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A Satellite City Gone Wrong June 7, 2011

Posted by isbcems in Affordable Housing, Urbanization.
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By Shahen Dastur

I came across this article about a Satellite City, Kayabaşı developed by the Housing Development Administration of Turkey, also known as TOKI. This article reveals how many housing projects are not successful even if they provide the option of improved living standards for many low-income families. Kayabaşı, the satellite city developed by TOKI remains unpopulated as the people it aimed to sell its apartments to are unwilling or have moved back to Tarlabaşı, the neighboring city.

After a journey by bus and minibus (dolmuş) that takes almost exactly two hours despite the light traffic, the driver of the dolmuş stops at a crossroads. “From here, you have to walk about 15 minutes,” he informs us. “This is as close as I can get you.” There are only a few low-rise houses around, some of them surrounded by gardens. Chickens scurry away to avoid an oncoming tractor and the occasional cow nibbles on patches of brownish grass. A variety of big and small road signs point in the directions of factories and businesses in the area. A shed is plastered with cardboard signs labelled “Kayabaşı Apartment Sales Office.” It is closed.


Technology is a Magnifier of Human Intent June 7, 2011

Posted by isbcems in Education, Employability, Technology.
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By Nimesh Mehta

Technology is perceived as ‘the solution’ to problems like affordability and scalability in education and skill development. Kentaro Toyama highlights that technology is only a magnifier of human intent and capacity; it can’t substitute them. 

The Costs and Benefits of Migration June 2, 2011

Posted by isbcems in Economic Development, Employability, General Interest.
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By Nimesh Mehta

Interesting book review on migration and its impact on reducing income inequality. As Europe and America age, they will need more young and skilled professionals. The demand for highly skilled workers from developing countries like India will grow too. Migration will be an effective tool for reducing global poverty. Also, cheaper communication and increased mobility has reduced the emotional costs (though still hefty) of leaving home.

WHEN a Bangladeshi man goes to work on a construction site in the Middle East, his wife typically moves in with her husband’s family. Not all wives enjoy this. They sweat in a strange kitchen, take care of a bossy mother-in-law and see their husbands only for a few weeks each year. And although their husbands send home plenty of money, they often send it to their parents, not their wives. Migration creates losers as well as winners…

…After filling in the historical background, the authors give a rigorous but readable guide to the costs and benefits of modern migration. Poor countries may suffer when they lose their best brains to the West: 43% of Liberian doctors, for example, now work in North America. But the prospect of migrating spurs people in poor countries to acquire marketable skills. Some then decide not to migrate after all. Others spend several years abroad but then return home with new skills, new contacts and a pot of savings to invest. Overall, the brain drain actually helps poor countries. And of course, it benefits the migrants themselves. If it did not, they would not leave home.

Are Indian millionaires the stingiest in the world? June 1, 2011

Posted by isbcems in Economic Development, Philanthropy.
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Giving in India is greater when compared to other developing nations but seriously lags behind developed nations. For example, in the US, individuals and corporations are responsible for 75% of charitable gifts. In India, individual and corporate donations make up only 10% of charitable giving. 65% comes from India’s central and state government and the remaining gifts are provided by foreign organizations. This recent article in Knowledge@Wharton explores the possible reasons behind the Indian Lakhpati‘s lack of largesse.

Katherina M. Rosqueta, executive director at the Center for High Impact Philanthropy at the University of Pennsylvania, points out that given the differences in history and culture, philanthropy in India is very different from that in the U.S. Philanthropists in India, she notes, typically have some personal relationships with the beneficiaries of their generosity. “If I had to sum it up in one word, I would say that right now, Indian philanthropy is more ‘intimate’ than American philanthropy,” says Rosqueta

…While there is no hard data to support this, going by the information available, the education sector gets the most of the philanthropic donations in India. This is not surprising. For one, it is well accepted that education plays a vital role in the upliftment of a society. Two, India’s scorecard in this sector is dismal. According to various estimates, the literacy rate in the country is only 65%, only 39% children reach 10th grade and of these, only 40% move to the next level, one out of three children in grade five cannot read and write, 75% of the schools are multi-grade and teachers are not trained adequately.

The $300 house may respond to misconceptions, not needs June 1, 2011

Posted by Nikhilesh Sinha in Affordable Housing, Economic Development, Urbanization.
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Can the $300 house be a pipe dream and a white elephant at the same time? A house that costs less to than $3000(ten times) to build, probably won’t find many takers, not in Mumbai, not in small-town Gujarat, and not in Hyderabad. Echanove and Srivasta argue that if it were possible to build a $300 house, a mumbai slum-dweller wouldn’t touch it with a barge pole.

Those who own houses have far more equity in them than $300 — a typical home is worth at least $3,000. Many families have owned their houses for two or three generations, upgrading them as their incomes increase. With additions, these homes become what we call “tool houses,” acting as workshops, manufacturing units, warehouses and shops. They facilitate trade and production, and allow homeowners to improve their living standards over time.

None of this would be possible with a $300 house, which would have to be as standardized as possible to keep costs low. No number of add-ons would be able to match the flexibility of need-based construction.

Time for a Realty Check? May 30, 2011

Posted by isbcems in Urbanization.
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By Dhaval Monani

Real estate developers trying to sell costly property cannot find buyers, who in turn find themselves squeezed out of the market by rising mortgage costs and inflated property prices.

Inventory, jargon for built-up homes that haven’t been sold, is piling up. Fittingly, a full 25 per cent of total units remain unsold in Mumbai, where real estate rates are the least realistic; Chennai and Pune follow with 19 per cent units unsold, 16 per cent of units can’t be sold in Delhi and its surroundings, followed by Bangalore and Kolkata, reports Economic Times.

Developers who find themselves unable to sell built units cannot pay back loans and find it hard to raise capital for new projects. Sensible economics suggests that if they can’t sell at high prices, they should cut rates and find buyers. But most builders would rather hold on, hoping for gullible buyers to buy dream homes at prices dreamt up by the sellers.

Anecdotal evidence suggests that many builders are selling land holdings to finance loans, rather than cut prices. This too is good, because it will bring more land back into the market, creating further pressure for property prices to fall. For many years, India has not seen a property crash, so many people still believe in the phrase ‘safe as houses.’ But globally, property has been prone to long cycles of price appreciation and decline.

To some extent, the Indian real estate market has been immune from price cycles because of the prevalence of cash transactions in this sector. But with almost all regulators, including the RBI, tightening screws on the property market and trying to trace money trails for high value transactions, it’s just become harder to do cash trades.

