Mental Models = Sustainable Development

I really enjoyed our reading this week on Challenges for the 21^st Century.  It got me thinking about the connection of greenhouse gas emissions and developing nations.  Figure 15.4 in Macro Economics in Context shows the direct connection between GDP and CO2.

Expanding further on the overall environmental impact of each income class the authors then go on to suggest a course of action.

“Each group must approach environmental sustainability with different objectives.  For the lower-income group, the focus must be on improving material living standards and expanding options while taking advantage of environmentally friendly technologies.  The challenge for the middle-income group is to keep overall environmental impacts per capita relatively stable by pursuing a development path that avoids a reliance on fossil fuels, disposable products, and ever increasing levels of material consumption.  Finally, the high-income group must find a way to reduce environmental impacts per capita through technological improvements, intelligently designed policies and changes in lifestyle aspirations.”

Reading this I realize this is more of a “ . . . yes, and . . .” situation for the lower income groups (developing nations) meaning that really all of the above listed items in rank priority apply to them.  

The first objective of improving material living standards is directly tied to raising GDP in these countries.  In one of Norm’s posts titled “Week Demand in Europe and US is Slowing Growth in Developing Countries” he sites an article that links the declining economies of these developed countries to the GDP health of developing nations. 

Let me see if I understand this correctly:



Though there had been some thought that the current economic crisis might give way to the opportunity for emerging leaders to arise from the developing world – as of late this perspective has all but disappeared and become quite the opposite.  They are thought to be the “victims of the Western slowdown.”

The article goes on to say that, “The [GDP] results suggest trouble ahead for emerging economies, with banks in Asia and Latin America showing deeper caution, which can lead to weaker lending.”

Hum . . . so where might the leverage points be?  The thing that stand out to me is that Material and Financial Aspirations (though this is a mental model and mental models are the hardest to change) may actually be the best leverage point.  And possibly where all nations need to start.

What other variable might be injected into the system that would bring a greater state of wellbeing?  What if we where able to turn the GDP for Developing Nations apart from the impact Western economies are having on them?

This report announces a new initiative to boost sustainable business in developing countries with a 3.2 million Euro budget.  The Rio+20 report on "The Future We Want" outlines specific goals, measures and presents a plea for others to join in the effort.

 "We call on all countries to prioritize sustainable development in the allocation
of resources in accordance with national priorities and needs, and we recognize the
crucial importance of enhancing financial support from all sources for sustainable
development for all countries, in particular developing countries."

Though I would agree this report is encouraging to see the intent of collaborative effort to leverage change the thing that disturbs me a little is the intangible nature of what each of these countries on their own will be doing to effectually innovate sustainable systems with the resources they already have.

It is much easier to ask for a hand out than take full responsibility of the situation you find yourself in, to "be the board" if you will and consider why certain circumstances are presenting themselves and what adjustment might one make to leverage the power we each have to make decisions.  I'm not trying to be cold and heartless here but want to highlight the importance individual reasonability plays in the system.  How much, all the more, would nations and private investors from the North want to support sustainable development in a given nation if they see that nations going all out to "do for themselves."   And some countries are!

Overall however, to me this comes back to a international culture that has been created and that needs to be recreated with a new mindset -- yes, we are back to the mental model.  A culture that is growing but that needs to be further fostered by each of us.  A culture that closes the door on escapes such as blame, self pity and victimization,  and sits with the way things are . . . choosing to engage with the world, take responsibility, initiative and discover how we might redesign the systems we operate in, including our material and financial aspirations.

International Trade – Investigating a Potential Business Model

In my research on poverty I came across a poverty alleviation business model that is most commonly referred to as the BoP Perspective or BoP Ventures.  It was developed with the idea that new market entry strategies are needed, particularly in developing nations where there are large informal markets and implementing traditional formal business models create a host of socio-economic issues.

