Chinese government fail math test. 2 + 2 = 5

Economic data from China is, if not entirely wrong, then nearly fully fabricated.  For example, Hong Kong exports red table wine to China.  Strangely, though, Hong Kong exports more red table wine to China than China imports (not just from Hong Kong, but from the entire world).  The Hong Kong data is reliable, the China data is unreliable.  China is underreporting imports.  Because of this and many other examples, economists take all data from China with a grain of salt.  Really more like “with a salt mine of salt”.

That means we don’t really know whether their economy is growing as fast as we fear it is.  We don’t know unemployment.  We don’t know their imports.  We don’t know their exports.

Export data is distorted not just by Chinese fudging, but also by the method of counting.  China exports Apple iPhones at a value of about $120 per phone.  That consists of $30 of parts, many from places like Malaysia and Taiwan, $6 of assembly costs at Chinese factories, and $54 of software designed in Cupertino, California.  Only the $6 of assembly costs go to China’s corporations and workers, yet we count the full $120 as the export number.

No doubt, the Chinese economic miracle has been substantial.  It has raised more people up from poverty than all other worldwide poverty alleviation efforts combined (including microfinance, governments and charity).  The government has managed a slow transition to capitalism without masses of peasants with pitchforks coming for them.  It’s working.  All the folks in the West that were studying Japanese in the 1980s are studying Chinese today.

Critics point to problems.  FoxCon, the manufacturer of all those iPhones for Apple, experienced 17 suicides last year.  17 suicides is a lot of suicides, and these critics blame the shoddy working conditions at FoxCon as the cause.  Bad Corporation!  Bad Country!

But then again, critics play games with numbers.  17 suicides, across more than 400,000 employees at that FoxCon plant, is about half the national suicide rate.

So the economic data is terrible coming out of China.  About as terrible as the manipulations we do on data to win an argument.

The Cash Messiah

I’m a huge proponent of using profit motives to solve social problems like education and poverty.  I’m the Gordon Gecko of impact investing, shouting “greed is good” at every conference.  People tolerate me awkwardly.

My point:  without greed, we will continue to do what we do – trying to solve our social problems with just 3% of our resources.  That’s right, the US charity and non-profit economy is still just 3% of the US for profit economy.  The problems are too big for just 3%.

No big surprise – we’re focused on money.  Enough so that perhaps we should admit that cash is the Messiah, to be followed, worshiped, and kept close to the heart always.  Cash can give us happiness way more than following the teachings of some guy, right?  A new car feels better, is more fun, and faster than a new soup kitchen.  “New car smell” conjures a specific smell, a specific happiness.   “New soup kitchen smell” does not.

Well, no, we shouldn’t confuse the two.  The Messiah is the Messiah.  Cash is just a means to an end.

Since none of us are the Messiah, it’s hard to convince people to always do the right thing, to help one another.  Not that we shouldn’t keep trying, but spending 3% of resources on doing good implies that we’re about 3% successful with our efforts.  Dieting is good for us, too, but on average an American woman weighs eleven pounds more today than last decade.  Clothing manufacturers now have American sizes and world sizes.  Our Medium is everyone else’s Large.

Thinking good thoughts and trying to do the right thing are not enough.  Just spend time with a six year old.  No, we need other tools in the toolkit of world improvement.

And cash is that tool.  Or rather, profit.  A demonstrated profit in solving social problems will tempt others to make money while solving social problems.  Profits lead to copycats.  And thus, money flows towards the profit, towards the poor, and towards these problems.

Regardless of your feelings about the current microfinance backlash in Andra Pradesh, a casual observer has to admit that the IPOs of Compartamos in Mexico and SKS in India have led to a massive explosion of new capital flowing to the needs of the poor.   In Mexico, there were 200 banks of Compartamos’ type prior to their IPO in 2008.  Two years later, there are now 800.

Despite the amazing growth, microfinance is barely scratching the surface of the need.  Perhaps 10% of the eligible customers are offered microfinance.  What other industry has so little penetration?  iPads?  iPhones?  Anyone in the US can buy an iPad.  Imagine if iPads were only available, and only worked, in Northern California.  Everyone else in the US has to wait.  For a generation.  Geeks everywhere would be PISSED.

Education?  Everyone in the US has access to free public education.  What if education were only available in Florida and Ohio?  Children everywhere would be THRILLED.  That’s the level of penetration of microfinance among the poor.

There is certainly room for abuse when combining profit and the poor, and we should stay diligent.  Abuse occurs when people believe cash is the Messiah.  Cash (and profit) are the tool.  A really, really nice, yummy tool.

