Management Matters

Bhagwan Chowdhry Proposes Financial Access at Birth

His goal: $100 for every child born in the world

By Cynthia Lee, UCLA Today

Bhagwan Chowdhry, professor of finance at UCLA's Anderson School, has come up with a big idea. A very big idea. Elegant in its simplicity, but utterly complex in its implementation.
 
Chowdhry's grand idea is to convince the world's nations to contribute one-fiftieth of one percent of their gross domestic product - the sum of all goods and services produced within a nation's borders - to a fund that would give every child born in the world $100 in a savings account that will be opened when his or her birth is officially registered.
 
He believes the world fund has the potential for solving huge problems that have plagued poor countries in need of help, and it could also give wealthier countries and charitable organizations a more effective way of helping them.
 
A wacko idea? Not according to the hundreds of people who have heard about Chowdhry's Financial Access @ Birth campaign through articles in print and web publications, speeches he's given, blogs, tweets and Facebook pages.
 
In fact, Chowdhry is in the process of formalizing an organization, with support from the Center for Financial Inclusion, an international collaboration aimed at advancing the commercial model of microfinance. In addition, Anderson M.B.A. students will be working on research projects through the UCLA Center for International Business Education and Research to study the feasibility of a testing the idea in one country.
 
"Surprisingly enough, nobody has said to me, 'This is a dumb idea,'" Chowdhry said. "The words they use are, 'This is very ambitious.' People haven't said it's not a good idea, nor have they said, 'Don't do it.'" And that includes many of his Anderson colleagues, who tend to be skeptical by nature, he said.
 
Among the co-founders of his campaign are Peter Singer, a philosophy professor at Princeton University and author of "The Life You Can Save: Acting Now to End World Poverty"; Michael Sherraden, professor of social development at Washington University in St. Louis; Raghuram Rajan, professor of finance at the University of Chicago Booth School of Business and a former chief economist of the International Monetary Fund; Vijay Mahajan, social entrepreneur and founder of BASIX, India; and Paul Hudnut, an entrepreneur who teaches at Colorado State University.

Chowdhry has no illusion that $100 will cure world poverty. The $100 actually serves as an incentive for parents to get children registered - currently, 80-to-90 percent of all births in the poorest of countries go unregistered, which means that these children cannot be uniquely identified through biometric information such as fingerprints, and access to basic health care and education becomes less likely.
 
The bank account would give poor people a way to save money for their children. Even more importantly, in the wake of a natural disaster or emergency, governments and charitable and relief organizations could transfer money electronically to those in need in the most efficient way possible. Funds would go directly to children's bank accounts and thus to their families, enabling them to purchase supplies delivered to the area instead of relying on the chaotic distribution of supplies by helicopters or trucks - chaos most recently evidenced in Haiti after last winter's earthquake.
 
Other types of donations could be easily made as well.
 
"Imagine if my teen-age daughter wanted to send $5 each month to support a child in Rwanda," said Chowdhry. Matched through a charitable nonprofit, she would text her contribution directly to the child's bank account.
 
While the $100 from the world fund would not be accessible until the child turns 16, other funds, including those put into the bank account by parents, donors or relief organizations, would be accessible immediately.    
 
Considering that half of the world's population currently has no access to basic financial services, Chowdhry's idea could fix some formidable problems by bringing the infrastructure for electronic banking into remote villages and towns. For example, electronic banking has made a profound difference in Kenya, where money can be sent via cell phone to places like grocery stores where recipients can pick up the cash.
 
Chowdhry is quick to say that his idea is not new.
 
In 2005, the United Kingdom established Child Trust Fund to set up a savings or investment account for every child. Eligible children receive a government voucher for at least 250 pounds, or $376, money that becomes accessible at age 18. Children from low-income families receive twice as much. However, on May 24 of this year, the government announced the program will end.
 
In the United States, efforts in Congress to pass similar legislation have been unsuccessful. Earlier this year, the ASPIRE Act was introduced by U.S. Reps. Patrick Kennedy (D-RI), Tom Petri (R-WI) and Jim Cooper (D-TN). It would set up a lifetime savings account for every baby born after Dec. 31, 2010, when his or her Social Security card is issued. Every child in America would be entitled to a one-time $500 contribution by the Department of Treasury, and children from low-income families would get up to $500 more.
 