BoP stands for the Bottom of the Pyramid and refers to the 2/3 world or the impoverished population of the world that lives on the least amount of income.  Though there is varying thought as to where the income line is draw to say that you fit into this category it is clear that we are talking about the population of the world that is making $1-2 dollars a day or slightly more.  If that line is draw at $10 a day, as I mentioned in my last blog, that would account for 80% of the world’s population . . . so we are talking about a HUGE base.

The BoP model focuses on mutual value creation. It is a revenue generating enterprise that sells to, or produce goods for the poor.  It holds the following overarching measurement of success:

The greater the ability of the venture to meet the needs of the poor, the greater the economic return to the venture, the greater the venture.

This reminded me of a quote I heard from, I believe it was Henry Pinchot, Gifford’s father that said something to the effect of “Do the greatest good for the greatest amount of people for the greatest amount of time.”

BoP ventures have two main approaches as seen here:

The above is an excerpt from Ted London’s working paper on BoP Perspective on Poverty Alleviation.  It was a rich resource for understanding the fundamentals of this approach.

An article published call The Fortune at the Bottom of the Pyramid is thought to have provided inspiration to this BoP approach.  Since the publishing of the article a book with the same name has been released.

There are six BoP principles.  In more or less my own words, they are as follows:

DESIGN

1.    External Participation

Key Idea: Understand, leverage and build on existing social frameworks – partnership with “social embeddedness or “native capability”

Unique Approach: Non-local participation is involved which differs from Micro- and Small-Enterprise Development.

Measurement of Success:  A new non-locally owned or managed revenue-generation venture begins to serve BoP markets.

2.    Co-Creation

Key Idea: BoP active participation in designing the business model and conceptualizing any technological solutions.

Unique Approach: Each model is tailor made for the local BoP vs. a corporate or development sector strategy that relies on pre-existing “Western” business models and technologies that are brought into new market environments.

Measurement of Success:  The voices of the BoP are incorporated into the venture design.

IMPLEMENTATION

3.    Connecting Local with Non-Local

Key Idea: BoP products or consumers are connected to non-local markets that previously they were not able to access.

Unique Approach: Local intellect, perspectives and experience are engaged to create a new innovative venture with mutual benefits vs. being solely focused on creating jobs for those at the BoP.

Measurement of Success: Products/services from BoP reach non-local markets or non-local products/services reach BoP markets.

4.    Patient Innovation

Key Idea: The business model has a long-term orientation with the patience to scale only after demonstrating success.

Unique Approach: Starts small and scales based on success vs. immediate large-scale implementation with related economic returns or societal impacts.

Measurement of Success: Finances and resources are available to support the long-term objectives that are not strictly tied to short-term performance goals.

PERFORMANCE

5.    Self-Financed Growth

Key Idea: Profits from competitive advantage are the primary source of long-term growth of the business.

Unique Approach: The goal is to generate competitive advantage for a specific venture vs. dominating a particular industry.

Measurement of Success: Competitive advantage is achieved based on maintaining mutually beneficial partnerships with local entities.

6.    Focusing on What is “Right” at the BoP

Key Idea: The idea that there is intrinsic value and rationale to the informal economy and this undergirds the business strategy.

Unique Approach: The goal is not necessarily to formalize the informal market vs. approaching the venture with initiatives of creating an environment for formal economic growth.

Measurement of Success: Distinctive leverage points are identified by the BoP venture and it’s partners that enhance resources and capacities that currently exist at the BoP.

I would like to suggest that there is one more category and two more principles that need to be more directly stated to ensure the long-term mutual benefit of a BoP venture partnership.

EVALUATION

7.    Environmental Impact

Key Idea: Sustainable environmental practices are instituted to ensure the long-term benefit of the partnership.

Unique Approach: Zero impact practices are imbedded in the DNA of the business model vs. approaching resources with the idea that there is an unlimited supply and that waste has no residual effect on the environment.