For salaried professionals, cash was never an option, so the easy money, low interest rate regime earlier was a good time to get cheap mortgages and buy homes. But with interest rates hardening, these people have become cautious about what prices they’re willing to pay for real estate. This too is welcome: it’ll force builders to build homes that buyers can afford, rather than try and peddle overpriced merchandise. All markets have gone through corrections; it’s time real estate also got its reality check.

More ‘Affordable’ housing for Mumbai May 26, 2011

Posted by Nikhilesh Sinha in Affordable Housing, Economic Development, Emerging Markets, Urbanization.
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The Urban Development Department and the the Maharashtra Housing and Area Development Authority (MHADA) have taken another ungainly stab at affordable housing provision in Mumbai. I missed this article when it came out a couple of months ago, but the fact that it was published in the Mumbai Mirror may have had something to do with it.

The article draws attention to a recent notification that amends the Development Control rules established under the Maharashtra Regional and town Planning Act of 1966. The new rules make way for private developers to partner with MHADA in the construction of so-called affordable housing in Thane, Kalyan-Dombivali, Bhiwandi, Mira-Bhayandar, Vasai-Virar municipal corporation areas and Ambernath, Badlapur, Panvel, Karjat, Khopoli, Uran municipal council areas. The idea is that developers will use 50% of the alloted Floor Space Index (FSI), otherwise known as Floor Area Ratio (FAR) to construct affordable housing. This will then be handed over to MHADA at cost.  The good news for developers is that FSI which is usually 1, has been raised to 2.5 for these projects.

I had a chance to see some MHADA affordable housing blocks while driving out of Mumbai recently. These were 7 storey structures with no lifts, meaning that people living on the top floor must get a fair amount of exercise. Despite being fairly new, the buildings looked run-down and ill-maintained. While this move by the Urban Development Department indicates that affordable housing is finally getting some attention, I’m not sure that this represents the ideal public-private provision model. Also the fact that the notification recognizes flats that are 525 square feet in area as ‘affordable housing’  in Mumbai, seems a hard one to force down one’s alimentry canal.

The Issue of Drug Access May 26, 2011

Posted by Nikhilesh Sinha in Economic Development, Emerging Markets, Healthcare.
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By Prabal V. Singh

According to the WHO, 449-649 million people in India lack regular access to essential medicines. I have been thinking about this recently since I am involved with a colleague in a study on Drug Accessibility and Affordability—the two components of achieving access being physical access and affordability.

As for physical access, drugs are dispensed through retail pharmacies (80%), hospital-based pharmacies (12%), government pharmacies (5%), medical professionals (3%) and the rest through non government organization run programs, according to research carried out a few years ago by Kotak Institutional Equity Research. Critically, most of these points of sale for drugs are located in urban and semi urban settings – while most people in India, some 70%, live in rural areas.

As for affordability, the supply chain starts, of course with R&D, and winds its way down to the tiny shops where most people buy their medication, which each chink in the supply chain adding costs. The choice of which medication to take is actually not made even by the consumer but by the prescriber or in some cases by the pharmacist. The consumer is the most ignored stakeholder in the entire supply chain.

Are there lessons to be learned about expanding access from the banking industry? One of the strategies being implemented in the financial inclusion initiative is introduction of banking business correspondents. Correspondents are agents of the bank who try to extend banking services to under-served populations. According to the Reserve Bank of India, the central bank, correspondents are often groups:

“Banks may use intermediaries, such as, NGOs/ Farmers’ Clubs, cooperatives, community based organisations, IT enabled rural outlets of corporate entities, Post Offices, insurance agents… for providing facilitation services. Such services may include (i) identification of borrowers and fitment of activities; (ii) collection and preliminary processing of loan applications including verification of primary information/data;  (iii) creating awareness about savings and other products and education and advice on managing money and debt counseling… [etc.]”

I think we should experiment with having medication or Drug Correspondents (DC).  Identification of DCs should be preceded by mapping of areas under-served by pharmaceutical services. In Tanzania (http://www.msh.org/news-bureau/tanzania-public-private-partnership-increases-access-to-medicines.cfm), where this model is being tried out, DCs through authorized outlets are allowed to dispense drugs in a designated area. Big pharma companies are working on a rural business initiative, which apart from increasing awareness includes development of low cost rural brands. This is because in India you are not allowed to vary the price of a single brand in different parts of the country. The Tanzania Food and Drug Authority authorized duka la dawa baridi (convenience store) to sell non-prescription drugs. These stores dot the country where licensed pharmacies are scarce. To regulate them strictly Tanzanian government converted them into government authorized drug dispensing outlets (ADDO).

India’s pharma industry is among the worlds largest, and there is potential to reach every single Indian consumer effectively. The overall health market size is estimated to be more than $50 billion. The India’s share in the $82 billion global pharma market  for generics is about $11 billion. Sales through the private and not for profit sector accounts for around 94%. Government sales account for just 6% in India.

The government’s National Pharmaceutical Policy for 2002 has noble intentions: It focuses on ensuring availability, affordability, quality in production and distribution, building internal capacities, promoting research and development and creating an enabling environment to attract investments.

Yet the reality is worth focusing on. For acute conditions medication is hard to come by, and for chronic conditions patients must come several times or continually to purchase medicines, which is exceedingly difficult for people living in rural India.

FT special report May 25, 2011

Posted by Reuben Abraham in Emerging Markets, General Interest.
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The Financial Times has a special report titled New Trade Routes: India. Will be useful to anyone interested in India and the emerging markets space.

Density vs Urban Sprawl May 1, 2011

Posted by Nikhilesh Sinha in Urbanization.
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Witold Rybczynski, Professor of Urbanism at U Penn discusses the question of density versus urban sprawl in the Wilson Quarterly. He argues that downtown living, and the perceived rejuvenation of urban centers in America were a product of the housing bubble rather than a signal that consumer preferences have changed.

…But after a century of spreading out, will Americans change their minds and draw together? Some observers maintain (hope) that the current economic recession will encourage (force) home buyers to demand smaller homes and more densely planned communities. This result would be unusual, since previous recessions have not had similar effects. Consumers generally have short memories. Following the energy crisis of 1973, for example, Americans switched to smaller cars, but by 1984, when prices at the pump had dropped, gas-guzzling minivans appeared, soon to be followed by SUVs. In any case, choosing where one lives has never been a strictly economic proposition. It is always a trade-off among the affordability of housing, the length of commutes, the quality of neighborhood amenities—especially schools—and preferred lifestyles.

