Out of Poverty: Financial Institutions and Economic Development

Here's a news release (HT to Marginal Revolution) that could be useful a number of ways.  It's about some research that came from data collected by Dr. Robert Townsend of MIT. It the article speaks to the role of saving in helping people out of poverty. But I think it would be useful when discussing financial systems, institutions (the importance of saving), and the formation of capital. There are links to various articles, working papers and a book on Dr. Townsend's page. I'm also adding the book in my carousel at left. I hope to pick up a copy soon. Then I will share my review.

What Are You Willing to Give Up?

What if you had the chance to sit in on a course by a Nobel Prize winning economist?  What if it was "free"? Well, “free” in the sense that there's not a monetary payment necessary. As we all know, there's an opportunity cost. This may take about 25 hours or so of your time. You probably won't get a lot that you can use directly with your students, but I suspect you'll gain a lot more understanding of an important topic that your students will benefit from.

Follow this link and you will have the chance to sit in on Gary Becker's lectures on human capital at the University of Chicago (HT to Marginal Revolution). I know I'm going to enjoy them.

"Marginal" Thoughts

Today's issue of The Wall Street Journal has a keeper (subscriber content at this writing, but put the headline in your browser and you might find an ungated version). it contains a very good article that can be used when discussing marginal productivity of labor and marginal revenue product. It really is worth the effort to try and find it. The slideshow is "okay" but doesn't have the potential of the article.

The is about how the venerable fast-food chain is adding things to its menu to appeal to changing customer tastes. The problem is some of the investments are hefty and the additional revenue generate may not pay for the investment. In the article, one franchiser talks about how a certain piece of equipment wasn't paying for itself. Another franchiser discusses how an attempt to stay open 24 hours at a certain location didn't cover the labor costs.

At the same time, the article discusses how new ideas can drive productivity - a key aspect for profitability in the fast food business. The most obvious example is the addition of a second drive-thru lane at some restaurants.

As I said, you might want to spend some time trying to find this article. It has real potential to help when discussing those "exciting" cost curves in your micro classes. As always, I look forward to your comments.

Productivity

This video (HT to Carpe Diem) is about a new, robotic warehousing system. I could see all kinds of lessons arising from this video.



Show the video and ask students to identify which tasks disappear when a system like this is introduced? Using a productivity or growth equation (Y = aF[L,K,N] or some variation), what is happening when a system like this is introduced? What tasks is the system taking over? What skill-level would workers doing that job have to have to do those tasks? How would those jobs be classified (skilled, semi-skilled, unskilled)? How might this system offer an improvement over workers performing those tasks? How would marginal cost/benefit be a part of the decision to introduce such a system?

What would be the implications to a program of unemployment support for displaced workers if systems like this were wide-spread? Would this be an example of cyclical or structural unemployment? How does this relate to Schumpeter's idea of creative destruction?

Haiti Update

A few weeks back, I posted on the unintended consequences of foreign aid. Specifically I highlighted a story on National Public Radio about how food aid to people in Haiti who had been impacted by the earthquakes earlier this year was affecting local rice farmers.

NPR did an earlier story (which I did not see or cover) about a Haitian woman who was in danger of losing her small business, which had been devasted by the earthquake, because she did not have the funds to make a loan payment.

But her life has changed. Many NPR listeners sent her money - more than enough to make the payment. She has taken the bulk of the extra funds and reinvested in her business. It's a great story, and speaks to the positive side of aid to developing countries - and especially to the power of small amounts of capital to change a life.

Now in NPR's Friday podcast, there is a follow-up on that story. You can listen beginning at about the 3-minute mark. I see it as an interesting variation of an unfettered market. Funds did not have to go through a government bureaucracy, and they provided a benefit to both parties - the donor and the recipient. The recipient’s business is clearly better off, and the donor "profits" although not in a monetary sense. Rather the donor feels better knowing they have done some good. This is similar to what I try to teach about Adam Smith. It is not just about The Wealth of Nations, but it is also about The Theory of Moral Sentiments. (However, suffice it to say, there is a trade-off to success. But I don’t want to give it away.)

In that same podcast, there is another story about economic success in Haiti, beginning at about the 14:45 mark. In this case, it involves an economic development project to help Haitian mango farmers. The previous attempts by various governmental and non-governmental entities failed. But through the combined efforts of the villagers who benefitted, the work gets done - apparently including digging up and replacing 27 miles of pipe to bring water to a newly-built processing center.

