Hello all,
Over the weekend I listened to the podcast of a lecture* given at the LSE in the beginning of 2009, regarding the strength and importance of the Fair Trade logo. While the lecture itself was quite interesting and informing, what struck me most was Dr Teddy Brett’s – professor in two of my courses at the LSE last year – ‘critique’ on Fair Trade actions and products.
Citing Krugman’s “In Defense of Cheap Labour” – a highly contested publication in 1997 – in the process, Dr Brett argues that, while it might be pleasant to learn that big supermarkets are more and more switching large sections of their products towards fair trade-labelled products, this actually means that a high number of the producers formerly in business with these supermarkets are now either in financial difficulties or altogether out of business.
As argued by Krugman before him, Brett questions what the impact would be of a global public boycott on a specific brand of sports shoes, because the workers in these factories do not receive high wages and/or are children, i.e. that it is not an ethically run business. Boycotting this brand might stop the guilt at the (Western) customer’s side of the process, unfortunately at the production side of the process this will mean that the workers and child labourers will basically end up without a job. They will have to resort to their next best opportunity, which will probably mean prostitution, trafficking, and if they are lucky a similar job in a non-boycotted factory. Or how good intentions can lead to unwanted results...
Now, don’t get me wrong: I’m not quoting Brett, Krugman and the example above because I think low wages and exploitation are a good thing. In a perfect world, people would not be ‘exploited’ – probably not the right word in this context, because these workers often prefer this job to their next best opportunity – and would earn decent wages that are comparable to those in developed countries. However, we do not live in a perfect world (yet); we live in a very unequal world, dominated and bounded by political and market forces. These market forces minimise costs, and they form the constraints within which people operate. Brett then argues that “Fair Trade is only going to produce ethical results if it doesn’t impose conditions on people out there that make it impossible for them to actually deliver and supply goods and services effectively”.
That being said, if the “global market” was in fact a global market, freed from the political minefield of subsidies and tariffs, these 3rd world products and producers would probably not even need a ‘fair trade-intervention’. In this light, Brett states that the businesses in the UK that have been around for more than a century – Lloyd’s Bank, Cadbury – were more often than not operating on ethical principles (e.g. those founded by the Quakers).Brett’s conclusion sums up nicely what I personally took away from this podcast: while markets are not designed to result in ethically optimal solutions, in the long run “ethical business works better than non-ethical business provided that it operates within the constraints set by the market”.
Thank you.
* The lecture is called “Fighting the Banana Wars”, and the podcast is available for download on the LSE pages.
Monday 30 November 2009
Thursday 26 November 2009
This post is: 50% EC conference, 50% personal chit chat
Yes, I know, it’s been a while. But I have been extremely busy these past two weeks. Everything is progressing nicely here in Chimoio, and I have only just returned from a very short trip to Maputo to attend a two-day conference organized by the European Commission delegation of Mozambique. A 20h bus ride, two full conference/discussion days with workshops, seminars, and networking sessions, followed by another 20h bus ride. Needless to say I’m a bit tired.
The conference itself was quite interesting, being a call for proposals for the European Commission’s second Energy Facility for (energy-related) projects in the ACP countries, which will officially be launched in the upcoming months. A number of EC delegates, local NGOs, and government officials were present – as was yours truly – and some interesting discussions were held. In sum, happy to have been able to attend.
On a completely different note: I really love my iPod, and I would have no idea how I would have been able to cope with these 20h stints without it. So thank you iPod, and thank you Arctic Monkeys for making music that I will never grow tired of hearing.
Anyways, in between Monkeys’ cds, I let my mind wander from time to time during these bus rides, because I usually get my blog-ideas during these ‘nothing to do but look at the landscape’ moments. So, a new blog post will be coming soon (after the weekend probably), with my view on certain aspects of globalization and the whole ‘The world is Flat’ metaphor/hype, and its inevitable link with development – as you might have been able to tell, I’m currently reading Thomas Friedman’s ‘The World is Flat’.
Anyways, in between Monkeys’ cds, I let my mind wander from time to time during these bus rides, because I usually get my blog-ideas during these ‘nothing to do but look at the landscape’ moments. So, a new blog post will be coming soon (after the weekend probably), with my view on certain aspects of globalization and the whole ‘The world is Flat’ metaphor/hype, and its inevitable link with development – as you might have been able to tell, I’m currently reading Thomas Friedman’s ‘The World is Flat’.
