something to lighten up the mood....:)
By Jan Henning
Dir: Tim Burton. Screenplay: John Logan
Based on: the musical by Sondheim and Wheeler
Tim Burton’s recent film of Sweeney Todd, starring Depp, Bonham-Carter and Rickman, is more streamlined than the original stage-musical; probably because of the vocal limitations of the three principals. Therefore sundry things like a coherent plotline and chorus of Bedlam-lunatics, are dispensed with. This strategy has the effect of throwing certain aspects of this venerable tale into stark relief.
One of these is the economic underpinning of the Sweeney-Lovett combined barbering-and-pies consortium.
Let us therefore look at how a serial killer and a besotted but amoral baker succeed in their joint enterprise, by turning an inevitable by-product into a commodity.
When Mr Todd returns to London from his enforced holiday in the antipodes, it is clear that the city is in the grip of an economic recession. We are informed of this by Mrs Lovett, the pie baker.
Ah, sir, times is hard, Times is hard!
We shall see that, throughout, it is Mrs Lovett who keeps a grip on the economic realities. Her two main songs – The Worst Pies in London, and A Little Priest - give a clear outline of her economic modus operandi; first before, then after she sets up the partnership.
In The Worst Pies, her business is on the brink of collapse. She has no custom, and insufficient raw materials with which to make the pies. Meat is in short supply, and therefore too expensive for her limited means. Thus her “meat pies” are without their main ingredient.
She attempts to rectify the situation in three ways.
Firstly she thickens the lard-based pastry - It's nothing but crusting!
Secondly she serves alcohol with the pies to mitigate the effect of the taste - Here, drink this, you'll need it!
Finally she resorts to road-kill for the pie filling –
Never thought I'd live to see the day when men would think it was a treat
Findin' poor animals wot are dyin' in the street!
None of these strategies have worked; and indeed, her rival Mrs Mooney, with pies made from (live) domestic cats, is fast cornering the market. Lovett admires the strategy, but confesses that she is unable to imitate it –
And I'm tellin' you, them pussycats is quick!...... Well, pity a woman alone, with limited wind …
It’s at this low point her career that Sweeney Todd arrives in her shop, intent on revenge against the wicked Judge Turpin, who has condemned him to Transportation, then debauched his wife and abducted his infant daughter. Later, when Sweeney has made his first kill; and also narrowly missed in his first attempt at the Judge and is feeling ready to widen the scope of his revenge, it is Mrs Lovett who sees the possibilities inherent in a constant supply of fresh corpses..
Her economic logic is impeccable:
Such a nice, plump frame wot's 'is name has...
Had...
Has!
Nor it can't be traced...
Bus'ness needs a lift,
Debts to be erased..
Think of it as thrift, as a gift, if you get my drift!
And then – this remarkable calculation:
Take, for instance, Mrs. Mooney and her pie shop!
Bus'ness never better using only pussycats and toast!
And a pussy's good for maybe six or seven at the most!
And I'm sure they can't compare as far as taste!
Thus, with a guaranteed supply of fresh meat, and the services of Workhouse-orphan Toby, who has a superb line in hard-selling to customers, Mrs Lovett’s business gets a kick-start. Later we see the successful pie shop – premises refurbished and improved – barely meeting the demands of its customers.
Sweeney himself contributes to the business solely as a creative artist. Money is never his principal aim, even in his own barber-shop. He becomes a commodity-supplier as a by-product of his over-arching aim in life; which is revenge.
Finally, of course, the cosy business enterprise is terminated quite suddenly. It’s worth speculating whether this could have been averted if only it had occurred to Mrs Lovett to diversify into glue-manufacture. That way those inconvenient (and incriminating) finger and toe-bones might also have been gainfully processed into a utility; with the useful side effect of destroying the evidence more completely.
Sadly this failure to diversify resulted in …….. ah, but that would spoil the ending!
Monday, March 3, 2008
Tuesday, February 26, 2008
A Case for Microfinance Backed Securities
By Gautam Kalani
It is now widely accepted that the microfinance model is successful in significantly reducing rural poverty by improving access to the credit market. It fills the gaps left by the inefficiency of formal credit markets in developing countries. Microfinance has been effectively implemented in countries as far reaching as Bangladesh, Indonesia, Kenya and Bolivia. The secret of its success lies in its ability to significantly reduce the debilitating information and enforcement costs inherent in the credit markets of developing countries, through the process of endogenous group formation and social monitoring. The repayment rate for microfinance loans is as high as 97% in some places, spurred on by the pride of the impoverished borrowers and the system of social enforcement. This is far higher than the rate for commercial banks and government-operated social banks . Also, unlike formal credit, most microfinance loans require no collateral. Moreover, when compared to social banking expansions, microfinance is a cheaper way of increasing rural access to the credit market because, unlike social banking, it tackles the inefficiencies at the root of formal credit markets. Microfinance undoubtedly increases and equalizes access to the credit market, and is a cost-effective method of lowering rural poverty.
Microfinance, however, is not nearly as widespread as is desirable. This is because microfinance institutions (MFIs) are run primarily by non-profit NGOs, which do not have sufficient funds to expand into rural and remote areas. In vast and heavily populated countries like India, the penetration costs of expansion into the far-reaching, isolated corners are too high for NGOs to bear. Though microfinance is more cost-efficient, it is not as widespread as government-controlled social banking, due to high penetration and expansion costs.
To overcome imperfections in the credit market and reduce rural poverty cost-effectively, efforts must be made to expand microfinance. One of the largest obstacles to the growth of microfinance today is the lack of resources available to MFIs. A possible method to overcome this barrier and promote the spread of microfinance is to float an MFI on a public stock exchange. Listing an MFI on a stock exchange would give it access to more funds and resources, which it could use to increase lending and also to expand into untapped regions. Positive financial returns (which can be in the mid to high single digits ), combined with the social benefits, can draw investors to MFIs. An MFI like Grameen Bank would be a prime candidate for such a listing. Its model is well known and it has an exceptional track record . If a listing proves to be successful and the model profitable, this would also cause other MFIs to start up, further increasing the reach and spread of microfinance.
If it is viable to float an MFI on a stock exchange of an emerging market, then it should be done as soon as possible. Growth in emerging markets is high and stock markets are at all time peaks. The Indian and Chinese stock markets, in particular, have reached unimaginable heights. In India, liquidity is also widely available.
