the right network conditions, people will become more innovative and productive in their interactions and socioeconomic transformation will be a natural outcome of these interactions.

So where does this fit in with microfinance? Putting ideas into action needs money (most of the time) whereas money without ideas is just a piece of paper. Our strategy is thus based on the premise that if we have a network of credit enabled people sharing information and ideas, the network dynamics will work its magic. (What magic you might ask – I will talk about this in future posts).

We have thus embarked on a journey of building a monetizable information delivery network that, together with efficient delivery of finance, creates a strong growing business. The test, however, is how well we leverage this to turn it into something far beyond a business. Succeeding in the ultimate goal will require some clever understanding of the properties of the human network we are working with so that we can affect it as intelligently as possible. And that, I think, is the exciting challenge in this whole effort.

Visit us at www.maduramicrofinance.com

Where is this blog leading? Who’s your audience?

2010-03-23T10:03:00.000-07:00

Yesterday someone I know very well (no names will be named) asked me ‘What’s the purpose of your blog? Who do you want as your audience?’ So I said ‘What! Can you give me a break? This blog is only a couple days old’. ‘It’s just not evident to me what this is leading up to,’ unnamed person persisted. I won’t tell you what I said then, but grudgingly I’ll admit those are good questions. So here are the answers.

My posts will encompass the following range of topics:

1) Explanations of different concepts underlying networks in nature, and network principles in general, and how they relate to the issue of poverty. These will be a little didactic but are concepts that will help in understanding other posts. Initially there will be more of these but over time that ratio will change in favour of the categories below.

2)Discussions of different approaches to tackling poverty and their successes and shortcomings.

3)Discussion of a network based approach to solving the problem of poverty using a for-profit enterprise model which will include empirical data and network models.

4)An update on the practical approaches and outcomes at Madura Microfinance where we will use network understanding to drive socioeconomic change.

The audience I envision are people with an interest in the issue of poverty who 1) work in companies, government, non profits and other organizations who are curious about what science may have to offer as an approach on the frontlines 2) are scientists in the areas of nonlinear dynamics, condensed matter physics and other related fields who are interested in taking on research that can have immediate practical relevance.

How Nature Works by Per Bak: A recommended read on power laws

2010-03-23T00:33:00.000-07:00

I have previously posted on the heavy-tailed or power law nature of income distributions where income and number of people with that income has a power relationship. (See Who cares about the average income!)

To get a feel for how much of Nature can be described by a power law and what could be behind this, here is a good book to start with: How Nature Works by Per Bak. Per Bak (now no more) was a physicist who developed a model that he called ‘self-organized criticality’ that produces power law outcomes. However, it is not the only model of dynamical systems that produces power laws. Consequently he did get quite a bit of criticism for stretching to claim that this (his model) is how nature works. Nonetheless it is an interesting read.

As a general principle though, models of systems that produce power laws (like the one developed by Per Bak) are ones that are dynamic or in motion, and by their very nature are able to explain the coexistence of the few very large events (the accumulation of billions among a small number of individuals) and the large number of very small events (a huge number of people who have not acquired much money at all). This is a fundamental shift in thinking relative to the prevailing notion that the existence of billionaires (or rare events) is ‘anomalous’. Indeed billionaires appear to be a natural outcome of a dynamical system of money flow.

The Tales of Tails

2010-03-19T09:07:00.000-07:00

When we enter a space our natural inclination is to do a quick visual survey of who’s around. When we walk into a first grade classroom for instance, we expect to see a whole lot of 5 and 6 year olds and one or two adults.

Now if we were to plot the heights of the people in the room we would get a narrow ‘bell curve’ like distribution centred around 3.5’ and a point or two sticking out somewhere in the range of 5’and 6’.

Let’s say I wasn’t there and all I had in front of me was the distribution that you put down. I could pretty easily guess what kind of situation this was. Where else do you have a bunch of small people with just one large person? Now instead, what if I showed you a distribution that looked like this?

There are still thirty kids of the same size range. But now there are around 30 grown ups as well. Where would you find that kind of situation?

If you guessed that it was one of the kid’s 6th birthday parties, you would probably be right. So every distribution has a tale to tell. And the tale runs deeper. It tells us something about the nature of height itself. The bell shaped curve suggests that the height of one child in the class is virtually independent of the height of the others. Indeed for each of us, our heights play out from a highly similar genetic program with small variations arising from random environmental events.

It’s fairly easy to make sense of this kind of bell shaped distribution since we’ve all seen it in school. But what about the distribution of incomes? What tale does it tell? Why does it look so different? (To understand what income distributions look like, please read my earlier post Who cares about the average income!). These heavy tailed distributions and the power relationship that they often reflect, tells you that there’s no one size fits all, no meaningful ‘average’. More significantly they reveal a story of high interdependence, a story of a dynamically changing complex system. It is a reflection that my income does depend on yours in some very complex way. The distribution of income is a static view of a constantly changing interdependent process. Money is changing hands all the time and every so often we take a picture of how it is looks before it is passed on. This is fundamentally different from the story of the bell curve. And every small turn and kink in the distribution offers another twist to the tale.