The fact that Financial Access @ Birth is universal in scope with no conditions on who gets it or how the $100 is spent makes it less open to fraud and corruption, Chowdhry said. "If you put conditions on it, then somebody would have to administer that. If you give people that power, they may take advantage of it. This idea appeals to many different people because it's universal, transparent and simple."  
 
For now, he is hoping to be able to run a pilot project in a country like India.
 
"My colleague, Paul Hudnut, told me, 'Your name, Bhagwan, stands for 'big, hairy, audacious goals.'" I told him that 'wan' stands for 'worth attempting now,'" Chowdhry said with a grin.

Sebastian Edwards Says the Future of Latin America Depends on Education and Institutional Reform

Sebastian Edwards, professor of global economics and management at UCLA Anderson, has said that the economic history of many Latin American countries reads like a novel authored by Gabriel Garcia Marquez, in possession of a certain "magical realism." In his new book, "Left Behind - Latin America and the False Promise of Populism," Edwards shed light on the region's political and economic histories - sans the magic - providing readers with a region-wide view of where Latin America has been and where it might be going. As Anderson plans to launch its latest degree program, the proposed Global Executive MBA for the Americas, Anderson's Henry Ford II Professor of International Economics, sat down to discuss the economic future of Latin America.

 

When reading your book, it gives the feeling you are not as enamored with opportunities in Latin America as others seem to be. Is that accurate?

Well, the book is written with a long-term perspective and a sense of reality. It covers, in one way or another, over 200 years of Latin American history and looks into a more distant future. And when you do this, you cannot fail to conclude that Latin America is not Disneyland. The region provides opportunities and challenges, but it is not a sure bet. What we - at Anderson and, more generally, at UCLA - certainly want to do is contribute to dealing successfully with this challenge through our educational programs and a mission to train managers and executives.

And it's not as if Latin America is a singular monolith - we're talking about a number of different countries.

Of course. It's a very diverse society. There are countries with a failed state, where there are no institutions, where corruption is rampant and where two years after an earthquake (Haiti) people are still desperate. Then you have another country (Chile) that suffered a much worse natural disaster, and it wasn't in the news three months afterward, because they pulled themselves together. From Haiti to Chile, from tiny Honduras to Brazil - it's an extremely diverse region.

The point I make in the book is that during the last decade or so Latin America solved half its problem - that of a very unstable macroeconomic environment. The region's history is replete with currency crises and triple-digit inflation or inflation in the thousands, which is very hard for us to imagine. That is gone. We now have stability. Currency values are predictable. Inflation in almost every country is single-digit; in some countries, it's even lower than in the United States.

With stability, you can plan ahead. The problem with inflation is that prices keep going up, so you don't know the costs that you - as an entrepreneur - will face. And you don't know if the prices for the goods you're selling are going up because there's generalized inflation or because the goods have become more attractive in the marketplace or because they are more competitive. The price system is supposed to provide signals that allow firms to react and change their behavior if needed. Inflation takes away that fundamental property of the prices, which is to transmit signals. And inflation is gone; currency crises are gone, which is one part of the equation.

And the other half of the problem?

There are tremendous challenges to getting the other half of the equation right. Now Latin Americans have to become really productive, so they can compete successfully in the global marketplace. They need to expand the range of their exports and diversify away from commodities. In order to do this better, management practices and techniques are needed. That's where Anderson comes in. We're going to train good Latin American managers and make them excellent, the best in the world. Then the potential of the region is going to become a reality. Having said that, I have little hope for Venezuela, Nicaragua or Bolivia. The problem is that these countries' political leaders are implementing populist policies and are trying to kill the market through the elimination of competition. There are also systematic violations of property rights.

What are the greatest challenges facing the region as its various countries attempt to become productive?

In different countries, different problems are the more salient ones. Moreover, they change through time. Five years ago, for example, the drug trade was an irritant and an annoyance in Mexico. Today, it's the central social and political issue.

If I were to think of a single problem that presents itself throughout the region, it's the dismal quality of the educational system. The problem with education is that it's hard for voters to evaluate. When, as a result of trade openness, people realized that the quality of goods produced in Latin America was low, they did what they had to do: they stopped buying local goods and began importing them. So, local producers were forced to improve quality, and now the goods produced in Latin America are as good as those you can import.

