1. Superb illustration of the widening income inequality in the US, using data put together by Emmanuel Saez, from the EPI website. Between 1917-2008, average incomes in the US grew by $38,216 (in 2008 dollars). The richest 10% got 51% of that increase and their share in the growth has been rising since the eighties.
2. Excellent visualization of President Obama's Budget proposals for 2011-12. New York Times has another superb spending category-wise visualization of how the $3.7 trillion is proposed to be spent, with changes from last year. Such graphics help sift through the avalanche of budget related data and informs at one glance the areas where spending cuts can make a difference to the overall budget deficit.
Wednesday, February 16, 2011
Tuesday, February 15, 2011
The iPhone success in perspective
Nothing captures the essence of Apple's overwhelming success with smart phones better than the graphic below comparing the trends in market and profit shares of all global cellphone makers. Apple has virtually decimated the field by capturing more than half the market profits since iPhone was launched in 2007, and that too with just 4% market share.
It sure helped that Apple could make a super-normal profit of $360 from an iPhone 4 which retailed for $600.
This market share is certain to fall. But it should take nothing away from Apple's spectacular success in such a competitive, dynamic and technology-intensive market.
It sure helped that Apple could make a super-normal profit of $360 from an iPhone 4 which retailed for $600.
This market share is certain to fall. But it should take nothing away from Apple's spectacular success in such a competitive, dynamic and technology-intensive market.
Monday, February 14, 2011
Nudging with mobile phones on behaviour change
One of the important requirements for achieving behaviour change is the salience of behaviour change causing triggers. Information, presented in the most cognitively salient manner and with some close-enough periodicity, can be a powerful trigger to achieving behaviour change.
Mobile phones, thanks to their near universal coverage even in many developing countries and ubiquitousness in daily lives of citizens, have the potential to delivering such information. They are an excellent channel for doctors and health care professionals to maintain a continuous dialogue with the patients.
In recent years there have been numerous studies on experiments that have used mobile phones to both generate optimal treatment response and more effectively manage disease incidence. They have relied on using reminders to people about medication and treatment schedules and management of their eating and lifestyle behaviours.
A randomized control study on adherence to antiretroviral therapy (ART) for AIDS using mobile phone SMS reminders in Kenya among 431 adult patients over 48 weeks found that "weekly text reminders increased antiretroviral drug adherence from 40% to 53% of participants". The authors write,
In a study about application of sun protection creams to reduce the risk of developing skin cancer, 70 patients in the 18-72 age group were sent cell phone text messages (along with weather report, at 7 AM) reminding them to apply their sunscreen daily for six weeks. The patients’ adherence to daily sunscreen usage was evaluated with a novel electronic monitoring device, which was strapped onto the tube of sunscreen - when the cap of the sunscreen tube was removed, the device sent a text message to researchers that was then recorded as evidence of sunscreen use.
The study found that text reminders increased the proportion of people who applied sun protection from 30% to 56%. Specifically, the 35 subjects who received daily text message reminders to apply sunscreen had a mean daily adherence rate of 56 percent compared to a mean daily adherence rate of only 30 percent by the 35 subjects who did not receive reminders.
A review of 12 RCT studies which examined the use of text messages to promote weight loss, get people to stop smoking and manage diseases like diabetes and asthma, found evidence to support text messaging as a tool for behavior change in eight of nine 'sufficiently powered studies'. The authors write,
The NYT reports of a mobile phone messaging service in the US, text4baby, "that sends free text messages to women who are pregnant or whose babies are less than a year old, providing them with information, and reminders, to improve their health and the health of their babies". Registration can be done from your cell phone by simply texting the word BABY (or BEBE for Spanish) to 511411. The sender will be asked to enter the baby’s due date or baby’s birthday and zip code. Once registered, the sender will start receiving free messages with tips for pregnancy and caring for baby. These messages are timed to the due date or the baby’s birth date.