Another possibility is to create microfinance backed securities. Microfinance loans from many regions could be bundled together; these bundles could then be sliced up and the parts sold to investors as microfinance backed securities. Securitization is probably the quickest and simplest way for the microfinance industry to gain access to mainstream capital markets. Since microfinance generates positive returns, it would not be hard to find investors for these securities, as profits are combined with the lure of ‘social investing’. These securities diversify risk for investors since they are based on loans given in different regions. This makes these securities more desirable than commercial bank shares as they would “represent lower country risk than shares in banks. ”
Additionally, there is evidence that MFIs have a low correlation with broader macro-economic indicators - “microcredit borrowers are operating in the informal sector, and so they are less affected by shocks to the formal economy. ” The positive performance of microfinance in recent financial crises is evidence that microfinance growth is less dependent on macro conditions. For example, when Indonesia had its financial crisis in the 1990s, the microfinance sector suffered less than the formal sector . Also, it can be argued that the poor have different risk sensitivity from the rest of the economy – they are not usually directly involved in the boom and bust of, say, real estate. This suggests that microfinance securities would probably be less likely to fail to pay out in the face of downturns; that is, the systematic risk (beta, in financial jargon) would be lower for these securities. Thus, microfinance backed securities would also be an attractive option for investors and fund managers looking into portfolio diversification. In times like these, this can only be a good thing. Robert Annibale, global director of Citi Microfinance, echoed this sentiment when he said that the “microfinance field looked to be largely immune from global credit liquidity problems following the U.S. subprime mortgage crisis, and that in previous economic crises the very poorest had proved themselves surprisingly bankable. ”
In fact, microfinance backed securities already exist. In April 2006, Morgan Stanley arranged the BlueOrchard Loans for Development 2006-1 transaction (BOLD 1)—an almost USD100 million collateralized loan obligation (CLO) backed by unsecured senior loans to 21 MFIs in 13 developing countries in Latin America, Eastern Europe and Asia. The largest of its kind to date, and the first to be arranged by a major international investment bank, the BOLD 1 transaction showed that standard securitization techniques can be used to allow the mainstream capital markets to invest in the microfinance industry. This was followed in 2007 by BOLD 2, which is a USD110 million CLO. The different BOLD 2 notes received S&P ratings of AA and BBB. These ‘investment grade’ are further evidence of the viability of microfinance as an asset class. (Ha! You can’t mean this, surely… especially after what happened over the summer? – but don’t I justify this statement when I explain that microfinance isn’t affected that much by broader macro indicators and that its not susceptible to a crash like the subprime market saw? If you feel that isn’t enough, just delete the last sentence and add ‘investment grade’ before S&P ratings.)
In my opinion, giving microfinance access to mainstream capital markets is the key to its future growth. If MFIs can harness the power and efficiency of capital markets on a large scale to achieve its social goals, then microfinance would grow exponentially, leading to widespread poverty reduction. However, this is only feasible if MFIs, and microfinance ventures in general, are profitable. There has been much debate on this issue of profitability in relation to microfinance. Murdoch (1999) argues that although repayment rates associated with microfinance are high, there is little concrete evidence to suggest that microfinance is, in fact, a profitable venture. He claims that “(m)ost programs continue to be subsidized directly through grants and indirectly through soft terms on loans from donors. ”
This, however, cannot explain the successful survival of for-profit MFIs in recent years. Organizations like SKS Microfinance , which operates in India, and Bangladesh’s Grameen Bank, have notched up healthy profits in the past few years. SKS has already drawn millions of dollars from financial giants such as Citigroup, ABN Amro and HSBC – not as donations, but as investments. As of 2006, ICICI Bank, India’s largest private sector bank in terms of capital, had loaned more than USD10 million to SKS; these loans “have been low-risk and give ICICI a slightly higher return on capital than it gets from its corporate borrowers. ” Additionally, as the following graph shows, Grameen Bank has declared positive profits for every year since 1993; there has also been a rapid rise in profits in recent years which correspond to the exponential growth in microfinance. (BUT: Grameen is partly government owned <~6% by the Government of Bangladesh> AND it’s bonds were guaranteed by the government as well; so does using Grameen as an example invalidate your point that MFIs can operate/ survive on their own?? Yes, because now Grameen runs free of subsidies and donations – it is a self-sustaining organization. Also, the govt ownership is a very small percentage.) Thus, there is strong evidence that microfinance can be run as a profitable venture.
As the current debate on the profitability of microfinance rages on, there is a general consensus on one aspect – in order for the microfinance sector to sustain growth and better serve the poor, it needs to “diversify beyond small loans to saving and insurance schemes. ” Murdoch (1999), too, believes that the present microfinance model is by no means perfect – “The full promise of microfinance can only be realized by returning to the early commitments to experimentation, innovation, and evaluation. ” He claims that in order to attain financial sustainability, MFIs need to radically alter their management structures, and also expand into the provision of flexible savings plans to the poor. Thus, improvements to the microfinance model are essential for the continued growth of the sector.
As we enter an age in which the growth of the global economy is driven by strong emerging market growth, conditions are conducive to a large scale expansion of microfinance. Stable and positive growth prospects in large emerging markets like India and China are attracting large amounts of foreign investment into these countries – if microfinance does successfully access mainstream capital markets on a large scale, then a tiny fraction of this foreign investment will also undoubtedly reach the poor in the form of micro-loans. A tiny fraction of this massive foreign investment would be enough to alleviate millions from poverty. Additionally, the continued good economic performance of these developing countries in the face of global economic downturns like the sub-prime mortgage crisis implies greater immunity to MFIs operating in these countries from unfavorable macro conditions in the developed world.
Thus, the most efficient and cost effective way to broaden the spectrum for microfinance is through the financial market in the above mentioned ways. Competitive markets would then do their job in ensuring efficient allocation of resources. Spreading microfinance would be the cheapest way of increasing and equalizing access to the credit market, overcoming some of its barriers. This in turn would significantly lower rural poverty. It would truly be an extraordinary amalgamation and alignment of capital greed and social interests, bringing new meaning to the phrase, “Greed is good.”
