Seeing The Elephant Part 7

Note: Percentage of Respondents Asked to Pay a Bribe to Obtain Service During Past 12 Months.

Toward a Poverty Strategy In short, viewing the poor as charity cases that require handouts hasn't worked, especially because many handouts have often lined dictators' pockets instead of feeding hungry mouths. Poverty alleviation strategies should attempt to minimize the possibility of corruption, which in many situations means avoiding direct lending or aid to corrupt governments. Although liberalizing trade should be the primary strategy (as it has been in China and India), one must recognize that many tactics are necessary. Governments alone cannot eradicate poverty. The solution is not just writing a check-direct antipoverty efforts such as microfinance lending and other NGO initiatives are becoming far more important. Echoing some of the themes and ideas mentioned earlier, to successfully combat poverty will require cultivating capitalism at a gra.s.sroots level, engaging both private and public sector players, and reforming some multilateral inst.i.tutions all of which, in combination, should work holistically toward promoting the capitalist peace.

Bottom of the Pyramid P.C. Prahalad's seminal Bottom of the Pyramid (BOP) concept argues that there is room for business development at the BOP-that is, among the poorest of the poor. This theory flies in the face of conventional wisdom, which is characterized by the "dominant a.s.sumption that the poor have no purchasing power and therefore do not represent a viable market."55 The private sector, specifically multinational corporations and lending inst.i.tutions, have an enormous opportunity to play a huge role in alleviating poverty while at the same time making a profit, expanding brand recognition, and opening new market opportunities. And best yet, BOP strategies cut out the government middleman, avoiding needless bureaucracy and room for potential corruption. The private sector, specifically multinational corporations and lending inst.i.tutions, have an enormous opportunity to play a huge role in alleviating poverty while at the same time making a profit, expanding brand recognition, and opening new market opportunities. And best yet, BOP strategies cut out the government middleman, avoiding needless bureaucracy and room for potential corruption.

Simply as a result of the enormous numbers of impoverished, the poor represent "a significant latent purchasing power that must be unlocked."56 If even half of the current poor were incorporated in the global market, they could buy enormous quant.i.ties of goods and services in aggregate even if individual purchases are small. Moreover, because poverty is relatively concentrated, it is not difficult to reach vast swaths of poor at once. Consider that by 2015 there will be more than 225 cities in Africa, 903 in Asia, and 225 in Latin America. More than 368 cities in the developing world will have more than one million people in each, and at least 23 of these will have more than 10 million residents. Collectively, these cities will account for about 1.5 to 2 billion people. About 35 to 40 percent of these urban concentrations will comprise BOP consumers. The density of these settlements-approximately 15,000 people per hectare-will allow for relatively easy market penetration. If even half of the current poor were incorporated in the global market, they could buy enormous quant.i.ties of goods and services in aggregate even if individual purchases are small. Moreover, because poverty is relatively concentrated, it is not difficult to reach vast swaths of poor at once. Consider that by 2015 there will be more than 225 cities in Africa, 903 in Asia, and 225 in Latin America. More than 368 cities in the developing world will have more than one million people in each, and at least 23 of these will have more than 10 million residents. Collectively, these cities will account for about 1.5 to 2 billion people. About 35 to 40 percent of these urban concentrations will comprise BOP consumers. The density of these settlements-approximately 15,000 people per hectare-will allow for relatively easy market penetration.57 BOP businesses have the potential to shift att.i.tudes of many poor, showing them the "capitalist light" at the end of the tunnel. Dejected and disenfranchised, the poor don't have a reason to believe in globalization and commerce until they can physically touch it and see it. When someone in the neighborhood has a car, cell phone, and maybe even a laptop, the results seem more tangible. But until then, despair is pervasive for people stuck in the poverty trap.

The BOP strategy that has perhaps received the most attention lately is microcredit. Microcredit is an umbrella term for all programs extending small loans (microfinance lending-often as little as $25) and other financial services such as savings accounts, to very poor people for self-employment projects that generate income and a source of support for their families.58 Virtually unheard of before the 1970s, microlending has become a global phenomenon as businesses and people realize its efficacy in fighting poverty and inequality. Microfinance develops a culture of trust and teaches basic concepts of having to pay back and understanding a.s.set and liability matches or mismatches. The Microcredit Summit's latest report notes that small loans to the poor rose to 133 million people-up from 13 million people in 1998. Virtually unheard of before the 1970s, microlending has become a global phenomenon as businesses and people realize its efficacy in fighting poverty and inequality. Microfinance develops a culture of trust and teaches basic concepts of having to pay back and understanding a.s.set and liability matches or mismatches. The Microcredit Summit's latest report notes that small loans to the poor rose to 133 million people-up from 13 million people in 1998.59 As of 2007, 3,316 microcredit inst.i.tutions reported reaching 133,030,913 clients, 92,922,574 of whom were among the poorest when they took their first loan. Of these poorest clients, 85.1 percent are women. As of 2007, 3,316 microcredit inst.i.tutions reported reaching 133,030,913 clients, 92,922,574 of whom were among the poorest when they took their first loan. Of these poorest clients, 85.1 percent are women.60 Increasingly, banks and philanthropies are realizing that microlending provides an excellent way to both alleviate poverty and instill a sense of economic power including savings and ambition for the future. Increasingly, banks and philanthropies are realizing that microlending provides an excellent way to both alleviate poverty and instill a sense of economic power including savings and ambition for the future.