If you are a middle class parent, who do you compare your kid's educations to? Also, you can't import education. The best Latin American country does poorly on international standardized tests. The quality of education is very poor, and teachers' unions stand in the way of any truly innovative reform. And that's a very serious problem.

What will the next 25 years look like in Latin America?

I venture to say in the book that there will be a three-tiered Latin America. First, there will be a group of countries that will basically continue to fail and do very poorly. These are mostly the countries that insist on taking shortcuts and not implementing modern pro-market, pro-competition and pro-transparency policies. If you don't have competition, there will be no innovation. If there's no innovation, there will be no progress. These are countries that currently have populist regimes.

Then, there will be a core, middle group of countries that will move forward but at a rather mediocre rate. That means the gap between these countries and the more successful countries in the world, in terms of growth, will become even wider.

Then, there will be a small group of countries that will do very well and will increasingly distance themselves from the rest of the region. That group is going to include Chile, probably Costa Rica, maybe Peru and hopefully Brazil. What is needed in Brazil, since they finally got rid of inflation and instability, is that they become truly competitive.

In your book, you say that education reform is essential for Latin American countries - like Brazil - to truly become competitive and fully participate in the world's economy. You note that in a 2006 international educational survey of standardized tests in science, only six Latin American countries chose to participate and all fell into the lower half of the survey. Brazil, for example, ranked 51st out of 57 countries. What would happen if Brazil went from 51st to, say, 35th?

That would take a generation. A generation ago, Latin America started in earnest to go back to the markets, after long dictatorships that varied from country to country. Unfortunately, at that time, no serious efforts were made to improve the quality of the educational system.

If these countries had started to focus on education the day they returned to democracy, today they would be in a position to start harvesting the fruits of that investment. It does take a long time, but education is fundamentally important, because it changes people. Not only does it add marketable skills but also it changes people's culture and their approach toward innovation and productivity. That is the most important thing about it.

Along with education, what else does Latin America need to become competitive over the next generation?

Most Latin American countries have a rather low savings rate. The problem, of course, is that countries need to save in order to finance investments. And investments are required in order to add to the capital stock, buy new generation machines and improve infrastructure in a way that matches the needs of the country.

In addition, in order to grow in a sustainable way, workers' skills need to improve through time. That's where education comes in; better skills require a modern, efficient and effective educational system.

Finally, economic growth requires innovation. That is what we call productivity growth.

If one takes a long view, a one-generation perspective, there is a question mark on whether a large number of Latin American countries will be able to deliver on all three of these requirements for growth. Those that do it will succeed and become members of the exclusive club of overachievers. The challenge, of course, is to get as many countries as possible moving into the upper tier.

If Chile, Brazil and Costa Rica are doing well in 25 years, to what extent do they pull the rest of the region along with them?

I think that if enough countries actually move into the upper tier, and this upper tier does very well, then there's going to be a positive spill-over effect.

There's likely to be an imitation effect. People in the "so-so" group will ask what the successful countries did and will try to follow their path. In that sense, benchmarking is very important. One of the points that I make in the book is that a successful Latin American country should stop comparing themselves to the region itself. Why be satisfied with having a better educational system than Colombia, where, because of the war and the drug trafficking, many schools can't even open? It is not so hard to be the best Latin American country. For some time now, I have been arguing that the Latin American countries should benchmark themselves with Australia, New Zealand and Canada, advanced commodity exporting countries. And that can make a huge difference.

Richard Rumelt Discusses Strategies to Survive Major Global Problems

Professor Richard Rumelt gained a worldwide reputation with his book, "Good Strategy/Bad Strategy," and has been called "Strategy's Strategist," by the McKinsley Quarterly. He has been elected to Thinkers 50, a group of the 50 most influential business thinkers in the world.

Professor Rumelt says that strategy is most effective as a concept when talking about what an individual organization or executive should do. Strategy becomes more complicated, he says, when applied to collections of independent actors. This brings the need for communication, consensus building and collective action. Despite these challenges, Rumelt has helped numerous firms, government agencies and educational institutions develop good strategies.