Measurement of Success: Power, water and resources used or consumed are from renewable sources and result in zero waste.

8.    Social Justice

Key Idea: Human rights and principles of equality and dignity are engrained and promoted within the strategy of the venture.

Unique Approach: Local partners are deemed as equal collaborative partners with the focus on how we can help each other.

Measurement of Success: Fair trade principle are observed and the venture measurably narrows the gap of disparity within the local economy.

In Norms article Chocolate Versus Cocoa Will Reduce Poverty In Africa he shares a link to an article that argues that developing nations such that are in Africa must move up the value added chain by producing higher value commodities. 

While it may be true you can sell chocolate for more than coco and clothing for more than cotton, I’m not convinced that producing more processed goods for the sole motivation of profit is the best impetus.  The article sites a “successful” marketing campaign that persuaded 5 million Nigerians to consume an instant-noodle product, known as Indomie, instead of the popular more natural cassava product called Garri.  No consideration in the article was given to which was healthier for people or least damaging on the environment in it’s production . . . I’m noticing a trend that economists tend to all too quickly forget about the non-monetary factors such as quality of life, cultural heritage, health and happiness that inspire dignity and well-being.

The type of development the above article is describing, might lead one to believe, imposing Westernization on these countries with a formal market is the best and only way to bring them out of poverty. There are alternative possibilities however.  The BoP perspective focuses on a bottom up approach that respects the strengths and capabilities that already exist at the BoP vs. imposing a top-down more corporate design focus on overcoming weaknesses in the value added chain and “Westernizing” local business activities.

I’m very excited about what I have learned about this BoP business model however, if not just for marketing sake, I think it needs a better more catchy name.  Any ideas?  

Poverty and Perspective

This week, looking through Norm’s articles on poverty, “100 Million Housholds Ranked Poor or Near Poor By Census Bureau” caught my eye.  Last year the Census Bureau released a report that showed the number of people in poverty in America is at an all time high since 1959.

Norm sites an article by the New York Times that talks about the “near poor,” a term that highlights those living between poverty and 150% of the poverty line.  The new alternative measure, shown below, is an adjusted model that takes into consideration the cost of living, benefits received by the government, health care expenses, work expenses such as transportation and income lost to taxes – arguably a more accurate representation of those that experience the effects of poverty in the US.

 

While it is disturbing to see these numbers in the alternative measure of the near poor reach 33% (one in three), I can’t help but wonder, if this is how we are struggling, as the wealthiest nation in the world . . . what about those that are living at or near the international poverty line living on $1.25 or maybe $2 a day.   If we want what is better for ourselves, our neighbors, our children . . . then how much more developing nations.  This short Ted Talk by Hans Rosling, a Swedish professor who loves using data to understand our world, held my attention and gave perspective on the difference between the luxuries we American’s enjoy verses those in developing nations.  Hans is also the co-founder of Gapminder, a nonprofit that has developed a free software that can illustrate statistics . . . a potentially very useful tool for making presentation that use data to illustrate a point.

The reality is American’s at the poverty line have $68 a day to spend on life’s necessities.  This chart below from Global Issues remind us that most of our bottom third are still among the world’s top 20% of wealthiest individuals.

So what needs to change?  And where does that change begin? 

I believe as Americans, rich or poor, we need to change or perspective to see beyond our boarders.  That we need to leverage the power that we do have to not just equalize inequality for ourselves.  Consider for a moment how we maybe able to live on less and be happy with less.   If we are able to do so we can refocus our attention on other things and utilize our status as being part of the top 20% to leverage change globally. 

I am worn out from of hearing people complain about having to work hard to make the living that they do – is that not to be expected?  Those living in developing nations making gravel by hand or hauling loads for a living have much less return on their work.  Are we so spoiled that we MUST be entitled to things that we have not worked to get?  YES, the system is broken and YES, it is easier for the rich to stay rich and the poor to stay poor.  Don’t forget however that as an American, even with these shortcomings, we STILL have far more opportunity than those living in most nations. 

