[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]

In a rare defeat, I’ve put down Daniel Klein’s [amazon_link id=”019979412X” target=”_blank” ]Knowledge and Co-ordination[/amazon_link], although there is obviously an interesting argument in there trying to get out. But I just couldn’t follow the argument. Still, it sent me back to Thomas Schelling’s (1978) [amazon_link id=”0393329461″ target=”_blank” ]Micromotives and Macrobehaviour,[/amazon_link] which is one of the all-time classics – its economics both rigorous and humane, with no equations and clearly written.

Opening it at random, I found this:

“A good part of social organization – what we call society – consists of institutional arrangements to overcome these divergences between perceived individual interest and some larger collective bargain. Some of it is market-oriented – ownership, contracts, damage suits, patents and copyrights, promissory notes, rental agreements, and a variety of communications and information systems. Some have to do with government – taxes to cover public services, protection of persons, a weather bureau.. one way streets, laws against littering, wrecking crews to clear away that car in the southbound lane and policemen to wave us on in the northbound lane. More selective groupings – the union, the club, the neighbourhood – can organize incentive systems or regulations to try to help people do what individually they wouldn’t but collectively they may wish to do. Our morals can substitute for markets and regulations, in sometimes getting us to do from conscience the things that in the long run we might elect to do only if assured of reciprocation.”

In one paragraph, an illustration of the rich array of approaches to solving collective action problems, and thus the wide scope of collective action problems we face. It makes the ‘leave it to the market’ versus ‘the government must do something’ kind of argument that features in so much policy debate look completely facile.

The book also has my favourite-ever example of a simple, elegant, self-enforcing policy – the traffic signal. A few people will run red lights, but mostly they do not because it is in their own interest not to drive into the line of traffic with a green light. The role of policy is to coordinate everyone on the meaning of green and red, and the implementation will on the whole look after itself. All this and much more, including the introduction of ‘tipping points’ and the dynamics of racial segregation. A brilliant book.

[amazon_image id=”0393329461″ link=”true” target=”_blank” size=”medium” ]Micromotives and Macrobehavior[/amazon_image]

I’ve begun reading an intriguing book, [amazon_link id=”019979412X” target=”_blank” ]Knowledge and Co-ordination: A Liberal Interpretation[/amazon_link] by Daniel Klein. The author, someone I’ve not come across before, doesn’t go out of his way to be accessible, and also starts out describing his close identification with hardliners of the Austrian School. So I was preparing to take a look and write the book off as eccentric. But there’s proving to be enough of interest to have kept me going. For one thing, the author is a big fan of Deirdre McCloskey on [amazon_link id=”0299158144″ target=”_blank” ]The Rhetoric of Economics[/amazon_link], and of [amazon_link id=”0393329461″ target=”_blank” ]Thomas Schelling[/amazon_link] on game theory. I also liked this comment at the start of Chapter 2:

“Economists often talk of asymmetric information, but they rarely talk of asymmetric interpretation. They rarely talk of discovery, imagination or serendipity, and consequently they tend to neglect these as vital factors of economic progress. They often carry over their mental habits to public policy.” (p11)

And he goes on to quote Hayek:

“To use as a standard by which we measure the actual achievement of competition the hypothetical arrangements made by an omniscient dictator comes naturally to the economist whose analysis must proceed on the assumption that he knows all the facts which determine the order of the market.”

The challenge to economists who comment on public policy is a powerful one: is the assumption of omniscience, an objective external perspective, on our own part – rather than the assumption of rationality – our real failing?

[amazon_image id=”019979412X” link=”true” target=”_blank” size=”medium” ]Knowledge and Coordination: A Liberal Interpretation[/amazon_image]

Thanks to a couple of decent train journeys, I’ve at last read Matt Ridley’s [amazon_link id=”0007267126″ target=”_blank” ]The Rational Optimist: How Prosperity Evolves[/amazon_link], published in 2010. Some readers will no doubt think it mis-titled, and might argue instead for The Delusional Optimist. After all, the nearly two years since publication have hardly seen a lot of economies enjoying the sunny uplands of vigorous growth. But they would be unfair to read the book as a commentary on the current state of the economy; its theme concerns the very long run of growth.

Ridley’s main thesis is that specialisation and trade are what drive innovation and growth. Indeed, he argues that trade came before agriculture, before urbanisation and is in fact part of our genetic nature, although as a non-expert on genetics, I thought this particular bit of the argument involved quite a lot of “It is a reasonable guess that…”. The book canters through history from the dawn of time, touching on everything from natural selection to the specifics of the Industrial Revolution. If, like me, you’ve read Paul Seabright’s [amazon_link id=”0691146462″ target=”_blank” ]Company of Strangers[/amazon_link] and Ian Morris’s [amazon_link id=”1846682088″ target=”_blank” ]Why The West …. For Now[/amazon_link], and some economic histories like Greg Clark’s [amazon_link id=”0691141282″ target=”_blank” ]A Farewell to Alms[/amazon_link] or David Landes’ [amazon_link id=”0349111669″ target=”_blank” ]Wealth and Poverty of Nations[/amazon_link], a lot of this material will be familiar. But for everyone else, The Rational Optimist gives an accessible and useful overview of the wide range of material. And there were inevitably some new nuggets of information – I didn’t know the Calico Act of 1722 banned the wearing of cotton in England – and was not repealed until 1774.

I share Ridley’s conviction that specialisation and trade are the key to improving the well-being of people in general, even if not that of specific producer groups, like English textile manufacturers of the 18th century. I also very much enjoyed his spluttering against what he calls the ‘green chic’ movement, rich people who enforce totemic beliefs about what is ‘natural’, often to the detriment of poor people – or even the environment. Ridley is acid about the environmental movement’s opposition to GM crops, for example, and with the authority that comes from genuinely understanding the genetics.

Why does protectionism recur again and again? The book suggests it is part of an inevitable cycle of a society’s decline. Trade creates a surplus which is increasingly appropriated by rulers or governments, encouraged by producer interests, or by priests or intellectuals who do not like the fact that nobody is in charge of trade. I think he underestimate the support protectionism gets from many citizens who do not like uncertainty or change. After all, specialisation is disruptive of livelihoods. This is an issue I touched on in my 2001 book,[amazon_link id=”1587990822″ target=”_blank” ] Paradoxes of Prosperity[/amazon_link]. Nor am I wildly optimistic about averting protectionism during the current economic crisis – let’s hope this is wrong, but rational pessimism could be more in order for the next few years.

[amazon_image id=”0007267126″ link=”true” target=”_blank” size=”medium” ]The Rational Optimist: How Prosperity Evolves[/amazon_image]