Community Finance in West Africa

Vasco Pyjama talks about community finance. The ROSCA is known as a “sou-sou” in west Africa, or at least in Nimba county, Liberia. Sousous run for a fixed term, based on the number of members. If there are 10 members and the contribution is $10, each month one of the members will get $90 (9 other members * $10 each). At the end of ten months, the sousou can either be restarted, or the membership can be renegotiated (for example, to drop people who failed to pay on time during the past sousou period). If the sousou is reconstituted with more or fewer people, it doesn’t really change anything, it just runs shorter or longer until the next restart. Sousous run best when they are between 6 and 12 people for social and economic reasons (a 5x – 11x payoff is manageable in a cash society). The order of the payouts is determined randomly at the startup meeting of the sousou. Sometimes people negotiate to trade their places in the payout order in order to assure that the sousou payout would arrive at a time that was convenient for them.

One thing Vasco forgot to mention about it is the very powerful social aspect to village finance. In a village environment, saving face is important. Failing to be a reliable member in a sousou is a pretty embarrassing. But the worse punishment comes when people are invited to the next sousou, and you are excluded. People who are trustworthy get the benefits of a community savings scheme, and those who don’t are excluded. Tough, but transparent. Those excluded from a sousou this time might get another chance with another sousou later. The basic fabric of village life means that everyone has a chance at redemption.

The proceeds of social investment in Nimba are used for things like concrete floors and new roofs. Some richer guys planned on buying a car by combining savings from their salary over the year and their sousou windfall. Then they paid their brother to drive it, making a small foundation of a family taxi company. Others would arrange for their sousou windfall to come in the same month as their vacation, so they could use the money to buy cement and work full time on a second house. After two or three years of this trick, using sousou windfalls every six months or so to advance construction, they’d be landlords — and that’s the real secret to getting rich in Liberia. (To be clear: landlords benefit from a transfer of wealth, they do not actually make new wealth by producing something. So it’s relative prosperity, not global GDP growth.)

There’s are some added systems that some sousous I learned about used. One had a loan concept, where members who wanted to be moved to the head of the line had to pay higher amounts in ($12 instead of $10) with the “interest” being accumulated into a long-term reserve pool. The reserve pool would then be paid out at the dissolution of the sousou to the non-borrowing members. Another sousou, this one with a large reserve after years of continuous operation, included a “compulsory loan month” in August. Each member was compelled to take a loan in August and to spend it in the local economy. He had to pay back this loan, and his normal sousou contribution during the rest of the year. They explained to me that the compulsory loan was intended to create demand in the local marketplace at a time when the local shopkeepers were normally seeing lower than average sales. Another sousou arranged their payout schedule to defer some of the normal payouts until December, to help buy Christmas presents.

As an aside… the business of a eastern Congolese motoman is interesting as well. I don’t remember the figures anymore, but it was a very tidy little business. I think the motocycle buyer could get his investment 100% paid off in 9 months by renting the moto to a motoman, and then for the remaining 3 year life of the motorcycle, he made $25 a month “moto rent”, and the motoman (usually a younger relative) got a steady job driving the motorcycle. The only problem was competition. In east congo, the business case for motos is blindingly obvious, and the right conditions exist: reliable supply of cheap chinese motos and parts from the port in Mombasa, capital ready to invest, and roads that are hostile to more comfortable cars. So there are 10 motos for every customer. The price does not collapse, because it tracks the running costs (gasoline) closely. Instead the weekly wage of a moto driver collapses, because the moto owners still demand their rent, no matter how bad competition gets.

The Economics of being a Hostage


Here’s an incredible inside view of the piracy business. What’s incredible is that NPR’s Channa Jaffe Walt managed to get a CEO of a shipping company on the phone and hear the inside story of the negotiations.

Here’s what’s really interesting. The first thing the CEO says is, “I never thought for a moment that I wouldn’t have to pay anything. The only question was how much, and when.” Channa asks him why and he says, “Look, there’s no one to turn to, we’re on our own out there and that’s all there is to it. You pay.”

I found it really interesting to compare that to humanitarian kidnappings, where paying a ransom is theoretically not allowed (though we know it happens sometimes), and even if it does happen it is a very very very last resort. For a shipping company, paying a ransom is the first resort! That’s the difference between water and land, between diplomacy and business. And how much safer and more pleasant it is for the hostages. I’m not making this up: I’ve read excerpts from a book by a former French pirate hostage, and I worked with a former MSF hostage. The hostages of the pirates have it easy, sleeping in their own beds, eating their own food, usually with constant communication to their families, and detention measured in weeks not months. Compare that to the story of Pilar Bauza (7 days sleeping under the stars, walking 100 km, little food and water) or Arjan Erkel (20 months of captivity with almost no communication).