Mobile phones, thanks to their near universal coverage even in many developing countries and ubiquitousness in daily lives of citizens, have the potential to delivering such information. They are an excellent channel for doctors and health care professionals to maintain a continuous dialogue with the patients.
In recent years there have been numerous studies on experiments that have used mobile phones to both generate optimal treatment response and more effectively manage disease incidence. They have relied on using reminders to people about medication and treatment schedules and management of their eating and lifestyle behaviours.
A randomized control study on adherence to antiretroviral therapy (ART) for AIDS using mobile phone SMS reminders in Kenya among 431 adult patients over 48 weeks found that "weekly text reminders increased antiretroviral drug adherence from 40% to 53% of participants". The authors write,
"In intention-to-treat analysis, 53% of participants receiving weekly SMS reminders achieved adherence of at least 90% during the 48 weeks of the study, compared with 40% of participants in the control group (P = 0.03). Participants in groups receiving weekly reminders were also significantly less likely to experience treatment interruptions exceeding 48 h during the 48-week follow-up period than participants in the control group (81 vs. 90%, P = 0.03)."
In a study about application of sun protection creams to reduce the risk of developing skin cancer, 70 patients in the 18-72 age group were sent cell phone text messages (along with weather report, at 7 AM) reminding them to apply their sunscreen daily for six weeks. The patients’ adherence to daily sunscreen usage was evaluated with a novel electronic monitoring device, which was strapped onto the tube of sunscreen - when the cap of the sunscreen tube was removed, the device sent a text message to researchers that was then recorded as evidence of sunscreen use.
The study found that text reminders increased the proportion of people who applied sun protection from 30% to 56%. Specifically, the 35 subjects who received daily text message reminders to apply sunscreen had a mean daily adherence rate of 56 percent compared to a mean daily adherence rate of only 30 percent by the 35 subjects who did not receive reminders.
A review of 12 RCT studies which examined the use of text messages to promote weight loss, get people to stop smoking and manage diseases like diabetes and asthma, found evidence to support text messaging as a tool for behavior change in eight of nine 'sufficiently powered studies'. The authors write,
"Twelve randomized controlled trials published between 2005 and June 2009 of interventions for disease prevention and management using text messaging were reviewed. Nine countries were represented, only one of which is a developing country. The majority of the studies (8) found evidence of a short-term effect regarding a behavioral or clinical outcome related to disease prevention and management. Of those that found no evidence of effect, only one had sufficient power to detect an effect in the primary outcome. Evidence for text messaging in disease prevention and management interventions was observed for weight loss, smoking cessation, and diabetes management. Effects appeared to exist among adolescents and adults, among minority and non-minority populations, and across nationalities."
The NYT reports of a mobile phone messaging service in the US, text4baby, "that sends free text messages to women who are pregnant or whose babies are less than a year old, providing them with information, and reminders, to improve their health and the health of their babies". Registration can be done from your cell phone by simply texting the word BABY (or BEBE for Spanish) to 511411. The sender will be asked to enter the baby’s due date or baby’s birthday and zip code. Once registered, the sender will start receiving free messages with tips for pregnancy and caring for baby. These messages are timed to the due date or the baby’s birth date.
Sunday, February 13, 2011
Iceland Vs Ireland?
Almost alone among those who faced the depths of the financial crisis, Iceland refused to bailout its financial institutions. It placed its biggest lenders in receivership and chose not to protect creditors of the country’s banks, whose assets had ballooned to $209 billion (11 times GDP). In other words, the creditors, not the taxpayers, shouldered the losses of banks.
The krona lost 58% of its value by the end of November 2008, inflation spiked to 19% in January 2009 and GDP contracted by 7% that year. The Prime Minister Geir H. Haarde resigned after nationwide protests.
As a Bloomberg report argues, if early signs are any indicator (with economy projected to grow 3% in 2011), then Iceland’s decision to let the banks fail is looking smart and may provide important lessons for others. The GDP grew for the first time in two years in the third quarter, by 1.2%, inflation is down to 1.8%, the cost of insuring government debt has tumbled 80%, and banks have bounced back into the profitability.