During the last decade, proponents of downtown living pointed to an increase in downtown residential construction as a harbinger of an urban renaissance, but empty condominiums in cities such as Miami and Chicago suggest that this boom was a product of the housing bubble rather than a signal of a significant change in home buyers’ preferences. Similarly, the fact that the average size of new suburban houses—and lots—has recently shrunk for the first time in decades may be less meaningful than it is made out to be. In a recession, the only customers are first-time buyers who can afford only modest homes (which qualify for Federal Housing Administration mortgages, the chief form of housing finance during economic downturns). Meanwhile, larger houses are not being built because move-up home buyers are unable to sell their homes in today’s weak housing market.

Choking Mumbai through regulations April 28, 2011

Posted by Reuben Abraham in Affordable Housing, General Interest, Urbanization.
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Former CEMS researcher, Shilpa Rao, has an interesting piece in the Global Urbanist on how land regulations have choked Mumbai. This is the first in a 3-part series.

Due to this dwindling physical land bank, Mumbai is now forced to depend on the creation of a virtual land bank through additional floor space allowances. For years vertical growth has been severely restricted due to fears that this will attract more people and the city’s infrastructure is not ready to support them. However, now the Floor Space Index (FSI) is being used as a currency rather than a zoning tool. Additional FSI of up to 4 is being ‘sold’ at exorbitant rates to developers in return for public amenities like ‘parking lots’ (among many other silly things). Because of this rule, in downtown Mumbai you now find more parking lots than cars in locations that have absolutely no need for them.

Consequently Mumbai has a haphazardly rising skyline (with dozens of buildings as high as 40 floors) with absolutely no supplementary increase in water, sanitation and transport infrastructure. To an external observer, it almost seems that civic authorities are not really interested in restricting vertical growth, but merely want to retain these regulatory instruments as a means of political funding.

Tim Harford on Charter Cities April 22, 2011

Posted by Reuben Abraham in Urbanization.
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I missed this, but Tim Harford wrote an op-ed earlier this month in the Financial Times titled Is it time to outsource cities.

No one is more radical than Paul Romer. Romer’s first career was as the most influential growth theorist of his generation; he was then a successful entrepreneur. Now he beats the drum for “charter cities” as a radical solution to the problem of poverty. Like all cities, charter cities are built on land, populated by people and run according to certain rules. What is unique is that the land, the people and the rules might come from entirely different sources.
When I met Romer in London last year, he was concerned about the credibility of the city’s institutions. Because a city is costly to build, much of its infrastructure will last for decades. Romer argues that investors will not bite without a steady (Canadian? Norwegian?) hand on the tiller. Perhaps he is right, but there is another angle to charter cities, which offer the opportunity to experiment with new rules that do not apply elsewhere. Cities such as Singapore and Hong Kong have prospered because the rules there have been conducive to doing business. Perhaps countries do not really need to outsource new cities; perhaps a special economic zone will be credible enough.

Take New Songdo, a conurbation close to Seoul. For Greg Lindsay, New Songdo is an aerotropolis, notable for its proximity to Incheon airport. I think its quasi-charter status is more important: South Korean politicians privately admit that New Songdo is attractive because businesses can be offered light-touch regulations without seeding a political storm.

Notes from Bihar: searching for the right medicine for a beleaguered state April 22, 2011

Posted by Nikhilesh Sinha in Economic Development, Emerging Markets, Healthcare.
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By Priya Anant

I spent the last two weeks in Bihar commissioning a project on government contracting for improved child survival. The objective of this project is to work with both the government and the private sector providers on improving the survival rates of infants. This is the third phase of our engagement with our partner, the Norway India Partnership Initiative (NIPI). Earlier phases included a workshop that was focused on understanding experiences in the country as well as global experiences in government contracting or Public Private Partnerships (PPP) as they are widely known. State and district level research on existing private sector highlighted the need and opportunity to engage the private sector.

It was exciting to see for ourselves the huge “redeeming” agenda of the public sector. “Primary education and health have to be provided for by the Government”, observed a senior administrator. There is frantic infrastructure building activity across the state. The State Health Society, Bihar (SHSB) is one of the swankiest state offices that I have ever been to; the sense of urgency (including a biometric attendance system for staff) is evident. During the course of our numerous interviews with senior heads of departments in SHSB (connected to child health), the most common shared concern was the lack of staff, quality and productivity.  The numbers are revealing- of the 80,000 odd ASHA (Accredited Social Health Activist) workers across the State, 40% are yet to be trained on the first four of seven training modules (Government is stepping up the pace by expanding the trainer institutions). The fact that INR 696 out of the INR 1,274 Crores (USD 1.39-2.55 billion) annual outlay was returned unspent, along with an interest of Rs.17 Crores (USD 3.4 million), underlines the problems with “absorption”. This makes me wonder whether more money would necessarily translate into improved health care availability and a subsequent improvement in the indicators.

The restoration of law and order has been the biggest change that Bihar has seen over the last few years. This has provided the confidence for many development agencies and donors to come into the State. We met many important development partners working on healthcare in the State: DFID, which has the agenda of providing technical assistance to the State for Public Private Partnership structuring and execution and undertaking health sector reform, UNFPA which is focused on improving access to good quality family planning services, NIPI with the child survival “catalysing action” agenda and of course, the latest entrant BMGF with two large implementation-focused grants, were some of the key partners we met. One of the BMGF grantees is a consortium led by CARE and the other is World Health Partners. The outlays of the development partners vary between Rs.45 to 2,000 Crores (USD 9 million to 4 billion) for the next five year period. But what is common among most partners is the agenda of “working with the Government to strengthen public systems”.

A mechanism is on the anvil for all development partners to sit down together to align missions and operations. It has been proposed that the Government should play the role of a steward, which would help these agencies work together and with each other in a meaningful manner. The informal channels of communication currently used would then be formalised.

Baby with grandmother, Kathari Biga village, Nalanda district

It became evident during our journey to the districts of Jehanbad and Nalanda, why Gulshan Bawra wrote the beautiful lyrics “Mere desh ki dharti sonaa ugale, ugale hire moti….mere desh ki dharti” (roughly translated as: the earth of my country produces gold, silver and diamonds…). Endless fields of golden grains, swaying gently to the summer breeze present a huge contrast to the many problems. Widespread landlessness (while the government estimates stand at 10 percent overall, sample surveys indicate that over 50 percent of households may be landless in certain areas), abject poverty (50 percent of the families here live below poverty line) and huge burdens of maternal and infant deaths. It is a land that is abundantly endowed with natural resources but also with some of the poorest health standards in the country (Human Development Index for India is 0.612 whereas that for Bihar is 0.476). A large percentage of the poor seek care from the private sector because 70% of the doctors operate in the private sector. The 30% who don’t, have a right to a private practice beyond office hours. The private sector is unregulated and driven purely by market forces.