Have a great weekend.
Until we meet again.
Luc
p.s. Another thing I do during these bus rides, is try to make 30sec videos with my camera and capture life on the roadside in Mozambique. I’ll try to upload some of them soon, but am still looking into the easiest way to upload and spread them (youtube, rapidshare, googledocs, …). Suggestions?
p.p.s. I just add one pic, because I couldn’t withhold it from you all.
- The newest hits from my boy Akon, in the bus on the DVD player. Speechless, really.
Monday 16 November 2009
Service delivery to the poor: solar energy in rural areas.
During my stay in Mozambique, I have been confronted on a daily basis with real poverty: children living on the streets or in shanty towns, selling candies or peanuts, and living on less than a dollar a day. Many NGOs projects and government funded programs aim to bring development to these people, in an attempt to improve life at the so-called bottom of the pyramid. Unfortunately, many of these projects never reach their full potential. Even worse: a number of projects actually do more harm than good, because of bad planning or a wrong strategic approach. Let me give you one example of a good project gone semi-wrong, which I personally encountered last week:
The framework in Mozambique to deliver solar energy to the rural areas is quite poorly constructed compared to other African countries: solar products (panels, lanterns, …) come with a high added import tax (compared to tax-free in e.g. Uganda), most of the projects in solar energy have to go through a strictly organized government-funded agency, and there have hardly been any awareness campaigns towards these rural areas. The poor have been left both literally and metaphorically speaking in the dark.
One response from a local NGO has thus been to train and support community leaders to distribute solar systems, to overcome the knowledge barrier. To take the price hurdle, this NGO has provided support to these community shops by sourcing the materials themselves and selling them to the shop at a lower price (i.e. co-financing). At first sight, this seems like a straightforward and reasonable strategy to follow: people can now enjoy the benefits of a solar home system at a price that is comparable to what it would be without these added taxes. This NGO started with this program and strategy about a year ago, and has already helped put away a high number of solar home systems in the rural communities. Today, however, the program has temporarily stopped, the shopkeeper has stopped selling solar panels, and demand is steadily decreasing. Why?
The local NGO obviously depends on other (often International) NGOs, government agencies, or development agencies to deliver the funds for these programs. In this particular case, the local NGO has received no further funds, as the program was for one year only and the donors were still reassessing their strategy. Therefore, the NGO no longer had the capacity to buy materials, so that the supply to the communities was halted all of a sudden, while the successful shopkeeper was running out of supplies. The community shopkeeper could obviously bypass the NGO and try to directly secure the materials from the main suppliers, though this would mean that the shopkeeper would have to bear both the real costs of the products plus the costs of transportation, so that he would only be able to offer solar systems and components at prices much higher than what people were paying just one month before. Ergo, demand drops, and the shopkeeper does not want to take the risk to invest in expensive systems.
It becomes clear that it will be very difficult to either convince one retailer to invest heavily in these systems, or to convince the customers that this investment is worth making (despite their neighbour having paid about 30% less for the exact same system just weeks before).
There’s obviously a mixed feeling: one the one hand, thanks to the strategy followed by this local NGO, people who formerly could not afford a system have now been handed the chance to purchase one; on the other hand, in the long run it will prove to be difficult to pick up the pace without once more subsidising these systems and offering them at a price that is lower than the market can offer them. Now, I don’t want to criticize this system of subsidies to heavily, as the outcome in this case is still positive (without this NGO, hardly any systems would have been sold at market prices). But, it is clear that this strategy will only be sustainable, if it can include some aspect of market development. Through market development tools – organising suppliers so that they can buy in bulk, increased competition, setting up associations to lobby the government for a more beneficial legal framework – prices will inevitably drop and quality will improve. When market prices drop, so will the value of the subsidy, while the total price of the systems offered through the local NGO to the community shops remains the same. In the long run, the market price has become exactly this offering price, so that the local NGO is no longer required to provide financial support. Subsequent market price drops will then also result in real price drops, and inevitably an increased demand.