The three biggest Icelandic banks - Kaupthing Bank hf, Landsbanki Islands hf and Glitnir - who had indulged in the spectacular lending spree at home and overseas were seized by regulators on October 6, 2008. The Bloomberg report writes,
In contrast, Ireland guaranteed all the liabilities of its banks when they ran into trouble and has so far injected 46 billion euros ($64 billion) as capital so far to prop up these banks. The result is an unsustainable debt burden that could swell to twice its GDP, up from 94% now and the near certainty of a sovereign debt default. It is a widely held feeling in Icleand that if it had guaranteed all the banks’ liabilities, they would have been in the same situation as Ireland.
See this Vanity Fair article by Micheal Lewis on Ireland. Micheal Mandel has an excellent series of graphics that puts the role of external sector, exports/imports and financial profit repatriations, on Ireland's economic fortunes in perspective.
The krona lost 58% of its value by the end of November 2008, inflation spiked to 19% in January 2009 and GDP contracted by 7% that year. The Prime Minister Geir H. Haarde resigned after nationwide protests.
As a Bloomberg report argues, if early signs are any indicator (with economy projected to grow 3% in 2011), then Iceland’s decision to let the banks fail is looking smart and may provide important lessons for others. The GDP grew for the first time in two years in the third quarter, by 1.2%, inflation is down to 1.8%, the cost of insuring government debt has tumbled 80%, and banks have bounced back into the profitability.
The three biggest Icelandic banks - Kaupthing Bank hf, Landsbanki Islands hf and Glitnir - who had indulged in the spectacular lending spree at home and overseas were seized by regulators on October 6, 2008. The Bloomberg report writes,
"The government negotiated with the creditors, almost all of them outside the country, including mutual funds and hedge funds in the US and the UK and European banks and pension funds. Kaupthing’s creditors agreed to take an 87% stake in Arion, and Glitnir’s creditors now own 95% of Islandsbanki. Glitnir’s biggest creditor as of June was Dublin- based Burlington Loan Management Ltd., followed by Royal Bank of Scotland and DekaBank Deutsche Girozentrale, the fund manager for Germany’s state-owned savings banks.
Glitnir’s 8,500 creditors and Kaupthing’s 28,000 expect to get about 30 cents on the dollar for their claims, based on secondary-market prices of the banks’ debt and asset valuations by the resolution committees. About half of Kaupthing’s creditors are German depositors who had Internet accounts, have gotten their principal back and are seeking interest payments.
Landsbanki’s creditors opted for a promissory note from successor NBI hf instead of a stake in the new bank. Landsbanki had collected about $5 billion of overseas deposits through branches in the U.K. and the Netherlands. Iceland didn’t guarantee those deposits at the time it seized the bank, as it did for domestic customers, leading to a dispute with the British and Dutch governments. In December, Iceland agreed to compensate the U.K. and the Netherlands in full for their payments to Icesave depositors, as the Landsbanki accounts were known. Payment, including interest of about 3 percent, will be made over 35 years."
In contrast, Ireland guaranteed all the liabilities of its banks when they ran into trouble and has so far injected 46 billion euros ($64 billion) as capital so far to prop up these banks. The result is an unsustainable debt burden that could swell to twice its GDP, up from 94% now and the near certainty of a sovereign debt default. It is a widely held feeling in Icleand that if it had guaranteed all the banks’ liabilities, they would have been in the same situation as Ireland.
See this Vanity Fair article by Micheal Lewis on Ireland. Micheal Mandel has an excellent series of graphics that puts the role of external sector, exports/imports and financial profit repatriations, on Ireland's economic fortunes in perspective.
Saturday, February 12, 2011
The M-PESA success story
It is undoubtedly true that the mobile phone is one of the really revolutionary inventions of our times, with the potential to transform human lifestyles and the way we even do business. Fundamental to its success is its ability to bridge the last-mile connect and deliver numerous services.
