Saturday, March 29, 2008

The Happy State of World Progress

Don't worry, be happy. Simple advice, and an annoying song (Bobby McFerrin, what were you thinking?). But not the type of advice one associates with economists, especially these days.

A growing number of economists, and even the Economist itself, are starting to feel that GDP just isn't up to the task of determining how we are doing. Since "what gets measured, gets managed" it is important to measure the right things about our world. Like happiness and health, in addition to income.*

WorldWatch's 2008 State of the World Report conains a nice summary of the field. In "A New Bottom Line for Progress," John Talberth outlines the approaches to improving and expanding both macroeconomic and microeconomic measurements of progress. The big problem is that "GDP gives no indication of sustainability because it fails to account for the depletion of either human or natural capital." Talberth provides some useful examples, including a disturbing graph showing the escalating GDP in Sudan during the Darfur genocide and in Sri Lanka after the tsunami. These disasters are simply not captured by the GDP accounting system.

While rising GDP is correlated to genuine progress in the early stages of development, Talberth proposes that there is a threshold effect, beyond which social and environmental costs offset the benefits of economic growth. He cites work in China showing that their recent economic growth may have been entirely offset by these costs in some provinces. Yup, it appears that those dang "off balance sheet items" weren't just a problem for Enron, but are a growing problem for our global eco(nomic)system. And we all own stock in the Gaia 401(k).

Talberth also provides a summary of new ways to measure progress for enterprises, covering certification, waste streams, eco-efficiency, and both work place and community well being. For entrepreneurs, his table of microeconomic indicators would be a good checklist for building a green business. And for companies starting to develop and implement sustainable business strategies, this report would be an excellent place to begin.

*Amartya Sen's book "Development as Freedom" is my personal favorite on this topic.

Wednesday, March 26, 2008

Welcome to the Big Blog Leagues

I take my blog screening duties seriously. Before I add any blog to my "Interesting Ideas" list, I read it. Fairly frequently. I ponder it's fit. It's intellectual contribution to the field. Whether the blogger has ever bought me a beer. Whether it is worth reading in ADDITION to my blog and the effort expended by clicking on the link. So, after much careful consideration, I have added a few:

1) Rob Katz has moved to Acumen Fund in NYC. A worthy group. By adding Rob, they have finally made it to the Big Blog Leagues.

2) Patagonia's "Cleanest Line" blog. After a lot of pondering on my part. There are some great posts, but some are underwhelming. Perhaps now that they have made it to the big leagues, Yvonne and crew will step it up a notch (but don't hire Rob). Being an Abbey fan, I loved "Get Some Ed in Your Head." And I still have a Patagonia fleece jacket that is older than any of my kids. That's sustainable. Their blog is not as good as their clothing, but it has potential.

3) In an act of pure nepotism, I have added KLD's blog. I mean it is a good blog on socially responsible investing, but it is a crowded field. However... they recently hired one of my favorite children. One of the independent ones. One who no longer requires financial support from her old man. Smart firm. As with Patagonia, they are on probation. But they appear to be worthy.

One I haven't added: "What Sucks? The All Purpose Guide to Everything Disappointing and Sucky." Too bad it is a comedian and his rants about celebrities. Instead of an inspiring site like this one. Maybe we could partner up?

And, if you haven't checked out the new New Belgium website, try it. Clever and Creative. I feel lucky to work with this crew (and to drink their brew). But it's not a blog.

My most loyal readers (that's you Mom) may notice I finally upgraded to the new version of Blogger. So my picture is bigger. And the wrinkles of wisdom are more noticeable. That isn't why I changed. I changed because I thought it would be easier to do an iGoogle gadget, which would make it convenient to find out when I occasionally post. No clicking. No wasted calories. No waiting near the digital mailbox. Alas, I have yet to figure out how to do this. Which sucks.

Monday, March 24, 2008

Phones4Loans and New HEROes?

Students in my Social Entrepreneurship class are working on a very cool project, Phones 4 Loans. Last year, I gave students the option of doing an impactful project in lieu of a final exam. They got student pledges to reduce CO2 emissions by over a million pounds. In just a few weeks. I was impressed. This year, we got started on the class project earlier in the semester.

Just like Butch Cassidy's knife fight*, there are few rules for an entrepreneurship project. The idea was to figure out a way to get money (by cleaning up some "bad") and then use it in a worthwhile way (doing some good). Oh, and since it was a business school course, it had to be an enterprise, not just a project. Not necessarily a company, but something that could grow past the end of the course.

