Saying goodbye to pneumonia

Written By Sarah Martin

In the poorest countries in the world millions are dying every year from diseases that modern medicine can treat and prevent. Surprising but true, in Africa pneumonia claims more children’s lives than AIDS.

Vaccination against pneumococcal disease, which causes pneumonia, meningitis and other lethal illnesses, could greatly reduce child fatality rates in the developing world. The problem is that no such vaccine exists.

So far there has been no incentive for drug companies to develop and produce vaccines for the diseases that claim the most lives worldwide. Where these vaccines are needed the most, people are too impoverished to demand them. In developing countries as little as £9 or less is spent per person per year on health care. Shockingly, over 90 percent of drug investments go to diseases that affect the richest 10 percent of the world’s population.

The Advance Market Commitment (AMC) for vaccines is market-based solution to this market failure. Originally proposed by Harvard economist Michael Kremer and the Centre for Global Development, an AMC is a pledge to subsidise future purchases of a vaccine not yet available.

A pilot AMC is underway for a vaccine to prevent pneumococcal disease. Six of the world’s richest countries (including the UK) and the Bill & Melinda Gates Foundation have pledged a total of £750 million pounds. It is estimated that it could save the lives of as many as 5.4 million children by 2030.

This is how it works: When a safe and effective vaccine is developed, the benefactors of the scheme subsidise the price down to a level more affordable for developing countries, thereby spurring demand. The promise of this demand is an economic incentive to supply the vaccine, and thus a market for the vaccine is created. The AMC provides the subsidy for an agreed period of time, after which the pharmaceutical company is obligated to provide the vaccine at a low price.

And this is why it could work: An AMC is not a purchase guarantee, there is only a cost once a vaccine is available that is actually demanded by developing countries. The competition for demand means that the best and most cost-efficient vaccine will prevail. The subsidy will provide enough return on the drug company’s investment in research and development to justify supplying the vaccine at a low price after the AMC ends.

The main obstacle now is to determine what subsidised price to provide the vaccine at. At the moment a price of about £2-3 is being discussed. This would involve a 90 percent reduction in price, the steepest drop ever seen in the price of vaccine in its first year of production.

However, some are concerned that this is still too expensive. They question whether a vaccine could be produced at lesser cost in by drug companies in India rather than in the West.

If successful the AMC for pneumococcal disease could be the first in a series of AMCs for vaccines against such diseases as malaria, tuberculosis and AIDS, and in the long term AMCs could save literally millions of lives.

Microfinance: Panacea for all economic ills?

Written By Shamanthy Ganesha

From ancient slums and impoverished villages in the developing world to the tired inner cities and frayed suburbs of America’s economic fringes, these and millions of other women are all part of a revolution. Some might call it a capitalist revolution . . . As little as $25 or $50 in the developing world, perhaps$500 or $5000 in the United States, these microloans make huge differences in people’s lives . . . Many Third World bankers are finding that lending to the poor is not just a good thing to do but is also profitable.
(Brill 1999)

Over the past few decades, the popularity of microfinance as a poverty alleviation tool has increased vastly. The UN declared 2005 as the year for Microcredit while Dr. Mohammed Yunus, well known as ‘The Father of Micro Finance’ won the Nobel Prize for Peace in 2006 for his work. Microfinance industries in many countries such as India, Bangladesh and Indonesia have been growing exponentially. There has been a giant wave of interest amongst people from many quarters, including economists and policy makers. In broad terms, microfinance is the provision of microcredit, microsaving and microinsurance services to people who are usually otherwise excluded from formal financial markets. While there is much reason to be highly optimistic about the potential of microfinance, I adopt a more sceptical view of it. I spent this summer working as intern at a well known microfinance think tank in Chennai, India. My work their involved constant interaction with both urban and rural microfinance clients. In this article, I detail how the information that I gained from informal interviews with these microfinance clients made me question some typical assumptions that are made about microfinance and its functioning.

