Category Archives: Economics

Smart phones are outwitting poverty

Alexander Graham Bell would be astonished at the power of today’s smart phones. Yes, the app that makes it possible to find a Starbucks along an unfamiliar highway can feel like a miracle, but the true revolutionary power of the telephone is felt most in developing countries. In Kenya, for example, the mobile phone has, to some extent, stabilized the economy for many citizens and transformed quality of life.

Nearly all Kenyan households own at least one mobile phone—not state-of-the-art smart phones, but phones “smart” enough to accommodate at least one M-Pesa account. Available to any customer of Safaricom, Kenya’s mobile network leader, M-Pesa is a money transfer service that allows a daughter at one corner of the country to send money safely and securely to her mother in a village seven hours away. Previously, she would have entrusted an envelope of cash to a bus driver heading to her mother’s village (at considerable risk) or relied on a money transfer that took days—and a daunting amount of red tape—to process.

Of course, to withdraw funds through an M-Pesa account you must have access to an agent who can disperse the cash. Happily, in response to the popularity of M-Pesa, the network across Kenya has mushroomed to 150,000 agents. Working with Innovations for Poverty Action, Associate Professor of Applied Economics Tavneet Suri, a native Kenyan, and her colleague William Jack have been tracking incomes in regions where new agents have opened for business. They compared the financial health of those regions with that of regions where agents are not as accessible.

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A Spinout with Olympic Impact

When the International Olympic Committee settled on Vancouver for the 2010 games, Bruce Dewar, MOT ’92, wanted to make sure the region could survive it. Host cities have suffered devastating economic fallout, and Dewar was determined that the Vancouver Games would give back to the community as much as it reaped.

As CEO of 2010 Legacies Now, he developed and supported projects to help British Columbia leverage the games to strengthen local communities—an effort that the International Olympic Committee has lauded as best practice. Today, seven years after the event, Dewar is still tapping the impact of the Games. In 2011 he launched a venture philanthropy organization called LIFT Philanthropy Partners that grew out of the new enterprise climate generated by the Olympic Games.

LIFT invests in building the capacity, sustainability, and impact of charities, nonprofits, and social enterprises working to remove barriers to health, education, and employment for vulnerable Canadians. Dewar, who is president and CEO, says that LIFT is improving the fabric of society. “We’re building self-sufficiency. We’re building confidence. We’re building support networks.”

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African Governments Must Inspire New Enterprise

Local governments across Africa should make every effort to promote entrepreneurship, says Flavian Marwa, SF ’10, but they shouldn’t enter the risky business of picking and backing winners. Founder of Sebelda Global Development Advisors and a consultant for the World Bank Group’s Africa region, Marwa is responsible for developing sustainable models of technology-based startup incubators with a focus on Africa.

“When governments provide seed money,” he says, “new enterprises tend to rely on it rather than learn to compete in the real marketplace. They lose their incentive to make it work when they know they can get capital infusions from the government.” Marwa believes that governments can best promote a healthy enterprise culture by partnering with industry to create mentorship programs. “Governments need to facilitate connections between young entrepreneurs and seasoned business leaders who can help them anticipate and navigate thorny patches,” he says.

Marwa also stresses the importance of promoting a healthy lending climate. He notes that government investment is critical, but not straight-out subsidies. “It costs investors a relatively steep sum of money to write a loan, and that discourages them from making the small-scale loans that would be appropriate to help a startup.” He believes that governments can offset loan origination costs with incentive programs—and similarly provide economic perks in the form of tax breaks or subsidies to motivate established businesses to invest in new enterprises.

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A robot can drive you to work, but can it advise you on your finances?

The founding father of artificial intelligence Marvin Minsky once said that his ultimate goal was not so much to build a computer he could be proud of as to build one that would be proud of him. MIT Sloan Professor Andrew Lo mentioned this anecdote in a recent piece about financial advisers in The Wall Street Journal. In essence, he poses the question: Can a robot do the job?

Andrew LoLo says that while tech-savvy millennials would be just as happy interacting with an app as with a human adviser, robo advisers can’t take into account the emotion of investors. “When the stock market roils, investors freak out,” Lo explains. “They need comfort and encouragement.” During the recent stock-market rout, he notes that Vanguard Group was so besieged with calls from jittery investors it had to pull staff from across the company to handle the call volume. “Investing is an emotional process,” Lo says, and “robo advisers don’t do emotion.” At least not right now.

Integrating human feeling into the digital advising process is probably the greatest challenge of financial technology. Lo likens the present state of digital financial advising to a rotary phone in an iPhone world. He points out that investing is much more complex and nuanced than tasks like driving, “which is why driverless cars are already more successful than even the best robo advisers.”

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How much is a living wage? MIT Sloan faculty experts weigh in

Arguably, a living wage is the goal of all civilized societies—that is, the amount of money a person needs to maintain a basic standard of living. But what exactly is a sufficient wage? And will increasing the minimum wage create a knee-jerk effect among employers to hit the brakes on hiring?

At present, the hourly minimum wage in the United States is $7.25, and the Democratic Party platform is advocating more than doubling that rate to $15. MIT Sloan asked three of the School’s top economic and labor experts to weigh in on the idea of raising the minimum wage. Here’s what they had to say:

ErikErik Brynjolfsson
MIT Sloan Professor of Information Technology
Director, MIT Initiative on the Digital Economy

Having more people working and earning good wages is good not just for the people we help, but for all of us: People who work are more engaged in community, creating a virtuous cycle. If we do these three things, we’ll be on track to becoming a richer, more engaged, and more dynamic nation.