In the past, banks in the developing world rarely lent to the poor, instead the poor had to go to moneylenders who often charged exorbitant interest rates. This trapped farmers and other low-income earners in a cycle of poverty and deprived developing country economies of small businesses. Grameen Bank of Bangladesh and its founder Muhammad Yunus, n.o.bel Peace Prize winners for their work using microcredit loans to lift millions of women out of poverty, have shown how poor borrowers can be as reliable as the rich, and that trust can motivate repayment as well as collateral. Yunus pioneered "social collateral," where he would give loans to a group of women who were then responsible for each other's repayment. This kind of peer pressure turned out to be remarkably effective. Think of this in contrast to securitization and credit ratings discussed in Chapter 2. Indeed, in Bangladesh today, Grameen's loan recovery rate is an astonishing 98.5 percent, as compared to 40 to 50 percent at conventional banks that offer loans to affluent families in Bangladesh.61 Grameen's success lends support to a growing recognition that capitalism can be harnessed to curb poverty just as, if not more effectively than aid programs. (See Grameen's success lends support to a growing recognition that capitalism can be harnessed to curb poverty just as, if not more effectively than aid programs. (See Table 8.2 Table 8.2.) Other organizations besides Grameen Bank are increasingly recognizing the value of microfinance lending, both for their own economic well-being as well as that of their clients. Similar programs have popped up all over the globe, from Mexico to Indonesia. Making loans and expecting investment returns encourages a greater degree of accountability than simply making a grant. For the recipients, meanwhile, there are benefits apart from the capital received, including the opportunity to demonstrate their creditworthiness and fiscal responsibility. A loan from a foundation can serve as a credit history, key to obtaining more traditional forms of capital, such as bank loans, and attracting for-profit investors.The recipients of microfinance loans are generally perceived as more credit-worthy by these inst.i.tutions.62 One of the more innovative NGOs in this s.p.a.ce is Kiva ( One of the more innovative NGOs in this s.p.a.ce is Kiva (www.kiva.org, see box), an Internet-based platform that connects small lenders-who often lend just $25-to needy businesspeople in countries from Kazakhstan to Cambodia.

Table 8.2 Microfinance Inst.i.tution Activity (as of December 31, 2006) Microfinance Inst.i.tution Activity (as of December 31, 2006) SOURCE: 2007 Microcredit Summit Report, 2.

Given its aims and historical position, the World Bank should take the lead and the initiative on microfinance lending to ensure it becomes an engrained multilateral Macro Quantum strategy. Currently, World Bank projects focus on the goals of its 1999 Comprehensive Development Framework, which encourages countries to own their development agendas and be active stakeholders.63 By working almost exclusively with governments, the World Bank is in danger of both making itself obsolete as well as abetting corrupt regimes. Microfinance lending, on the other hand, has the power to reach impoverished citizens, bypa.s.sing crooked governments, and cultivating commercial culture.The World Bank could give out leveraged loans to microlending inst.i.tutions in order for them to expand. In the spirit of microlending itself, by making loans to microlending organizations deemed "too risky" by traditional commercial banks and investors, the World Bank could provide an important stimulus for local growth. By working almost exclusively with governments, the World Bank is in danger of both making itself obsolete as well as abetting corrupt regimes. Microfinance lending, on the other hand, has the power to reach impoverished citizens, bypa.s.sing crooked governments, and cultivating commercial culture.The World Bank could give out leveraged loans to microlending inst.i.tutions in order for them to expand. In the spirit of microlending itself, by making loans to microlending organizations deemed "too risky" by traditional commercial banks and investors, the World Bank could provide an important stimulus for local growth.

But BOP development means more than just microlending and has greater impact by broadly engaging the lowest strata of developing countries. Oftentimes, poor people cannot afford to buy greater volumes of goods that they would like; a reasonably priced small packet would have great appeal. For example, figure 8.6 figure 8.6 shows the growing number of single-serve packages of shampoo that are sold in the Indian market. Measured in tons, the Indian shampoo market is as large as that of the United States. Large MNCs, such as Unilever and Procter & Gamble (P&G), as well as local firms have penetrated the BOP through scaled down products. Today, the penetration of shampoo in India is about 90 percent. shows the growing number of single-serve packages of shampoo that are sold in the Indian market. Measured in tons, the Indian shampoo market is as large as that of the United States. Large MNCs, such as Unilever and Procter & Gamble (P&G), as well as local firms have penetrated the BOP through scaled down products. Today, the penetration of shampoo in India is about 90 percent.64 There are numerous examples of BOP success. "Emerging markets are our key growth areas," says Francois Perraud of Nestle. "Our best sellers in Africa are 3-for-1 products, where granulated coffee, cream, and sugar are all sold in one powder sachet." As Gunender Kapur, of Unilever Nigeria, says, "Our well-recognized brands are sold in small, low-priced packs. This ensures that consumers towards the bottom of the economic pyramid, earning daily wages, can buy our brands with a relatively modest cash outlay.65 Or consider that India's Tata Motors just developed what it calls the world's cheapest car, the Nano. Unveiled in January 2008 with a retail price of about $2,500, the cars have no radios, no airbags, no pa.s.senger-side mirror and there is only one windshield wiper. Or consider that India's Tata Motors just developed what it calls the world's cheapest car, the Nano. Unveiled in January 2008 with a retail price of about $2,500, the cars have no radios, no airbags, no pa.s.senger-side mirror and there is only one windshield wiper.66 However,Tata Motors is hoping that the introduction of the Nano not only empowers the poor but also opens up a previously unexplored market niche for the company. This should be a wake-up call to other automobile manufacturers, particularly in industrialized countries. As GM and Ford continue to struggle with huge financial losses in the face of growing compet.i.tion from more efficient overseas firms, perhaps they should look to expanding their market share in developing markets with no-frills, inexpensive automobiles. However,Tata Motors is hoping that the introduction of the Nano not only empowers the poor but also opens up a previously unexplored market niche for the company. This should be a wake-up call to other automobile manufacturers, particularly in industrialized countries. As GM and Ford continue to struggle with huge financial losses in the face of growing compet.i.tion from more efficient overseas firms, perhaps they should look to expanding their market share in developing markets with no-frills, inexpensive automobiles.

Figure 8.6 Single-Serve Sachet as a Percentage of Total Shampoo Market in India Single-Serve Sachet as a Percentage of Total Shampoo Market in India SOURCE: www.whartonsp.com/articles/article.asp?p=389714&seqNum=4.

The U.S. government could do a lot to promote these BOP opportunities through increased funding for government agencies that support U.S. business abroad, such as the Export-Import Bank and the Overseas Private Investment Corporation (OPIC). Moreover, governments can subsidize or give tax breaks to corporations that invest in the developing world.With government support between NGOs, multilateral a.s.sistance, and corporate efforts, poverty can be eradicated while at the same time promoting the capitalist peace.

These BOP opportunities cannot be easily leveraged without the cooperation of all these players. At the core of all poverty arguments is essentially the promotion of wealth, stability, and more solid citizenship. G7 countries, particularly the United States, have failed to realize these can be achieved by accessing BOP populations-some two billion people worldwide. BOP should be a win-win: The more Fortune 500 companies that venture out to emerging markets, the more seeds of capitalism are spread while simultaneously opening up new markets and building brand recognition. As long as developing countries' poor are excluded from target markets, G7 countries will continue to miss out on incomparable business opportunities.