For this to happen, however, it is crucial that firstly, the local NGO has sufficient funds to go the distance, and that secondly, some form of market development is happening (be it by the local NGO or any other organisation).
Thanks for listening.
Your blogger, at your service.
The framework in Mozambique to deliver solar energy to the rural areas is quite poorly constructed compared to other African countries: solar products (panels, lanterns, …) come with a high added import tax (compared to tax-free in e.g. Uganda), most of the projects in solar energy have to go through a strictly organized government-funded agency, and there have hardly been any awareness campaigns towards these rural areas. The poor have been left both literally and metaphorically speaking in the dark.
One response from a local NGO has thus been to train and support community leaders to distribute solar systems, to overcome the knowledge barrier. To take the price hurdle, this NGO has provided support to these community shops by sourcing the materials themselves and selling them to the shop at a lower price (i.e. co-financing). At first sight, this seems like a straightforward and reasonable strategy to follow: people can now enjoy the benefits of a solar home system at a price that is comparable to what it would be without these added taxes. This NGO started with this program and strategy about a year ago, and has already helped put away a high number of solar home systems in the rural communities. Today, however, the program has temporarily stopped, the shopkeeper has stopped selling solar panels, and demand is steadily decreasing. Why?
The local NGO obviously depends on other (often International) NGOs, government agencies, or development agencies to deliver the funds for these programs. In this particular case, the local NGO has received no further funds, as the program was for one year only and the donors were still reassessing their strategy. Therefore, the NGO no longer had the capacity to buy materials, so that the supply to the communities was halted all of a sudden, while the successful shopkeeper was running out of supplies. The community shopkeeper could obviously bypass the NGO and try to directly secure the materials from the main suppliers, though this would mean that the shopkeeper would have to bear both the real costs of the products plus the costs of transportation, so that he would only be able to offer solar systems and components at prices much higher than what people were paying just one month before. Ergo, demand drops, and the shopkeeper does not want to take the risk to invest in expensive systems.
It becomes clear that it will be very difficult to either convince one retailer to invest heavily in these systems, or to convince the customers that this investment is worth making (despite their neighbour having paid about 30% less for the exact same system just weeks before).
There’s obviously a mixed feeling: one the one hand, thanks to the strategy followed by this local NGO, people who formerly could not afford a system have now been handed the chance to purchase one; on the other hand, in the long run it will prove to be difficult to pick up the pace without once more subsidising these systems and offering them at a price that is lower than the market can offer them. Now, I don’t want to criticize this system of subsidies to heavily, as the outcome in this case is still positive (without this NGO, hardly any systems would have been sold at market prices). But, it is clear that this strategy will only be sustainable, if it can include some aspect of market development. Through market development tools – organising suppliers so that they can buy in bulk, increased competition, setting up associations to lobby the government for a more beneficial legal framework – prices will inevitably drop and quality will improve. When market prices drop, so will the value of the subsidy, while the total price of the systems offered through the local NGO to the community shops remains the same. In the long run, the market price has become exactly this offering price, so that the local NGO is no longer required to provide financial support. Subsequent market price drops will then also result in real price drops, and inevitably an increased demand.
For this to happen, however, it is crucial that firstly, the local NGO has sufficient funds to go the distance, and that secondly, some form of market development is happening (be it by the local NGO or any other organisation).
Thanks for listening.
Your blogger, at your service.
Saturday 14 November 2009
Community Development
Hellow all,
I just returned from a 3-day trip to several communities in the proximity of Chimoio and Beira, to assess how people in the communities use solar energy, and what they use it for. A pictures says a thousand words, so in what follows please enjoy my 3000 word report.
Ciao
- A small business application: panel, battery, phone charger
I just returned from a 3-day trip to several communities in the proximity of Chimoio and Beira, to assess how people in the communities use solar energy, and what they use it for. A pictures says a thousand words, so in what follows please enjoy my 3000 word report.
Ciao
- A small business application: panel, battery, phone charger
- Charging a battery for illumination.
- Reparing/testing solar modules.
Tuesday 10 November 2009
Take 2 spoons of Pride. Add milk. Stir. Enjoy.