So maybe it’s not “greed is good”.  Perhaps it’s “tricking the greedy is good”.

 

Why I gave up pizza, and what I learned about poverty

I’ve recently discovered that a long illness of mine can be cured by avoiding gluten and dairy in my diet.  Of course, that basically eliminates the vast majority of the American diet.  No pizza, no cheeseburgers, no pasta and garlic bread.  OK, sure, I can eat as many french fries as my heart desires.  But I’ve seen Supersize Me and know where limitless french fries can lead my heart.

Some folks have looked towards me with pity.  A world without Krispy Kreme doughnuts!  Egad.

I’m absolutely delighted.  Mainly because I feel great, while a meal mistake costs me 2 to 7 days of my life.  But there is another benefit I hadn’t realized.

I’m happier with less.

In America, we can have any food we want, whenever we want it.  When it’s cold outside, we can be warm.  And not just warm, but with a selection of 5 different coats for going outside.  We don’t just have shoes, we have 20 pairs of shoes.  Not just a house, but Corian countertops and 3 extra bedrooms for guests (that only arrive annually).  Heated floors are a new trend, because apparently blowing hot air is so 20th century.

We have cars.  Even cars without dents, and 50,000 miles is time for a change.  We have our choice of computers, cameras, cartoons, and 11 kinds of apple at the organic store.

Not being able to eat everything I want, whenever I want, reminds me that we are in the tiny minority of people whose basic needs are met.  When I watch someone else eat a bagel, I’m reminded that a few billion people would watch what I eat now – vegetables, rice, and meat — with the same longing that I feel for cream cheese.  Ah, cream cheese.

Those same billions of people would be amazed that I can eat whenever I want — middle of the night, popping out for a coffee break, or strangely, at least three times a day, every day.  Like an alien from another planet.

From the perspective of my new stomach, I now believe that we cannot understand the needs of the poor, really feel the needs, without giving up something of significance.  Forever.  Giving up something for Lent is a similar notion — a reminder of our excess.  These are all attempts to “feel” our brilliantly lucky lives, to “feel” the problems of others that we’d like to solve.

From my ravioli-less existence, I wonder what else I should relinquish.  I worry that my notion of the American dream, our notion, is akin to the selfish mantra we try to undo in our children:  I want it all.  I want it now.  Now.  Now.  Now.  All.  All.  All.

A nation of children with it all, with it now, can sometimes decide to give a bit back in a moment of guilt or largess (and the statistics are that we give back about 3%).  But to make the world a better place, it might take a bit more discipline from us.  After all, we have 5% of the world’s population but we consume 25% of its resources.

We have become a nation of victors, spending the wealth of our success, parading down the main promenade in painted wagons and flamboyant silks, comparing to one another.

But we are, and have always been, a nation of idealists, who support their beliefs with equally fervent actions — actions not just for the poor, the tired, the huddled masses yearning to be free, but with the poor, tired, and huddled.

I crave more of our unique practical idealism and less of our parade.  I also crave brownies, that edible parade of yumminess, but I’m reaching for the broccoli.  It’s not easy.

Faux Profits

I have a new phrase to try out on you, dear readers. What do you think?

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Faux Profits. Noun. Certain non-profits, NGOs, and governments that claim to make “investments”, but have no plan or ability for making profits or achieving a financial exit. Synonyms: social enterprise, social investor. Origin: Sean Foote, after hearing a friend’s description of a haircut as a “faux hawk”.

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I feel a certain need to defend the words “investments” and “profits”.  In my Microfinance and Venture Capital classes I use the following intellectual equation:

Investments – financial exit = charity

Sean Foote on NPR

Self PR here. I was on Michael Krasny’s syndicated Forum program on NPR yesterday, talking about Microfinance along with Eric Weaver of Opportunity Fund and Neil Macfarquhar of the New York Times.

Listen to it here

I was more upbeat than I have been in the last few posts, for all those people who have told me I’ve been to gloomy about the economy.

Social stock market. Really?

There is a movement afoot to create social stock markets. The idea is to replicate a for-profit stock market, like the New York Stock Exchange or Nasdaq, but have it used by social businesses that are seeking a double bottom line.

I don’t get it.

Marketplaces serve a few purposes.  They are aggregators of supply and demand.  They provide cash for growing companies and liquidity for those companies’ investors, and they allow stockholders to buy and sell stocks based on the expectations of future value.