NGOs and Social Entrepreneurs All around the world, nongovernmental organizations (NGOs) have become the frontline warriors in the fight against global poverty, often working with multilaterals and MNCs to turbo boost the effort. There are thousands of such philanthropies around the world, with more than 3,000 of them having UN consultative status today.67 These nonstate ninjas have been essential in filling the gap between what the state and the international community are willing and able to provide and what the people need. In many cases, the largest NGOs provide more in direct funding than parts of the United Nations. These nonstate ninjas have been essential in filling the gap between what the state and the international community are willing and able to provide and what the people need. In many cases, the largest NGOs provide more in direct funding than parts of the United Nations.

For example, the Gates Foundation, the world's largest private charity founded by U.S. billionaire and Microsoft founder Bill Gates and his wife Melinda, runs a global development program that works with "motivated partners to create opportunities for people to lift themselves out of poverty and hunger."68 The operating budget for the Gates Foundation in 2006 ($33 billion) was actually 10 times greater than the operating budget for the World Health Organization in the same time period. Similarly, Oxfam International-one of the oldest and best known NGOs-is a confederation of 13 ent.i.ties working together with more than 3,000 partners in more than 100 countries to combat and eradicate poverty. The operating budget for the Gates Foundation in 2006 ($33 billion) was actually 10 times greater than the operating budget for the World Health Organization in the same time period. Similarly, Oxfam International-one of the oldest and best known NGOs-is a confederation of 13 ent.i.ties working together with more than 3,000 partners in more than 100 countries to combat and eradicate poverty.69 Oxfam has a presence in virtually every corner of the world, sponsoring development programs and responding to crises such as the Darfur tragedy. Oxfam also maintains campaigns for policy and practice change on fair trade, conflict and humanitarian response, climate change, and issues such as debt relief, the global arms trade, poverty reduction, and universal basic education. Oxfam has a presence in virtually every corner of the world, sponsoring development programs and responding to crises such as the Darfur tragedy. Oxfam also maintains campaigns for policy and practice change on fair trade, conflict and humanitarian response, climate change, and issues such as debt relief, the global arms trade, poverty reduction, and universal basic education.70 In the fiscal year 2005-2006, Oxfam disbursed $638.25 million through its global programs. In the fiscal year 2005-2006, Oxfam disbursed $638.25 million through its global programs.71 All told, the sophisticated and experienced staff and large budgets of these NGOs help them provide vital services to the world's poor. All told, the sophisticated and experienced staff and large budgets of these NGOs help them provide vital services to the world's poor.

One of the more exciting NGO trends is the emergence of "social entrepreneurs," the venture capitalists of the nonprofit sector.72 These small players recognize a social problem and use entrepreneurial principles to organize, create, and manage specific ventures to make social change. Whereas traditional venture capitalists measure performance in investment returns and profit, a social entrepreneur focuses on broader societal impact. These groups tend to be smaller than most NGOs (often just one or two people and often very young). They sometimes partner with NGOs, multilaterals, or other citizen groups (in both the public and private sectors). By using private sector savvy and taking advantage of market forces, social entrepreneurs are playing an important role in alleviating poverty throughout the world. The Schwab Foundation even sponsors the attendance of social entrepreneurs at the Davos World Economic Forum. These small players recognize a social problem and use entrepreneurial principles to organize, create, and manage specific ventures to make social change. Whereas traditional venture capitalists measure performance in investment returns and profit, a social entrepreneur focuses on broader societal impact. These groups tend to be smaller than most NGOs (often just one or two people and often very young). They sometimes partner with NGOs, multilaterals, or other citizen groups (in both the public and private sectors). By using private sector savvy and taking advantage of market forces, social entrepreneurs are playing an important role in alleviating poverty throughout the world. The Schwab Foundation even sponsors the attendance of social entrepreneurs at the Davos World Economic Forum.

One headline grabbing organization founded to support these activities is Ashoka, started in 1980 by former McKinsey consultant Bill Drayton, often called "the G.o.dfather" of social entrepreneurship."73 Drayton likes to say that social entrepreneurs neither hand out fish nor teach people to fish-their aim is to revolutionize the fishing industry. Responding to the demand, many universities are now offering cla.s.ses in social entrepreneurship, and there are a growing number of role models. Drayton likes to say that social entrepreneurs neither hand out fish nor teach people to fish-their aim is to revolutionize the fishing industry. Responding to the demand, many universities are now offering cla.s.ses in social entrepreneurship, and there are a growing number of role models.74 The emergence of more social entrepreneurs and their improved access to growth capital as they get better connected to philanthropists, is creating enormous productivity opportunities for the citizen sector. The emergence of more social entrepreneurs and their improved access to growth capital as they get better connected to philanthropists, is creating enormous productivity opportunities for the citizen sector.75 The first Ashoka fellow was named in India in 1981. There are now about 1,800 fellows in 60 countries and Ashoka has a $30-million annual budget funded by donations. Fellows often come from Ashoka's private sector partners like consultants McKinsey & Co. and public relations firm Hill & Knowlton. The first Ashoka fellow was named in India in 1981. There are now about 1,800 fellows in 60 countries and Ashoka has a $30-million annual budget funded by donations. Fellows often come from Ashoka's private sector partners like consultants McKinsey & Co. and public relations firm Hill & Knowlton.76 Ending Agricultural Subsidies As we've pointed out several times now, failing to bring the Doha trade negotiations to a successful and equitable conclusion has wreaked havoc on the global economy. A well-greased trade system is an integral part of the international development agenda:All development partners should collaborate in devising a shared global strategy to address this global problem. G7 farm subsidies should be eliminated; the returns on this concession would be far greater than the sacrifice. In addition to making impoverished farmers' crops more compet.i.tive in the international market, ending subsidies would give G7 countries remarkable leverage with developing country governments in the manufacturing sectors. Over the long term, agricultural productivity must increase in the developing world in order to both avert food crises as well as to combat poverty. In order for this to happen, however, the Doha round must be settled in a way that allows developing countries' agricultural products to compete fairly in the global marketplace.

Even the World Bank Group President Robert Zoellick has suggested rich countries could help finance a "green revolution" to increase farm productivity and raise crop yields in Africa. One measure the U.S. Congress failed to pa.s.s in 2008 aimed to create a pilot program to buy $25 million in food grown locally in poor countries. Currently, the United States buys food from U.S. suppliers and pays high shipping fees to send it to needy countries.77 By implementing this legislation, the United States could have saved money as well as encourage local production by buying directly from local farmers. By implementing this legislation, the United States could have saved money as well as encourage local production by buying directly from local farmers.