I recommend this. If you can’t sit and listen, download and put it in your personal device and listen while you jog, while you work in the yard, or around the house. It will be time well-spent.

Graphics on Greek Debt Crisis and Larger Implications

I don't know how many of you have students asking about the Greek debt crisis. I know I was pleased when one of my students asked me to explain why it was relevant. But I ran across a few graphics (HT to the folks at Chartporn once again) that can help your students understand the ties that bind.

This first one is from The Guardian in the U.K. It uses a domino metaphor to show how Greek default would ultimately affect Britain.

This second one is from The New York Times. It's labeled "interactive." Frankly, I don't see it. But it does include all of the countries with major debt problems (Greece, Ireland, Italy, Portugal and Spain). It does remind me of a graphic one of my undergraduate history professors distributed showing the web of alliances in Europe prior to World War I. You should note that Europe's Big Three (Britain, France and Germany) are the most exposed as it is.

The third, also from The New York Times, is interactive and illustrates the debt levels of various European countries a number of ways. 

These can be used to illustrate concepts like fiscal policy, role of government, globalization and interdependence quite well.

Interactive Innovation Graphic

This item also comes from The Economist. It's a very interactive graphic on innovation. It allows you to play with a number of variables and graph the impact of economic innovation in various countries over time.

Remittance Economics

I ran across a very interesting article that may have application whether you are discussing national policies (as they relate to immigrant labor), entrepreneurship or exchange rates. The article is from the Middle-Eastern newspaper, The National, and is about remittances - the flow of payments from immigrant workers to their homes.

It provides a view of the issue we often don't think about, the flow from other countries with large numbers of immigrant workers. If you follow the immigration debate in the U.S. to any depth, you are bound to have run across the issue of remittances. Immigrant workers often send a significant amount of their pay home to support families in their home countries. Back in 2008, The Wall Street Journal had an excellent story (free at this writing) on the effect the then faltering U.S. economy was having on job opportunities and remittance flows for immigrant workers in the U.S.

However, back to the article that is the subject of this post. In addition to describing the importance of the flows from workers to their families (and the local economies where the families live), it describes some entrepreneurial activity (taking the process to the workers); as well as the value of exchange rate information.

I suggest you give it a read. It's short, but it's packed with opportunity. I look forward to your comments.

***UPDATE***
Looking a bit further, I found this article on the VOXEU website about the impact of remittance flows on sub-Saharan Africa, which can also help round out the picture. I hope you enjoy all of them. As always, I welcome your thoughts.

Today in the History of Economics

Today is the anniversary of the birth of Thomas Malthus. Many people hesitate to recognize Malthus, dismissing his essay on population as faulty. For those of you unfamiliar with his essay posited that unchecked population growth always exceeds the growth of the means of subsistence. The problem with his hypothesis was it failed to take changing levels of capital into account. Since he wrote at the beginning of the Industrial Revolution, he was soon proved wrong.

But he also wrote on rent and Say's Law. Regarding rent, Malthus argued against the idea of rent being a cost of production, rather believing that it was a deduction from surplus. Regarding Say's Law, Malthus felt that general gluts were possible, thus negating the "supply creates its own demand" idea that felt those periods of overproduction weren't possible. You find some good bios on Malthus here, here and here.

Today in the History of Economics

It's the birthday of Eugen von Bohm-Bawerk. He was a leading member of the Austrian School, and his focus was on interest rates. If you're interested, you can access his major work, Capital and Interest, here. (I've not read it.) He was also one of Schumpeter’s teachers. There's a good bio of Bohm-Bawerk here.

It's a busy day today so there's just time for this short post. (If some extra time pops up, I may post again later.)

As always, I welcome your comments.

Fairy Tale

Steven Landsburg at The Big Questions has a post based on an opinion piece he wrote for The Wall Street Journal in 2001.

Part of the "fairy tale" should be familiar to most of you as it deals with the concept of double taxation of corporate profits. But Landsburg makes a case that there is actually triple taxation - an interesting idea. I will have to think about it a bit more, but he makes a good case. Although I'm not sure how to address the problem he lays out.

What is your reaction? I'm interested to hear a counter-argument.