The enthusiasts for social stock markets want to use the power of Adam Smith’s invisible hand to promote these double bottom line businesses. Let greed be the good that Ivan Boesky claimed it to be.

The aggregation function I can understand.  It is extraordinarily difficult to find social businesses in which to invest / donate.  It is a fragmented $350 billion business, with something like 50 organizations in the country with budgets above $50 million (can’t find the article to reference here, so feel free to help in comments below).  That leaves millions of small organizations trying to do good in the world and connect with donor or investor dollars.  Aggregation of supply and demand would be really helpful for this, and a marketplace could do it.  I will set aside for the moment whether greed is really at play in the investors/donors minds in this scenario, as this may just be a way to more efficiently match buyers and sellers rather than taking advantage of the marketplace’s Invisible Hand.

I can also imagine how an “IPO” for a social business might work on the social stock market.  It’s a way for the company to raise money at relatively low cost, giving up equity in their double bottom line (and often not profitable) businesses.  For investors/donors this is another way for them to donate to the company, with the bonus of receiving something more than karma in return.

Now, I run into a little trouble with the IPO.  Like the traditional stock markets, the company needs to promise not to issue more shares whenever they want, or else the price of their shares will go to zero as supply exceeds demand.  Thus, the IPO is going to have to be sized to provide a substantial portion of the funds needed by the organization for years to come.

If the IPO is for an organization that is also funded outside the social stock market by donor dollars, this presents a problem.  Will donors continue to give freely, or only contribute money to the company through stock offerings?  I’m sure some would go each way, with some donors preferring to receive some shares in return for their donation,.  Thus, those yearly donor dollars would evaporate / switch to the IPO.

Since many double bottom line businesses are not profitable, donor dollars remain the “revenue” that allows them to operate.  The social stock market might risk these revenues.

After the IPO, I’m really lost.  Proponents of the social stock markets discuss various rules for the stocks.  For example, some argue that a social company should only have to provide their investors enough value to eventually return the amount they originally invested.  This would be done, for example, through dividends.  Let’s say 5% dividend over 20 years.

Other proponents argue that traders that want to show their support for an organization will want to buy its share on the market.

In both cases, proponents believe there will be an active aftermarket for these shares.  I doubt it.

In the first instance, capping the possibility of economic return from the company will make every share worth less than their IPO price.  In the example of the 20 year dividend stream that equals the purchasing price, the present value of that dividend stream is way below the purchase price.  Unless there is some other value in this stock, the stock will trade way below offer price.

And unless the organization intends a secondary offering, why would the organization care where its shares are trading?  On the traditional stock market, the stockholders can FIRE MANAGEMENT, which makes management very interested in the value of the stock.  I haven’t heard that ability appearing in the social stock market proposals.

In the second instance, traders trade because they believe the actual value of a share is higher or lower than the current price.  How is this value determined?  If it is a metric of social good plus economic good, how is social good estimated?  Is this reforestation share fairly valued versus that feed the children share?  What is the value of trees versus children, anyway?  100 trees per child?  You see the folly of trying to estimate after-market value on a social basis for financial gain.

Traders would also trade if they expected a future merger or acquisition.  Shares always raise or lower as these issues appear on the traditional market.  However, mergers of social businesses are extraordinarily rare, and their affect on stocks that have no control or significant economic provisions would be slight.

The notion that traders will buy stocks because they want to be affiliated with a social business’s mission, then, is all that remains as a viable argument for an active aftermarket in social shares.  But, of course, this is the one argument that is non-economic.  It violates the overall tenant of social stock markets, namely of harnessing the value of markets.  Owning shares merely for the sake of affiliation is a relatively minor driver of stock market value (although perhaps a slight driver for consumer companies and stock held by retirees and employees of companies)

The bottom line for a holder of social stock market shares is that few people will want to buy the shares from you, and trading will be thin.  Expect losses, illiquidity, and no control over your investments.

I HAVE A DIFFERENT PROPOSAL.  Markets are brilliant at baking complex data in to a simple price.  I propose the establishment of a social stock market GAME.  This would be akin to the Hollywood Stock Exchange, which uses fake money to trade futures on movies that are not yet in production.  They also trade movie stars.  It’s all funny money, and it’s highly successful (and accurate at predictions).

While social businesses are not nearly as gossipy as movie stars, a stock market game would answer one very important question.  Measurement.  It is impossible to provide accurate measurement data on who is providing social value.  So, we’ll let the market decide.  When GreenPeace trades at a Price / revenue per share ratio of 1 while the Red Cross trades at a Price / revenue per share of 2, we’ll have the market’s comment on how to measure the social value of the two.