World Bank Reform Aside from the Doha round, the World Bank itself has become part of the poverty problem. It focuses on governments, ignoring gra.s.sroots groups. The IMF and the World Bank have sometimes extended funds to governments that either have no interest in reform or are unable to pull it off, thereby providing some additional financial breathing s.p.a.ce to malfeasant rulers. Despite good intentions, World Bank funds may actually be subverting the spread of pro-market policies.78 By seeking cooperation primarily with governments, the World Bank is, quite literally, banking on the local government infusing cash into the economy rather than hedging its bets by engaging the impoverished themselves. By seeking cooperation primarily with governments, the World Bank is, quite literally, banking on the local government infusing cash into the economy rather than hedging its bets by engaging the impoverished themselves.

Furthermore, while the World Bank has taken positive steps toward poverty eradication, the organization's resources could be used more efficiently to do more. As discussed in Chapter 2, creating a permanent fund based on gold reserves could help foster many areas that may fall outside traditional World Bank lending programs today. For example, funding venture capital for microlending, alternative energy projects, sustainable agriculture, and other BOP sectors could dramatically accelerate progress on the World Bank's mission to end poverty. Ending poverty cannot be achieved by the public sector alone, and initiatives like this are the best way to ensure long-term sustainability and growth.79 The broadening of the World Bank's shareholder base, as discussed earlier, would also help this effort by making more capital available. The broadening of the World Bank's shareholder base, as discussed earlier, would also help this effort by making more capital available.

Capitalist Peace Corps The United States could do much to promote capitalism, provide aid, and alleviate poverty in the long-term through the formation of a "Capitalist Peace Corps," a group modeled on the current Peace Corps, with an expanded budget and a renewed focus on commerce, finance, and trade. One of the Peace Corps' stated missions is to "help promote a better understanding of Americans on the part of the peoples served." What better way to do that than to use it to promote capitalism, a core American value. Initiatives like this provide a crucial basis for inspiring good will toward the United States and other developed countries as well as providing a useful platform from which to combat poverty.

The U.S. Peace Corps was officially established in March of 1961 and has had 190,000 volunteers and trainees to date in 139 different countries. According to the Peace Corps website, there are 8,079 current volunteers. Currently, however, only 15 percent of the Peace Corps budget is being put toward business development. The rest is dedicated to other important areas as education (36 percent), health and HIV/ AIDS (21 percent), environment (14 percent), youth development (6 percent) and agriculture (5 percent),80 with the aim of helping: (1) the people of interested countries in meeting their need for trained men and women; (2) to promote a better understanding of Americans on the part of the peoples served; and (3) to promote a better understanding of other peoples on the part of Americans. While these are admirable goals, "dollars and sense" deserves its own focused organization. This more specialized Capitalist Peace Corps would aim to identify business/entrepreneurship opportunities in developing countries, mobilize needed resources in social entrepreneurial fashion, and tie in American industry where feasible. In addition to creating greater potential for business, such a group would also indirectly promote the U.S. image abroad.The Peace Corps fiscal year 2008 budget was $330.8 million, which could easily be increased by at least $1 billion to accommodate the creation of the new Capitalist Peace Corps. with the aim of helping: (1) the people of interested countries in meeting their need for trained men and women; (2) to promote a better understanding of Americans on the part of the peoples served; and (3) to promote a better understanding of other peoples on the part of Americans. While these are admirable goals, "dollars and sense" deserves its own focused organization. This more specialized Capitalist Peace Corps would aim to identify business/entrepreneurship opportunities in developing countries, mobilize needed resources in social entrepreneurial fashion, and tie in American industry where feasible. In addition to creating greater potential for business, such a group would also indirectly promote the U.S. image abroad.The Peace Corps fiscal year 2008 budget was $330.8 million, which could easily be increased by at least $1 billion to accommodate the creation of the new Capitalist Peace Corps.

Alleviating Poverty as a Macro Quantum Strategy While poverty has been decreasing, there is still work to be done. As trade, foreign investment, and technology have spread, the gap between the economic haves and have-nots has widened, not only in wealthy countries like the United States but also in poorer nations like Mexico, Argentina, India, and China. There are pockets of ultra-wealthy people now living in these countries alongside some of the world's poorest. This widening not only exacerbates antiglobalization sentiment (which is not in the interest of either the G7 or impoverished people), but also makes the battle lines less clear in the fight against poverty. It is necessary for the G7 as well as rising powers to step up and address poverty before our collective economic interests are threatened.

Imagine the potential if these last two billion impoverished were brought into the Macro Quantum economy.The capitalist peace thrives on differentiated labor, on compet.i.tion, on economies of scale and on innovation-all things that poverty severely inhibits. There are still hundreds of millions of people barely eating enough calories each day to survive, let alone to dream about partic.i.p.ating in the global economy-these are the people we need to incorporate and raise out of the vicious cycle of poverty. Therefore it is in everyone's collective interest to cultivate new markets and labor sources throughout the world.

With momentum in the Millennium Development Goals stalled, and 2015 MDG targets not likely to be met, global poverty reduction requires a renewed focus not only from the G7 countries led by the United States but also from new rising powers. Moreover, the foreign-aid strategies of the past need broader support from NSAs geared toward engaging populations not simply governments. Beyond greater trade engagement, the better use of NGOs and social entrepreneurs, MNCs and microlenders, as well as more effective multilateral platforms, are necessary to alleviate poverty and ensure that we continue striving to achieve the capitalist peace.