See what I did there? I took the recipe of the chocolate Nesquik milk I drink so often these days (addictive stuff, I tell you), and replaced ‘delicious Nesquik powder’ with the word ‘pride’. Why? Well…
Firstly, because I finally managed to get myself behind my laptop, and write something decent for a change (referring to my post on the Mozambiquan informal economy below). I’m happy to share with you that I’m currently contemplating writing a short piece on servicing the needs at the Bottom of the Pyramid, but probably not before the end of the week as I’ll be on a field visit for two-three days as of tomorrow.
Secondly, I have finally taken some pictures of Chimoio, so you can all now see where it is that I live (mainly pictures of streets, but still).
Enjoy!
Ate a proxima (still learning more and more Portuguese every day J)
luc
It's the informal economy, stupid!
Last year, I read some books and articles on the mystery of the informal economy, where products are being sold and/or traded outside of the (formal) economy. During my stay here in Mozambique, this whole concept has become clearer to me, being confronted with it and dealing with it on a daily basis. The informal economy in Mozambique is responsible for a large share of the total value of transactions of goods and products; in fact, it is safe to say that a large chunk of the population depends on this informal economy.
But what is it exactly? The most obvious aspect is that it is ‘not formal’. Contrary to the formal economy, the informal economy consists of transactions performed and products sold by non-registered and non-licensed actors. These actors are running non-registered shops, and are therefore not paying the taxes that their registered counterparts are. Prices in the informal economy are therefore often lower (compare the registered supermarket, with prices on the market or in the stalls) if competition allows for it. On the other hand, when competition is lacking, margins are often several times higher than on the formal economy where some form of social and governmental monitoring exists – e.g. you will not find high margins on the sale of tomatoes, as competition is high for this product, whereas lending capital is a transaction where competition is often absent, so that margins can skyrocket.
Informal vs formal?Because prices are lower in the informal market, demand for these products is relatively high, resulting in an increased motivation for actors to either stay informal, or become informal. At first glance, there doesn’t seem to be much that would advocate a switch towards becoming formal. Still, being/becoming formal has its advantages: you can set up a registered business, and consequently own the land on which your shop is situated, which is then protected under the rules and laws of the nation; as you own property, you can bring it in as collateral when applying for a loan (this applies to regular bank loans; microfinance institutions work differently); as you pay taxes, you can subsequently benefit from tax benefits, social infrastructure (registered shops are on the main street, informal shops are more often located on markets or street corners), and some form of protection – at least everybody plays by the same rules.
It looks simple: a general switch form informal to formal economy would boost government revenue from taxes, which could then result in higher public spending and more investments in science and technology. In the end, the actor benefits from better infrastructure and better long term prospects.Clearly, this reasoning is flawed, or at least missing some aspects. For starters, in the short run there are definitely significant margins to be made and profits to be reaped in the informal market. Moreover, a lack of confidence in a governments ability (capacity) or willingness (corruption) to increase public spending when tax income increases, provides a further stumbling block on the path to formality. Thirdly, overly bureaucratic systems tend to make it very difficult for actors to become and then stay formal, as Hernando de Soto clearly points out in his book ‘The mystery of Capital’ by labeling the assets the poor possess “dead capital”. (Dead, because their assets are worthless, as they are not valued on the market (e.g. a shop built on land that is not owned, so that they cannot bring it in as collateral for a loan, and moreover that they could get kicked of that piece of land basically overnight) Finally, and crucially, the actors in the informal economy often do not have the same capacity as the formal actors in similar transactions. Forcing them into formality would therefore result in them being completely outcompeted by the more experienced and better trained formal competitors.
The informal economy has often been linked with (relatively) poor quality, and because customers knew this, they bought goods on the informal market while accepting a poorer quality for a cheaper price. Bigger investments such as TVs and solar panels were then bought in licensed and trusted shops, where warranty and after-sales service influence the decision making process. Over the last few years, however, the informal market has gradually expanded its reach into these somewhat bigger types of investments. It is therefore not surprising nowadays on the markets and in the bancas/barracas/stalls to find TVs, solar panels, and car parts on sale.
All in all, you would want a country’s informal market to decrease relatively compared to its formal counterpart, combined with a government that is both capable and willing to maximize the potential of the added (tax) revenue. However, the divide between informal and formal is becoming more and more unclear.
To be continued.
p.s. While I do not fully agree with the views of de Soto, his book ‘The Mystery of Capital’ does provide for a very interesting read.