The executive directors of these organizations would care, too.  If the game became successful enough, leaders would start quoting the market’s opinion of their value add to donors, investors, and boards of directors.

And it’s all a game.  No money changes hands.  No greed to confuse the issue.  It’s merely for fun, just like the Massive Multiplayer Online Games that convince people all over the world to spend hours working to generate fake money in their fake worlds in order to buy fake +2 swords.  But MMOGs are big business.

The social stock market game could be fun, the fun would drive trading, and trading would provide an incredible social value – measurement.  Leave the aggregation of buyers and sellers to another solution.  Give me a  measurement solution and we will have solved a major problem in social business today.

GM – the latest double bottom line business

GM now has to serve two masters — profit and politics.  It’s a great but different example of the problems of “double bottom line”.

In my microfinance class I spend some time talking about double bottom line.  The theory is that an organization, typically one with social goals, tries to maximize both profit and “doing good.”

The bottom line on double bottom line is it’s impossible as a metric.  Here’s the challenge.  Pretend you are an investor or a manager and you are asked to pick between two opportunities.  One generates $100,000 per year in profit and helps 2,000 people.  The other generates $20,000 per year in profit and helps 10,000 people.  Which should you pick?  A strict “double bottom line” goal of maximizing both doesn’t help with this decision.  They are both equally attractive.

And so, repeated many times over, the company under-delivers on both criteria, and the trade-offs start to lose their intellectual rigor in exchange for horse-trading, political favors, or emotional attachment to the ideas.  Not a good way to run a company.

Any companies that serve two goals typically struggle.  Corporate VC, for example, are short-lived.  They try to provide financial return and strategic objectives.  Since they can’t maximize both, at some point the corporate overlords declare failure and close the fund.  (And VCs call them “dumb money” from their purely profit driven perspectives).  Non-profits with “double bottom lines” typically try to do the maximum good while earning enough to reduce their yearly charitable fundraising targets.

And now GM, which will struggle mightily to serve two masters and will fail at both.

There is one wrinkle with GM that bears comment.  The TARP money was a loan.  The original AIG bailout was non-voting preferred stock.  Neither of those investment vehicles provides the investor with any say in the running of the company.  It is only when the government converted the loans to common stock that they gained voting rights and became the true decision makers.  As I tell my VC class – don’t confuse ownership percentage with control.

So GM is getting slammed in the press for this double goal.  This should be a cautionary tale for everyone thinking about “double bottom line”.

The only solution that works for me for “double bottom line” investors and operators is to hold one dimension constant while allowing the other to vary.  So, something like “within the field of investments which will help people, we will maximize profit.” or “As long as it breaks even as an investment, we will maximize helping people.”  The challenge with the latter option, where profit is the static dimension, is that investments are risky.  You’re often wrong, and the operator or investor will probably undershoot the hurdle rate.  So consider that when setting the goal.

New radio interview on Microfinance

Just did a radio interview with  Steve Bonenberger for Business Talk Radio on May 6th.  The topic was Microfinance, and I was talking about the upcoming Microfinance 2.0 conference as well as my microfinance class at UC – Berkeley Haas Business School (which I simulcast to 13 campuses last year and perhaps 30 to 50 this year).  Loaded up here for your pleasure.

radio show

Build a school for $5,000, or 1/5th of a computer mouse

A friend whom I admire told me a story of his recent trip to Cambodia.

“We visited a school in rural Cambodia,” he said, “and when we walked in, all the students stood up and applauded.”

I contemplated that for a bit while grabbing another bite of lunch, and decided that was not usual cultural behavior.  “Why did they do that?” I asked.

“Because I built the school,” he replied.

Another bout of chewing allowed me to process this, raising my esteem for my friend in the process.  “Um, how much did that cost?”

“I don’t know exactly, around $5,000.”

This conversation led to an entirely new perspective on the world for me: the CSE, or Cambodian School Equivalent.  For example, the average car in the U.S. selling for almost $28,000, that equates to 5.6 Cambodian School Equivalents.  A designer couch?  One CSE.

This should remind us that we have so much in this country, which could be one reason why other countries are both jealous and spiteful. (For those interested in helping education in Cambodia, please check out The Cambodian School Project, among others.  You too can build a school.)

I was not terribly suprised to see, then, that a computer mouse, with 3 year warranty, costs nearly 5 CSEs.  $25,000.  The Worlds Most Expensive Mouse. For the computer that has everything.