Social EntrepreneursSocial entrepreneurs prove that a worldwide impact can be made by relatively few individuals. Some of these efforts are modest. For example, Soraya Salti, a 37-year-old Jordanian woman is trying to transform the Arab world by teaching entrepreneurship in schools. Her organization, Injaz, is now training 100,000 Arab students each year to find a market niche, construct a business plan, and then launch and nurture a business. The program has spread to 12 Arab countries and is aiming to teach one million students a year. Girls, in particular, have flourished in the program, which has had excellent reviews and is getting support from the U.S. Agency for International Development.Or consider Cinepop, the brainchild of Ariel Zylbersztejn, a 27-year-old Mexican. Ninety percent of Mexicans can't afford to go to movies, so he started his own Cinepop, which shows movies on inflatable screens in public parks for free. He sells sponsorships to companies to advertise to the thousands of viewers who come to watch the free entertainment. Cinepop is only three years old, but already 250,000 people a year watch movies on his screens-and his goal is to take the model to Brazil, India, China, and other countries.But perhaps the most far-reaching and global of the social entrepreneurial projects is Kiva.org. In 2005, more than 20 years after Grameen Bank pioneered the idea of microlending, Matt and Jessica Flannery brought a touch of Silicon Valley innovation to the practice. Kiva is "the world's first person-to-person micro-lending web site, empowering individuals to lend directly to unique entrepreneurs in the developing world." Its model is simple: Kiva partners with existing microlending organizations that choose qualified entrepreneurs.The organizations use kiva. org to post profiles of these entrepreneurs and their projects. The stories of the people found on Kiva are often very detailed. A random perusal of the site brings up Grace from Uganda, whose $500 loan allowed her to buy refrigeration equipment for her peanut b.u.t.ter business; and Angel, a Roma gypsy from Bulgaria, who used $850 to start his own bicycle repair shop.On the giving side, potential lenders are able to browse potential recipients, then lend using a credit card or Pay Pal account. Over time, the entrepreneur repays the loan (without interest). Repayment and other updates are posted on Kiva and e-mailed to lenders if they chose. When lenders get their money back, they can re-lend to someone else in need, donate their funds to Kiva for operational expenses, or withdraw their funds. In only a couple of short years, Kiva has become an extremely popular tool. The web site gives statistics on the loans made and repaid in the last week. A typical week looks like this: $680,600 was lent; 1,574 entrepreneurs funded; 9,103 lenders made a loan; and 644 loans were completely repaid. Not only has Kiva brought a new degree of transparency to microlending, it has fostered a personal rapport between lenders and recipients, reinforcing the sentiment that, through technology, it really has become a small world, after all.The increasing prominence of social entrepreneurs has the potential to generate huge benefits by spreading capitalist culture abroad and identifying unfulfilled societal needs. America Forward (www.americanforward.org), a consortium of social entrepreneurs, proposes an expanded concept of national service and federal matching of private social investment funds that invest in community-run programs to increase the number of social entrepreneurs in the futureao.

Chapter 9.

Driving with a New Dashboard in the Macro Quantum World There are three kinds of lies: lies, d.a.m.ned lies, and statistics.

-BENJAMIN DISRAELI

It would be an understatement to say that the world today is a very different place than it was just 20 years ago.Throughout our discussion, we've described, from trunk to tail, the tremendous opportunities and challenges presented by the new elephant in our living room: globalization. Its ripple effects have touched virtually every facet of our daily lives-from how we feed ourselves to what we do for a living, and from how we teach our children to what we aspire to be, have, and do.

Down but Not Out In the Macro Quantum world, greater cross-border exchange and the rise of emerging powers and NSAs have reshaped the face of the global economy. To continue to survive and thrive in this ecosystem, we've discussed how the United States must adapt from a unipolar to a multipolar (or what Richard Ha.s.s calls a "nonpolar") system where dozens of players-states and NSAs alike-exercise power and influence. 1 1 One popular adage on Wall Street is, "the trend is your friend," meaning you profit by trading with the market not against it.While the United States once was One popular adage on Wall Street is, "the trend is your friend," meaning you profit by trading with the market not against it.While the United States once was the the market, the market now has many players that America cannot control. And before we let other countries control, or even corner, the market, it is in our collective interest to solidify the rules and sanction the referees of the globalization game. This will require not only acknowledging but actually welcoming new players through more inclusive multilateral architecture and policy stances. Cultivating a multilateral "strength in numbers" att.i.tude will be key to avoiding the calamities of unchecked globalization that befell the world in the early twentieth century. market, the market now has many players that America cannot control. And before we let other countries control, or even corner, the market, it is in our collective interest to solidify the rules and sanction the referees of the globalization game. This will require not only acknowledging but actually welcoming new players through more inclusive multilateral architecture and policy stances. Cultivating a multilateral "strength in numbers" att.i.tude will be key to avoiding the calamities of unchecked globalization that befell the world in the early twentieth century.

The recommended adjustments in trade, energy, security, immigration, health, environment, and poverty policies aim to strengthen and modernize our current inst.i.tutional infrastructure-including NATO, the WHO, the WTO, the World Bank, and the UN, among others. Lately, many of these organizations have been left to languish, but with a little attention and extra funding, a revived multilateral system could shepherd the capitalist peace forward based on the rule of law not the law of the jungle. In addition to reforming such multilaterals, the United States needs to turn a critical eye to policies, att.i.tudes, lifestyle trends, and inst.i.tutions at home. Small adjustments at the domestic level could have quantum reverberations beyond our borders. But this will not be easy.

While the United States has lost economic ground to new players and tarnished its reputation abroad through its own knee-jerk unilateral reactions, it is still capable of evolving and thriving in the Macro Quantum world. Although American government has been slow to adopt the new thinking and policies necessitated by globalization, our private sector has been at the forefront of these megatrends for decades. The United States has topped the World Compet.i.tiveness Yearbook rankings for 15 straight years through 2008, a study that surveys 55 economies according to 331 criteria measuring how nations create and maintain conditions favorable to businesses.2 And despite the financial body blows it has taken recently, the United States still has arguably the world's most sophisticated economy and financial system. Moreover, the United States is the global vanguard of venture capital and technology as well as the leader in measures of individual productivity across many key industries. While the global credit crisis, bank failures, and mounting government deficits seem ominous, they are hardly intractable. The United States has a uniquely entrepreneurial and pragmatic culture, finding the means to reinvent itself even at the darkest hour. U.S. business has always been adept at Joseph Schumpeter's "creative destruction"-the Darwinian process whereby visionary, radical innovation continuously propels the economy forward; this must become an integral feature of our government as well. And despite the financial body blows it has taken recently, the United States still has arguably the world's most sophisticated economy and financial system. Moreover, the United States is the global vanguard of venture capital and technology as well as the leader in measures of individual productivity across many key industries. While the global credit crisis, bank failures, and mounting government deficits seem ominous, they are hardly intractable. The United States has a uniquely entrepreneurial and pragmatic culture, finding the means to reinvent itself even at the darkest hour. U.S. business has always been adept at Joseph Schumpeter's "creative destruction"-the Darwinian process whereby visionary, radical innovation continuously propels the economy forward; this must become an integral feature of our government as well.

