Lounging by a pool on a well-deserved holiday this week, I mostly read thrillers, but my  serious reading was the new edition of [amazon_link id=”0140276041″ target=”_blank” ]When China Rules The World[/amazon_link] by Martin Jacques. It is a very interesting and well-informed book, whose argument I couldn’t agree with. Reading it in the week when Chinese politics took a dramatic turn, with the highly public dismissal of Bo Xilai and detention on his wife in a murder investigation, it seems obvious to me that the China’s future in the world remains highly uncertain, no matter how inevitable the decline of the west appears. (See this analysis in the FT this weekend, and this fascinating Foreign Policy article by John Garnaut on the current political contest in China.)

Having said that Jacques’ historical determinism doesn’t persuade me, the book is nevertheless compelling, and the first edition obviously deserves its best-seller status. The history of China and its entire region is lengthy but stuffed with things I’d never known, and a great overview for newcomers to the subject. Jacques picks up on some interesting points that are often overlooked. For example, he makes I point I’ve often thought important and underestimated:

“We should not forget the increasing importance of Chinese subcontractors as ‘systems integrator’ firms in the global supply chain of many foreign multinationals, a developlment which might, in the long term at least, prove to have wider strategic significance for these multinationals in terms of their management, research capability and even ownership.” (p226)

Jacques is also interesting on aspects of Chinese culture. He is far too much of a cultural relativist for my taste – women’s rights for me are a universal, and people never seem bothered about political freedom until, suddenly, they are. However, the book gave me real insight into the very different perspective on the state, with its Confucian origins, in China. It is also eye-opening on Chinese racism. This is a subject of which the author has tragic first-hand experience, given the death of his Indian wife due to her wholly inadequate care in a Hong Kong hospital. It does make one wonder about the future of China’s investments in Africa.

However, the Chinese economic model is understandably of great interest to developing countries, and Justin Yifu Lin at the World Bank is one Chinese economist who is helping move the global development consensus away from the disgraced “Washington Consensus” to a far more statist approach (see this pdf). Jacques sums up the Chinese approach as a competent and strategic state combined with extremely vigorous competition – including competition between state firms and between them and the private sector. He writes:

“First, there is a ubiquitous state, operating at national, provincial and city level, which is highly active and involved in multifarious ways in the economy and society. Second there is, at the same time, a powerful commitment to the market and a very strong belief in competition: the Chinese government is inimical to monopolies.” (p621)

This combination looks rather compelling to other countries whose governments would like to emulate China’s growth record. But it may be that the role and economic competence of the state in China, combined with its uniquely large scale market, will make it hard for others to follow the same model. In many poor countries the state remains predatory, as Acemoglu and Robinson so forcefully point out in [amazon_link id=”1846684293″ target=”_blank” ]Why Nations Fail[/amazon_link].

As for China’s politics and geopolitical status, the events of the past week seem to me to illustrate the uncertainty. China may ‘rule the world’ one day but it is surely, to borrow the famous saying, too soon to tell.

[amazon_image id=”0140276041″ link=”true” target=”_blank” size=”medium” ]When China Rules The World: The End of the Western World and the Birth of a New Global Order[/amazon_image]

I was dipping into [amazon_link id=”052149964X” target=”_blank” ]Economic Growth in Europe Since 1945[/amazon_link], edited by Nick Crafts and Gianni Toniolo, and published in 1996, interested to see what difference of perspective the intervening 16 years and Great Financial Crash have brought. The collection very much focuses on the insights of endogenous growth theory, on human capital formation and technology transfer. However, the editors’ essay notes that these factors do not tell the whole story of the Golden Age, les Trentes Glorieuses. They highlight also trade liberalization. And add, interestingly:

“A full understanding of Europe’s Golden Age of economic growth requires a subtle appreciation of the impact of policy and institutions on incentives to invest and obstacles to complete catching up.”

The subsequent chapter by Barry Eichengreen emphasises labour market institutions as the main explanation for differences between European countries, while Mancur Olson looks at Eurosclerosis through the lens of rent seeking. Both actually stand the test of time pretty well. Worth revisiting now that growth is the only hope of a benign path out of the mess we Europeans are in now.

[amazon_image id=”052149964X” link=”true” target=”_blank” size=”medium” ]Economic Growth in Europe since 1945[/amazon_image]

‘Yes’ is the vigorous answer in [amazon_link id=”069114446X” target=”_blank” ]Free Market Fairness[/amazon_link] by John Tomasi. In both the popular view and among left-inclined intellectuals, free markets are intrinsically unfair, and the economic growth they foster only reaches people on low incomes through the notoriously fickle ‘trickle down’ effect. Freedom in the economic domain and fairness are in conflict.