It is a well known fact that the world’s poor generally do not have access to formal sources of credit. There is an essential asymmetric information problem between the providers of formal credit and the poor. The costs of monitoring how the poor use their debts by far outweigh the benefits that they accrue to formal credit providers. They have low propensities to save given that they are highly liquidity constrained. Moreover, under usual circumstances the poor own little or no assets at all. Thus the effectiveness of using collateral as a form of screening device is severely limited. The group lending mechanism which is often hailed as the greatest innovation of microfinance is said to get around this moral hazard problem by allowing the borrowers themselves distinguish between ‘safe’ and ‘risky’ individuals. Given that each individual is jointly responsible for the entire group’s loans, economic reasoning tells us that individuals who have relatively high coefficients of risk aversion will form groups with other risk averse individuals while the individuals with relatively low risk coefficients are screened out. Also, once the individuals receive their loans, they have an incentive to monitor each other’s activities if they are to make regular repayments and be eligible to borrow in the future. The task of monitoring the use of borrowed funds is effectively transferred from the lenders to the borrowers themselves.

Firstly, it does not seem to be the case that group formation takes part on the basis of risk type. Quite a few of the women with whom I spoke told be that they had not known all, if any of their group members before they joined the Joint Liability Group (JLG) or Self Help Group (SHG). The common practice is for one of the women to initiate the group (the group leader). This group leader then invites other women to be part of the group. Most often than not, this group leader invites women who live in close proximity to her, maybe in the same street. To me, it seems more likely that women segregate themselves by geographical proximity, caste and religion than by their relative risk types. Also, even once the loans are received it is unlikely for the women to be actively engaging themselves in monitoring each other’s business activities. Very few of the women I spoke to had any information regarding the type, costs and profits of the businesses of other women in their groups. One reason for this could be that monitoring is not costless for the women. Given that nearly all these women have to manage their time between their duties towards their families and nurturing their own businesses, very little time and energy is left for monitoring their peers’ activities. It is only when one of the women repeatedly fails to make repayments that the other members will make a visit to her house to inquire about what is happening. In my opinion, it seemed that there was less social cohesion among group members than is commonly assumed in the literature.

Moreover, it is common to assume that microfinance organisations have low interest rates and require no collateral and that it follows that they should be preferred to the mean usurious moneylenders who charge exorbitant interest rates. There are several misconceptions in the above statement. Firstly, the real rates of interest (as opposed to the quoted nominal rates) that the MFIs offer may not be very much lower in comparison to the professional moneylenders’ interest rates. Secondly, it is not always true that MFIs do not ask for collateral. In some cases the MFI asks prospective borrowers to make an advance deposit equivalent to some percentage of the loans that they are to receive before releasing funds. Thirdly, the moneylender is not always the mean and usurious man he is made out to be in the traditional literature. More often than not, the local moneylender will be a family friend of the borrowers. The women to whom I spoke to would never refer to them as moneylenders but usually as ‘acquaintances of the family’. In fact, it could be that in some particular cases the moneylenders are actually preferred to MFIs. One reason for this could be that the money lenders do not stipulate strict repayment schedules. Given that they have an informational advantage over the MFIs and other formal providers of credit and live in close proximity to their clients, they are unlikely to stipulate a strict repayment schedule. The borrowers pay back their loans as and when they make enough money to do so. Further, it seems quite a common practice for women to borrow from money lenders while they are borrowing from micro finance institutions. As mentioned above, some MFIs have deposit requirements. The women go to the moneylenders to obtain funds to make the deposit. The initial microfinance loans tend to be small and may not be sufficient to start up an enterprise from scratch. At times of emergencies such as illness in the family or a daughter’s wedding the women which require one-off expenditures that will not provide any direct revenue, the poor have little choice but to reach out to the local moneylenders.

Another reason why people believe that microfinance is an invincible tool is the high repayment rates that are reported by various MFIs. It is common for most MFIs to quote a repayment rate of 95% and above. Does it mean that the women’s income generation activities are producing very high returns? Many of the clients with whom I interacted did not use their loans solely for their enterprises. A good part of the loan may actually be used for consumption purposes. Moreover, some of the women were engaged only sporadically in their respective enterprises (Some of their services and produce were demanded only seasonally). Also it is more likely for the women’s enterprises to be a supplementary source of income for the household. Thus the enterprises don’t always have very high returns. It is slightly puzzling to me therefore as to how the women manage to make regular repayments. An important question to ask here is whether the repayments are made voluntarily. I was told by some of the women that peer pressure induced them to go to the moneylenders, thus they become indebted involuntarily to the money lenders. Also, anecdotal evidence suggests that some MFIs may use strict enforcement schemes on groups that fail to make repayments that are not very different to the methods used by professional money lenders.