In the following interview, Professor Rumelt explores the issues involved in applying the "good strategy" concept to complex global issues.

What is a good strategy?

A good strategy is a mixture of policy and action designed to surmount a high-stakes challenge. It stands in stark contrast to bad strategy. When you learn to spot it, you will see bad strategy flourishing at all levels, from a local urgent care center to the White House. The hallmarks of bad strategy are a failure to define the challenge, mistaking visions and financial goals for strategies, using fluffy concepts and language to disguise the lack of actionable ideas, and generating long lists of so-called "priorities" rather than having a coherent way of exploiting a point of leverage.

Good strategy has a simple logical structure I call the Kernel. These three elements are (1) a clear-eyed diagnosis of the challenge being faced, (2) an overall guiding policy explaining how the challenge will be met, and (3) a set of coherent actions designed to focus energy and resources.

Can the concept of good strategy be applied to critical global problems?

Yes it can. But there is almost always a severe problem of collective action in global problems.

To begin, a key step is generating a workable diagnosis of the problem. A good diagnosis is a bit like a scientific hypotheses - it is an educated guess about the nature of the difficulty. The more important the problem, the more you want to back up your diagnosis with data and analysis by the best minds available. It is also very important to have a diagnosis that is actionable - that defines the problem in a way that allows something useful to be done about it.

For example, the current European debt and deficit crisis is being treated as one of money supply and government spending. But the deeper problem is that many governments have bought votes by spending borrowed money that cannot be repaid. This is true in Greece, Italy, Spain. But, this is only part the story. The other half is that banks have lent money to these governments, earning short term fees but exposing themselves to huge longer-term risks. And the final dismal part of the story is that these same banks can be fairly confident that other politicians will push national governments to bail them out rather than risk the consequences of default. So, in my view, there is an unhealthy cycle of myopia and payoffs between political and financial elites. The ultimate source of the problem is political as lawmakers ultimately set the ground rules through which both business and politics are carried out.

Given a diagnosis like this, one can immediately see the weakness, or "badness," of most of the responses being made to the debt crisis. They are like treating a severe infection with Advil; some immediate pain is relieved, but the underlying condition continues to fester. A real solution must set boundaries on borrowing and lending.

In this case, as in so many large global challenges, the nub of the difficulty is the issue of collective action. That is, no one actor has the power to compel others to play complementary roles in solving the problem.

There are three traditional solutions to this kind of collective action problem. First, one can wait for an explosive crisis. When the whole collective faces destruction, it is more likely that members will pull together to save the whole. Second, members of the collective can appoint a temporary czar who enforces rules on the collective. Thus, during the Republic, ancient Romans would elect a "dictator" to lead in time of war. With some foresight, this can happen before the emergency actually bites.

Third, a dominant actor may be able to put aside myopia and cajole and compel other members to abide by new rules. The usual way in which this happens is for the dominant member or clique to create a new organization which only extends membership to others who hue to certain rules and policies. (Unfortunately, the designers of the European Union botched this opportunity, a large cause of the current crisis.)

Does the private sector have a role in solving global problems and an advantage in taking collective action?

Companies are economic engines. Just as a diesel engine or a turbine engine can be harnessed to any kind of pulley or gear system to various kinds of physical work, companies are economic engines that can be harnessed to a wide variety of economic purposes. However, you're not going to get charity out of companies. They're not organized to do charity any more than the U.S. Marine Corps is organized to deliver charity. It's an inappropriate use of the organization. Private companies can be very efficient, but you have to pay them and you have to engineer a reasonable amount of competition among them. You should consider them as engines and harness them to tasks that need to be done.

Can a problem like the global need for energy be resolved by making energy production or conservation more profitable?

Yes, in certain situations it can make sense to subsidize an activity for a while. One case is where there are many different activities to be coordinated, so that no one company is willing to step forward. For example, converting automobiles to electricity or hydrogen fuels requires complementary investments in energy production, energy distribution, entirely new energy delivery means at "gas" stations, automobile design, and more. Unless you are willing to let a company enjoy the fruits of monopolizing this new business for a generation, you may have to provide special incentives to get the ball rolling.