But what is it exactly? The most obvious aspect is that it is ‘not formal’. Contrary to the formal economy, the informal economy consists of transactions performed and products sold by non-registered and non-licensed actors. These actors are running non-registered shops, and are therefore not paying the taxes that their registered counterparts are. Prices in the informal economy are therefore often lower (compare the registered supermarket, with prices on the market or in the stalls) if competition allows for it. On the other hand, when competition is lacking, margins are often several times higher than on the formal economy where some form of social and governmental monitoring exists – e.g. you will not find high margins on the sale of tomatoes, as competition is high for this product, whereas lending capital is a transaction where competition is often absent, so that margins can skyrocket.
Informal vs formal?Because prices are lower in the informal market, demand for these products is relatively high, resulting in an increased motivation for actors to either stay informal, or become informal. At first glance, there doesn’t seem to be much that would advocate a switch towards becoming formal. Still, being/becoming formal has its advantages: you can set up a registered business, and consequently own the land on which your shop is situated, which is then protected under the rules and laws of the nation; as you own property, you can bring it in as collateral when applying for a loan (this applies to regular bank loans; microfinance institutions work differently); as you pay taxes, you can subsequently benefit from tax benefits, social infrastructure (registered shops are on the main street, informal shops are more often located on markets or street corners), and some form of protection – at least everybody plays by the same rules.
It looks simple: a general switch form informal to formal economy would boost government revenue from taxes, which could then result in higher public spending and more investments in science and technology. In the end, the actor benefits from better infrastructure and better long term prospects.Clearly, this reasoning is flawed, or at least missing some aspects. For starters, in the short run there are definitely significant margins to be made and profits to be reaped in the informal market. Moreover, a lack of confidence in a governments ability (capacity) or willingness (corruption) to increase public spending when tax income increases, provides a further stumbling block on the path to formality. Thirdly, overly bureaucratic systems tend to make it very difficult for actors to become and then stay formal, as Hernando de Soto clearly points out in his book ‘The mystery of Capital’ by labeling the assets the poor possess “dead capital”. (Dead, because their assets are worthless, as they are not valued on the market (e.g. a shop built on land that is not owned, so that they cannot bring it in as collateral for a loan, and moreover that they could get kicked of that piece of land basically overnight) Finally, and crucially, the actors in the informal economy often do not have the same capacity as the formal actors in similar transactions. Forcing them into formality would therefore result in them being completely outcompeted by the more experienced and better trained formal competitors.
The informal economy has often been linked with (relatively) poor quality, and because customers knew this, they bought goods on the informal market while accepting a poorer quality for a cheaper price. Bigger investments such as TVs and solar panels were then bought in licensed and trusted shops, where warranty and after-sales service influence the decision making process. Over the last few years, however, the informal market has gradually expanded its reach into these somewhat bigger types of investments. It is therefore not surprising nowadays on the markets and in the bancas/barracas/stalls to find TVs, solar panels, and car parts on sale.
All in all, you would want a country’s informal market to decrease relatively compared to its formal counterpart, combined with a government that is both capable and willing to maximize the potential of the added (tax) revenue. However, the divide between informal and formal is becoming more and more unclear.
To be continued.
p.s. While I do not fully agree with the views of de Soto, his book ‘The Mystery of Capital’ does provide for a very interesting read.
Saturday 7 November 2009
Picture time (2)
Hellow all,
- Concert/award show for African artists. Location: Maputo.
- World Cup frenzy, featuring Mozambiquan roadside view.
I’m back. Back in Chimoio after a successful trip to Maputo, back online, back in the rhythm. Back in general. Unfortunately, Chimoio shops have the quite annoying habit of closing either entirely in the weekend, or just opening up for the Saturday morning rush. Same for the internet café I’m currently at, catching up on emails, work, and news. Therefore, just a short message today, although I have once more included some pictures taking during my trip to Maputo and its surroundings.
Wishing you all the best, all the way from central Mozambique.
Ate a proxima,
Luc
- Studying Portuguese, and enjoying a well-deserved Prince-biscuit!
- Concert/award show for African artists. Location: Maputo.
- World Cup frenzy, featuring Mozambiquan roadside view.
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