Rather than become paralyzed by the void in the glass being half empty, let’s utilize the substance that is there - the benefits and status that we do have to make a real difference.

Poverty: Making the System Visible

There are many different theories on how to reduce poverty, how it is created in the first place and how poverty becomes cyclical.  Two common schools of thought that I found in Wikipedia include Personal Failing and Structural Failing.  

The theory of Personal Failing points the finger at those in poverty and basically says that they have caused their own problem.  Where as Structural Failing focuses on the responsibility of government to create social and economic systems that promote development.

Because poverty is such a large issue, it can be tempting to point the finger at the party that holds the greatest power.  Most economists believe that the greatest effectiveness is achieved through regulation and government policies including redistribution through social and welfare programs illustrated in the following chart:

Source: OECD, *Poverty thresholds: 50% of median income.

The United States Sweden leads in the percentage of redistribution among all first world countries considered. At first glance however, redistribution does not seem to be a solution for fixing the problem, rather it may just be masking it.  Notice our poverty rate prior to this assistance falls in the median range similarly held by other countries.  A much deeper dive into data on poverty however would be needed to provide any substantiation either way and even then I’m sure there would still be room for great debate.

In my perspective however, the Personal Failure and Structural Failure theories each individually represent an incomplete picture of this very complex issue.  Poverty is more of a “yes, and…” situation that places responsibility on both the individual and society. 

In Norm’s blog on How to Reduce Poverty in Poor Countries he points to an article that highlights the benefits of microeconomics at work.  Three books are promoted.  The book called Poor Economics caught my eye.  Here is a short video clip of one of the authors expounding on how the effectiveness of social and economic programs can greatly increase when we factor in the decision-making and behavioral patterns of people living in poverty.  The author also suggests that because the macro level is so complex and overwhelming with slow progress it may be more effective to approach the issues of poverty on a micro level.

Due to high levels of corruption in developing nations (and at times in developed nations) that impede the implementation of beneficial government programs and regulations that would stimulate development on a Macro level, Norm suggests that likely both approaches will be needed to move development forward.

If considering the behavior patterns and the cause and effect of decision-making can make a difference in the third world – the same should hold true in the United States.  Below I have begun to map out the variables that initially come to mind:

       

 

Key: The color blue has been used to indicate a positive or same relationship, red arrows are used to indicate a negative or opposite relationship.

Thought this first draft is quite busy to look at, and likely is still missing some variables and connections, it has already been helpful to me to begin to see the loops and patterns that reinforce behaviors.  And to capture some of the new economic factors that I have been learning about, helping me further see their connections to the overall picture.

One variable that I had not considered very much, that now stands out to me, is the role of depression in this system and how it effect self-image, ambition and how it can lead to personal failing that results in poverty.  There are a significant number of factors that lead into depression making this variable a possible strong leverage point. The “example set” by others as influencers seams to be another important leverage point.

The next step will be to identify the reinforcing and balancing loops and identify what factors might be leveraged to gain greatest economically change.

Are there patterns that stand out to you? 

Are there any reinforcing loops with odd numbers of red/opposite relationships that puzzle you or intrigue your thinking?

Your comments and insights are welcome!  In the fight against poverty (both foreign and familiar) all hands are needed on deck to address the problem . . . and all forms of economics – both macro and micro!

Thanks for your comments!

Taking Responsibility for Extreme Inequality

“Growing inequality is one of the biggest social, economic and political challenges of our time.” Says The Economist in a special report this month. 

This map, also taken from the same article, show America among countries leading in wealth disparity with 10.5% of our GDP being made up by the world’s largest concentration of billionaires.  The deep orange color illustrate our >20% increase in inequality since 1980. 