Income Distributions around the World

2010-03-19T08:57:00.000-07:00

In my last, and much lighter post Who cares about the average income! I talked about the heavy tailed nature of income distributions. Here’s a link to some actual income distributions for the USA, India, Japan and France (scroll all the way to page 3 and look at Figure 1 on that page). Of course, the data for India includes only that of taxpayers and most of India has insufficient income to pay taxes so this is grossly misrepresentative. And unfortunately, the authors also note that the Indian data, even for taxpayers, is incomplete relative to the other countries for the reason that: “In spite of the best of our efforts in collecting the equivalent data from the Income Tax Department of the Government of India or the Reserve Bank of India, we are unable to give or compare with any better data”.

But before you eagerly click on the link, note that when you take a heavy tailed distribution that looks like the graph on the left below (where the number of people that have a particular income is equal to that income raised to some negative power) and convert the axes into log units it turns into a straight line which is easy to recognize visually.

Since many income distributions tend to have such power law properties (misleadingly called a power law since there is no law here, it is just a power relationship), they are generally shown in the log-log coordinate form to easily be able to distinguish them from other kinds of heavy tailed distributions which are not power laws.

It’s a pity that power law distributions are not taught alongside the normal distribution in school since if you work with them a few times they become as easy to intuit. More importantly though is that this arrangement describes so much of nature and society that we would gain a much better understanding of our world.

Who cares about the average income!

2010-03-17T09:57:00.000-07:00

Many of us think of statistics as basically taking the average of some numbers. Maybe we even think of the normal distribution or ‘the bell curve’ and the concept of standard deviation. In this context, if you say the average height of people in India is around 5’ 5” with a standard deviation of 5”, it’s pretty intuitive what that means – that when you arrive in India you will find most people around 5’5” with some variation this way and that way of mostly 5”. In large part we all look similar and can fit in the same seats, sleep on the same size beds and fit through the same doorways. Instead, imagine if the distribution was not a bell curve but rather looked like this. A decreasing function with a heavy tail.

What this would mean is that most people are less than a foot tall while a few are absolutely enormous 50’ giants (in the heavy tail) with the rest somewhere in between. In this scenario there is no one size fits all and it would be impossible for a randomly selected group to be comfortable sitting at the same sized table. The enormous giants the height of multi-storey apartment buildings would have to live in a different sort of world than their underfoot counterparts. The average height in this distribution is still around 5’5” but knowing this average, and even the standard deviation, would be completely uninformative. Rather what could prepare you for what to expect is to know something about the rate at which the distribution decreases, basically the exponent that describes the relationship.

Now, unlike height distribution, which are bell curves, virtually all over the world the distributions of incomes and wealth display heavy tails. What differs between countries is largely the exponent. So if you knew nothing about India and you wondered what single number would best prepare you for the economic landscape, average income is really quite uninformative. Rather if you knew the exponent, or better still had a good visual of the distribution, you would come prepared to find Mukesh Ambani in a 27 story house on Altamount road surrounded by millions of abysmally poor people with barely a roof over their heads (and a little bit of everything in between). So, particularly from the perspective of understanding poverty, what we should care about is the exponent. Who cares about the average income!

In a separate post I will talk about what gives rise to these different types of distributions and why income and wealth distributions looks like this. Stay tuned.

**Note that if you do decide to delve further into this, most people show heavy tailed distributions in log-log or log-linear scales to emphasize the properties of the tail so make sure you look carefully at the axes.

The Physics of Poverty

Microfinance: Time to move towards financial inclusion

Scrap the MBA

Cityscape

Happy Nation

One World, One (Giant) Language

Cigarettes and Swans

What is it worth?

Relationships Not Productivity?

The Glitter of Gold

What do you know about village life?

From Subsistence to Suprasistence

What do you know about rural India?

A Different Species

Productivity Line

Microfinance 2.0

Gross Domestic Poverty

Like a Diamond

Learning to Organize

Cumulative Advantage

Branded by Poverty

Wikiwhat?

Hear Ye! Hear Ye!

Who cares about the average income!

It's not a pyramid!

When there are no words...

Evaluating Social Impact

Social Entrepreneurship? Really?

Caps, Drugs and Microfinance

A Culture of Progress?

Go on. Innovate!

The Decade of the Cow

Potential Money

Of Mind and Money

Physics of Poverty at YourStory.in

Hear Ye! Hear Ye!

Creating Social Value

Do not disturb

It's not a pyramid!

Driving more productive interactions

The Madura Experiment (more refined)

Read More, Make More

Culture and Progress

Social Impact Evaluation in Interconnected Evolving Systems

The Value of Money

Interpreting Poverty through Images

Mobile Phone Data Capture

Engineering organizations

Is organization an innate human trait or learned?

Madura is looking for a postdoctoral scientist

Increasing the rate at which ideas have sex?

Who cares about poverty in the summertime?

More on money flow

What's a newspaper for?

What's Google? Is Obama a computer program?

A physicists view of financial bubbles

A network view of entrepreneurship

The Strength of Weak Ties

Microfinance, money flow and social impact

Connected we succeed, divided we default

Driving socioeconomic change by making women more dependent

The Physics of Friendship: Do we make friendships no differently than a bunch of particles bouncing around?

Where does the money go?

Why 'physics'?

Linked: How everything is connected to everything else and what it means for business, science and everyday life

The Madura Experiment

Where is this blog leading? Who’s your audience?

How Nature Works by Per Bak: A recommended read on power laws

The Tales of Tails

Income Distributions around the World

Who cares about the average income!