Further, it would be interesting to know what the statistical measures are for survivability and psychological and physical comfort of hostages in the petroleum business versus humanitarians (both on land, but way more money at play for oil workers).

Finally, why is it the pirates manage to safely board ships without killing anyone, but humanitarians are sometimes killed before they are captured and ransomed?

All of which makes me wonder, what would it take, what fundamental change to put humanitarian aid hostages into the same relatively safer category as pirate hostages? Why do we get the shaft? (As usual, follow the money, and there you will find the answer.)

Other really incredible stuff from the story:

  • The ransom payers delivered an electric counter (complimentary, no less!) to try to speed the ship release process. Even so, the pirates counted and/or argued among themselves for 30 hours.
  • They keep timesheets so they know how much to pay each class of pirate!
  • There’s a supposition that the minimum wage for a unskilled guard on a captured boat is USD 1000, twice the average family income in Somalia. The attackers, who board the ship, make many thousands more.
  • The likely payoff for the underwriter is around 200% with a turnaround of less than one year. Try getting that from Wall Street!
  • There’s a delicate balance at work where the holder on the monopoly (the ship) needs to keep the ransoms in check lest they get too high and prompt the ships to defend themselves better such that the pirates lose their monopoly on the commodity.

Repair vs Replace

What are the economic effects of the repair vs replace decision? Interesting question, that.

If you missed “more local employment of the blue collar type”, go read this:

There is a slight diversion of purchasing strategy, repair rather than replace. This feeds a blue collar industry in the local region.

It used to be, when money was loose, replace with new was the norm. If the repair was 75 percent of the cost of replacement a new motor was ordered, the old motor was scraped, and the country of origin (Mexico, China, Taiwan) benefited. These beautiful USA built, 50 year old, 200 horsepower motors, were going to the scrap heap.

Now the repair industry is swamped.

Africans have known this for a long time, though for them, the causality is the other way around. If you don’t have the communications, transport, logistics and capital it takes to access new products made in far off lands, then you take the next best thing, which is to keep what you have working by repairing it.

My favorite things, all at once!

Yay for old friends, economics, and technology! All at once!

kc wrote a blog posting with her humble ideas on how to use IP address space tax. Wait… there’s a tax on address space? Yes, because it has become a scare quantity, because people are too lazy to move to IPv6, IPv4 address space is running out. The best of all bad ideas about what to do about this is to make an open market for address space, as though network addresses were some kind of useful piece of property with any kind of useful value. (BTW: When the present econolypse is over, and the next bubble starts, it will be an IPv4 address space bubble. Mark my words…) Address space is bits. We can make more bits… Look! I just made some! But because the value of a network exists in everyone who is using it, not just your implementation of the network, you can’t just add bits in your IP stack and get any benefit. So, while bits are free, and address space could conceiveably be free, because we have a network with limited space, we have a scarce asset. And, of course, what do humans do with scarce assets? We make bubbles! Yay for bubbles!

OK, now that we’ve gotten kc and tech checked off the list for this post, what about economics? Well, actually I touched on economics above, but there’s something way more fundamental to economics. Fundamental questions tend to be hard to recognize because they seem so obvious. The world would be a lot more sane place if more people took the time to ask this particular question and understand (no… really understand) the answer:

What is money?

In case you are not following me and don’t see why this is a hard question, see if any of these wrong/incomplete answers are floating in your head:

  • Money is the paper with green ink and dead guys on it. And red discs with the other dead guy on them, but it takes 100 of those red discs to make one of the green papers.
  • Money is dollars, euros, and yen. It’s what you spend when you want to buy something. You can change it to the other kind of money if there’s a different symbol in front of the price on the thing you want to buy.
  • Money comes from the government. The Fed sets the rate and it goes into banks, then I get it from the ATM.

These answers are all wrong. Not just a little bit wrong… they are like “the earth is flat” wrong, or “the sun goes around the earth” wrong.

So what’s the answer? I’ll tell you what… the answer is so hard that I certainly can’t tell you. You could earn two PhD’s and not really know. Money is something that humans invented after we invented trade, but before we invented numbers. That means it’s something that’s fundamental in the human condition, and that it is as human as culture and art. You might as well give up on the money question and work on a nice simple one like, “What is art?”.

But it wouldn’t be very nice of me to bring you this far and dump you with no ideas of what money is. What lead me to write this post is this great quote I found in one of the papers kc linked to in her blog posting. Here’s the quote:

The Nature of Money

My very great teachers (Alchian, 1977; Brunner and Meltzer, 1971) taught that a society uses as money that entity that economizes best on the use of other real resources to gather information about relative prices and to conduct transactions. This makes clear that the common — but wrong — statement of Gresham’s Law about “bad money” driving out “good money” needs to be restated. What we have observed through the millennia is that high-confidence monies drive out low-confidence monies (Hayek, 1976, p. 29; Mundell, 1998).