Bits and Pieces for a Snowy (Here) Saturday

One of the more puzzling aspects of this recent downturn has been the rush to embrace traditional Keynesian economics and abandon other schools. I have been particularly interested in the loud denunciation of the "Chicago School". Yet, in this post, John Taylor offers some facts about the backgrounds of various policy-makers.

Next, Steve Landsburg offers this "quick lesson" in basic economics on the problem with taxing capital income, whether in the form of dividends, interest or whatever.

Finally, one of Greg Mankiw's readers shares an acrostic for teaching economics. I have to agree, if the students in our basic economics courses remember nothing else, this would be great.

I hope you will share your thoughts.

Economics and Somali Pirates

I think this story from The Financial Post about Somali pirates setting up a "stock exchange" has a lot of possibilities. (HT to Arts & Letters Daily.)

It provides a platform to launch discussions on a variety of concepts. The author examines risk and reward, providing an opportunity to discuss incentives. The story can also be used to discuss markets and other economic organizations (or lack thereof), as well as the rules (institutions) used in the market (from participation to cash to barter). There are even aspects of marginal analysis (cost vs. benefit) that can be brought out with a little discussion of "everyday life" in Somalia. As you're approaching the end of the semester and looking for something to prime their brains for exams, this could be a fun and educational diversion.

I welcome your thoughts and comments.

Market Skills: Technology vs. People

As economies change, the need for skills can change. This cartoon might be an example of a chicken-or-egg situation, but there's a clear message.



What do you think?

Productivity, Cell Phones and Global Development

One of the things we try to teach our students is that it's not about wages but about productivity. Worker productivity drives the price of labor and, ultimately, the product of labor. This past week, there is a special report on the mobile telecom revolution in The Economist. The main idea is that this relatively small and inexpensive piece of technology is having a significant impact on the lives of people living in less developed economies. Cell phones can even work as small, mobile banks.

The story is not unlike the one I posted on back in February of this year, or this article from The Quarterly Journal of Economics.

There are many things that make the cell phone valuable and significant. But what I find most interesting is its ability to add time and place utility where previously there was none. By connecting people to information in remote areas and at almost any time, they are empowered and can make better decisions. And it makes them more productive by allowing them to match their resources to outside markets, and to get better returns on those resources.

These stories are worth looking at, both for you and your students.

Microfinance and Economics

There was an interesting group of articles in today's issue of The Wall Street Journal (WSJ), all dealing with the idea of microfinance or making small loans to poor people (usually in underdeveloped countries) to help them improve their personal economy, which in turn can help the local and then the larger economy develop. I'll get to the stories later, but first some background.

Long-time readers of this blog have read about microfinance, Grameen and Yunis before. There are some excellent summaries of what Yunis is doing with the Grameen Bank on YouTube, and on the Nobel Prize site.

What makes this microfinance story so compelling is the success it has generated. With a 95%+ repayment rate, at interest that many Westerners would consider onerous, Grameen has made a difference in many lives. But what is most interesting is the procedure the Grameen Bank uses. It lends to women, in societies where women are often looked down upon or, at the least, undereducated. It also depends on peer pressure. Borrowers are expected to have sponsors or be part of a group. The group has a role in making sure the borrower makes repayment, on time and in full. And the Bank turns traditional credit on its head. The less the borrower has, the more creditworthy they are. In fact, Yunis himself states in a February, 2008 lecture before the London School of Economics that the approach was to examine what large financial institutions did and to do the opposite.

This brings us to today's WSJ stories (all free at these links at the time of writing). It seems that the success of Grameen Bank has drawn other institutions into the microfinance market, with some success.

One sees the attraction, high rates of return with low default rates. It certainly seems like an attractive business model. But I suspect for the kind of success Grameen has experienced, the full model must be implemented. (Please note Grameen plows profits back into loans. The borrowers are the owners - more of a credit union/co-op model than a commercial bank.)

A second story (which includes a great short video) relates how for-profit investors are noting what may be the early signs of a credit bubble (not unlike the one experienced the West); with borrowers piling loans on loans on loans, often to finance consumption rather than business development. Apparently, the lenders often ignore the real uses or encourage borrowing. This leads to short-term increases in living standards, but not long-term development or financial independence.

Indeed, the article indicates that because the firms did not use the full Grameen model, institutions are now pushing back on the loans. Groups of borrowers and religious organizations are encouraging non-payment. And, as is shown in this accompanying story, some object to the idea of group pressure, despite the fact that the same pressure is part of what makes Grameen successful.