Tomasi has two main counter-arguments. One is that long run economic growth in free market economies has done far more to benefit the poor than any alternative approach to organising the distribution of resources. He calls economic growth “the great fact.” I agree that the everyday benefits of growth – such as plumbing and affordable lighting and antibiotics and toothpaste and tea bags and …… – are almost always overlooked and certainly do benefit those on low as well as high incomes. However, I don’t think he addresses adequately the social justice question being asked in the aftermath of the Great Financial Crash, which is why almost none, none, of the real GDP gains of the past generation have gone to anyone below the top fifth or so of the income distribution. (I would probably answer this by saying we have only had a pretence of free markets, as a cover for creeping oligopoly.)

However, his second main argument is a powerful one often overlooked by many on the left of centre (although very much not ignored by Amartya Sen in his [amazon_link id=”0141037857″ target=”_blank” ]The Idea of Justice[/amazon_link]), that people who are poor care at least as much about freedom – including economic freedom – as people who are rich. Freedom is a good in itself, and social institutions should not be seen only instrumentally as a means of attaining an ideal distribution.

Anyway, this rather densely-argued book does a pretty good job of bridging the ground between libertarians and liberals (using the American terminology). He calls this third way “market democracy” and says it involves a “fundamentally deliberative approach to the questions of political life.” This emphasis on procedural justice is derived from (as in Sen) from [amazon_link id=”019825055X” target=”_blank” ]John Rawls[/amazon_link]. Tomasi’s plea for us to step away from polarized views is surely welcome – although it seems pretty unlikely to make much headway in the US this presidential election year.

[amazon_image id=”069114446X” link=”true” target=”_blank” size=”medium” ]Free Market Fairness[/amazon_image]

[amazon_link id=”B007FPP7NI” target=”_blank” ]Money, Real Quick[/amazon_link]

Reviewed by Dave Birch, Consult Hyperion

The M-PESA mobile money transfer scheme in Kenya is an astonishing success, a business school case study for the next generation and what futurologists will almost certainly see as a “weak signal for change” to a new monetary order. The scheme, which allows people to deposit and withdraw cash from accounts associated with their mobile phone numbers has something like 16 million users (more than two-thirds of the adult population) and 30,000+ agents. It is so important that its origins and trajectory need to be recorded and reported, so I was delighted to see this latest addition to the cannon. In [amazon_link id=”B007FPP7NI” target=”_blank” ] “Money, Real Quick – The story of M-PESA”[/amazon_link], Tonny Omwansa and Nicholas Sullivan tell the story of the scheme. It’s a super read, explaining the history and the people involved, and is packed with potted case studies the clearly illustrate the impact of M-PESA on Kenya and on Kenyans.

The first hero of the story (in my eyes, anyway) is Nick Hughes. Nick was then Head of Social Enterprise at Vodafone (which owned 40% of Kenya’s Safaricom). Nick had had the idea of using mobile phones to make the distribution of microfinance loans in Africa more efficient and he submitted a proposal to the UK Department for International Development (DFID) for matching funding. This was granted back in 2003, and M-PESA was born. Nick then brought in “UK-based consultants” to develop the idea. Modesty forbids me from mentioning who these midwives to monetary revolution were (oh, all right then, it was Consult Hyperion).

The second hero of the story is Susie Lonie, also from Vodafone. Susie had been working on mobile commerce in the UK, and in 2005 she was sent to Nairobi to get the M-PESA pilot up and running. She combined first-class project management skills with real vision, and together with Nick steered the system from a pilot that could so easily have run out of control, such was the popularity of the system once it launched, to the launch of a genuinely new national payments scheme in 2007.

(I should say, incidentally, that it isn’t only me who sees Nick and Susie as heroes. In 2010, “The Economist” magazine gave them its Social and Economic Innovation award.)

When the system went live it was immediately apparent that the market was using it in ways that had not been part of the original business model. At that time, the very forward-looking CEO of Safaricom, Michael Joseph, realised that something big was going on and drove the team on to scale. Within a year, they had two million subscribers and were handling $1.5 million per day and he turned his attention to developing the agent network. Safaricom already had agents, of course, because they used them to sell airtime, but Michael realised that they needed to increase the size of the network substantially, and quickly. I won’t distract the reader with it here, but I strongly recommend anyone interested in the topic to read how this was done and the issues that needed to be managed: agent incentives, float management, trading and so forth. Suffice to say that becoming an M-PESA agent became an attractive proposition. 