That’s academic speak, and it’s easier to understand if you read it in context. But what it’s basically saying is that “a culture will chose as money that thing which minimizes the costs for them to participate in the market to find the correct price for goods”.

That is profound. It’s very far removed from what we think about money when we are at the checkout counter at Tesco (which for me is usually “Gee, this yogurt will be 37 pence, I hope I have exact change and can make my pocket lighter”).

Here’s a related story from when I worked as an administrator in Liberia for Doctors Without Borders. A rumor was going around the country that “little head” dollars were no longer accepted by the bank. “Little head” dollars? This is Liberian shorthand to describe the difference between newly designed money with the large heads and other security features in them. The rumor, as they usually always are, was based in fact. When currency circulates outside of its place of origin, counterfeiting is easier to get away with. In Liberia, from time to time, I noticed bills that, if they’d been given to me as change in the USA, would have made me call the manager. But as long as the staff accepts them, it’s not my problem. Why do they accept suspicious money from me? Because they have no fear that the guy selling cement bags at the corner will refuse it. That guy in turn doesn’t know or care about counterfeit US dollars, and so the bill moves on through the system.

Banks who do international business don’t feel the same way about counterfeiting. Afterall, if a Liberian bank sends some counterfeit currency to London or New York, it’s not going to get passed on. It’s going to get subtracted from their total deposit amount. It won’t be investigated as a crime if it’s just one bill here or there, because it’s a drop in the ocean and the trail to the original counterfeiter has already gone cold — it was likely introduced by North Koreans into Kenya by way of India and made it’s way across to Liberia overland. There’s a certain cost of accepting money from areas with endemic counterfeiting. It’s perhaps 0.1%, but it’s there. That’s $1 per $1000, and it adds up.

Banks don’t just eat costs like that, they pass them on. One place that cost has showed up is in the exchange rate between USD and other currencies. The exchange rate between USD and Euros is different depending on the bill. Little heads low rate, big heads full rate. I don’t know who actually takes the fall for the fake bills — who’s account is debited when they are removed from circulation. But whoever loses that money is not bothered, because they’ve already covered the cost (and more) on the spread between their “little head exchange rate” and what the true exchange rate should have been that day.

OK, so back to Liberia. When the Liberian banks started charging a differential exchange rate (the same as their partner banks were doing in London), that reality-based fact morphed in the street into “the banks don’t take little heads”. The US Embassy put out a press release to try to stop the rumor. It said, “Dollars are dollars, big head or little. Every dollar anywhere on the planet can be exchanged for any other, and they are all dollars.” Which would be true, except it’s not. If you try to bring $10,000 from Liberia and spend them in the US, the odds that you have a counterfeit bill in there someplace are high enough that you’ve probably brought (on average) $9994 instead of the $10000 you thought you did.

In any case, a press release from the embassy certainly wasn’t enough to stop this story. Whether because they believed the rumor, or because they just didn’t want to be the only one not believing it (the musical chairs effect), within a few days the vendors stopped accepting little head notes. This was a few days before payday, and several staff brought the story to me, worried I would pay them in little head notes that they could not spend in the local market. I showed them the newspaper, and told them a dollar is a dollar. They told me, “a dollar I can’t spend isn’t a dollar”.

I’m going to repeat that, because it’s part of the answer to the question, “what is money?”

A dollar I can’t spend isn’t a dollar.

So, what to do? I called my boss in Monrovia, who’d had the same complaints. She made a quick decision: starting that moment, little head dollars no longer existed in the MSF system in Liberia. I was to find every little head dollar I had (a few hours work, in the end it was about 50 notes totaling about $550) and send them to her. She would send me back big head ones (thereby balancing our books). She’d send all of the little head dollars from the entire mission back to Geneva, and we’d change them there into francs and put them back into the budget at headquarters. Presumably she only chose non-suspicious bills to send back to Geneva, lest “MSF counterfeits dollars” were to show up in the newspapers the next day!

Problem solved. The staff loved me because I paid them in big head dollars. And I learned, first hand, a little bit more about what is money.

PS: Think rumors are funny? Managing rumors and knowing when to give up and get out of the way is serious business for humanitarian aid workers. Here’s an article about 3 Red Cross workers killed due to a rumor. My boss didn’t make the decision she made because she’s a nice lady. She decided this wasn’t a rumor that we were going to kill, and we needed to get the heck out of the way of it.

