29 October 2011

Macrolending - An Alternative to Microlending

Above is a trailer for a documentary titled The Micro Debt, which seems to criticize microlending as a tool for alleviating poverty.

I've had a Kiva account for a while. Kiva allows any of us to lend money to entrepreneurs in developing countries. But I've always been unsure about how effective this is because when the money is lent to the entrepreneur in developing countries, it is at extremely high interest rates (around 30 to 40 per cent). Most businesses in developed countries struggle to even produce 10 per cent, so to expect people in the developing world to earn 30 or 40 per cent is highly optimistic.

The answer to poverty, in my opinion, can be found in Asia, especially in China. Institutions need to be in place to create labor-intensive low-skilled jobs. The products are then normally exported to developed countries.

Kiva must change. Instead of lending money to microfinance institutes at zero per cent interest who then relend that money to poor entrepreneur for 40 per cent interest, Kiva should take lenders' money and instead lend it at zero interest rate to large labor-intensive companies like Nike, Adidas, Foxxcon, or HTC on the condition that in return for receiving zero interest loans, these companies must hire people from poor countries. Kiva can then pay auditors like Ernst and Young or PricewaterhouseCoopers to audit these firms to provide to Kiva and microlenders assurance that a certain number of workers are being hired and paid a certain amount and that basic labor rights are maintained, e.g. the right for workers to go to the toilet.

If the venture does not work, the lenders lose money. If the venture works and profits are made, it can be split in half between Kiva and e.g. Nike (or any other proportion the two organizations negotiated). Either way, for labor-intensive companies there is a no-risk venture as all the risk is absorbed by the lenders and all the gains are for the company.

22 October 2011

The Train Ride

It was afternoon. The train moved quickly and smoothly along the tracks, but suddenly the carriage in which I sat shook and swayed. Perhaps the train had hit a rock left on the track by vandals. Nevertheless, none of the commuters on the crowded carriage seemed to care. Their heads were down as they read their novels or newspapers. Some even played colourful childish games on their smartphones, even adult men who daintily pressed their fingers on the phone touchscreen like finger-painting kindergarten children.

A man in smart casuals sitting opposite me tried to move his feet. His knees pressed against mine. We made eye contact with each other for a moment, and I noticed he had an angry look in his eyes, and he isn’t afraid to express it. I averted eye contact and justified to myself, in my mind, that it was not my fault. I cannot help having long legs. It was the train that was at fault as it was not big enough and there weren’t enough seats.

A woman who sat to the left of this angry man stared forward like a zombie. White headphones in her ears emitted soft beats. Looking at her was like looking at someone experiencing an intense moment of indulgence while on the toilet taking a dump. She wasn’t the only one enjoying the music. Every third commuter was wired up to his portable music device. Their eyes rolled up into their heads as the music poured into their ears. They were spaced out and out of this world. What are they trying to escape and why is it so scary?

My eyes performed a 180-degree scan of the commuters in front of me. I ignored the men and the old women, focusing instead on the young females. I look at one girl in particular, a blonde schoolgirl who wore dark blue uniform with a light blue ribbon in her hair. She too had white headphones dangling from her eyes. Her eyes stared out the window, and she had the look of a girl who wanted to be somewhere else.

The 99% Movement

A growing number of people are protesting against corporate greed and the inequality of wealth. They seem to be calling themselves "The 99% Movement" in reference to the growing gap between the rich and the poor. To many of them, the government structures policies that benefit the top 1 per cent of society.

Are you a 99 percenter?

Do you earn less than US$506,553?

If the answer is yes to the question above, you are in the bottom 99 per cent. The New York Times' piece About That 99 Percent... has the following startling facts about the gap between rich and poor in America:
American households right at the 99th percentile (that is, the cut-off for the top 1 percent) will earn about $506,553 in cash income this year, according to a Tax Policy Center analysis. The income curve is very steep at the high end, meaning that people just a few tenths of a percentile point above that make much, much more. A family at the 99.5th percentile, for example, makes $815,868; its neighbor at the 99.9th percentile makes more than double that, at $2,075,574 a year.

Don't these lazy people just want money without having to work?

Many critics of the 99% movement claim that the protesters simply want to make money without working hard for it.