Where there are very long lead times and terribly expensive R&D, as in fusion power or large-scale desalinization, there is a role for extra-market incentives. There is nothing really surprising about having to do these kinds of things - it is what many corporate and business strategies are actually about. Senior management looks at the plans of each division or department and reaches a judgment that, "these individual actions, taken together, are not going to solve our key problems or capture the future." They then impose a system of policy and incentives to get something going in the company that is "not natural." In the same way, a society may come to the realization that there is something really important that the present system of independent action is not going to accomplish. So, we have to impose a logic on that system.

Richard Roll Offers New Diagnosis for the Financial Crisis

Richard W. Roll, the Joel Fried Chair in Applied Finance, has authored a paper that offers a new diagnosis for the recent financial crisis. The paper, "The Possible Misdiagnosis of a Crisis," appeared in the March/April 2011 issue of the Financial Analysts Journal, a publication of the CFA Institute.

In the paper, Professor Roll uses basic principles of finance to challenge prevailing explanations, "including excessive leverage, subprime mortgages, exotic derivatives, reckless risk taking, and easy money that spawned a housing bubble."

He offers an alternative diagnosis for the crisis and prescribes a treatment protocol of less government spending, lower taxes and greater reliance on the private sector to stimulate the U.S. and global economies. Professor Roll describes this as "economic liberalization," meaning an increase in the fraction of GDP spent by the private sector relative to the fraction spent by the public sector.

The paper earned Professor Roll his fourth Graham and Dodd Award from the Financial Analysts Journal. The award was in the "Best Perspectives" category recognizing timely, thought-provoking opinion. The FAJ Advisory Council and Editorial Board selected the winners. The award, created in 1960, honors the contributions of legendary investors Benjamin Graham and David L. Dodd to the investment analysis field.

In addition to his work at UCLA Anderson, Professor Roll is principal of the consulting firm, Compensation Valuation, Inc.

Former Mayor Riordan Says Los Angeles Facing Insolvency

In this video interview, former Los Angeles Mayor Richard Riordan predicts that Los Angeles will be unable to meet its obligations to former and current employees within two to three years and will be forced to declare bankruptcy. He urges city leaders and employee representatives to make tough choices to reduce costs. And he calls on the city to attract business and spur employment.

 

In the brief interviews below, UCLA Anderson faculty offer suggestions for ways that Los Angeles can mitigate the problem. One point of agreement is that the city's future is closely tied to the recovery of the U.S. economy.

How Can Los Angeles Avoid Bankruptcy?

Dan Mitchell Notes Three Options for Cutting Labor Costs
"The crisis today in Los Angeles is that more was promised to employees than was contributed into the retirement and healthcare programs. You can't reduce benefits for those who have already retired. That's a legally binding obligation. But you can consider moving current and future employees to a less costly plan. It can still be a defined benefit plan, but with lower payments for years of service, age and so on.

"Or you can move to a defined contribution model going forward. These are basically tax-preferred savings plans. The employee usually has some say in how the money is invested. If you do well, the money grows enough to finance your retirement. If things don't go so well, then maybe you aren't going to do so well in retirement. The risk is on you. This is like 401k programs in the private sector.

"Another option is to raise the employee contribution to existing plans. Or you can have some combination of these solutions.

"How do you get there? Most organizations have collective bargaining contracts and there are various rules and procedures for how you go about negotiating. But you come to some agreement with the public sector labor unions about how this is going to be done. There have also been efforts to control spending at state and local levels through ballot measures. We could see some activity there -- but it might be best to quietly negotiate a settlement and keep it out of the political realm.

"In the 1990's, Orange County went bankrupt and it was a very costly process. It's full employment for lawyers. It also makes it very difficult if you ever need to go back to the credit market. You're going to pay a premium for credit. So both the direct costs and future costs discourage local governments from declaring bankruptcy. The City of Vallejo in the Bay Area declared bankruptcy during the recent downturn and people have noted how costly it was."

David Lewin Suggests User Fees
"Los Angeles will need to do some of the things that many other state and local governments are doing such as raising the retirement age, moving from defined benefit plans to defined contribution plans, increasing employee contributions to health care and changing the formulas for determining retirement benefits, including eliminating overtime pay from base earnings that are used for calculating benefits.