These are a few reasons as to why I believe that the results of microfinance that are commonly reported should be looked at more critically. This does not mean that I think that microfinance is not a good thing and is an absolute failure. What I do believe is that microfinance is not as perfect as it is made to sound. The way forward would be to acknowledge it’s shortcomings and devise appropriate ways to overcome them.

An Uneconomic Look at the Economics of Local Eateries

Written by Jan Henning
(with thanks to Judith Shapiro for the Beta)

Given English Michelin-star restaurant economics these days, can LSE students still hope to eat out in WC2? Read on…..

In a recent interview, chef Heston Blumenthal announced that his fish-and-chip platter contained a total of five chips.

Checking the sample menu at Heston’s restaurant; I’d estimate the price of the fish-and-chip platter at around £30 (His à la carte 3-course menu weighs in at £80; platter probably a Main); so, if we assume that the fish covers about 2/3 of overall price, each chip would be worth £2.00
Given that an average bundle of chips from a traditional fish shop takeaway runs into at least double figures (for approx £1.50), we might infer any or all of three things about Heston’s variety.

• The five chips are so huge as to stretch the definition of “chip” to its uttermost boundary;
  
• They are extraordinarily labour-intensive to produce;
  
• They contain an above-average to-die-for factor.
  

If you’d really like to pay these prices (as well as the price of a trip out of London to Bray), here’s the link to the Fat Duck - http://www.fatduck.co.uk/

However, it might be less time-consuming, more profitable and indeed, pleasurable, to look at what’s on the doorstep.

The following establishments (a random personal choice) are all within walking-distance of LSE. Some have even been known to serve chips (NB: if these are described in the menu as “French fries”, you should rigorously apply the to-die-for factor [dff]).

1.The White Horse Pub
Sheffield Street WC2

Walking-time from St Clements Building: 0.5 minutes

Ambience and comfort-factor: Limited. It’s a tiny establishment with a bar-stool fixation – only one table-with-chairs. One average-size party of miscellaneous admin staff will crowd it out. (Students are also now welcomed, following a recent management-policy change).

Menu: Limited to sandwiches and toasties.

Dff: Also limited, but that’s not what you’re paying very reasonable prices for (around £2.65 per sandwich). The sandwich variety is very good, if maybe a little hearty-meat-oriented – sausages feature quite a lot. The drinks are reasonably priced also.

Miscellaneous: the two-man bar/cooking staff work well together, and are kindly and welcoming.

2.Coopers Wine Bar:
49a Lincolns Inn Fields, WC2A 3PF
http://www.london-eating.co.uk/5784.htm

Walking-time from St Clements Building: 1 minute

Ambience and comfort-factor: Depends on when you visit. A crowded lunchtime can be very unrestful. They have a ground-floor restaurant, and a cellar-bistro (more limited menu, lower prices); so you very rarely get turned away for lack of tables.

Menu: Regarded as reasonably-priced for its neighbourhood; it can actually be a bit high, if you go for things like the crab-starter. On the other hand, the other starter-size salads are very reasonable, and quite exciting (try their signature dish of lightly smoked chicken with salad and lime and honey dressing). No one minds, BTW, if you just have a starter-portion. They’ll also do you a single bowl of chips, if you ask. Price approx £1.60 – but they’re “French fries” (which means uniformly thin. You suspect they’ve been factory-extruded and bought in by the packet). Not terrible, for all that.

The wine list, is of course, what makes the profit, so be prepared for high-ish prices on all drinks (soft drinks also somewhat overpriced). A good choice of wines at all prices, however.

Dff: When things are at their singing best at Coopers, some of the food is delicious, and well above the level you’d expect. They can have off-days, however.

Miscellaneous: Coopers is fairly well-established. The owners are always friendly and welcoming; but the turnover of agency staff sometimes renders service a little uneven.

3. The Terrace
Lincoln’s Inn Fields WC2A 3LJ
http://www.london-eating.co.uk/7026.htm

Walking-time from St Clements Building: 1.5 minutes
Ambience and comfort-factor: This relatively new restaurant is situated in a hut behind the tennis courts, and can be a bit draughty. Also when it’s crowded (which is frequently), your neighbour’s elbow comes very near to being in your soup.