Notes:
Endogenous group formation implies that borrowers form their own groups which are jointly liable for the loans. This process effectively improves the risk pool for MFIs and tackles the adverse selection problem of the mainstream credit market in a cost-effective manner
Financial Times article, “Microfinance: not as risky as you think,” published on May 25th, 2007.
http://www.ft.com/cms/s/2/848c27ee-0acd-11dc-8412-000b5df10621.html
Burgess and Pande (2004) claim that the social banking expansion in India (1977-90) was successful in reducing rural poverty; however, such expansions are extremely costly since they do not tackle inefficiencies at the root of formal credit markets in developing countries.
Financial Times article published on May 25th, 2007.
http://www.ft.com/cms/s/2/848c27ee-0acd-11dc-8412-000b5df10621.html
The official Grameen Bank website claims that, “As of January, 2008, it has 7.44 million borrowers, 97 percent of whom are women. With 2,488 branches, GB provides services in 80,949 villages, covering more than 96 percent of the total villages in Bangladesh.”
http://www.grameen-info.org/bank/index.html
Financial Times article mentioned in footnote 4.
Financial Times article mentioned in footnote 4.
Reuters article, “Citi sees microfinance growth even in downturn,” published on December 21st, 2007. http://www.reuters.com/article/email/idUSL2157748820071221?sp=true
Reuters article, “Citi sees microfinance growth even in downturn,” published on December 21st, 2007. http://www.reuters.com/article/email/idUSL2157748820071221?sp=true
Murdoch (1999) – The Microfinance Promise
For more information on SKS Microfinance and its profitability, refer to the Wall Street Journal article, “Entrepreneur Gets Big Banks to Back Very Small Loans”, published on May 15th, 2006.
Wall Street Journal article mentioned in footnote ?.
Data source: official Grameen Bank website.
http://www.grameen-info.org/
Reuters article mentioned in footnote 6.
Murdoch (1999) – The Microfinance Promise
It is now widely accepted that the microfinance model is successful in significantly reducing rural poverty by improving access to the credit market. It fills the gaps left by the inefficiency of formal credit markets in developing countries. Microfinance has been effectively implemented in countries as far reaching as Bangladesh, Indonesia, Kenya and Bolivia. The secret of its success lies in its ability to significantly reduce the debilitating information and enforcement costs inherent in the credit markets of developing countries, through the process of endogenous group formation and social monitoring. The repayment rate for microfinance loans is as high as 97% in some places, spurred on by the pride of the impoverished borrowers and the system of social enforcement. This is far higher than the rate for commercial banks and government-operated social banks . Also, unlike formal credit, most microfinance loans require no collateral. Moreover, when compared to social banking expansions, microfinance is a cheaper way of increasing rural access to the credit market because, unlike social banking, it tackles the inefficiencies at the root of formal credit markets. Microfinance undoubtedly increases and equalizes access to the credit market, and is a cost-effective method of lowering rural poverty.
Microfinance, however, is not nearly as widespread as is desirable. This is because microfinance institutions (MFIs) are run primarily by non-profit NGOs, which do not have sufficient funds to expand into rural and remote areas. In vast and heavily populated countries like India, the penetration costs of expansion into the far-reaching, isolated corners are too high for NGOs to bear. Though microfinance is more cost-efficient, it is not as widespread as government-controlled social banking, due to high penetration and expansion costs.
To overcome imperfections in the credit market and reduce rural poverty cost-effectively, efforts must be made to expand microfinance. One of the largest obstacles to the growth of microfinance today is the lack of resources available to MFIs. A possible method to overcome this barrier and promote the spread of microfinance is to float an MFI on a public stock exchange. Listing an MFI on a stock exchange would give it access to more funds and resources, which it could use to increase lending and also to expand into untapped regions. Positive financial returns (which can be in the mid to high single digits ), combined with the social benefits, can draw investors to MFIs. An MFI like Grameen Bank would be a prime candidate for such a listing. Its model is well known and it has an exceptional track record . If a listing proves to be successful and the model profitable, this would also cause other MFIs to start up, further increasing the reach and spread of microfinance.
If it is viable to float an MFI on a stock exchange of an emerging market, then it should be done as soon as possible. Growth in emerging markets is high and stock markets are at all time peaks. The Indian and Chinese stock markets, in particular, have reached unimaginable heights. In India, liquidity is also widely available.
Another possibility is to create microfinance backed securities. Microfinance loans from many regions could be bundled together; these bundles could then be sliced up and the parts sold to investors as microfinance backed securities. Securitization is probably the quickest and simplest way for the microfinance industry to gain access to mainstream capital markets. Since microfinance generates positive returns, it would not be hard to find investors for these securities, as profits are combined with the lure of ‘social investing’. These securities diversify risk for investors since they are based on loans given in different regions. This makes these securities more desirable than commercial bank shares as they would “represent lower country risk than shares in banks. ”
Additionally, there is evidence that MFIs have a low correlation with broader macro-economic indicators - “microcredit borrowers are operating in the informal sector, and so they are less affected by shocks to the formal economy. ” The positive performance of microfinance in recent financial crises is evidence that microfinance growth is less dependent on macro conditions. For example, when Indonesia had its financial crisis in the 1990s, the microfinance sector suffered less than the formal sector . Also, it can be argued that the poor have different risk sensitivity from the rest of the economy – they are not usually directly involved in the boom and bust of, say, real estate. This suggests that microfinance securities would probably be less likely to fail to pay out in the face of downturns; that is, the systematic risk (beta, in financial jargon) would be lower for these securities. Thus, microfinance backed securities would also be an attractive option for investors and fund managers looking into portfolio diversification. In times like these, this can only be a good thing. Robert Annibale, global director of Citi Microfinance, echoed this sentiment when he said that the “microfinance field looked to be largely immune from global credit liquidity problems following the U.S. subprime mortgage crisis, and that in previous economic crises the very poorest had proved themselves surprisingly bankable. ”
In fact, microfinance backed securities already exist. In April 2006, Morgan Stanley arranged the BlueOrchard Loans for Development 2006-1 transaction (BOLD 1)—an almost USD100 million collateralized loan obligation (CLO) backed by unsecured senior loans to 21 MFIs in 13 developing countries in Latin America, Eastern Europe and Asia. The largest of its kind to date, and the first to be arranged by a major international investment bank, the BOLD 1 transaction showed that standard securitization techniques can be used to allow the mainstream capital markets to invest in the microfinance industry. This was followed in 2007 by BOLD 2, which is a USD110 million CLO. The different BOLD 2 notes received S&P ratings of AA and BBB. These ‘investment grade’ are further evidence of the viability of microfinance as an asset class. (Ha! You can’t mean this, surely… especially after what happened over the summer? – but don’t I justify this statement when I explain that microfinance isn’t affected that much by broader macro indicators and that its not susceptible to a crash like the subprime market saw? If you feel that isn’t enough, just delete the last sentence and add ‘investment grade’ before S&P ratings.)
