Where's the beef?

The World Bank's private sector arm, the IFC, recently backed out of a deal funding cattle ranching in Brazil after objections from the Bank's own evaluation group, which argued that the deal posed a "grave risk to the environment:"

Vinod Thomas, the IEG’s director-general, sums up the dilemma: “Climate change threatens to derail development, while business-as-usual development threatens to destabilise the climate.”

The job of the World Bank and other aid agencies is not to promote business as usual. It is to promote innovation - new ways to grow, and to do so in a way that helps rather than harms the environment. The Economist magazine and others dwell on the costs of fighting climate change, but they rely too much on a static mind-set. With the right signals and incentives, great creativity will be brought to bear, and the problems will be addresses at far lower cost than we think.

Many of the solutions (especially energy efficiency measures) will generate net benefits, even with existing technologies, according to McKinsey. The others will be harder to tackle, but they can be tackled. To do so, however, will require extreme ingenuity and persistence - meaning that the next depression may be a psychological one rather than an economic one.

[GlobalGiving]
[image credit: Jelle at Flickr under a Creative Commons license]

"The work is grueling, but at least the pay is bad!"

Dr Nesse believes that persistence is a reason for the exceptional level of clinical depression in America—the country that has the highest depression rate in the world.

That is from an interesting article on Economist.com. Some recent research indicates that mild depression may be nature's way of discouraging people from trying to achieve unattainable goals.  One of the researchers notes that that the dynamism of the US comes from lots of people pursuing unreasonable goals.  On the one hand, entrepreneurial spirit makes the US the engine of innovation in the world.  On the other hand, the costs in terms of mental health are significant.

All of this research is still at the speculative stage.  But this article does provide a useful caution against overly romanticizing entrepreneurship.  Someone asked me the other day what I thought the most useful thing was that they could do to promote social entpreneurship.  "Create a nice place for social entrepreneurs to get together, blow off steam, and decompress," I told him. 

Maybe we should do the same for the project leaders on GlobalGiving, many of whom are out there every day straining to achieve the impossible.  As one of them told me a while back, "The work is grueling, but at least the pay is bad!" 

[GlobalGiving]

Invest in girls to fight global warming

Key to innovation and problem solving is looking at things from a different angle. Last year I did a post about how modestly changing your diet can not only improve your health -- it can also reduce carbon emissions as much as buying a hybrid:

Trimming the amount of meat Americans eat would not only help the planet — a mere 20 percent reduction is the equivalent of switching from a Camry to a Prius — but would also be likely to reduce obesity, cancer and heart disease.

Few people look at problems from a different angle better than David Wheeler, a former colleague at the World Bank who is now at the Center for Global Development. David was among the first to note that fighting global warming will require major efforts in developing countries, who are now the major - and fastest growing - source of carbon emissions (more here.)

Now my colleague Bill Brower reports on a talk David gave recently. According to Bill:

David calculated that investing in methods to slow population growth (educating girls and family planning) in developing countries could lead to greenhouse gas savings on the order of switching all coal-fired power plants to wind power—at a far lower cost.

There is no paper yet on this; I will post it when available. In the meantime, if you want to "green" your giving, consider supporting a "Girl Effect" project.


[GlobalGiving]

Bullets, Ladders, and Circles

Earlier I did a post about Silver Bullets. Silver Bullets are ideas or interventions that we get infatuated with, and we start thinking, "If only we could do X...then it would work [or I would be happy!]" In my post, I fessed up to many of the international development Silver Bullets I have become infatuated with over time. I noted that, alas, real Silver Bullets are rare, and that economic growth and opportunity usually require a lot of different things that reinforce and promote each other.

This reminded me of a graphic that Legatum has put together called the Legatum Prosperity Ladder. It is a nice attempt to show how different financial instruments are important at different stages of a country's development. Grant funding is needed when countries are really poor, followed by microfinance at the next stage of development, then private equity, and finally public capital markets for the most developed economies. This Ladder is a nice antidote to those who think that any one form of financing is a Silver Bullet for economic development.

As I reflect on Legatum's ladder, I realize that it can also be applied to the different life stages of regular people -- even in rich countries. Many of us have ascended this ladder in our lives.

By all measures, I am among the best off people in the world. I was born in the most affluent country, grew up with positive role models, and went to some of the best schools. And I have worked at some of the best organizations and companies. But it could have been different. Here is my own story:

My success is due in no small part to hard work and determination--but also to an incredible amount of luck and assistance from others. My family ended up living below the poverty line for several years when I was in grade school and junior high. Luckily, there were grant-funded programs that enabled my siblings and me to be productive in school nonetheless. For instance, we ate free and reduced-price school lunches. My family was also eligible for food stamps (though we were usually too proud to accept them).