Menu: This is owned by a Named Chef – Patrick Williams – who blends Caribbean and French cuisine. It’s thus not cheap from the à la carte, but the 3-course “taster” lunch at a set price (around £11 a few months ago) is excellent value.
The chips – which here come with a beefburger all set out on a square wooden block; are hearty and MAY be authentic. The wooden block is a trial, however.
Wine menu is extensive but expensive. So is the bottled water.

Dff: Can be sublime. Jerk chicken with plantain, the signature dish, is wonderful. Desserts are a bit blah.

Miscellaneous: The service is often agonisingly slow; so don’t go there if you’re in a hurry. Staff are pleasant, but they’ve somehow never solved the time-factor. They may need Gordon Ramsay!

4. Oops
31 Catherine Street. WC2
http://www.fluideating.co.uk/Oops_Restaurane_Vinateria_WC2B.restaurant

Walking-time from St Clements Building: 7 minutes
Ambience and comfort-factor: This is a newly-opened tapas restaurant, with probably the worst name in London – EVERYONE’S told them about this, but they stick stubbornly to their guns. The interior is a rather gloomy brown too.

Menu: The food redeems the name with a really exciting variety of smallish dishes to suit every palate and every pocket. The lunchtime set-menu costs £12.95 for four dishes, plus a glass of wine. The à la carte can be a bit pricier (and more varied too, to be fair); and there’s a blackboard of specials every day; which includes delicacies like fried razor clam and real calamari complete with tentacles. Well, whatever floats your boat!
Wine is actually quite reasonably priced here.

Dff: You may find a lot of exciting new experiences here – not all to die for, to be sure (super-hot pimentos, anyone?). However, the basics – chorizo, morcilla, doritos are all delicious; and you can’t go wrong with the octopus!

Miscellaneous: Service can be sketchy at times. Also – beware of matinee day – Thursday. The restaurant is situated exactly opposite the Lord of the Rings musical.

The Subprime Crisis

By Soumya Gupta

Everywhere you see especially in any financial paper or journal, seem to be harping on the fact of Credit Crunch and the subprime crisis. I realised how big it is when it started affecting an everyday person, be it through market chaos, lowering growth rates or simply the market uncertainty underlying the economic situation.

What actually happened?

How can some defaults on mortgages affect the economy on such a huge scale!!! Its all thanks to the new and innovative financial instruments which have been developed uniquely to make money for the big banks and hedge funds and other financial intermediaries.

House Mortgages were being provided on a large scale, even to consumers whose paying back capacity was really low. This is basically what a sub prime loan is, that is the risk is extremely high. All was hunky dory, as house prices were rising, making mortgages attractive to buyers and sellers. Subprime borrowers paid a higher rate of interest which benefited the lenders. Thus demand was high and supply was very forthcoming.

Now the banks wanted all this debt out of their balance sheets, so they created Special Purpose Vehicles (SPV’s), which took on the debt, securitised it and sold it in forms of bonds and securities. A lot of big investors invested in these, like pension funds, hedge funds, who had personal investors, corporate investors and leveraged debt.

This turmoil spread like wild fire because if one sector that is the mortgage holders get hit and cannot cough up the interest payments or the principle amount, the repackaged securities/ derivatives called the Residential Mortgage backed securities (RMBS) which were sold to a variety of investors don’t get their returns and this one glitches turns into an ugly vicious cycle resulting in chaos and like this time a credit squeeze. A credit squeeze because most of these SPV’s lent long and borrowed short, now the investors know about the instability and lack of return and unwilling to lend further accentuating losses.

What it resulted in?

Well as can be observed, there is major chaos in the financial sector. Stability has been undermined, the U.S.A. has sneezed and the world is catching the cold. The risk was so widespread that no one knows the extent of the loss. No one is willing to lend, the consumer confidence is dipping like the house prices further leading to lowering of growth rates and spreading of recessionary tendencies.

What is forecasted?

The Federal Reserve is trying its best to counter the situation by lowering interest rates, making money more easily available, and instructing big market players to come to rescue. The big problem; the big market players themselves are suffering. Everyday the papers talk about write off or a series of top officials resignation. The situation is predicted to last until next Christmas and be multi-national in nature. However, the thing that is strange is even though there has been massive globalisation with India and China massively relying on Foreign Investment to grow, they don’t seem to have suffered.