"A few months ago, several city unions representing some 40 percent of the city's employees, mostly people in low-paying occupations, formed a coalition and negotiated new agreements with the city that raised their contributions to pension and health care costs from about six percent to over 11 percent. These changes will affect the current workforce, not just new employees. This puts a stake in the ground for future labor-management negotiations.

"One other thing I would mention, but the city can't do this alone, is user fees. Other parts of the country have masses of toll roads and this has been the source of lots of revenue for lots of governments. Another option is to add a local surcharge of perhaps $.25 per gallon at the gas pump. Given the volume of traffic in Los Angeles, that initiative could have a substantial deficit reduction effect.

"You can also look at new local taxes, but user fees are preferable because they introduce the price system and people can make choices. That would be simple and straightforward, without changing tax codes or pension formulas.

"What we really need is more rapid economic growth and more employment. When you put people to work, they are earning and paying taxes. And if stock markets rise, things could look much brighter for the funds invested in retirement plans."

Romain Wacziarg Says Economic Growth is Needed
"There are two solutions to avoid bankruptcy. One is raising revenue and the other is cutting spending. Finding new sources of revenue is extremely difficult because L.A. is already losing its manufacturing base and it is losing people and businesses. So the only option is to cut services, a very painful option. L.A. has a huge budget and I think that's the only way it can sustain itself in the long run. Nobody likes to enact cuts to police and fire departments, libraries, welfare programs and things like that, but that may well be necessary to restore fiscal soundness.

"However it's not entirely clear that it is desirable to avoid bankruptcy. You need to understand what bankruptcy is. Bankruptcy is when you have a big stack of debt that you are no longer able to service. There's a bankruptcy judge who decides the priority level of the claims that are on a city and who will be repaid first or at all. Bankruptcy is not liquidation. It's not like there's not going to be a government or that public services will cease. Bankruptcy is like an orderly default. You might be better off going into bankruptcy rather than having to repay all this debt. However you still have to address the imbalance between expenditures and revenues going forward, which is not in itself affected by default.

"Santa Monica raised its sales tax by a half point. Los Angeles could do that but you would see businesses and people leave. It's tough.

"Ultimately the only thing that will really help is if we have an economic boom so the tax base rebounds, property values go back up and people start spending money again. You can undo really bad things quickly with a little bit of economic growth."

Jerry Nickelsburg Says the City Must Attract Business and Encourage Growth
"Most major cities in California have some long-term structural problems related to their pension and entitlement programs, and Los Angeles is no different. Pensions and entitlements definitely need to be re-examined to ensure they are sustainable, both for the benefit of the city and the benefit of their employees.. But a re-examination followed by a restructuring as required is very different than suggesting that bankruptcy is imminent. We are currently at the end of a deep recession and the beginning of a recovery and extrapolating from the current revenue shortfalls to future bankruptcy assumes that the economic recovery is going to leave Los Angeles behind.  The evidence is to the contrary. The only question is how fast and how much revenue will that growth generate?

"Improvements in taxes, infrastructure and services are the essential ingredients in accelerating Los Angeles' economic growth. For example, the city needs  to ensure its tax structure is competitive with neighboring cities. Differentials in taxes and tax rates may discourage growth because businesses can choose to locate in a lower tax jurisdiction and still retain the benefit of locating in greater Los Angeles.

"On the infrastructure front there is currently work going on to make the ports more competitive and enable them to increase traffic when demand dictates. There is also infrastructure development at the airport, including the substantial construction and expansion of the Tom Bradley West International Terminal. In addition, the mayor has proposed a new funding source for re-paving a third of the city's roads and the city is implementing an acceleration of public transit construction. So, there is extensive infrastructure work in process, which will contribute to making Los Angeles a more attractive location for economic activity and to alleviating some of the current fiscal stress.

"The ability of the city to reform pensions and the tax structure, to foster additional infrastructure construction and maintain an appropriate level of city services will be the key to fiscal strength in the future.  While none of the current or required initiatives are certain to be successful, an overall strategy to foster growth will generate the revenue required.  Thus, the notion that Los Angeles will be bankrupt is predicated on a prediction that the city will be unable to manage itself and its future growth, and the evidence that this is the case appears to be weak at best.  Such a prediction does, however, present a warning as to what might happen were the very real challenges the City of Los Angeles faces to be ignored."