The students were a bit worried about the pledges from last year. Would people really do what they said? These students wanted real impact they could see and measure. We discussed business models for H.E.R.O.s, those Human and Environmentally Regenerative Organizations that do good by cleaning up bad, so that no matter how much they grow, the earth is better off. We brainstormed, we intersectionalized, we did mock projects redesigning i-Products for Steve Jobs (I still don't think they believe that he calls me all the time right before class).

Then they saw Chris Jordan's artwork of the 426,000 cell phones discarded everyday. It hit a nerve.

"Let's collect and recycle cell phones."
"I think you can get money for some of them."
"Let's use the money to help do good."
"Hey, let's do Kiva loans, that way the money keeps rolling over and helping people."

Thus was Phones4Loans born. As with many start-ups, this one was formed by combining existing puzzle pieces. The Medici Effect and all. Companies like Collective Good have been set up to raise money for many organizations. But they are not yet linked with Kiva.

I will keep you bleeps posted. If you have an old cell phone in Fort Collins, look for our collection boxes around CSU campus and at local merchants. If you are outside Fort Collins, start a group doing the same thing. This is open innovation... the more the better. We are happy to share what we are doing. You can be a HERO too! Like Butch?
*OK, this is still one of my favorite scenes ever. And it helped me figure out how to embed a YouTube video in my blog. Listen to Butch. He is an entrepreneur. He has built a team. To make profits. He has been busy, and gone a lot. He is in a changing industry ("things are different now, you gotta plan more"). Looking to make a profit if things go against him. And a healthy disrespect for rules. Butch is the man.

Sunday, March 23, 2008

The Matrix

When you are a business professor, you are supposed to use a 2x2 matrix to explain your ideas. This past week I was in Dallas at the NCIIA March Madness for the Mind, a conference of collegiate entrepreneurs and engineers. Several asked me for feedback about choosing a business model for their ventures. So here is a matrix that may help entrepreneurs designing a new venture: (i) select a business model, based on the income level of their market and whether the problem is a chronic one or an emergency/crisis; or (ii) select a potential partner if they are working on a solution that goes across quadrant boundaries (particularly vertically). It should be read in conjunction with my Hand-Up and Handout post of March 15 to make much (any?) sense.

With this matrix, I am focusing on business models, not legal structures. For example, if a new venture's primary mission is to provide emergency medical aid for poor people, a donor based charity model may work best. It might also suggest that this entrepreneur could partner with ventures in the other quadrants if they occasionally need to provide emergency medical aid in wealthier markets. As discussed in the other post, it may take several of these approaches to best deal with a problem in a region that contains multiple market needs. Entrepreneurs should keep in mind that the BOP is a "big picture" concept and should avoid the trap of describing countries (India, Brazil) as BOP markets. Most of these countries contain many market segments, often within the same city block. It may make sense to partner (or have a different business model) just to serve that city block, as well as the many customers with that need in that region.

This matrix implies that Millennium Villages Project might be better organized as a hybrid social enterprise, in that the challenges it is addressing are chronic in nature. While the combination of challenges (hunger, AIDS, etc.) may contribute to a feeling of "crisis," the underlying problems are primarily chronic ones of agricultural practice and markets, which may be exacerbated by a crisis such as drought. The matrix would suggest that if MVP is in the botton left, but has occasions to deal with crisis isssues, it could move vertically up to the upper left quadrant for a partner.
This matrix also implies that organizations such as IDE, Selco and PSI may be more successful, in the long run, addressing chronic issues confronting the poor than those organizations that haven't fit their business model to the quadrant.
Is this a helpful way to think about business models for these markets? Can you think of examples of diagonal movements for partnerships? Who will still be serving the poor in rural Africa in 10 years- PSI, MVP or some partnership between the two?

Saturday, March 15, 2008

Hand Up and Handout?

An article in the Boston Globe last year has kicked off a fair amount of "discussion" in the intenational development community. Christopher Shea's "A Handout, not a Hand Up" cites research by two groups of researchers, as well as the opinions of Jeffrey Sachs and Arata Kochi (head of the WHO's global malaria program), which suggest that getting the poor to pay for bed nets, condoms or deworming meds "doesn't work." Business Week also reported on the controversy.

"In public health, many aid groups have embraced a strategy of stimulating demand for goods such as condoms, anti-malaria bed nets, and water-purification systems through education and advertising, and then selling them at very low prices through health clinics, kiosks, and itinerant vendors. One goal of this strategy, called "social marketing," is to create homegrown distribution networks that wouldn't exist if the products were simply given away. But another has been to persuade people to value products that are good for them, and for several decades it's been the conventional wisdom that unless people spend money on something they will be unlikely to value it - or use it. Give things away and they will be taken for granted, it's thought."
Shea then cites work by Miguel & Kremer and Cohen & Dupas indicating that free distribution of dewormers and mosquito nets has a greater impact than social marketing approaches. Charging $.75 for bed nets reduced their distribution by 75% and "there was no evidence that women who got free nets were any less likely to use them."