#1 Expand the Earned Income Tax Credit
Suppose that someone is earning $12 per hour, and we’d like them to earn $15. With an Earned Income Tax Credit (EITC) they’d get an additional $3 per hour worked from the government. The money to pay for this would come from general tax revenue including income taxes, or ideally increased taxes on carbon dioxide emissions, congestion, and other things we’d like to discourage.

#2 Reinvent Education
The wage gap between the most and least educated workers has grown enormously since the 1980s, and better-educated workers also have much lower unemployment rates and higher rates of workforce participation. But it’s not enough to simply do more of the same. We need to reinvent education for an age where machines are increasingly doing cognitive tasks—the second machine age. That means a greater emphasis on skills like teamwork, project management, persuasion, leadership, coaching, and creativity.

#3 Reduce unnecessary occupational licensing
Over 25 percent of workers now require a license to do their jobs, a five-fold increase since the 1950s. While some licenses are important for safety or other reasons, research has shown that excessive licensing requirements reduce employment and mobility.

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Improving the prediction of currency movements

ForbesExchange rates—they don’t exactly make the world go round, but when they fluctuate, they can give it a bumpy ride. As MIT Sloan Professor Kristin Forbes wrote on the commerce website MarketWatch recently, movements in exchange rates can significantly affect a country’s competitiveness. On a macro level, they can have an impact on everything from export competitiveness to GDP growth and can make it harder to repay foreign debt and reduce earnings on foreign investments. On a micro level, exchange rates can push up or down the prices of key merchandise, from oil to oranges.

“Currency movements also have big implications for the outlook for inflation,” says Forbes, who is an external member of the Monetary Policy Committee for the Bank of England. “This relationship is known as ‘pass through’…it captures how changes in the exchange rate pass through to import prices and inflation…for those of us tasked with setting monetary policy, understanding how currency movements pass through into inflation is critical to our decision on when to adjust interest rates.”

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  Economics  Finance  

Lester Thurow: Tribute to a Global Economic Pioneer

Lester ThurowMIT Sloan Professor Lester Thurow, dean of the School from 1987 to 1993, was one of the few economists in the 20th century to become a household name—in part, because he discussed topics of interest to ordinary citizens in words they could understand.

Thurow, who died on March 25 at the age of 77, spoke out early and eloquently about income inequality, believing that a more equitable sharing of economic burdens and benefits would generate prosperity. In a tribute to him in The New York Times, Jared Bernstein of the Center on Budget and Policy Priorities noted that “he was one of the first important economists to suggest that too much inequality is bad for society.”

Thurow was a true thought leader, advising governments, speaking to diverse groups, from economists to senior citizens, and writing iconic books like the 1980 bestseller The Zero Sum Society: Distribution and the Possibilities for Change, which offered recommendations about the best way to balance free-market aspirations and government stewardship of the economy. In The New York Review of Books, John Kenneth Galbraith called it “an extraordinarily good and lucid examination of current economic difficulties.”

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  Economics  

Resuscitating the Spanish economy—a lesson in strategic thinking

José-Maria Fernández, SF ’10After a precipitous free fall beginning in 2008, the Spanish economy, the fourth largest in the Eurozone, is beginning to climb out of recession, and there is nothing serendipitous about the recovery. José-Maria Fernández, SF ’10, Director General of the Spanish Treasury, and his team devote a major share of their working life to in-depth analysis and strategic thinking on how to finance the country and the implications for taxpayers in the short, medium, and long terms. “All our thinking translates into a relatively small number of decisions and actions,” Fernández says—actions, of course, that have wide-ranging impact and potentially long-term consequences.

“We raise approximately 240 billion euros a year selling bonds and bills globally to investors while executing only 50 or 60 funding transactions annually,” Fernández adds. “We probably spend 90% of our time designing, evaluating, and revising our financial strategy in light of market, economic, and budgetary conditions. That means only 10% of our activity is devoted to execution.” The equation, he believes, is as it should be.

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Should we be bullish or bearish on BRICS?

When the alliance first formed in 2001, many investors were bullish about BRIC, the association of what were then considered four burgeoning economies—Brazil, Russia, India, and China (South Africa joined in 2010). BRICS nations represent 40% of the world’s population and account for almost $16 trillion in GDP. The idea was that BRICS would create an international financial network that would rival the prevailing western-dominated system. But 15 years out, how much of a threat to the status quo does BRICS actually constitute?

Andrew LoAndrew Lo, Charles E. and Susan T. Harris Professor of Finance, believes that when it comes to BRICS, much depends on political factors. “The stability and credibility of BRICS governments is vital. If they can manage the volatility, including the threat of hyperinflation, and implement more disciplined monetary policies, it could be just a matter of time before they play a more important role.”

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  Economics  

Governing in an Interdependent World

Autonomy is so 20th century—at least in terms of governing nations. A half century ago, governments were relatively independent entities. They could make fairly autonomous decisions about their nations’ economic futures. MIT Sloan Senior Lecturer Otto Scharmer, a noted economist, sees a new world order today in which individual governments no longer enjoy the same kind of economic independence they once had.

OttoA world economy, Scharmer explains, is one in which capital accumulation proceeds throughout the world, while a global economy has the capacity to function as a single unit “in real time on a planetary order.” A world economy has existed for five centuries, he points out, but a global economy has been in place for only the last two decades, driven by new infrastructures built on advances in information and communication technologies.

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