I think the larger issue, offers a lot of possibilities for classroom use. The most obvious ones are related to the topics of banks, credit, capital, production and economic development. But one can also intertwine discussions of economic institutions. After all, what role can traditions or beliefs about of honesty, peer pressure, and gender discrimination have in credit markets? And while the WSJ stories focus on women borrowers, I found myself wondering if, with greater desire to lend, came a loosening of standards - i.e. money was also lent to men, or to people who already had access to capital (other loans). Clearly there were some false statements of intent on the part of some borrowers; and some “looking the other way” by some of the lenders.

I know there's a lot of information here. And I hope you will be able to access all of it. (Sometimes free links get changed to subscriber links.) But I expect you will find the story interesting, and I hope your students will, as well.

I look forward to your comments.

This Is So Cool....

HT to Mark Perry



Show this to your students and ask what some of the implications are for workers? for job skills? for infrastructure? for product quality? for competition?

This post references the following Keystone Economic Principles:
2. There Ain't No Such Thing as a Free Lunch.
3. All choices have Consequences.
4. Economic Systems Influence Choices.
7. Economic thinking is Marginal Thinking.
and
8. Quantity and Quality of available resources impact living standards

Books on Economics for Elementary School

This post relates to the following Keystone Economic Principles:

6. Do what you do best, and trade for the rest.
and
8. Quantity and quality of available resources impact living standards.

When school resumes next week, the Powell Center will begin one of its traditional activities at Collegiate School. Every spring, the Powell staff goes to the elementary school and does a "story time" session with the students to help them see economics through literature. One of the books we'll be using this year is Sweet Potato Pie by Kathleen D. Lindsey.

If you're unfamiliar with the book, it's about a family that faces a financial crisis. Their solution is to bake and sell sweet potato pies. I don't want to go into more detail than that, and I'm certainly not doing the book justice as a result. But the book provides a great way to examine how people (in this case a family) respond to incentives (in this case a negative incentive). But it is even better at providing a platform to discuss the production process and the factors of production: human resources, capital resources, natural resources and entrepreneurship.

We will be posting a formal lesson plan, with an accompanying presentation for classroom use sometime next week. I will post again when it is ready. But in the interim, check out the book and give it some thought. I think you'll find it a worthwhile resource for teaching some economics in the lower grades.

I look forward to your comments and suggestions.

Economic Cycles?

This post relates to the following Keystone Economic Principles:
4. Economic systems influence choices.
5. Incentives produce “predictable” responses.
8. Quantity and quality of available resources impact living standards.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

Last week, I posted on an interesting article about bicycles in Paris. The government had provided bicycles for Parisians to use with the intention of reducing automobile traffic and to help people get around. The bikes were available at no charge through an agreement with a private firm. But circumstances were causing the firm to rethink the idea.

Now we have a different story (HT to Izzit). But we travel to Zambia for this story. In this case, a couple of entrepreneurs have set up a not-for-profit and are selling bikes at a subsidized price. The idea is to provide much-needed transportation in this African country - transportation that will allow many to improve their standard of living.

I have a couple questions that you can pose to your students about this.
1) What is different about how the bikes are provided?

2) Does the difference in providing the bicycles create a different incentive structure for the people using the bike?

3) How is the Zambian story an example of application of capital to a developing economy?

If you use this in class, please share your experience. I would think this would be a good example to use when discussing property rights as an institution to help economic development.

Capital and Economic Development

This post relates to the following Keystone Economic Principles:
8. Quantity and quality of available resources impact living standards.
and
9. Prices are determined by the market forces of supply and demand…and are constantly changing.

A couple years ago, I posted on an interesting story (free content at this writing) about fishermen in India who were improving their business thanks to the arrival of cell phones. Yesterday's issue of The Wall Street Journal had a similar story about farmers in India benefitting from the arrival of cell phones.

We teach about productive resources: land, labor, capital and entrepreneurship. But we frequently forget how what seems to be a small (to us) addition of capital can significantly alter productivity and raise standards of living.

By adding cell phones to the mix in rural India, farmers get better access to more information that allows them to make better production decisions. Information about weather and prices in more distant markets provide a more efficient allocation of resources and better prices.

In addition to using this as an example of the addition of capital to the production process, you may also consider using it when you discuss economic development in the macro portion of your class.

I look forward to your comments.