This isn't actually surprising. Basic economics tells us that demand decreases as price increases (usually). Of course, economists like to assume market have good information. These products- nets, condoms, water purifiers- require education, or in development-speak, "market development." People don't generally want something they don't understand. And short term needs (hunger) logically outweigh long term needs (possibility of future sickness). For either the "charitable" or "social marketing" approach, there is a significant, long term educational component that may increase demand for, and usage of, these products.

The bigger problem with the "debate" is that these critics of social marketing haven’t dealt with the sustainability issue that caused social marketing/social entrepreneurship to emerge in the first place. Some charity works, but where it works is limited in amount and scope. It certainly has not been able to cure poverty, even after trillions have been spent. As Easterly and others have pointed out, charitable programs are limited by distribution problems (the Harry Potter vs malaria medicine challenge). In addition, where there is an overlap of charity and enterprise, another problem can arise where the charitable program crowds out the entrepreneur, but then leaves the community. The community is then worse off (depending on the measurement period). This has happened in BOP markets with microfinance, bed nets, and wheelchairs, to name a few. This "love 'em and leave 'em" approach has distorted markets and reduced trust, and will likely continue. A profit motivated venture has incentives to stay to recoup investments. Marketing costs can decline as customers become educated, repeat business occurs, and economies of scale help reduce costs. A donor driven program has fewer incentives to stay, once the initial intervention has been made. Too many donor funded models rely on "crisis" generated funding, not a long term commitment to addressing chronic problems. Who will give someone a new net in three years?

Sachs, the UN, and WHO are driven by (and dependent on!) a vision of massive developed country government funded programs… and I just don’t see those happening at the levels they want. One can rail against this failure to fund (and it will get you published in Time Magazine), but some of this failure is driven by donors wanting to see results. So far, they aren’t encouraging enough to justify big donor grants. Note that Gates Foundation is conspicuously absent from any direct funding of Millennium Villages (and you can be sure they have been asked). Just as PSI can be criticized (or Envirofit, Acumen, Grameen, etc.), so can the Millennium Development Goal projects of the big orgs such as UN. Achievment of the MDG’s is not just threatened by the failure of donor governments to fund at the levels Sachs suggests, but also by the failure of the implementation side. The Millennium Villages project has not yet established a record of sustainable improvements with the amounts Sachs claims are needed.

My take is that there is a need for a both approaches. For the very base of the pyramid (the 1+ billion living below $1/day), I think that charitable business models (perhaps using subsidized pricing to extend impact and provide some pricing signal) make the most sense. This is already the case with emergency aid- we don’t expect people to pay for food relief in a famine or polio vaccines. And the work of PSI and International Development Enterprises in these markets demonstrate there can be a role for business models where donor money is used for market development/education, while customers pay for some significant cost of the items they purchase.

Moving up the pyramid, market based models are likely to work better. As “Next Four Billion” and “Economic Lives of the Poor” show, the poor do have money and do make spending decisions. It may frustrate policy makers that people would prefer to spend money on cigarettes, or a burial ceremony, instead of a bed net in Africa. Just as it may frustrate policy makers that people buy cigarettes or a new TV, instead of health insurance in the USA. But that does not necessarily mean everyone should get free bed nets or health insurance. I have seen little evidence that those advocating market based mechanisms don’t also understand that these BOP markets are far from perfect. But market imperfections still seem to be better fixed by entrepreneurs than governments. And, in my opinion and experience, the relationship of merchant and customer seems to be more inherently balanced and long term (service, parts) than that of donor and aid recipient.

Shea's article cites Christian Lengeler, of the Swiss Tropical Institute, who found in Kenya that "10 percent of malaria nets currently deployed there were bought in traditional stores, 41 percent were provided 'through clinics via social marketing,' and 44 percent were handed out during the mass distribution of 2006, largely financed by the Global Fund to Fight AIDS, Tuberculosis and Malaria." Lengeler concludes: "clearly the time has come to see differing strategies as complementary rather than as competing alternatives." That seems wise- that we combine strategies, rather than argue that the one that contributed 41% of the nets "doesn't work."

I have yet to meet a social entrepreneur (or BOPreneur) that doesn’t believe there is a significant need for public goods and charity in some segments of the BOP. The most saddening thing is that in so many regions, people don't get any nets, condoms or dewormers, from the government, charities or entrepreneurs. To declare that social marketing "doesn't work," when it is clear that the basic needs of billions go largely unserved, seems disingenuous and divisive. Both approaches, and probably others that haven't been tried yet, deserve consideration in efforts to improve the lives of the poor.