Bihar currently has an Infant Mortality Rate of 52/ 1,000 live births as against the national average of 50 and the goal in Bihar is to take this figure to below 30 by 2012. A heart-stopping 53,000 infants were lost last year according to state data. We are now out on a fact finding mission in Bihar to collect data (facts, figures and human stories) and to corroborate the need to make infant care services available to the poorest, no matter where it comes from…public or private. The goal is to provide a substantive basis for decision-making and to ensure that more infants are not lost due to factors as meaningless as notional boundaries and fixed ideologies.

Direct tax mop up crosses $101 billion April 21, 2011

Posted by Reuben Abraham in Economic Development, Finance, General Interest.
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At CEMS, we believe in redistribution, but in redistribution of wealth, not poverty. As the pie grows thanks to economic growth, there is obviously more to redistribute (including for social programs) and everyone benefits in the process. TOI reports that the direct tax mop-up crossed $101 billion in 2010-2011.

Open source collaboration in drug discovery April 21, 2011

Posted by isbcems in Healthcare.
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By Anand Tatambhotla
All of us have known and witnessed Wikipedia as an excellent example of collaborative effort to accumulate the world’s knowledge in a re-usable format.

Consider a similar use-case in the Pharma industry, where drug development costs are exorbitantly high to the tune of about a US$ 1 billion and above, often taking more than 10 years for a molecule to come from the lab to the patient. With phases of inconsistent investor interest/ confidence and also a pressing need for innovative therapies, it is important to bring out new novel molecules cheaply and quickly.

Additionally, against an extremely challenging backdrop of declining R&D productivity, a looming “patent cliff” in which more than US$ 150 billion worth branded drugs lose patent protection, industry consolidation – focusing even more on R&D has become an imperative. As Andrew Witty, CEO –  Glaxo SmithKline says “The pharmaceutical industry needs to do more with less and still be innovative”. Such challenges could not be more apt for open collaborations between pharma companies, academia and niche specialist firms for rapid innovation.

Here are a couple of such examples which are successfully functioning and sustainable:

Open Source Drug Discovery (OSDD)

In their own words “OSDD is a CSIR Team India Consortium with Global Partnership with a vision to provide affordable healthcare to the developing world by providing a global platform where the best minds can collaborate & collectively endeavor to solve the complex problems associated with discovering novel therapies for neglected tropical diseases like Malaria, Tuberculosis, Leshmaniasis, etc. It is a concept to collaboratively aggregate the biological and genetic information available to scientists in order to use it to hasten the discovery of drugs. This will provide a unique opportunity for scientists, doctors, technocrats, students and others with diverse expertise to work for a common cause”

Since its inception there are over 800 scientists across the world working on discovering novel therapies for Tuberculosis. Based on its business model, all these scientists are engaged in target identification, validation and screening to provide qualified leads. Post this phase, the OSDD involves the  industry through Custom Research Organizations (CROs) to optimize candidate drug and proceed for clinical trials.

The organization has been able to identify a few qualified leads (hits) in a little over 2 years – something that would have taken a pharma company at least 5 years and a lot of money to accomplish.

More details about the organization here

Medicine in Need (MEND)

This is another good example of industry academia collaboration in order to bring drugs quickly and cheaply to the market. The organization initially started off with a seed funding from Bill & Melinda Gates Foundation is now able to sustain itself through drug sales.

The organization functions through two related but independent divisions MEND Biotech Development (MBD) maintains wet-lab expertise in Boston and Pretoria and performs activities like drug delivery system design, assaying, stability testing, formulation development etc. and MEND Innovation & Translational Alliance Management Division (MITAM) that manages partnerships between pharmaceutical scientists, academia both from developed and developing worlds in order to discover novel therapies and delivery systems.

Pink Army Cooperative

(Cooperative is an interesting choice of word – more on this here)

This one is even more unique in the sense that it provides “personalized medicine” for breast cancer patients. It is an open-source biotechnology venture which operates in a not-for-profit basis.

As cost for gene sequencing has been drastically falling and immense computing power is now available at free or affordable cost (Google Exacycle), it would be theoretically possible to create personalize medicine and not declare bankrupcy!

An overview of this initiative is here

Meet Raenette Taljaard, former shadow finance minister of South Africa March 27, 2011

Posted by isbcems in Emerging Markets, Events, General Interest.
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Tomorrow, the 28th of March, we at CEMS are hosting Raenette Taljaard, who used to be the shadow finance minister of South Africa in the first half of the last decade. Raenette was the youngest ever member of parliament in South Africa, having won elections for the opposition Democratic Alliance against the ruling ANC. She is now CEO of the Helen Suzman Foundation and is a senior lecturer at Univ of Witwatersrand and Univ of Cape Town. The interaction will be very informal and will run from 5:30 PM to 6:30 PM, with high tea to follow.

Have we budgeted for affordable housing? March 27, 2011

Posted by isbcems in Affordable Housing, Urbanization.
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By Dhaval Monani and Nikhilesh Sinha

This time around the Union Budget is remarkable mostly for what it does not do. The tax breaks aren’t breaking news, but with the economy seemingly back on a pre-crisis growth path there are likely to be few complaints. One key area that the budget has attempted to address is the 24 million unit short-fall in affordable housing for households earning below INR 7500 per month, as identified in the 11th Planning Commission Report. While the government has proposed both supply side and demand side measures, these are unlikely to have any significant impact on those who most need access to affordable housing.

On the demand side, the 1% interest rate subsidy will apply to home loans of up to INR 1.5 million for homes that can cost up to INR 2 million. Now the question is, does a house worth INR 2 million qualify as ‘affordable’ housing? The Equated Monthly Installments (EMI) for a loan of INR 1.5 million works out to about INR 12,000 a month after applying the interest rate subsidy. This is unaffordable even for the Middle Income Group (MIG) who earn on average, between INR 7,500 -14,000 per month. In fact even households earning INR 20,000 a month would struggle to pay INR 12,000 a month given the high average cost of living across the country. If increasing the ceiling on the home loan subsidy is not going to help households living on less than INR 20,000 a month, why is this being touted as an affordable housing sop?