With this great gap between the rich and the poor, does the title, “land of opportunity” still describe America?  What has contributed to this great discrepancy between the “haves” and the “have-nots” in America?  How does vast inequality affect our economy?  Is there an optimal rate of inequality that will maximize economic growth?  Who is responsible for establishing and restoring equality in our nation? 

These and many other questions caused me to dig deeper and learn more about the economic situation we find ourselves in, and where things could go from here.

Does the title, “land of opportunity” still describe America? 

Norms article today addresses the cost of inequality and points us to an article by New York Time’s Nobel prize winner, Joseph E. Stigliz who indicates it’s important we pay far closer attention to the financial world as America’s inequality rate is at undisputed historic highs. “. . . the top 1 percent takes in about a fifth of the income, and controls more than a third of the wealth” says Joseph.  And that is coupled with the resulting effect of less access for the vast majority to opportunities that would help individuals obtain positive economic mobility and overall future economic prosperity.  Weather or not this question can be answered conclusively, it may be too soon to tell.  It is clear in many of the articles that I read however, that there is growing concern that there is much less opportunity than there used to be.  The age old saying, it takes money to make money comes to mind, and seems to ring true now more than ever in our US history.  Take a look at these disparities:

What has contributed in America to this great discrepancy between the “haves” and the “have-nots”?

According to Zanny Minton Beddoes, who wrote The Economist article mentioned above, and  Learn Liberty, which seems to come from more of a conservative perspective – they both agree cronyism is one of the main factors.  This short video shows how cronyism, is hurting our economy and how governmental regulation does not always work in favor of small businesses.  With this in mind, it’s important as we go to the poles with a balanced perspective on the benefits and drawbacks that come with more regulation.  Ultimately what we need are government officials that have the integrity to not be bought-out by lobbyist that represent the “haves.”  Rather we need leaders and legislators who will stand up for the 99% of people (the vast population they are supposed to represent that don’t have the means by which to fill their pockets).

A second factor is the need to invest more in our youth - giving them access to opportunity. Traditionally this has been through education.  America used to lead in education however in more modern history we have fallen behind while our cost of education is skyrocketing.  Various forms of education need to be explored as the education system itself has become far too clunky, entrenched in it’s own bureaucracy of maintaining control.  According to research my team has been doing on college graduates, there is only a 6.4% wage difference between high school graduates and college graduates . . . and just 3% above the Median worker (see table below).  Either our thinking that a college education is the ticket to a better life is in serious question . . . and possibly just another way for the wealthy to line their pockets — or students are simply not receiving the value in the quality of the education they are paying for.

How does vast inequality affect our economy? 

There is great debate on this topic however in the end it seems all too apparent that the place in which we find ourselves now has not provide the healthy setting for a growing economy. Here are eleven charts that illustrate how out of whack inequality really is.  According to Stigliz, “Were the rich paying their fair share, our deficit would be smaller, and we would be able to invest more in infrastructure, technology and education — investments that would create jobs now and enhance growth in the future. While education is central to restoring America as a land of opportunity, all three of these are crucial for future growth and increases in living standards.”

Is there an optimal rate of inequality that will maximize economic growth?

According to research done by Jorge A. Charles-Coll there is a direct link between income inequality and economic growth.  Jorge reviews empirical data on international trends using the Gini Coefficient discovering that .39 is the optimal rate of inequality for efficient economic growth.  The questions is then begged – what is the current rate today in America.  According to this article published in The Atlantic, America is close to the bottom at .45.  Interestingly even Warren Buffet, a billionaire investor agrees that the rich need to be taxed more for the sake of our economy and the common good.

Who is responsible for establishing and restoring equality in our nation? 

The president generally is thought to hold a large amount of this responsibility by providing leadership that will protect the interests of the people.  As voters, likewise we also hold that responsibility to educate ourselves on the issues and elect the best person for the job.  But I think it’s important that we take it a step further and find creative ways from a grassroots level to leverage change – and that would be why I’m at BGI J