For much of the last decade, the United States' intoxicating post-Cold War confidence as the world's sole superpower deluded our government into believing that we could control globalization by sheer will. This has proven to be a myopic and unfortunate miscalculation. Now, the United States must begin to dismantle entrenched Micro Domestic att.i.tudes. Even if these strategies brought success 50 years ago, we must part with them in search of something more fitting for today's very different world. More important, these changes could serve as a model for the world to emulate. The United States is still in many ways the world's leader, but clearly the recent administration has misconstrued the source of this power. The esteem the United States has been afforded by the international community comes not from brute economic and military strength, as recent officials have believed, but the enduring admiration, trust, and respect its pioneering form has garnered during the twentieth century. The United States has long been viewed as both experiment and inspiration. Even as early as 1630, famous Puritan preacher John Winthrop told the members of the Pilgrim settlement in Ma.s.sachusetts that they would serve as a "city upon a hill," a standard for the rest of the world. As the United States settles into maturity after 230-plus years as an independent ent.i.ty, it must fight off the inertia of old habits and remember its role as a great innovator and leader. While global markets deal with the credit crisis triggered by America's subprime woes, United States leadership on the financial front may be truly appreciated by the world.

One factor preventing the United States from abandoning the Micro Domestic paradigm is simply how charmed and effortless our lives have been under this old perspective. Few alive today remember firsthand the Great Depression or World Wars I or II. Postwar babies have grown up bathed in prosperity, free to pursue individual happiness, but this has sometimes translated into unsustainable instant material gratification, mountains of debt, and displays of angry, armed aggression. Today, the circ.u.mstances have changed. What if such att.i.tudes were to spread globally? How would we deal with a world where 6.7 billion people "pursue happiness" through thoughtless consumption, and countries flex their military muscles to enforce their national agendas? Happiness is surely more than endless consumption with no regard for the true quantum costs to others. So what policies do we craft to achieve a more thoughtful, responsible happiness? To answer these questions requires new modes of thinking, and new ways of measuring where the United States stands, where it is going and how far it is from where it wants to be. Many critics have noted the structural flaws inherent in our economic metrics for measuring progress and failure. Our Macro Quantum world requires different ways to a.n.a.lyze root causes to problems, identify possible solutions, and monitor and evaluate policies and their outcomes.To move forward, we will need to view the world through radically different lenses and monitor ourselves on a new, multigauged dashboard. Driving with only a speedometer might tell us how fast we're going, but it doesn't tell us if we're going in the right direction or if we have enough fuel to get there.

Living by Numbers A man enters the lobby of an apartment building and greets his neighbor on her way out. "What's the temperature like outside?" she asks. "Feels like thirty-five or so," replies the man. Without further context, this single number doesn't tell us much. Perhaps this exchange happens in New York, and the woman will turn back to grab a heavier coat. Or maybe it occurs in London, where she'll brace herself for the sweltering 35 degrees Centigrade (95 degrees Fahrenheit). Or it may be the case that (regardless of locale) the man's running a fever and his response may not accurately correspond with the actual air temperature.

While this particular ambiguity is readily dispelled, the scenario draws attention to perhaps the greatest Macro Quantum challenge-devising, gathering, and interpreting appropriate measurements and statistics. Specifically, what measures should we be using to judge well-being, success, wealth, progress, and happiness? Temperature is fairly objective and easy to quantify, but measuring complex phenomena like economic advancement is messier and more subject to distortion than one might imagine. How do we best collect and aggregate data? How can we account for observational error and intentional statistical manipulation? Can we compare figures across borders? And is just measuring GDP alone enough to give us the best barometer for advancement?

While Adam Smith is often considered the father of modern economics, English economist and philosopher William Petty actually tried to get a scientific handle on the country's economic health almost a century before Smith and made some of the first estimates of national accounts (an accounting measure of the entire country's income and output) in 1665. Petty, Oliver Cromwell's chief economist and a.s.sistant to philosopher Thomas Hobbes, was one of the first thinkers to note that a country's wealth was larger than its sum of gold and silver. In trying to estimate the size of Britain's economy, he discovered that England's stock market was worth more than all its hard a.s.sets-land, metals, and livestock-and the difference must be the "value of people"-human capital.3 Petty was one of the first to recognize money in circulation and the velocity of it changing hands had much to do with economic value. It was here that the basic notion of a.n.a.lyzing and quantifying a country's economic activity was born. Petty was one of the first to recognize money in circulation and the velocity of it changing hands had much to do with economic value. It was here that the basic notion of a.n.a.lyzing and quantifying a country's economic activity was born.

The next major breakthrough in national accounting didn't come until the early twentieth century, as Ted Halstead and his colleagues describe: In 1931 a group of government and private experts were summoned to a congressional hearing to answer basic questions about the economy. It turned out they couldn't; the most recent data were for 1929, and they were rudimentary at that. In 1932, the last year of the Hoover administration, the Senate asked the Commerce Department to prepare comprehensive estimates of the national income. Soon after, the department set a young economist by the name of Simon Kuznets to the task of developing a uniform set of national accounts.These became the prototype for what we now call the GDP.4

Since the implementation of a formal system of national income and production accounting in the depression era, economic activity, whether tallied as gross national product (GNP) or as gross domestic product, has been the premiere measure of economic well-being. GDP, defined as the total market value of all final goods and services produced in a country in a given year, has become the most accepted standard and has changed forever how we look at public policy. Before the advent of national accounting, economists rarely had been consulted on public policy. Equipped with powerful new statistical tools, they became the the policy authorities of the postwar era. policy authorities of the postwar era.

Yet even the forefather of national accounting realized the limitations of GDP. Already in 1934, Kuznets warned that, "the welfare of a nation can scarcely be inferred from measurement of national income." He wrote again in 1962: "Distinctions must be kept in mind between quant.i.ty and quality of growth, between its costs and return, and between the short and the long run. Goals for more growth should specify more growth of what and for what."5 In other words, GDP and its components give us a measure of how much we produce and consume-but it doesn't reflect any of the qualitative aspects of the economy. It cannot answer essential questions: Are we consuming too much? Is some of today's registered consumption simply a waste? Will an increase in GDP today have a negative effect on GDP in the future? And, perhaps most important, are we producing goods and services that benefit society as a whole? Kuznets' critique has since been echoed by many prominent economists including n.o.bel laureates Joseph Stiglitz, Amartya Sen, and Muhammad Yunus. In other words, GDP and its components give us a measure of how much we produce and consume-but it doesn't reflect any of the qualitative aspects of the economy. It cannot answer essential questions: Are we consuming too much? Is some of today's registered consumption simply a waste? Will an increase in GDP today have a negative effect on GDP in the future? And, perhaps most important, are we producing goods and services that benefit society as a whole? Kuznets' critique has since been echoed by many prominent economists including n.o.bel laureates Joseph Stiglitz, Amartya Sen, and Muhammad Yunus.