This statement suggests that if you earn less than half a million dollars a year, it is your own fault that you are not rich, and the top 1 per cent who earn more than half a million a year who expect no handout from the government are successful because of they are hardworking. This seems to be a major theme from the 53% movement.

However, a key part of the 99% movement is its focus on Wall Street bankers who on average earn more than half a million a year and are truly in the top 1 per cent. The problem is that the banking sector in America has very close ties with the government, to the point where it seems as if the government is controlled by the banking sector. The left versus right political spectrum is misleading. People on the left of politics blame rich bankers whereas people on the right of politics blame the government. No one seems to notice that rich bankers and the government are one and the same. Here is what the New York Times piece The Guys from "Government Sachs" says on the issue:

Indeed, Goldman’s presence in the department and around the federal response to the financial crisis is so ubiquitous that other bankers and competitors have given the star-studded firm a new nickname: Government Sachs.

The power and influence that Goldman wields at the nexus of politics and finance is no accident. Long regarded as the savviest and most admired firm among the ranks — now decimated — of Wall Street investment banks, it has a history and culture of encouraging its partners to take leadership roles in public service.

It is a widely held view within the bank that no matter how much money you pile up, you are not a true Goldman star until you make your mark in the political sphere.

In the aftermath of the GFC in 2009, the US government bailed out mainly the banking sector. As a result, the U.S. taxpayers now owes as much as $23.7 trillion to fund the bailouts. In other words, the bankers mismanaged their business, the government cleans up the mess, and you pay for it.

If you or I were to start up a business (e.g. a cafe or a restaurant) and we failed because the food was bad or the location was bad or whatever reason, do you think the government will save us? Hardly. The government will tell us that we live in a capitalist society and hence we should not expect any help from the government. But the bankers on the other hand -- if they fail, the government pours trillions of dollars of public money into their pockets.

It's not just the banking sector. After 9/11 (a tragic event) the Republicans led by George W. Bush used the crisis to siphon off public money for the benefit of their friends in not only the banking sector but also the defense sector. Bush then proceeded to cut taxes for the rich. As of 2011, Bush's tax cuts for the top 1 per cent of America have cost U.S. taxpayers more than US$700 billion.

Divide and conquer

If you visit the We Are the 53% site, you will notice that most of these people like to show off that they come from humble backgrounds, they work hard, expect no help from the government, and do not whine.

As I have already explained, the bankers and other members of the top 1 per cent have effectively stolen all the money. To use an analogy, the top 1 per cent have taken the entire cake and have thrown a few crumbs towards the other 99 per cent.

The 99 per cent then proceed to fight among themselves for the crumbs. Those who get the bigger crumbs accuse those who get the smaller crumbs of being lazy and stupid. Sexism, racism, left versus right, differences in religion--all this further divides the 99 per cent, leading to greater conflict and division.

Divide and conquer (or divide and rule) is an old military strategy that has been successful employed since ancient times. Here is what Wikipedia has to say:

In politics and sociology, divide and rule (derived from Latin: divide et impera) (also known as divide and conquer) is a combination of political, military and economic strategy of gaining and maintaining power by breaking up larger concentrations of power into chunks that individually have less power than the one implementing the strategy. The concept refers to a strategy that breaks up existing power structures and prevents smaller power groups from linking up....

In modern times, Traiano Boccalini cites "divide et impera" in La bilancia politica... as a common principle in politics. The use of this technique is meant to empower the sovereign to control subjects, populations, or factions of different interests, who collectively might be able to oppose his rule. Machiavelli identifies a similar application to military strategy, advising in Book VI of The Art of War (Dell'arte della guerra), that a Captain should endeavor with every art to divide the forces of the enemy, either by making him suspicious of his men in whom he trusted, or by giving him cause that he has to separate his forces, and, because of this, become weaker.

How do we lessen the gap between rich and poor?

The answer to this problem is to encourage unity (not conflict) among those who earn less than half a million a year and to use the democratic processes to redistribute wealth from rich to poor.

The rebellion by the Libyan people against their dictator Muammar Gaddafi shows how difficult it is for the people of a country to demand their fair share in a non-democratic country.

But many Americans are lucky to live in a democracy where they can use democratic processes to vote for their fair share of the cake by taxing the rich. The problem is that most Americans, as discussed, are too busy arguing about other issues like race, sexism, abortion, and gay marriage, that they are distracted and do not vote as a united unit for the redistribution of wealth.