In my opinion, giving microfinance access to mainstream capital markets is the key to its future growth. If MFIs can harness the power and efficiency of capital markets on a large scale to achieve its social goals, then microfinance would grow exponentially, leading to widespread poverty reduction. However, this is only feasible if MFIs, and microfinance ventures in general, are profitable. There has been much debate on this issue of profitability in relation to microfinance. Murdoch (1999) argues that although repayment rates associated with microfinance are high, there is little concrete evidence to suggest that microfinance is, in fact, a profitable venture. He claims that “(m)ost programs continue to be subsidized directly through grants and indirectly through soft terms on loans from donors. ”
This, however, cannot explain the successful survival of for-profit MFIs in recent years. Organizations like SKS Microfinance , which operates in India, and Bangladesh’s Grameen Bank, have notched up healthy profits in the past few years. SKS has already drawn millions of dollars from financial giants such as Citigroup, ABN Amro and HSBC – not as donations, but as investments. As of 2006, ICICI Bank, India’s largest private sector bank in terms of capital, had loaned more than USD10 million to SKS; these loans “have been low-risk and give ICICI a slightly higher return on capital than it gets from its corporate borrowers. ” Additionally, as the following graph shows, Grameen Bank has declared positive profits for every year since 1993; there has also been a rapid rise in profits in recent years which correspond to the exponential growth in microfinance. (BUT: Grameen is partly government owned <~6% by the Government of Bangladesh> AND it’s bonds were guaranteed by the government as well; so does using Grameen as an example invalidate your point that MFIs can operate/ survive on their own?? Yes, because now Grameen runs free of subsidies and donations – it is a self-sustaining organization. Also, the govt ownership is a very small percentage.) Thus, there is strong evidence that microfinance can be run as a profitable venture.
As the current debate on the profitability of microfinance rages on, there is a general consensus on one aspect – in order for the microfinance sector to sustain growth and better serve the poor, it needs to “diversify beyond small loans to saving and insurance schemes. ” Murdoch (1999), too, believes that the present microfinance model is by no means perfect – “The full promise of microfinance can only be realized by returning to the early commitments to experimentation, innovation, and evaluation. ” He claims that in order to attain financial sustainability, MFIs need to radically alter their management structures, and also expand into the provision of flexible savings plans to the poor. Thus, improvements to the microfinance model are essential for the continued growth of the sector.
As we enter an age in which the growth of the global economy is driven by strong emerging market growth, conditions are conducive to a large scale expansion of microfinance. Stable and positive growth prospects in large emerging markets like India and China are attracting large amounts of foreign investment into these countries – if microfinance does successfully access mainstream capital markets on a large scale, then a tiny fraction of this foreign investment will also undoubtedly reach the poor in the form of micro-loans. A tiny fraction of this massive foreign investment would be enough to alleviate millions from poverty. Additionally, the continued good economic performance of these developing countries in the face of global economic downturns like the sub-prime mortgage crisis implies greater immunity to MFIs operating in these countries from unfavorable macro conditions in the developed world.
Thus, the most efficient and cost effective way to broaden the spectrum for microfinance is through the financial market in the above mentioned ways. Competitive markets would then do their job in ensuring efficient allocation of resources. Spreading microfinance would be the cheapest way of increasing and equalizing access to the credit market, overcoming some of its barriers. This in turn would significantly lower rural poverty. It would truly be an extraordinary amalgamation and alignment of capital greed and social interests, bringing new meaning to the phrase, “Greed is good.”
Notes:
Endogenous group formation implies that borrowers form their own groups which are jointly liable for the loans. This process effectively improves the risk pool for MFIs and tackles the adverse selection problem of the mainstream credit market in a cost-effective manner
Financial Times article, “Microfinance: not as risky as you think,” published on May 25th, 2007.
http://www.ft.com/cms/s/2/848c27ee-0acd-11dc-8412-000b5df10621.html
Burgess and Pande (2004) claim that the social banking expansion in India (1977-90) was successful in reducing rural poverty; however, such expansions are extremely costly since they do not tackle inefficiencies at the root of formal credit markets in developing countries.
Financial Times article published on May 25th, 2007.
http://www.ft.com/cms/s/2/848c27ee-0acd-11dc-8412-000b5df10621.html
The official Grameen Bank website claims that, “As of January, 2008, it has 7.44 million borrowers, 97 percent of whom are women. With 2,488 branches, GB provides services in 80,949 villages, covering more than 96 percent of the total villages in Bangladesh.”
http://www.grameen-info.org/bank/index.html
Financial Times article mentioned in footnote 4.
Financial Times article mentioned in footnote 4.
Reuters article, “Citi sees microfinance growth even in downturn,” published on December 21st, 2007. http://www.reuters.com/article/email/idUSL2157748820071221?sp=true
Reuters article, “Citi sees microfinance growth even in downturn,” published on December 21st, 2007. http://www.reuters.com/article/email/idUSL2157748820071221?sp=true
Murdoch (1999) – The Microfinance Promise
For more information on SKS Microfinance and its profitability, refer to the Wall Street Journal article, “Entrepreneur Gets Big Banks to Back Very Small Loans”, published on May 15th, 2006.
Wall Street Journal article mentioned in footnote ?.
Data source: official Grameen Bank website.
http://www.grameen-info.org/
Reuters article mentioned in footnote 6.
Murdoch (1999) – The Microfinance Promise
Wednesday, February 13, 2008
oultine of feature articles by Serena Tang...promising:)
China + World Inflation
- current macro situation: trend: rising inflation; why?:
---> growth
---> supply not catching up
- command economy type controls (price, quantity) which exacerbate things
- infrastructure not being able to catch up
- will it get worse?
---> policies it can use:
- price controls... short term? long term? (link back to above)
- banking system
- capital flows (to Hong Kong!)
---> new labour laws (I've got some great anecdotal evidence...):
- rising costs for factory owners; passed on to consumers; higher prices still!
- factories closed down; unemployment?