Negative Feedback

Planet Money is talking about the new Systemic Regulator, and also talking about other theoretical ways of regulating the banks. It occurs to me that one thing that’s missing, and not just a little bit missing, but radically missing, from the current system is negative feedback.

Wouldn’t it be interesting if we could set things up so that before the next bubble starts, the participants in the market can see that as certain stages of the bubble kick in, as measured by certain predetermined checkpoints, then certain economic brakes will be applied. We’d have to be careful not to take away all the control the Fed has, but perhaps you can invent a new set of levers which fall into this category of automatically triggered negative feedback.

Some examples:

  • Increasing the reserve requirement
  • Decreasing tax benefits of mortgage interest
  • Increasing the fees FDIC charges a bank to insure its deposits
  • Federal “encouragement” to states to make a rainy-day fund

The idea is to take “bad ideas”, the things Republicans hate, that they criticize as “friction on the economy” and program them into the financial landscape before they are needed. You’d probably have to choose many more of them, to make sure they provided negative feedback in all segments of the markets. After all, what’s the point of only having a brake on the front right tire?

The triggers would have to be automatically scaled with respect to the natural growth of the economy. Because whether or not there is a bubble, economies grow. And you’d have to find some way to defend them against political meddling. It’s comparatively easy to defend the Fed against pressure as it twiddles its one variable (the Fed funds rate), but it would be something else entirely to work out some kind of system that protected all the other keepers of the negative feedback rules.

One of the negative feedback mechanisms I named above might not be too clear without a description. For better or worse, we have a federal government. That means the states have freedoms that (for example) English counties don’t have. The central government has no right to tell California that it should spend or save it’s money in a certain way. The “solution” has been to setup matching funding mechanisms, then make the federal funds contingent on the state following the advice of the feds. To encourage the states to build up a rainy day fund during economic booms, perhaps all of the matching rules could be parameterized with respect to some sort of “bubble index”. Matching would be 1 for 1 (100%) minus X, where X is calculated with respect to the current “hotness” of the bubble, and how much the state is lagging the federal target for rainy day funds. Smart states would control expenditure to create a big surplus to go into the rainy-day fund, thereby preventing their X from getting above 0, and them losing matching funds.

With all economic things, you’ve got to try (hard as it is) to play the chess game forward a few moves and try to figure out the consequence. The theory of net present value helps decisionmakers take into consideration the future. By warning decisionmakers today that certain economic brakes will kick in tomorrow, they should be more willing to consider options today they wouldn’t have considered otherwise. On the other hand, even if there was certainty that the negative feedback rules were “out there” waiting to trigger, there would still be uncertainty on when the triggers would be reached. And it’s likely that some new and doubly-unstable form of speculation would come into existence.

Though the Planet Money folks have already declared a moratorium on it, I have to say, “the devil would be in the details”.

A Secret of the Economics of Manufacturing

I saw this quote in an article on E-Ink:

If you ever want to make a billion of anything cheaply, you print it. 

What an interesting observation! With such interesting far reaching consequences:

  • Nano Solar is on the right track, crystaline solar is not.
  • Diamond Age-style nano-assembly is not quite a sure bet, and mass-customization by table-top fabs will clearly never be able to compete on price with items that are printed. Though another way of looking at nano-assembly is to recognize that nature manufactures far more, far cheaper, than all the printing presses in the world…
  • Things that are flat, flexible, and where the complexity is expressed in 2D will always be cheaper than their competitors which violate one of those constraints of printing presses.

It also further informs my day dreaming about clay tablets: a system for preserving data needs to be flat, flexible, and 2D. My “dots on ceramic” design might still be able to fit the bill, but the kind of uber-cheap ceramic I was thinking of (i.e. the same stuff in the 20 cent porcelin plates at Ikea) won’t be the material, something else will be. But what? What can go roll-to-roll in a printing press environment, but has the chemical stability of ceramics? I’m feeling like I really wish there was a layman’s introduction to ceramics on my reading list right now. Anyone? Anyone? Bueller?

PS: On Tuesday, I was at the British Museum, and I saw some nice presses there. Across town at the London Museum of Science I saw some really great steam engines. Some day I want make my own table-top steam engine and have my own printing press (and a good collection of moveable type) in the garage. And just for super-geek status, I was thinking it would be interesting to find some semi-automated way to convert OpenType fonts into metal type for my press. All the idle dreams of a retro computist, I suppose.

PPS: Major disappointment at the London Science Museum: the Clock of the Long Now is locked up in an exhibit that’s under construction and is thus not on display. I hope it’s still running at least! I was really looking forward to seeing it after reading Anathem. Another disappointment: I got so wrapped up in the steam engines, I didn’t have time to see the working Difference Engine, just Babbage’s malfunctioning model. (The story of my life… I get distracted and miss the working computer for the broken one…)