The Finance Minister also announced the launch of a Mortgage Risk Guarantee Fund to insure lenders against the risk of default, encouraging banks to give home loans to households in lower income groups. While this kind of intervention has worked in countries like Canada and the Netherlands, creating a self-supporting fund, maintaining reserves, instituting a clear governance structure, and strict adherence to due diligence are the necessary and extremely challenging conditions for success. Leaving aside the challenges of instituting such a fund, the government has assumed an adequate supply of cheap housing. Aside from a handful of projects that have produced truly low-cost housing, the majority of ‘affordable’ housing offerings start at INR 1 million (10 Lakhs). The monthly installment for a loan on a house costing INR 1 million works out to over INR 8,000 a month (considering an 80% mortgage with a 20 year tenure), which would only be affordable to some of those in the Middle Income Group. Again, this is a measure that will have no impact on the 24 million urban households who can’t afford homes.

On the supply side the inclusion of a new clause under Section 35AD of the Income Tax Act, which allows for a full tax rebate on capital expenditure on affordable housing projects seems a more promising intervention. However this is only valid for schemes that are government notified. Unless the criteria for eligibility are made clear and the procedure for getting projects notified is made transparent, this could lead to subversion of the aims of the policy and to the diversion of funds. Section 80 IB(10) of the Income Tax Act used size of dwelling to ascertain eligibility, which is an easily verifiable criterion. Re-instatement of Section 80 IB(10) with exemptions for projects where dwellings do not exceed 500 square feet would have been a much more effective policy change. Apart from being simpler to implement and monitor, it would have provided the right cues for the private sector to increase supply of affordable housing.

Aside from the specific policies mentioned above, revised duties and tariffs will have an impact on the cost of construction inputs, which will in turn affect the affordability of housing. A 20% tax on iron ore exports is likely to bring down domestic steel prices, but cement prices may go up by as much as ten rupees a bag due to a 10% ad valorem tax and additional excise duty. In addition the rise in the price of B-grade coal, which is used in cement production, has created further upward pressure on cement prices.

It remains to be seen how this new regime will affect the housing market, but it is clear that affordable housing agenda has not been properly addressed by this years’ budget despite what the finance ministry claims.

Sequoia makes follow-on investment into K-12 March 27, 2011

Posted by Reuben Abraham in SME Investing.
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As we reported earlier on this blog, one of SONG’s first investments was into an affordable schools company called K-12 Techno services, in which SONG co-invested with Sequoia Capital. Sequoia just announced that it was investing an additional INR 250 million ($5.5 million) into the company.

K12 Techno will use the funds for growth as well as modernization of classrooms to allow teachers and students to leverage technology for improving learning outcomes. K12 Techno has already partnered with CfBT UK and Brilliant Tutorials for spoken English and IIT training. The investment will also be used for expansion of the network by an additional 25 new schools across Andhra Pradesh.
K12 Techno Services offers curriculum development, infrastructure development, pre-school management, teacher training and marketing solutions to educational trusts. The company plans to expand this business model to other states. “Sequoia Capital’s continued support remains a crucial element in our growth strategy and is a recognition of the pioneering efforts we have made in providing high quality education under the Gowtham Model School brand. This investment will be a strong facilitator for our rapid growth and expansion as we continue to focus on-providing high-quality education at an affordable price,” Venkatnarayana, Managing Director, K12 Techno Services, said.

Welcome to the urban century March 27, 2011

Posted by Reuben Abraham in Urbanization.
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This year at Davos, several of us were asked to write opinion pieces for the Washington Post. Mine is distilled from a short speech I gave this year on urbanization trends around the world. Here is the Washington Post link and the full post is below.

Urbanization is an issue that’s slowly been creeping onto the agenda at Davos, with multiple panels this year addressing various facets of urbanization. Not a moment too soon, since urbanization is the defining macro-trend of the next 20 to 30 years across Asia and Africa, affecting the lives of billions.

There has always been a tendency to romanticize the rural life and vilify the city. The irony is that the people who romanticize tend to either be wealthy and/or live in cities. I find this strange, given the absolute centrality of cities to economic progress and well-being. According to the urban economist Richard Florida, close to 70 percent of global GDP and 85 percent of all innovation comes from 40-odd urban mega-regions. New York City alone has a GDP of about $1.2 trillion (Ed: 1.4 trillion now), making it the 12th or 13th largest economy in the world. Although cities are traditionally seen as a consequence of economic growth, they are in fact a cause and consequence of economic growth, and you cannot have robust economic growth without rapid urbanization.

The trends are clear. In 1800, 2 percent of the world was urban. In 1900, it was 14 percent urban. In 2008, the world crossed the 50 percent threshold. By 2050, it is expected that the world will be 80 percent urban. In 1900, there were 16 metro regions with a population of 1 million or more; today there are 400, of which China has 160, the United States 49 and India 37. Both India and China are witnessing the greatest migrations in human history as hundreds of millions leave the countryside for urban areas. In India alone, 300 million to 400 million people will migrate to cities over the next 25 years. The challenges of managing this process are obvious, but there are opportunities as well. Urban areas are expected to produce 70 percent of India’s GDP and 85 percent of all tax receipts by 2025.

People tend to associate developing country cities with horrifying slums. True, but it’s worth keeping in mind that cities like San Francisco were once shantytowns as well (things get better as incomes rise), and the people who live in slums have voted with their feet and represent a severe indictment of the conditions they have migrated from. Slums are also a hive of economic activity; Dharavi (India’s largest slum) is assumed to produce economic activity worth anything between $600 million and $1 billion per year.

Cities also have a positive impact on population growth, with the pressures of city dwelling and increased incomes leading to lower fertility rates. In addition, cities will have a positive impact on climate change. Despite heat island effects, a recent study of American cities showed that New York City had the lowest per capita carbon footprint, which should be fairly intuitive since most New Yorkers don’t own cars and walk or take public transit. Finally, chances are that cities will emerge as the dominant power centers and mayors will become powerful political actors. Such a decentralization of power will make it easier to negotiate issues of international importance since you can form effective “coalitions of the willing” without getting into thorny issues surrounding transnational negotiations.

Welcome to the urban century!

Paul Romer in conversation with Sebastian Mallaby March 27, 2011

Posted by Reuben Abraham in Urbanization.
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Here’s an excellent webcast of a conversation on charter cities at the Council on Foreign Relations between Paul Romer and Sebastian Mallaby. If you haven’t seen it already, Sebastian Mallaby also wrote an excellent piece on Romer’s new idea in the Atlantic.

The DNA of Change: 10 greatest innovations of last 35 years March 27, 2011

Posted by Reuben Abraham in General Interest.
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India Today recently celebrated its 35th anniversary. As part of a special issue to commemorate the occasion, I was asked to write about the 10 greatest innovations of the last 35 years. An abbreviated version in on the India Today website, but here is the piece in full.