When her last child entered first grade, my mom, who was a single parent with five kids at home and few job skills, was trained and temporarily employed by a public jobs program. This program provided provide temporary income and then a stepping stone to regular employment for her. Some of us older siblings were able to get work as well - delivering papers, waitressing, etc. Our household income rose, so we were able to depend less and less on food subsidies and more on our own resources.

But we had few extra resources for education. I was able to get an extraordinary education, even though my various odd jobs could only pay for books and modest other fees. My public education was free, and then I received scholarships to a high-quality prep school, university, and graduate school. That schooling in turn enabled me to get an excellent job.

It was only when I was twenty-five that I began my full-time professional work life. Finally I was able to pay my way and take advantage of private financing markets through borrowing for a mortgage and equity ownership. After fifteen years working at my first job, I had, at age forty, accumulated enough experience and wealth to help launch my own organization.

Everyone starts out life grant funded (usually through a combination of family, public, and sometimes other private support). If things go right, we leverage this early stage "investment" in our productivity to get good jobs and/or start businesses and become largely self-sufficient. And then, as we age, many of us come to depend again on a form of grant funding through Social Security, Medicare, Medicaid, and other forms of assistance for the elderly.

All of this leads me to think that, in developed economies at least, the Prosperity Ladder is actually a Prosperity Circle.

[GlobalGiving]

To innovate, connect.

"Successful innovation depends less on how smart you are than how connected you are."

That is the finding of a new study from University College London. They find that the sharpest bursts of innovation in history occurred when population density and migration reached a certain critical level. The advent of the internet and social networking tools to some extent enables a form of virtual density that can partial substitute for physical density.

Recommended reading.

Photo: iStock Photo via Science Magazine.

[GlobalGiving]

The limits of selflessness?

New Philanthropy Capital (NPC) in the UK has just published a brave attempt to make the case for more mergers and acquisitions among non-profits. In general, I agree that more mergers are likely to be beneficial, but it is surprisingly difficult to make a compelling case for this conclusion. And it is maybe even more difficult to come up with an effective framework that would provide the right incentives.

First, there are problems making the case ex-ante that more mergers are needed. The report notes that, among large non-profits, the "rate of merger was just one-tenth of that among for-profit companies." So that seems to be a reasonable basis on which to presume more mergers among non-profits would be useful. The problem is that the value of any merger can generally only be determined ex-post. And in that context, it is important to keep in mind that an estimated 50-80% of mergers in the business world fail. So it's far from clear that the comparison with the for-profit sector is compelling.

The second issue is the incentive framework. There are two big reasons that make non-profit mergers much rarer than those in the for-profit sector:

i) There are no returns to non-profit shareholders. In the for-profit sector, the firm taking over the other generally offers a price higher than that prevailing in the market for the shares of the other firm. This provides an incentive for shareholders to sell - and it provides a healthy reward for the shareholders when it happens.

ii) In many cases, managers of the acquiring and acquired firms get bonus payments for concluding a merger. It is typical for the managers in the acquired company to get buy-outs. Sometimes these payments are even large enough for managers to put pressures on the shareholders to buy or sell by painting a rosy picture of the potential value created by a merged entity. By contrast, mergers in the non-profit sector generally mean that some managers lose not only their jobs and source of income, but their identities and status as well.

As I said, I agree with NPC and others that more mergers and acquisitions would probably help the non-profit sector realize efficiencies and sometimes create additional new value. But more data, more awareness of trustees, and more urging by commentators are unlikely to provide the incentives needed for that to happen. Something more catalytic is needed.

[GlobalGiving]

Photo: creative commons/flickr/ by aturkus

Sticks and Stones...

Sticks and stones can break your bones, but words can never hurt you. Or at least that's what I learned when I was young.

But I was wrong. The power of words is everywhere. Some of the most powerful words in history are the following:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government.

But words can also do terrible harm, as Isaiah Berlin reminds us in this lecture he gave about Jean-Jacques Rousseau at Oxford fifty-seven years ago. Berlin describes the evolution of Rousseau's ideas, and how Rousseau's inability to overcome internal contradictions in his thinking led him to a delusional philosophy that laid the groundwork for fascism and communism. In dissecting the harm done by Rousseau's words, Berlin's own words provide a strong innoculation against all forms of totalitarianism.

What a pleasure to be able to sit in and listen to this lecture as if one were a student at Oxford in 1952. Berlin is one of the best philosophers of the last century, and I am always surprised at how nontechnical and straightforward his writings are. There are four Berlin lectures available at iTunes, which deserves credit for making the spoken words of this extraordinary man available to us all.