Despite being very familiar with the M-PESA story there were section of this book which introduced me to new and fascinating aspects of the scheme’s growth and development. The section on the impact on the poor, and the dynamics in the Kibera slum, should be required reading for anyone interested in the topic. For instance: the average M-PESA balance has gone up fivefold since 2008. The poor are clearly using the service as an alternative to the mattress or the tin under the bed. Even with the M-PESA fees, mobile money is more cost-effective than cash. The authors correctly note that cash is the enemy of the poor. By giving them an alternative, M-PESA changed their lives for the better.

Central to the story is the relationship between the telecommunications sector and the financial sector. The authors note that “Commercial banks have finally decided to expand their borders beyond branches by hiring agents. But that was only after they tried, and failed, to shut down M-PESA”. This is why, for me, the most interesting part of the story comes once M-PESA reached five million subscribers (more than all 43 for Kenya’s commercial banks combined) back in 2008. At that time the acting Finance Minister said he was not sure that M-PESA would “end up well”. There was more than a suspicion that the worries were not around consumer safety and protection but the Kenya Banker’s Association concerns about competition. In the unrest that had followed the previous year’s elections, many consumers had withdrawn money from commercial banks and deposited with M-PESA, which they judged to be less risky.

Michael Joseph was always admirably clear on the key issue. M-PESA was not a bank, it was a payment system, and should be regulated as such. What’s more, the figures showed very clearly that despite the vast number of transactions flowing through M-PESA, the total amount of money was still inconsequential compared to daly inter-bank settlement. Starting in 2007, the commercial banks began to offer new services over the M-PESA network, thereby demonstrating that mobile money could lead to financial inclusion. As the banks began to offer more services, and became part of the M-PESA ecosystem as savings accounts and super agents, it seems to me that the whole financial sector was invigorated. Dynamic partnerships (such as the one with Equity Bank that led to M-KESHO savings accounts) delivered products that simply would not exist in a “traditional” bank environment. These included pensions, micro insurance, “layaway” and more. In essence, as Omwansa and Sullivan say, a new financial sector emerged.

This is the most important lesson from this excellent book. By allowing the non-bank to build a payment system more suited to the 21st century, the banks benefited. Together, the new financial sector that they developed has given Kenya an incredible platform for innovation and development.

[amazon_image id=”B007FPP7NI” link=”true” target=”_blank” size=”medium” ]Money, Real Quick: The story of M-PESA (Guardian Shorts)[/amazon_image]

One of the most enlightening aspects of my time as a competition regulator in the UK was learning what a wide range of businesses actually do – set prices, deal with suppliers etc. – after so many years generalising about it. Economists are prone to overly-abstract analysis without the interesting detail.

It is the detail combined with analysis that makes [amazon_link id=”0199794642″ target=”_blank” ]Working Hard, Working Poor: A Global Journey[/amazon_link] by Gary S Fields a terrific book. He describes from experience in several countries what it is that keeps poor people poor, the 3.1 billion globally who live on less than PPP US$2.50 a day.

In a nutshell, the answer is ultra-low pay for their hard work and long hours. Reducing poverty therefore depends on finding ways to increase their earnings – although, as the introduction points out, jobs and earnings are notable by their absence from the Millennium Development Goals, and the labour market in general absent from consideration in development economics.This is a striking gap when you consider that labour market success, in one way or another, is precisely how hundreds of millions of people have escaped poverty over the years; or indeed how much we focus on assisting the working poor in the western countries through income-supporting policies such as the EITC/Working Families Tax Credit.

The specific reasons for low pay differ from place to place. For the rural poor, the productivity of their farming is low, often because they do not have the savings or credit to buy equipment. They may also receive low prices for their produce, or be unable to sell directly in the market because of the need for a licence or to pay a bribe. For those in urban areas, relatively few of the very poor work in jobs, and one path out of poverty would require economic reforms to reduce barriers to the creation of formal jobs. As the author points out, the people working in factories like Foxconn’s in China have better pay and conditions than many of their compatriots. The majority of very poor people who are self-employed need to earn more from their work, almost always in the informal sector, and this will depend on context. In India, organisation in a union helped increase the pitiful earnings of women rolling bidis in their slum homes. Some training or access to loans would help others, as would reducing bureaucratic hassle, and enabling small-scale franchising.

Still, I hesitate to generalise about a book whose value lies in its specificity. It’s a short book, nicely written. It is highly suitable for students taking development economics courses. But anyone with an interest in global poverty should read it too, for the window on the lives of real people, their stories told in a matter-of-fact and non-patronising way. It joins [amazon_link id=”0691148198″ target=”_blank” ]Portfolios of the Poor[/amazon_link] as one of the most useful books I’ve come across in this field. Highly commended.

[amazon_image id=”0199794642″ link=”true” target=”_blank” size=”medium” ]Working Hard, Working Poor: A Global Journey[/amazon_image]