When I was asked to put together the top 10 innovations and ideas of the last 35 years, I unhesitatingly said yes. The more I thought about it however, the harder it became to write. After all, we are in the midst of an information revolution and it’d be easy to put together a list of 50 amazing innovations that have enabled it. To make the task harder, I decided to look across disciplines instead, and not restrict myself to innovations and ideas alone, but also to events driven by ideas that have had a massive impact. Most importantly though, dear readers, these are my non-expert opinions, not objective facts, so please do not tear out your hair if you find yourself in violent disagreement.

10. Hubble Space Telescope

In 1990, the launch of the HST realized a dream first articulated in 1923 of building large space based telescopes. Initially beset by problems due to faulty grinding of its mirrors, a rescue mission set it right. By 1995, HST had begun beaming back stunning images of our universe, including the creation of stars in the Eagle nebula, the celestial butterfly unromantically called NGC 6302, Hubble Deep Field images of the early universe and much more. According to Wikipedia, over 9000 peer-reviewed papers have been published based on Hubble data. Besides the scientific progress, HSTs greatest achievement has been to capture the layperson’s imagination and expose her to the wonders and mysteries of the universe. Hubble is an old lady today and will be decommissioned soon, but while we wait for the James Webb Telescope to go into orbit, enjoy some of Hubble’s amazing images at http://www.hubblesite.org.

9. Ordering the world’s information

This piece was written with help from Wikipedia and Google. In 1995, this would have required multiple visits to the library and opening some pretty heavy books. Instead, I sit in my office tapping into the incredible knowledge pool available on the web, courtesy of Google and Wikipedia. Google has made ordering the world’s information its explicit mission, while Wikipedia has used a collaborative model to generate 17 million articles in 275 languages. In English alone, Wikipedia has 3.4 million articles compared to 120,000 articles in the Encyclopaedia Britannica. This distributed model of generating and sorting knowledge through the collaboration can be seen not just with Google or Wikipedia, but also with Amazon, Yelp etc.

In addition to the increase in the volume of information, we also see broader access and power to generate knowledge. Typically, winners have written history, and this allowed them to whitewash embarrassing episodes like the Bengal Famine, Mau Mau uprising or the Herero Genocide (go ahead, look it up). This will no longer be possible, thanks to the democratization of knowledge creation.

8. Magnetic Resonance Imaging

Since its introduction in 1977, MRI scans have saved the lives of millions by giving doctors the ability to see detailed images of internal structures without using radiation. Specifically, its ability to contrast between soft tissues has made it invaluable to detect tumours and clots. Functional MRIs (fMRI) go beyond snapshots and track the body’s reactions during a scan. The technology owes a debt to the early Apollo missions, which developed digital signal processing to enhance images of the Moon. Today, MRI technology has gone well beyond its application in medical diagnostics to fields like paleontology and archaeology where they are used widely. For their efforts in developing MRI technology, Paul Lauterbur and Peter Mansfield won the Nobel Prize for Medicine in 2003.

7. Eradication of small pox

Small Pox! Does anyone remember? A horrifying infectious disease that first emerged over 12,000 years ago, small pox killed 300-500 million people in the 20th century alone. With help of an extraordinary vaccination campaign, the WHO declared small pox eradicated in 1979, the first time mankind had eradicated a dangerous infectious disease. Unfortunately, since then, only one other infectious disease – rinderpest – has been eradicated, though Polio remains on the verge. If only we could run a similar campaign to eradicate the greatest killer in human history: Malaria.

6. Right to information

I cheated. This is the one innovation where the jury is still out, but I am predicting huge impact. The Right to Information Act, 2005 (RTI) allows any citizen to request information from the government in an expeditious manner. Rajiv Gandhi famously said that only 15% of the money intended for the poor ever gets to them. While RTI is no panacea, it has the potential to introduce serious accountability into the system. Today, the RTI is making its presence felt in parts of the country, but imagine a day when everyone is aware of his right to demand information and accountability from the government. RTI will then become the bane of special interests and rent seekers and play a large part in rooting out the petty corruption that makes the lives of so many so miserable.

5. Return of Markets and Globalization

Despite the ancient provenance of markets and globalization – think Harappan seals in Mesopotamia, or Phoenician traders or Chola/Ming navies – there was a furious battle of ideas in the 20th century between socialist planners and market capitalists. In 1989, the Berlin Wall fell followed by the collapse of the Soviet Union and its satellites. Many formerly planned economies, including India, adopted the market system in the 90’s. China, meanwhile, had already moved to a market-based economy in the 80’s. As a consequence, 600 million people have been lifted out of absolute poverty in China alone in about 30 years, marking the quickest reduction of poverty in human history.

Developing countries like China, India and Mexico have been the prime beneficiaries of a new wave of globalization. Labour mobility and technology (inter-modal shipping, logistics algorithms etc) allow corporations to ‘send work to where the people are’, in the process reshaping the global economy to our benefit. Despite all its flaws, especially the unfortunate growth of crony capitalism, we are and will be better off if we stick to well-regulated, competitive, and free markets.

4. Tinkering with Genes

It’s hard to capture all the progress in genetics in the last few decades under one head. The human genome has been sequenced; advances in information technology have led to the creation of bio-informatics; genetically modified crops have led to greater yields, and in 2010, a team led by Craig Venter created the first synthetic bacterial genome. Tinkering with genes has also had applications in forensics (DNA testing), advanced diagnostic tests in medicine, understanding the history of human migration, and the creation of new materials. Potential applications could include personalized medicine, high yield disease resistant crops, creation of new energy sources and so on. However, scientists are speeding up evolution in the process and that makes a lot of people uncomfortable. Like all technologies, there are pros and cons to tinkering with genes and public debate is very useful. However, let’s also not forget that, used well, science has the ability to alter millions of lives for the better. Genetics is no different.

3. Return of Steve Jobs to Apple

Referring to Mark Hurd’s dismissal from HP, Larry Ellison said it was the worst personnel decision since “the idiots on Apple’s board fired Steve Jobs.” In 1985, Apple’s board forced Steve Jobs out, only to buy him back along with NeXT in 1996, by which time Apple was in the doldrums. In a renaissance inspired by Jobs, Apple began to crank out one “wow” product after another. The iPod and iTunes revolutionized the music industry. The iPhone changed the face of smart phones, while the iPad could revive the publishing industry. In the process, the firm made a transition from being merely a computer company to a consumer electronics and services one – from Apple Computer to Apple Inc.

Apple is the most innovative and valuable technology company in the world today. Obviously, this is due to great advances in technology, but one must give credit to Steve Jobs for recognizing the need for a shift of focus in product innovation from merely technology to technology enhanced by user experience.