GDP is a powerful indicator, but it is by no means a complete measure of socioeconomic activity. On the one hand, as economist and n.o.bel Laureate John Kenneth Galbraith reported, prosperity spread rapidly in the era after WWII in part thanks to "little observed but spectacular improvements in the statistical measures of the current output of the U.S. plant."6 But GDP is not a wholly accurate or objective measure. It excludes a number of factors that contribute to economic well-being, like the value of nonmarket goods and services (especially natural resources) and informal and unpaid activities.The contributions of stay-at-home mothers (or fathers) are ignored as well as in-kind trade.Yet anytime a dollar changes hands GDP is boosted, even if well-being or value is not created. If a housekeeper and lawn care company are hired to perform some domestic duties previously performed by a family member without pay, GDP is boosted. But GDP is not a wholly accurate or objective measure. It excludes a number of factors that contribute to economic well-being, like the value of nonmarket goods and services (especially natural resources) and informal and unpaid activities.The contributions of stay-at-home mothers (or fathers) are ignored as well as in-kind trade.Yet anytime a dollar changes hands GDP is boosted, even if well-being or value is not created. If a housekeeper and lawn care company are hired to perform some domestic duties previously performed by a family member without pay, GDP is boosted.

Since GDP includes all activities where money changes hands, it necessarily views cash-generating activities related to natural disasters and crime in terms of economic gains gains. For example, earthquakes and hurricanes register immense damage and disrupt thousands of lives, yet they also typically generate economic and labor expansion through rebuilding efforts. While disasters may raise GDP by causing money to change hands, they do not create well-being. French cla.s.sical liberal theorist Frederic Bastiat pointed out this faulty rationale nearly 160 years ago in his parable of the broken window.7 Bastiat describes a shopkeeper whose window is broken by a boy. Because repairing the busted window makes work for the glazier, who will then buy bread, benefiting the baker, who will then buy shoes, benefiting the cobbler and so on, the townspeople hail the mischievous boy as an economic benefactor, ignoring the opportunities the shopkeeper may have had if he had not been forced to spend his money on a new window. Perhaps he would have spent the money to hire a new worker for his store, or saved for his daughter's education. Likewise, GDP is unable to capture the fact that victims of floods, hurricanes, wildfires, and earthquakes are merely replacing destroyed property (if even possible), not adding to their wealth or happiness. By this equation, the most productive citizens for a national economy are "terminally ill cancer patients going through a costly divorce," because they generate a lot of economic activity. Bastiat describes a shopkeeper whose window is broken by a boy. Because repairing the busted window makes work for the glazier, who will then buy bread, benefiting the baker, who will then buy shoes, benefiting the cobbler and so on, the townspeople hail the mischievous boy as an economic benefactor, ignoring the opportunities the shopkeeper may have had if he had not been forced to spend his money on a new window. Perhaps he would have spent the money to hire a new worker for his store, or saved for his daughter's education. Likewise, GDP is unable to capture the fact that victims of floods, hurricanes, wildfires, and earthquakes are merely replacing destroyed property (if even possible), not adding to their wealth or happiness. By this equation, the most productive citizens for a national economy are "terminally ill cancer patients going through a costly divorce," because they generate a lot of economic activity.8 Figure 9.1 Figure 9.1 ill.u.s.trates some of the concepts-such as leisure, health, and satisfaction-that GDP cannot measure, as well as some concepts that are included in GDP but do not contribute to well-being, such as depreciation and "regrettables" such as spending on crime and disaster remediation. ill.u.s.trates some of the concepts-such as leisure, health, and satisfaction-that GDP cannot measure, as well as some concepts that are included in GDP but do not contribute to well-being, such as depreciation and "regrettables" such as spending on crime and disaster remediation.

If, for a moment, we set aside the philosophical issue of what we want to measure and consider GDP not as a proxy for well-being but simply as a measure of economic activity, there are still significant statistical challenges surrounding how GDP is actually measured. In his 1950 book On the Accuracy of Economic Observations On the Accuracy of Economic Observations, Princeton Economics Professor Oskar Morgenstern reminded us that national income may only be measured within a 10 percent margin of error, although economic policy advisers often propose policies based on adjustments in national income of 1 percent or less-a shift that is statistically insignificant.9 Although data collection has become more sophisticated since Morgenstern's book was published, accuracy remains as elusive as ever. Many countries lack adequately trained professionals capable of observing economic data and rely instead on GDP estimates made by the Word Bank. Some developing countries are experiencing fundamental economic and social changes that bring more stakeholders into the market, changing the way people invest, get employed, earn money, and consume; statisticians may have a difficult time keeping up. Nor can aggregate statistics at a national level capture regional disparities within these states. Even in OECD countries, only within the last 70 years have government agencies and private economic researchers systematically collected economic data, and this data is still p.r.o.ne to manipulation and error. Although data collection has become more sophisticated since Morgenstern's book was published, accuracy remains as elusive as ever. Many countries lack adequately trained professionals capable of observing economic data and rely instead on GDP estimates made by the Word Bank. Some developing countries are experiencing fundamental economic and social changes that bring more stakeholders into the market, changing the way people invest, get employed, earn money, and consume; statisticians may have a difficult time keeping up. Nor can aggregate statistics at a national level capture regional disparities within these states. Even in OECD countries, only within the last 70 years have government agencies and private economic researchers systematically collected economic data, and this data is still p.r.o.ne to manipulation and error.

Figure 9.1 What GDP Does (and Does Not) Measure What GDP Does (and Does Not) Measure SOURCE: Deutche Bank. Deutche Bank.