- OR, is it just a trend in the whole world, higher inflation?;
- some figures, and projected trends
- where did it go the last 20 years?
- what can be done now?; can anything be done now?
- In the midst of this, where is China heading to now?
- projected slower growth (WB China Quarterly Update)
- price stability ~ political stability (think 1988 discontent over prices, and 1989...)
- can communist era economic policies reign in an increasingly capitalist system?
Hong Kong
- current macro situation: importing inflation left, right and centre: main reasons:
--> China
- reliance on Chinese economy for food, necessities
- Chinese funds and investments
--> USD peg
- brief history of currency peg; how it works; why did we do it?
--> stability
- what to do about inflation and other problems?
--> not possible to cut China links
--> leave peg?; possible consequences? (rumours of revaluation led to speculative attacks in Oct 2007!?... I didn't know about this...)
>> BUT is independent monetary policy really needed?; fiscal policies at work
--> THIRD WAY: "may the best currency win" (this was from MS's Stephen Jen...!!):
- repegging to the yuan, OR
- a gradual shift to actually using yuan only (already happening) ('optimum currency area??? implications?? constraints??)
--> Implications for nations (UAE, Qatar, etc) which also have dollar pegs? (Not much!)
- current macro situation: trend: rising inflation; why?:
---> growth
---> supply not catching up
- command economy type controls (price, quantity) which exacerbate things
- infrastructure not being able to catch up
- will it get worse?
---> policies it can use:
- price controls... short term? long term? (link back to above)
- banking system
- capital flows (to Hong Kong!)
---> new labour laws (I've got some great anecdotal evidence...):
- rising costs for factory owners; passed on to consumers; higher prices still!
- factories closed down; unemployment?
- OR, is it just a trend in the whole world, higher inflation?;
- some figures, and projected trends
- where did it go the last 20 years?
- what can be done now?; can anything be done now?
- In the midst of this, where is China heading to now?
- projected slower growth (WB China Quarterly Update)
- price stability ~ political stability (think 1988 discontent over prices, and 1989...)
- can communist era economic policies reign in an increasingly capitalist system?
Hong Kong
- current macro situation: importing inflation left, right and centre: main reasons:
--> China
- reliance on Chinese economy for food, necessities
- Chinese funds and investments
--> USD peg
- brief history of currency peg; how it works; why did we do it?
--> stability
- what to do about inflation and other problems?
--> not possible to cut China links
--> leave peg?; possible consequences? (rumours of revaluation led to speculative attacks in Oct 2007!?... I didn't know about this...)
>> BUT is independent monetary policy really needed?; fiscal policies at work
--> THIRD WAY: "may the best currency win" (this was from MS's Stephen Jen...!!):
- repegging to the yuan, OR
- a gradual shift to actually using yuan only (already happening) ('optimum currency area??? implications?? constraints??)
--> Implications for nations (UAE, Qatar, etc) which also have dollar pegs? (Not much!)
Generic drugs providing second-rate solution to Honduran health
April 23rd, 2007
Alex Jones/Honduras This Week
Generic drugs such as these flu medicines are used in public hospitals in Honduras.Narcotics in Honduras are too expensive for many, including the government. As a result the state cannot fulfil its constitutional duty to provide enough free or adequate healthcare to Honduran citizens. In an attempt to approach this problem and decrease the cost of drugs, some companies illegally make generic copies of patented original molecules. As they don’t have to fund research, they are able to sell at lower prices. These illegal generic drugs thus play an absolutely crucial role in Honduran health. “Currently the government buys mostly generics for the public hospitals, because by doing so they can afford to buy significantly more drugs,” says Dr. Jacobo Andonie, technical director at Andifar Laboratories, a manufacturer of generic drugs. Individuals make the same decisions, as “at a private pharmacy the difference between a patented and generic drug might be the difference between L.1000 ($50) and L.100 ($5).” With 60% of the population living below the poverty line, this may mean the difference between life and death in the case of an easily treatable disease. Whilst it is clear that cheap, generic drugs play a vital role in Honduran health, there are major problems with coupling the need to provide cheap healthcare with the need to provide good quality drugs.
You can’t make generics of original drugs unless they have run out off their patent or your company buys patent rights, “in theory,” says Andonie, “but the world is not working that way. There are two big players in the east – China and India – and as soon as a new US or European drug comes out they have their chemists study the molecule and make the raw material.” This may take up to a year, but sometimes takes less than three months. “This raw material is then available to the manufacturer who has the guts to make the drug.”
This is illegal, and “the big companies don’t turn a blind eye towards generic companies when they break the patent laws, but for them it is such a small market that sometimes to fight it is not really worth it. The (Honduran) pharmaceutical market is between $110 and $130 million per year. But then you have so many drugs in that market, so to fight each little bit doesn’t really make sense. If you were in Mexico I am sure they would fight it, they have 90 million people there. In Brazil they fight it for sure.”
Indeed last year Novartis, a Swiss pharmaceuticals multinational corporation, challenged an Indian law that denies patents for minor or trivial improvements on already known drugs. The legal challenge came after a patent was denied for the new cancer treatment, Glivec/Gleevec. The challenge was dismissed in a high court ruling, and this decision that was welcomed by health activists around the world, including Medicins Sans Frontieres, The Berne Declaration Group and the All-India Drug Action Network.
Similarly, last year Brazil’s president had to authorise the country to sidestep the patent on an AIDS drug manufactured by Merck, a US pharmaceutical giant, after they refused to supply the drug to Brazil at the same cheap price they do to Tailand, citing the size of the Brazilian economuy. Brazil now imports a cheaper, generic, Indian made version of the patented Efavirenze drug.
These are just two examples of where a developing market has become large enough such that it is worth fighting the patent laws. Novartis cited India’s “booming middle class” in an open letter to the NGO community justifying its action in India, and Merck justify their policy towards Brazil by claiming that “as the world’s 12th largest economy, Brazil has a greater capacity to pay for HIV medicines than countries that are poorer or harder hit by the disease.” However, as these countries do seem to have two markets within one economy, they also seem, so far, able to fight off the pressure. Many people are worried that as small economies enter free trade agreements with each other they are creating large markets of small economies. This may mean that they create markets large enough for research based pharmaceuticals to earn a profit upholding patent laws or pushing for more stringent patent laws, but made up of governments that are individually too weak to stand up for their citizens as the Brazilian and Indian government have shown an ability to do so.