2. The World Wide Web

In similar lists elsewhere, the web would unquestionably rank No:1. The Internet existed before the Web, but in 1989 an unknown researcher at CERN called Tim Berners-Lee published a proposal simply titled “Information Management: A Proposal” for running a service on the Internet called the “worldwideweb” which would let a user access hyperlinked documents using a rudimentary version of the browser. Originally built to meet the demand for information sharing among scientists at CERN and elsewhere, the web exploded after the introduction of the Mosaic and Netscape browsers. Almost as important as the invention itself was Saint Tim’s decision to keep the web non-proprietary and free. In time, the web has altered our civilization, spawned great wealth, enhanced productivity, increased the speed and pace of globalization etc. And we’re still in early days.

While doing my Ph.D., I wondered how anyone did research without the help of the web and search engines. I look forward to the day when our children will not stop to think of that question any more than we wonder how people communicated before the arrival of the telegraph.

1. Mobile phones

In 1998, India had a million mobile phone subscribers. By Oct 2010, that number crossed 700 million.

Though mobile phone technology has been around for a while, its adoption across developing countries has been a real game changer. There are today over 5 billion mobile phone users on the planet, the vast majority in these countries. Much more than for you or I, the mobile phone has been the single biggest improvement in the lives of the poor over the last few decades. What the telegraph did in the 1800’s in the west – cutting the link between transportation and communication and generating enormous productivity gains as a consequence – the mobile phone is doing today across rural Africa, Asia and Latin America. The telegraph and the telephone enabled everything from multinational corporations to futures markets to skyscrapers. Who can guess what the mobile phone will do – especially if the Web migrates to mobile platforms — over the next decade or two across healthcare finance, education, or business?

Honourable mentions: RSA Algorithm (which is behind almost every secure online transaction), Global Positioning Systems (GPS), Social Networking and Nanotechnology.

Thought experiment: Think ahead and predict what the top 10 ideas might be in 2045. Most likely, you will be wrong on all counts. If you don’t believe me, ask someone who was around in 1975 and see if they could have predicted any of the above.

FT on SONG’s first two investments March 26, 2011

Posted by Reuben Abraham in Economic Development, SME Investing.
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As some of you know, CEMS is a knowledge partner to the SONG fund, which we helped set up with the Soros Economic Development Fund, Omidyar Network and Google, who are the investors in the fund. SONG made its first two investments in education and healthcare in 2010. Here is the Financial Times’ coverage of the investments.

“We set up a partnership with the investors out of a conviction that business schools have to go beyond their traditional boundaries to support the development of a profitable small and medium-sized enterprise (SME) sector that has an outsized social impact,” says Ajit Rangnekar, dean at the ISB.
“We want to focus on sectors that can contribute significantly to the socio-economic development of India, such as education, healthcare, agriculture and housing,” he (Reuben Abraham) says.
Big funds’ lack of interest in small ventures attracted the attention of Song, which has seen opportunities in the largely untapped bottom of the pyramid investment segment. At present, Song, which manages a $17m fund, has invested roughly $4m in two projects.

Together with Sequoia Capital, the venture capital group that helped launch Google in the 1990s, it backs K12 Techno Services, a school management company focused on providing affordable schooling in south India. “The plan is to create a teaching and school management scheme that can be taken across India and implemented at very low cost,” says Kartik Srivatsa, an investment manager at Song who oversees the project. Song’s other major investment has been in Eye Q Vision, a chain of high-quality, low-cost eyecare hospitals based in the north of India.

Dr Reddy’s Labs partners with CEMS to set up Cell for Employability March 24, 2011

Posted by Reuben Abraham in Employability, General Interest.
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Dr.Reddy’s Labs has partnered with the centre to set up a cell to promote research into employability issues. For a start, Nimesh Mehta and Radhika Khandelwal will look after the activities of the cell.

The Indian School of Business (ISB) today signed a Memorandum of Understanding (MoU) with Dr. Reddy’s Laboratories Limited to establish the ‘Dr. Reddy’s Cell for Employability and Skilling’ at the ISB. The MoU was signed by Ajit Rangnekar, Dean, ISB and GV Prasad, Vice Chairman and CEO, Dr. Reddy’s. The Cell is established under the aegis of the Centre for Emerging Markets Solutions (CEMS), an inter-disciplinary research centre at the ISB with the mandate to research and develop market-based solutions to socio-economic problems. Dr. Reddy’s is committed to provide a grant of INR 10 crores to CEMS at the ISB, over a period of five years, for promoting research in the area of employability and skilling for the youth of India.

The objective of the Dr. Reddy’s Cell is to conduct in-depth, inter-disciplinary research to develop market-based solutions which are catalytic in nature, and create affordable, profitable, scalable, and replicable business models to address the skills shortage in the country. The Cell will work with partners to implement pilot projects, test their feasibility and demonstrate the impact of these business models. The research focus will be on sectors such as Banking, Financial Services, Retail, Healthcare and Education that have the potential to employ a large number of young people with a basic level of education (class 12 students, college dropouts, and graduates from tier-2 cities and beyond) and train them to become a part of the skilled workforce.

Making the announcement, Ajit Rangnekar, Dean, ISB said, “India will have to educate, skill and gainfully employ about 500 million youth by 2020 to reap its demographic dividend and reduce income inequality. Setting up the Dr. Reddy’s Cell is an important first step for us towards addressing this issue. We are delighted that DRL also shares our belief, and would like to thank them for supporting us in our endeavour. The ISB will launch several similar initiatives that address issues of national importance, in keeping with our commitment to making a positive impact on business and society.”

Commenting on the association, GV Prasad, Vice Chairman and CEO, Dr. Reddy’s, said, “We are happy to partner with ISB to support the work we are doing through the Dr. Reddy’s Foundation. This partnership further strengthens our commitment towards creating sustainable livelihoods for the socially and economically weaker sections of the society”.

AACSB spotlight on CEMS March 24, 2011

Posted by Reuben Abraham in General Interest, ISB related.
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The Association to Advance Collegiate Schools of Business (AACSB) is one of the best-known accreditation agencies in the world. In July 2010, they turned the spotlight on CEMS in this piece.