(Thanks for the pointer, April!)
[GlobalGiving]

Should'a eaten that spinach

This paper by my old professor Angus Deaton, and Raksha Arora, finds a strong positive correlation between height and income/well-being.  Very interesting findings and conjectures about what is at work:

[GlobalGiving]

Coral Reefs for Development?

Mario Morino posted a nice piece recently about the need to nurture "coral reefs" for innovation in the US. I like his metaphor very much. He notes we don't know how to create reefs from scratch. Silicon Valley and other innovation centers such as the Research Triangle in NC, the Boston/Cambridge area, and the Seattle/Richmond area have grown organically, without a lot of top-down planning or intervention. The key, Mario notes, is to make sure that conditions are favorable for these reefs to grow, and to avoid disturbing or destroying them when they emerge.

Though Mario is making the case for innovation in the broader sense, it is particularly relevant to developing countries. Per capita income throughout the world was more or less the same from the beginning of recorded history to the early 1800s. People struggled to produce enough to survive. In the early 1800s, a variety of technological and institutional innovations drove an incredible increase in per capita income. These innovations increased output beyond what was needed for immediate consumption, and the surplus could be re-invested to produce even more output in the future. Continued innovation meant that the returns to each unit of invested surplus (ie productivity growth) kept increasing as well.

Few of us realize the extent to which we live in a period of unprecedented affluence. But the picture looks very different for people who live in what we call developing countries. Here is a comparison of growth in per capita for developed vs. developing countries (click to enlarge):

The astounding gap between growth in developed vs developing countries is hard to explain. There have been many schools of thought over the years, but most have turned out to provide few useful insights about how to spur faster growth in developing countries.

The whole international aid field is built on the notion that the developed countries can invest additional capital into the developing countries to accelerate the latters' rate of growth. Unfortunately, the returns to the $2 trillion in aid spent over the last 50 years have been disappointing. Some studies show zero return, while other studies show a positive, but small return. No one questions the fact that there has been little or no productivity growth in the returns to the aid spent.

The low or zero productivity growth for aid reflects the lack of innovation in the field, which resembles the world economy pre-1800. But there is hope: when Mari and I did the first Innovation and Development Marketplaces at the World Bank ten years ago, we accidentally tapped into an exceptional well of innovation that the current aid system is ignoring.

The prescription here is clear: "Physician, heal thyself." The top challenge for the aid system is to infuse innovation into its own DNA. GlobalGiving is a first step in that direction, and we are planning many new features in the year ahead. There have been other admirable new approaches arising out there as well. But much more needs to be done to bring the aid business into the modern era.

[GlobalGiving]

The paradox of the silver bullet

On Monday, I spent an hour with an Ivy League professor who is considered to be a contender for a Nobel Prize.  He has an idea that he is sure - absolutely sure - can revolutionize the field of development and economic growth.*  As I listened, my right brain could not help but be taken in by his enthusiasm, and I told him to let me know what I could do to help out.

My left brain, however, was flashing a yellow light: his idea has been tried many times before, though in somewhat different incarnations. Based on my long experience, he is unlikely to achieve what he is hoping (though he may well make a solid contribution).

I realized I was listening to was a guy in thrall to a silver bullet.  After thinking long and hard about a problem, he had come up with what he was SURE was going to be the breakthrough answer.

After our conversation, I began to think about the last 25 years of my career in the field, and about the  silver bullets that I had become enthusiastic about over those years.  Here is a partial list, starting in 1983:

- population control through family planning
- rural off-farm employment
- agricultural productivity
- smallholder tree crop farming
- housing reform
 -household energy retrofits
- girls' education
- microcredit
- SMEs (and credit for SMEs)
- better rule of law, especially property rights
- more open trade
- financial sector reform

In many cases, I got as enthusiastic about my latest silver bullet as the professor.  And in most of the cases, I made some progress and hopefully some positive impact - although never to the extent I had feverishly dreamed.  After so many silver bullets, you would think I would have learned.

The paradox here is that, on the one hand, there *is* no silver bullet; but on the other hand, you almost have to believe in your particular silver bullet to expend the energy and make the sacrifice to make progress.  Many of the projects I did in my "official" development career required levels of effort and commitment that were irrational when the personal costs and benefits were tallied.  And lord only knows what an irrational labor of love GlobalGiving has been.

Today someone sent me a link to a spirited discussion on SocialEdge about Kiva.  One of the commenters pointed out that microcredit is not a silver bullet for poverty alleviation.  He is right.  But the folks at Kiva have done an exceptional job in advancing the popular understanding of the role that credit can play as part of a package of things that can raise people out of poverty.  And in doing so, they have sacrificed much personally.  For that, we owe them (and the Ivy League professor) thanks.

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* The professor asked me not to identify him or the idea until he reveals it later this summer.

[GlobalGiving]