Another down side of being a generics company in a developing country is that you hold very little power in the international arena, especially compared with the major research based pharmaceuticals. It is thought that these big pharmaceuticals use their strength to suggest international regulations in such a way that makes it hard to produce cheap equivalents of what they do. A lot of the time it appears that these pressures are exerted in the form of new standards, procedures and laws demanded through the World Health Organization (WHO). Thus many standards are put into place and advised upon through WHO, but are incompatible with a need to produce affordable drugs.
“For example, since 2000, WHO – through each government in Central America – have required that every manufacturer complies with the Good Manufacturing Practice (GMP).” This is a series of criteria that regulate the quality of the equipment and methods used to make the drugs. “It is a great tool, and it definitely helps us to improve our service, but I am sure a lot of the smaller generic companies went bankrupt over it.”
Similarly, “you can no longer use published data to register new molecules…but that is exactly what you have to do if you are a generic company. The US doesn’t want us to use their data. They want us to do our own clinical trial. That both raises our cost and delays our launch into the market.”
“In developed countries a generic has to be bioequivalent with the original. In Honduras this topic of bioequivalence is gaining force, but it is still not the same.” For two things to be bioequivalent means that they act the same in a test tube. It is an analysis that should be carried out with tablets to test the rate at which they dissolve, for example, or quantity of medicine that will end up in the right place after being filtered through the liver. Syrups and vaccines however don’t need to be tested for bioequivalence.
The status of bioavailability is similar in the developed world, but, because of its high price, less practiced even than bioequivalence in developing countries. Bioavailability signifies the extent to which two medicines act the same in humans, and so needs live human testing. “However bioavailability and bioequivalence are hard and expensive to do, so the industry has focused on GMP instead.” For this reason, according to Andonie, you will hear stories of drugs which didn’t have the full affect, or had to be taken in double doses etc... “Once you comply with the GMP, if you have the time and the money, you comply with bioequivalence. Then you are providing a 95% similar drug. Once you have done that you may do bioavailability, and that is perfect, but then you are way off the charts…nobody would be able to afford your products…the whole point of generics in Honduras is to have low prices.” For this reason, in Honduras, generics often fall short of qualities desired in the developed world, and are not necessarily the same quality as the original drug.
After all this, “generics do provide a better option, particularly for poor countries.” But it is not enough to just continue in a balance between of breaking the law and being an insignificant player in the international arena. There needs to be a change such that developing countries can legally provide adequate and affordable healthcare. “In a fairer world these companies (research based pharmaceuticals) should offer a different price for poorer nations.”
Monday, February 11, 2008
Format War Deja Vu. Now in Hi-Def!
The ongoing war between the next-generation high definition formats HD DVD and Blu-Ray Disc seems to be finally coming to an end, with the latter emerging as a clear winner.
The defections from the HD DVD format, backed by companies like Microsoft, Fuijitsu and Kenwood, was prompted by the announcement in early January of Warner Brothers to release its titles exclusively on the Blu-Ray Disc, supported by companies Sony, Apple and Dell. The exodus from HD DVD has continued: Netflix, the online DVD rental service in the States announced a month later that it too will start phasing out HD DVD and switch to Blu-Ray only by the end of the year, and The Times has reported that as many as 20 companies currently part of the HD DVD Promotion Group are contemplating removing their names from that list [1].
Since both the formats were introduced in 2003, neither had shown a clear lead in the race. Having learnt from the infamous format wars in the late 1970s – 80s between Sony’s Betamax and JVC’s VHS home video formats, both the HD camps have maneuvered to gain a majority share in the home entertainment market, so as to benefit from network externalities and ‘bandwagon effects’. Network externalities refers to how an individual purchasing a good would indirectly benefit other consumers; in this case, the more consumers choose Blu-ray Disc players, the more likely rental services or DVD shops are likely to stock Blu-Ray discs, and the easier for other consumers to find and enjoy their high definition DVDs. This in turn would lead to the ‘bandwagon effect, where momentum for a particular product builds up, encouraging the support of consumers, distributors, licensees, such that it becomes the industry standard. Considering this, it seems rational for Sony to have release their Playstation 3 game console—which features a Blu-Ray Disc drive—at a significant loss.
It has been argued that unlike the Betamax-VHS format war, the present competition has effectively been decided in boardrooms, with the major studios making the decision of where their loyalties lie before consumers. In this respect, network externalities and bandwagon effect at the producers and distributors’ level was what mattered in the current war– the more studios back one format, the easier and cheaper it would be for producers to mass produce the discs. However, it must be noted that Blu-Ray discs were already outselling HD DVDs by about two to one in the first three quarters of 2007 [2], such that it may be too early right now to declare whether it was the consumers or producers who decided the winner of the format war.
Rationale Reckons:
- Since companies are already working on the successor to Blu-Ray Disc format, and DVDs are still holding up, is it possible that we may leap-frog this HD format, such that it doesn't quite matter who won this round?
- Would this development matter much to those of us who seem to be increasingly enjoying our media in out formats (...downloading, anyone?)
- Lord of the Rings on Blu-Ray...at last!
Sources
[1] Lewis, Leo “Blu-Ray takes inside edge in war with HD-DVD” (8th January, 2008) Times Online
http://business.timesonline.co.uk/tol/business/industry_sectors/media/article3153038.ece
[2] McBride, Sarah. “DVD formats Blu-Ray, HD square off” (30th September 2007) http://www.charleston.net/news/2007/sep/30/dvd_formats_blu_ray_hd_square_off17561/
The defections from the HD DVD format, backed by companies like Microsoft, Fuijitsu and Kenwood, was prompted by the announcement in early January of Warner Brothers to release its titles exclusively on the Blu-Ray Disc, supported by companies Sony, Apple and Dell. The exodus from HD DVD has continued: Netflix, the online DVD rental service in the States announced a month later that it too will start phasing out HD DVD and switch to Blu-Ray only by the end of the year, and The Times has reported that as many as 20 companies currently part of the HD DVD Promotion Group are contemplating removing their names from that list [1].