Moreover, there may be strong incentive for governments to adjust, or even falsify, statistics. Improving economic performance can increase the responsible party's chances of staying in power. Consider China, where regional officials' performance is measured by provincial GDP growth.10 Rampant ma.s.saging of local growth figures has resulted. Statistical manipulation can also help to gain entry into international organizations, like when Greek government officials distorted budget deficit numbers in order to gain entrance into the European Monetary Union (EMU). Rampant ma.s.saging of local growth figures has resulted. Statistical manipulation can also help to gain entry into international organizations, like when Greek government officials distorted budget deficit numbers in order to gain entrance into the European Monetary Union (EMU).11 Up until 1995, Greece maintained high government deficits, often more than 10 percent of GDP. The number dwindled incredibly rapidly, and by 2000, Greece's deficit was below 3 percent making the country eligible for EMU membership. After Greece was accepted to the EMU, the Statistical Office of the European Communities refused to validate figures prepared by the National Statistical Service of Greece (NSSG). In reaction, the NSSG was forced to revise its debt estimate several times until the surplus became a deficit. Up until 1995, Greece maintained high government deficits, often more than 10 percent of GDP. The number dwindled incredibly rapidly, and by 2000, Greece's deficit was below 3 percent making the country eligible for EMU membership. After Greece was accepted to the EMU, the Statistical Office of the European Communities refused to validate figures prepared by the National Statistical Service of Greece (NSSG). In reaction, the NSSG was forced to revise its debt estimate several times until the surplus became a deficit.

Even the United States is not immune to such tampering. U.S. political commentator Kevin Philips notes: The use of deceptive statistics has played its own vital role in convincing many Americans that the U.S. economy is stronger, fairer, more productive, more dominant, and richer with opportunity than it actually is....The corruption has tainted the very measures that most shape public perception of the economy-the monthly consumer price index (CPI), which serves as the chief bellwether of inflation; the quarterly gross domestic product, which tracks the U.S. economy's overall growth; and the monthly unemployment figure, which for the general public is perhaps the most vivid indicator of economic health or infirmity. Not only do governments, businesses, and individuals use these yardsticks in their decision-making but minor revisions in the data can mean major changes in household circ.u.mstances-inflation measurements help determine interest rates, federal interest payments on the national debt, and cost-of-living increases for wages, pensions, and Social Security benefits. And, of course, our statistics have political consequences, too. An administration is helped when it can mouth ba.n.a.lities about price levels being "anch.o.r.ed" as food and energy costs begin to soar.12 Philips believes most American presidents from John F. Kennedy through George W. Bush have made a variety of tweaks to the methodologies of inflation and unemployment that give Americans a distorted view of the economy. As a result, the U.S. economy can seem up even when average Americans are feeling pretty down.

A second statistical concern surrounding GDP is its standardization across the globe. Even without manipulation, national income statistics are poor bases for international comparison due to different cla.s.sifications, definitions, price systems, population growth rates, and exchange rates, as well as different measurements of inflation between countries. Consider how just one small piece of the puzzle can throw off the whole picture, such as the varying accounting treatments of depreciation across countries. Since estimates of depreciation are made by corporations themselves and are guided by tax considerations and local regulations, the results can provide misleading ideas about the value of enterprises. For example, the same equipment may be worth more on the books under U.S. accounting rules as opposed to those of, say, Thailand. A useful indicator of national economic activity should be internationally comparable given that other countries are the benchmarks by which we measure our own progress. For example, in Chapter 6 we saw that Americans spend $2.3 trillion annually on health care. Without knowing that this is more than double on a per capita basis what most industrialized countries spend, that information would not tell us much. How can we adjust for statistical manipulation and cross-border differences? While the best we can do to combat manipulation is to enforce unified statistical standards and better monitoring, there are several methodologies currently employed to account for differences, including purchasing power parity comparisons and per capita adjustments.

Purchasing Power Parity The effect of exchange rates and varying living standards can also skew cross-border economic comparisons leaving us with a distorted worldview. In theory, market exchange rates should adjust perfectly so that the same good and service have the same price in different countries. But in practice, imperfect capital mobility (currency controls in the extreme case) and practical concerns such as transportation costs prevent exchange markets from working perfectly. Each year the World Bank gathers data from countries in their local currency and adjusts that to a base value relative to U.S. dollars. If a country's currency weakens, like Argentina's did in 2001, for example, the economy looks dramatically different from just a year earlier. Argentina's economy theoretically shrank by two-thirds in dollar terms from 2000 to the end of 2001. Does that mean that Argentina produced only one-third in 2001 of what it produced in 2000? No. It is likely the amount of food consumed and things bought were about the same. But in U.S. dollar terms, the ultimate "value" was much less. Conversely, a country whose currency is gaining against the dollar will see its economy grow dramatically.

To avoid this, several organizations, including the World Bank, have opted to look at economies on a purchasing power parity (PPP) basis-a measurement that equalizes the purchasing power of currencies in their home countries for a given basket of goods. Of course, this causes concerns over what we include in this basket but still is probably more accurate than a GDP measurement at market exchange rates.13 By defining a set of comparable goods across countries and asking how many units of the local currency are needed to buy this in relation to a base currency (usually U.S. dollars), PPP helps to avoid the flaws of exchange markets. When GDP is adjusted by this recalculated exchange rate, the figure is effectively adjusted to mirror the real purchasing power. By defining a set of comparable goods across countries and asking how many units of the local currency are needed to buy this in relation to a base currency (usually U.S. dollars), PPP helps to avoid the flaws of exchange markets. When GDP is adjusted by this recalculated exchange rate, the figure is effectively adjusted to mirror the real purchasing power.14 To see PPP in action, consider that the 2006 GDP per capita of Germany in USD market prices is 17 times that of China ($35,000 versus $2,000). However, taking proper account of the fact that the products and services people need to sustain their standard of living are substantially cheaper in China than they are in Germany and adjusting the GDP figures by this we find that the PPP adjusted per capita GDP in Germany is only four times that of China ($31,000 vs. $7,600).21 Indeed, the result of a PPP adjustment will most commonly be a reduction of the spread between rich and poor countries in terms of GDP levels. Indeed, the result of a PPP adjustment will most commonly be a reduction of the spread between rich and poor countries in terms of GDP levels.

Population Growth and Per Capita GDP Another simple but overlooked issue with GDP relates to population growth: The more a population grows, the more GDP grows. Remember our earlier equation: GDP=Population Per Capita Output.When a government reports its country's GDP has expanded 3 percent this year, if the population has also increased by 3 percent, per capita GDP is a