Impact on EME’s

I believe we can observe here the phenomena of decoupling on economies. Decoupling basically means the lessening of correlation or dependency between variables. This seems to be the case presently, that though the U.S. economy is suffering, that is low consumer and investor confidence, low growth and hence low exports etc, the EME’s do not seem to have taken the hit that badly. The EME’s are steadily growing and have ever increasing growth projections.

There could be many reasons for this. Though we are moving towards a more globalised world, the dependency between developing EME’s and the U.S. is decreasing. These countries are indulging in bilateral and multi lateral trade treaties where USA is not necessarily a party. They are increasingly trading with other growing economies and the ROW and not only the USA. Therefore this just mellows down the impact that the export oriented industries would have suffered previously, where a USA recession would have meant a world recession.

Also the growth in EME’s, commenting on India is more fundamental than financial. That is there is real growth in production, consumption and investment through growth in own population income and production as well. With extremely low labour cost and other incentives given by the government it is easier and cheaper for many multi nationals to actually shift parts of business to India. This helps in raising employment, income and overall consumer confidence and economic growth.

Taking the BPO industry, for example, that is the call centres been outsourced to India for its large, extremely cheap English speaking labour force. It was affected as the companies which had outsourced suffered, this Indian industry suffered, the IT industry suffered. However this was not large scale enough to offset the gains from increasingly effective manufacturing and the growing services industry.

Also since the developed world has been hit, and with returns higher from India and China and other fats growing, recently called the 3rd world, suddenly seem extremely exciting and safer. With the tax payer’s money being used to save Northern Rock, the better investment opportunity seems like the country who is galloping towards growth and overtaking the mighty-but-in-trouble big brothers. This flow of investment and growth in real sector has definitely been termed as fundamental and hence will aid the EME’s progress and prosper.

Some authors have gone to the extent of concluding that the growth of the EME’s is good enough to offset the recession in the developed world market. This might not be the case though, but it is fundamental enough to give back steady and high returns for a long period of time to come. It is just proving to be that stage on scene when it is end of Act 1 and the actor is refusing to leave, but Act 2 players are already on stage giving a brilliant performance.
The Emerging Economies are coming of age.

Impact on Students in the U.K.

I-banking seemed extremely lucrative to pay back the student debt… think again, I believe the opportunity cost to applying to these big banks is greater than attending that Econometric lecture as they are not recruiting very few anyway.

Those of us from the EME’s trade off between staying and earning in pounds is definitely decreasing as compared to returning home to better jobs. Our IC is becoming steeper.

Hoping the pound will follow the dollar in decreasing, we can spend more on clothes and parties....

Surveys

Q.6 Average amount spent daily on foodstuffs bought at the LSE (in pound sterling).

0-2 : 20% (10 of 50 respondents)
2-5: 62% (31 of 50 respondents)
5-10: 18% (9 of 50 respondents)
10 or more: Nil

Rationale reckons:

1. The average amount spent on foodstuffs bought at LSE is £3.72.

2. This is a significant amount and the LSE Catering Service should take note and try to absorb more of the LSE student clientele from the large shares commanded by Subway and Wrights Bar.

Conducted and compiled by Avnish Srivastava

Surveys

Q.5 Have you read the previous Economic Society journal – ‘Ekanamiks’?

Yes: 8% (4 of 50 respondents)
No/What is that anyway? : 38% (19 of 50 respondents)
I’m New (I wasn’t here last year): 54% (27 of 50 respondents)

Rationale reckons:

1. The respondents who did not read the last issue were probably jealous students from the Anthropology or Sociology Department.

2. Well this year we are seeing to it that the proportion of yes grow manifold by making ‘Rationale’ a roaring success. We treat this as an indicator and our aim of conducting this survey is to ensure that a couple of editions on, we get a 100% positive response.

Conducted and compiled by Avnish Srivastava

Surveys

Q.4 Do you think the LSE campus has become more crowded this year compared to last year?

YES: 40% (20 of 50 respondents)
NO: 6% (3 of 50 respondents)
I’m New (I wasn’t here last year): 54% (27 of 50 respondents)

Rationale reckons:

1. The very fact that more than half the respondents are new to the LSE seems to speak volumes about the number of new students on campus this year.

2. More than 40% of the respondents seem to agree that the LSE is more crowded this year than it was compared to the previous years. Will the LSE please take note?!!

Conducted and compiled by Avnish Srivastava