Since both the formats were introduced in 2003, neither had shown a clear lead in the race. Having learnt from the infamous format wars in the late 1970s – 80s between Sony’s Betamax and JVC’s VHS home video formats, both the HD camps have maneuvered to gain a majority share in the home entertainment market, so as to benefit from network externalities and ‘bandwagon effects’. Network externalities refers to how an individual purchasing a good would indirectly benefit other consumers; in this case, the more consumers choose Blu-ray Disc players, the more likely rental services or DVD shops are likely to stock Blu-Ray discs, and the easier for other consumers to find and enjoy their high definition DVDs. This in turn would lead to the ‘bandwagon effect, where momentum for a particular product builds up, encouraging the support of consumers, distributors, licensees, such that it becomes the industry standard. Considering this, it seems rational for Sony to have release their Playstation 3 game console—which features a Blu-Ray Disc drive—at a significant loss.
It has been argued that unlike the Betamax-VHS format war, the present competition has effectively been decided in boardrooms, with the major studios making the decision of where their loyalties lie before consumers. In this respect, network externalities and bandwagon effect at the producers and distributors’ level was what mattered in the current war– the more studios back one format, the easier and cheaper it would be for producers to mass produce the discs. However, it must be noted that Blu-Ray discs were already outselling HD DVDs by about two to one in the first three quarters of 2007 [2], such that it may be too early right now to declare whether it was the consumers or producers who decided the winner of the format war.
Rationale Reckons:
- Since companies are already working on the successor to Blu-Ray Disc format, and DVDs are still holding up, is it possible that we may leap-frog this HD format, such that it doesn't quite matter who won this round?
- Would this development matter much to those of us who seem to be increasingly enjoying our media in out formats (...downloading, anyone?)
- Lord of the Rings on Blu-Ray...at last!
Sources
[1] Lewis, Leo “Blu-Ray takes inside edge in war with HD-DVD” (8th January, 2008) Times Online
http://business.timesonline.co.uk/tol/business/industry_sectors/media/article3153038.ece
[2] McBride, Sarah. “DVD formats Blu-Ray, HD square off” (30th September 2007) http://www.charleston.net/news/2007/sep/30/dvd_formats_blu_ray_hd_square_off17561/
Organ donation....need a catchy title suggestions welcome
By James Wisson (being edited by Jagoda)
In the year that the NHS turns 60, Gordon Brown started a new policy debate over the issue of organ donation with an article in the Sunday Telegraph. He described the shortage of organ donations in the UK as “an avoidable human tragedy we can and must address.”[1] His proposed solution? To change from an ‘opt-in’ system, in which potential donors have to register their wishes to donate their organs, to an ‘opt-out’ system of presumed consent. Recent research from the likes of David Laibson that overlaps economics with psychology can help explain why this might increase the number of donors.
In the year that the NHS turns 60, Gordon Brown started a new policy debate over the issue of organ donation with an article in the Sunday Telegraph. He described the shortage of organ donations in the UK as “an avoidable human tragedy we can and must address.”[1] His proposed solution? To change from an ‘opt-in’ system, in which potential donors have to register their wishes to donate their organs, to an ‘opt-out’ system of presumed consent. Recent research from the likes of David Laibson that overlaps economics with psychology can help explain why this might increase the number of donors.
But first of all, how big is this shortage of organs? From the 1st April 2006 to 31st March 2007, 3,087 patients had transplants to save or improve their lives of which about 5 in 6 came from a deceased donor. However, 459 patients died during this period and by the end of it, 7,234 people remained on the active transplant waiting list (with a further 1,915 on the temporarily suspended transplant lists).[2] So for every one transplant that went ahead in the 2006-07 period a little over three more were demanded.
So there is a serious shortage of organs. More organs are needed because demand has increased, with medical advances allowing new transplants and an ageing population needing more of them, while supply has fallen – transplantation is only possible from the recently deceased, in practice, people who die in hospital, and as medical practice and road safety improve, less people are able to donate.
As of the 11th February, 15,006,985 people or 24% of the population[3] had signed up to the NHS Organ Donor Register. This will impress some (that over 15 million people have made the effort to sign up) and depress others (only one in four people are willing to help others live after they have died?) depending on individual points of view. But what is clear is that the number of organ donors is not sufficient. In the UK, the rate of 12.9 organ donors for every million people in the population is much lower than the rate of 35 donors per million in Spain[4], which has been held up as a model system by ‘opt-out’ supporters.
[1] http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2008/01/13/norgans213.xml
[2] All figures in this paragraph: http://www.uktransplant.org.uk/ukt/statistics/transplant_activity_report/current_activity_reports/ukt/transplant_activity_uk_2006-2007.pdf
[3] http://www.uktransplant.org.uk/ukt/default.jsp
[4] http://news.bbc.co.uk/1/hi/health/7183798.stm
[2] All figures in this paragraph: http://www.uktransplant.org.uk/ukt/statistics/transplant_activity_report/current_activity_reports/ukt/transplant_activity_uk_2006-2007.pdf
[3] http://www.uktransplant.org.uk/ukt/default.jsp
[4] http://news.bbc.co.uk/1/hi/health/7183798.stm
So, is it the case that the type of donation system in place in a country will affect the number of people signed up for organ donation? In neoclassical economic theory, it shouldn’t make a difference: individuals should weigh up the costs and benefits of a decision and always come to the same outcome regardless of whether it’s an opt-in or opt-out system.
But, during the Lionel Robbins Memorial lecture series in the Old Theatre last term, David Laibson of Harvard University showed why this isn’t the case. Focussing upon employee decisions over how to save their pension contributions, Laibson showed that when an employer sets an automatic proportion of income to be saved and a default type of pension fund for it to be invested in, a huge proportion of employees stuck with these defaults even when the proportion of income saved was low (there is normally an incentive to save more, as often the employer will match the amount contributed) and the type of stock invested in was very conservative. Sure enough, when the same company removed these defaults and instead obligated employees to choose both a savings rate and where the money was being invested, the savings rate increased and there was a change in the type of funds receiving the investment.
So, how does this cross over to organ donation? Laibson identified four psychological factors to explain this behaviour: financial illiteracy, endorsement effects from an institution that people trust, complexity or the cost of decision making, and present biased preferences. The first three factors do not really apply to UK organ donation although the endorsement effects of the government would make an interesting tangent – do the British population trust/support the government on this or not?