Affiliated faculty wins best paper award March 23, 2011

Posted by Reuben Abraham in General Interest, Healthcare.
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CEMS affiliated faculty, Prof Anand Nandkumar, won the best paper award in the emerging economies track at the Academy of International Business (AIB) conference in Rio de Janeiro. The paper, co-authored by Prof Nandkumar and Chirantan Chatterjee, is titled Absorptive Capacity, Firm Capabilities & Destination in Learning by Exporting: New Evidence from Indian Pharmaceutical Producers, 1994-2007

An obituary for C.K.Prahalad March 23, 2011

Posted by Reuben Abraham in Uncategorized.
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In the early part of the decade, several researchers, including me, had begun to notice the phenomenon of the poor taking up mobile phones in large numbers. Use of cell phones led to more efficient markets and greater productivity among the poor. Around the same time, C.K.Prahalad and Stuart Hart published “The Fortune at the Bottom of the Pyramid (BOP)”, which provided a construct with which one could argue that opening up markets to the poor was a good idea, as with mobile phones.

Dr. Prahalad made a powerful case for the use of market-based solutions, rather than development aid, as a means to end poverty. According to him, wealth creation was the best antidote to poverty, and any country that escaped the poverty trap did so through rapid economic growth. He looked at specific interventions by Unilever, ITC etc that led to solutions tailored for the poor. He appealed to multi-national corporations (MNC) to work with local entities to create new business models, which while profitable, could also reduce poverty. Effectively, MNCs were creating the middle class of tomorrow by these interventions. Prahalad also argued strongly in favour of technology and innovation which could re-invent cost structures, a pre-requisite for doing business at the BOP.

There were several criticisms of Prahalad’s BOP thesis:
1. It was too focused on consumption rather than production
2. It was too focused on MNC’s rather than small and medium enterprise (SME), which are the engines of job creation in an economy
3. Definitional issues of both poverty and the BOP and how to measure them

I had the chance to discuss these criticisms with Dr. Prahalad, and he had nuanced responses; he agreed, for instance, that the SME sector needed to grow rapidly to generate jobs at a fast clip, but he had more leverage with the MNCs. In 2006, the ISB set up the Base of the Pyramid Learning Lab in collaboration with Stuart Hart’s group at Cornell University. Along the way, learning from both the BOP debate between Dr Prahalad and his critics, and our own experiences on the ground, we expanded our mandate from being BOP-focused to a more integrated approach, taking into account multiple inter-related problems (urbanization, education, healthcare, housing etc) faced by developing countries. The Centre for Emerging Markets Solutions is the outcome. I think C.K.Prahalad would have approved.

Some photos from our housing pilot project March 23, 2011

Posted by Reuben Abraham in Affordable Housing.
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As some of you may know, our partner company Ashray Housing has pilot projects running in both Bawaal as well as Rajkot in Gujarat to build affordable homes in the Rs 300,000 to Rs 550,000 range ($6000 to $12,000). The company was commercialized out of research done at the centre by Dhaval Monani and his team. Here are some photographs from the project in Bawaal. We will keep updating the blog with progress reports on the pilots.

Melinda Gates: What non-profits can learn from Coke March 23, 2011

Posted by Reuben Abraham in Healthcare, Philanthropy.
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Paul Romer on charter cities March 23, 2011

Posted by Reuben Abraham in Urbanization.
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Book review: The Aid Trap March 23, 2011

Posted by Reuben Abraham in Economic Development, General Interest.
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Since the success of the Marshall Plan in reviving the economies of western Europe after the Second World War, it has been assumed that large-scale aid programmes will kickstart economic development in poor countries. For 40 years, aid was an important weapon of the Cold War, where allegiances could be bought and sold on the basis of aid packages. After the collapse of the Berlin Wall, the aid industry changed tack and used morality to market itself. Books like The End of Poverty by Jeffrey Sachs and the bully pulpits of rock stars hammered the message home. However, in recent times, a range of critics have appeared. George Ayittey and William Easterly were the vanguard, while Dambisa Moyo has taken the criticism to a much harsher level.

The Aid Trap by Glenn Hubbard and William Duggan of Columbia University articulates the criticism better than others. Does development aid ever work, they ask? Alas, if only. The road to hell they say is paved with the best intentions. Most poor countries still remain poor (or worse off) despite the aid dollars that have poured in over 50 years. According to them, the only thing that has ever worked effectively to reduce poverty is the growth of the business sector. The number of people living in absolute poverty dropped from 52 per cent in 1981 to 26 per cent in 2005, mostly driven by growth in India and China, which is just the latest example of the ability of the business sector to generate wealth at large scale and reduce poverty.

But first, the authors provide a historical framework for capitalism. Commercial activity can be traced back to the ancient civilizations of Mesopotamia, India, Egypt and China. The modern variant, after its origins around the Mediterranean, spread across western Europe till the Netherlands emerged as the first country to experience widespread prosperity. Once independent from Spain, the Netherlands replaced the feudal system
with a business-driven system, which catalysed strong economic growth. Dutch business practices were carried over to England when William of Orange ascended the throne.

So, if commerce demonstrably created wealth and widespread prosperity in western Europe (and later in America and Japan), why should it be any different in developing countries? Why are non-business actors (like NGOs) considered legitimate agents of economic development? Clearly, any developing country that has more NGOs than businesses will not get very far in creating wealth. And yet this is exactly the sort of approach that finds widespread currency among western governments, multilaterals, etc. What can be done to change the status quo and make aid more effective?

The authors suggest that we revisit the Marshall Plan. It has been forgotten that this was not really a conventional aid programme but a mechanism to revive business in western Europe. The surpluses generated were used by governments to fund infrastructure. So, why not create a similar mechanism for aid to developing countries today? Why not funnel aid dollars to fund businesses in countries that undertake to improve their business climate, with the surpluses used to fund more businesses and business infrastructure. The taxes levied on increased business activity pay for public services and social safety nets for the vulnerable. In the process, we recognize that only the business sector can ensure prosperity, and subsequent redistribution of wealth.

The devil obviously lies in the details. Unlike the original version, a new Marshall Plan will need an unprecedented level of international cooperation and coordination. The Second World War primarily destroyed physical infrastructure, not human infrastructure, so pouring money into promoting business worked as the policy reforms required were macroeconomic. In developing countries, the reforms required are fundamental and the lack of human infrastructure is a hard problem to tackle, especially in the short term. The other problem with many developing countries is that they are led by kleptocratic politicians, and not even this version of the Marshall Plan can work in such conditions. Ironically, many of the kleptocrats are kept in power by economic aid, so the incentives for governments to sign on and implement basic policy changes need
to be strong.

While recognizing these objections, I still think The Aid Trap does a good job of both highlighting problems with the current aid structure and prescribing solutions, hard as they may seem to execute. My hope is that this book will at least provide additional points of reference for future aid policies.

This book review appeared in the Dec 2009 edition of Alliance Magazine.

Addendum: A good debate on the book at the Aidwatch blog.