But by far the biggest effects on organ donation will come from the last factor, present biased preferences. In laymen’s terms this is procrastination. Dr Laibson presented a simple model for procrastination in his lecture. For an employee about to enrol into a pension plan the benefits of doing so are huge. Suppose the costs of making the decision are £50 and every day that passes she loses £10 of the overall benefit (counted as a cost in the workings below). Finally there is a discount factor for costs and benefits in the future. So the cost of doing something is the cost today plus the future cost reduced by the discount factor. Supposing that the employee’s discount factor is a half:
Cost of making the decision today = £50
Cost of making the decision tomorrow = 0 + (50+10)/2 = £30
Cost of making the decision in two days time = 0 + (50+20)/2 = £35As the minimum cost occurs tomorrow that is when a rational individual should join the pension plan. But of course ‘tomorrow never comes’, and so this logic will continue on into the future (only stopping when the cost of making the decision or the discount factor decreases – possibly because the individual has more free time).
Cost of making the decision tomorrow = 0 + (50+10)/2 = £30
Cost of making the decision in two days time = 0 + (50+20)/2 = £35As the minimum cost occurs tomorrow that is when a rational individual should join the pension plan. But of course ‘tomorrow never comes’, and so this logic will continue on into the future (only stopping when the cost of making the decision or the discount factor decreases – possibly because the individual has more free time).
So if defaults in organ donation affect the number of people who are on the organ donor register, it will largely be down to procrastination. By the logic above, with the present opt-in system, there is a group within the population who haven’t got around to signing up. If the default changes as the PM has proposed, then the number on the register should increase and then there will be a group of people registered who haven’t got around to opting-out.
How much will it increase? Well, in a survey carried out in October, two thirds of people said that they would be “willing to donate their organs for transplantation after their death.”[1] But how far do we trust a survey when in reality only one in four people have signed up to the donors register?
How much will it increase? Well, in a survey carried out in October, two thirds of people said that they would be “willing to donate their organs for transplantation after their death.”[1] But how far do we trust a survey when in reality only one in four people have signed up to the donors register?
While the opt-in or out register has made the headlines and will increase the ranks of potential organ donors, a more important aspect of our Spanish model may be the dialogue between specialised ‘transplant co-ordinators’ and families of potential donors after their death. The wishes of families still affect whether organs can be donated or not; in the UK there is a 40% family refusal rate compared to 15% in Spain (it was 30% in the 1990s)[2]. This has been attributed to the specially trained transplant co-ordinators in Spanish hospitals who attempt to persuade families to consider donation amidst their grief.
So perhaps the shortage of organs for transplantation will be more significantly addressed through specialised workers addressing the attitudes of families to donation instead of just attempting to increase the supply of people willing to donate (when their families in practice can make the final decision). But in practice we may have to accept that organ donations will never fully match the demand for transplants and so artificially created organs will probably provide the key to resolving this organ shortage.
news & analysis: the Webster ruling or how C.Ronaldo could go for just £12 million.
By Pierre Bachas (edited by Serena)
Andy Webster, doesn’t have Drogba’s strength nor C.Ronaldo’s skills. Neither is he one of the wonder kids in Arsenal’s youth team. However his name could well be remembered as marking football history. Going back to the summer transfer window of 2006, Webster signed a contract with Wigan Athletic, while still on the third year of his four year contract with Heart of Midlothian. While the world of football was expecting Wigan to have to pay a major fine to Heart, this January the Court of Arbitration for Sport ruled in favour of Webster, the only compensation for his former employer being the remaining value of the contract, £150 000.
The ruling will most certainly have a vast impact for the football economy.
First, transfer fees, such as the £19 m recently paid by Chelsea for Nicolas Anelka, could soon be a thing of the past. Indeed why pay exorbitant fees when one can sign a player for a negligible amount, after the two years of the "protected period" included in the contract. To give you an idea, Tottenham asks for £30 m for Berbatov, its star striker, whereas he could leave for as little as £1.3 m in the summer of 2009.
Secondly, this would be extremely beneficial to the labour force – the football players. Shame for those who thought players were already getting enough money, wages could now rise to unprecedented heights, since it will become the only way for teams to keep a hold on their players.
Furthermore the duration of contracts could decrease and as a consequence, player mobility would increase.
However FIFA, the governing football body, does not look favourably upon this major shift in revenue allocation from the team to the players. A further increase in player’s mobility would mean the potential downfall of team values and identity and the fall in transfer revenues would be a huge loss for less wealthy clubs, who rely on training young talents. FIFA stated that: "Should the protection of contractual stability finally indeed be subverted, FIFA will consider appropriate measures to safeguard the special nature of sport with regard to employment contracts."
This is one more episode in the long lasting opposition between EU law and FIFA, and raises the question of whether the employment of players should abide the same laws as other labour markets. FIFA is on the counter.
Andy Webster, doesn’t have Drogba’s strength nor C.Ronaldo’s skills. Neither is he one of the wonder kids in Arsenal’s youth team. However his name could well be remembered as marking football history. Going back to the summer transfer window of 2006, Webster signed a contract with Wigan Athletic, while still on the third year of his four year contract with Heart of Midlothian. While the world of football was expecting Wigan to have to pay a major fine to Heart, this January the Court of Arbitration for Sport ruled in favour of Webster, the only compensation for his former employer being the remaining value of the contract, £150 000.
The ruling will most certainly have a vast impact for the football economy.
First, transfer fees, such as the £19 m recently paid by Chelsea for Nicolas Anelka, could soon be a thing of the past. Indeed why pay exorbitant fees when one can sign a player for a negligible amount, after the two years of the "protected period" included in the contract. To give you an idea, Tottenham asks for £30 m for Berbatov, its star striker, whereas he could leave for as little as £1.3 m in the summer of 2009.
Secondly, this would be extremely beneficial to the labour force – the football players. Shame for those who thought players were already getting enough money, wages could now rise to unprecedented heights, since it will become the only way for teams to keep a hold on their players.
Furthermore the duration of contracts could decrease and as a consequence, player mobility would increase.
However FIFA, the governing football body, does not look favourably upon this major shift in revenue allocation from the team to the players. A further increase in player’s mobility would mean the potential downfall of team values and identity and the fall in transfer revenues would be a huge loss for less wealthy clubs, who rely on training young talents. FIFA stated that: "Should the protection of contractual stability finally indeed be subverted, FIFA will consider appropriate measures to safeguard the special nature of sport with regard to employment contracts."
This is one more episode in the long lasting opposition between EU law and FIFA, and raises the question of whether the employment of players should abide the same laws as other labour markets. FIFA is on the counter.
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