I have already blogged about its potential to revolutionize the way people manage their finances. The most famous example of this is the M-PESA - an SMS-based money transfer system that allows individuals to deposit, send, and withdraw funds using their cell phone - that was launched in March 2007 by the Kenyan cell-phone company Safaricom. Today M-PESA reaches approximately 65% of Kenyan households. Similarly, in the Philippines, Globe Telecom operates GCASH, and in South Africa WIZZIT facilitates mobile phone‐based transactions through the formal banking system. An excellent working paper by William Jack and Tavneet Suri documents the rise of M-PESA.
M-PESA is not a banking service. It does not pay interest on deposits nor make loans. It allows users to deposit money into an account stored on their cell phones, to send balances using SMS technology to other users (including sellers of goods and services), and to redeem deposits for regular money. In this sense, M-PESA transfers fungible cellphone talk time.
In exchange for cash deposits, Safaricom issues a commodity known as e-float or e-money, measured in the same units as money, which is held in an account under the user’s name. E-float can be transferred from one customer’s M‐PESA account to another using SMS technology, or sold back to Safaricom in exchange for money. Charges, deducted from users’ accounts, are levied when e-float or e-money is sent, and when cash is withdrawn.
Originally, transfers of e-float sent from one user to another were expected to primarily reflect unrequited remittances, but nowadays, while remittances are still a very important use of M-PESA, e-float transfers are often used to pay directly for goods and services, from electricity bills to taxi-cab fares. To facilitate purchases and sales of e-float, M-PESA maintains and operates an extensive network of over 23,000 agents across Kenya. M-PESA agents hold e-float balances on their own cell-phones, purchased either from Safaricom or from customers, and maintain cash on their premises. They only have to predict the time profile of net e-float needs, and maintain the security of their operations.
M-PESA caters to a specific category of small transactions. The paper finds that the volume of transactions effected between banks under the RTGS (Real Time Gross Settlement] method is nearly 700 times the daily value transacted through M-PESA, and the average mobile transaction is about a hundred times smaller than the average check transaction (Automated Clearing House, or ACH), and even just half the size of the average Automatic Teller Machine (ATM) transaction.
The paper documents many advantagees of mobile phone money transfers. They include facilitation of trade, making it easier for people to pay for, and to receive payment for, goods and services; provide a safe storage mechanism, and thereby increase net household savings; facilitates inter-personal transactions and thereby improve the allocation of savings across households and businesses by deepening the person-to-person credit market; by making transfers across large distances trivially cheap, it improves the investment in, and allocation of, human capital as well as physical capital (say, promote migration); it enhances the ability of individuals to share risk; it enables timely money transfers and thereby provides always-on access to money; empower women, and so on.
I have already blogged about its potential to revolutionize the way people manage their finances. The most famous example of this is the M-PESA - an SMS-based money transfer system that allows individuals to deposit, send, and withdraw funds using their cell phone - that was launched in March 2007 by the Kenyan cell-phone company Safaricom. Today M-PESA reaches approximately 65% of Kenyan households. Similarly, in the Philippines, Globe Telecom operates GCASH, and in South Africa WIZZIT facilitates mobile phone‐based transactions through the formal banking system. An excellent working paper by William Jack and Tavneet Suri documents the rise of M-PESA.
M-PESA is not a banking service. It does not pay interest on deposits nor make loans. It allows users to deposit money into an account stored on their cell phones, to send balances using SMS technology to other users (including sellers of goods and services), and to redeem deposits for regular money. In this sense, M-PESA transfers fungible cellphone talk time.
In exchange for cash deposits, Safaricom issues a commodity known as e-float or e-money, measured in the same units as money, which is held in an account under the user’s name. E-float can be transferred from one customer’s M‐PESA account to another using SMS technology, or sold back to Safaricom in exchange for money. Charges, deducted from users’ accounts, are levied when e-float or e-money is sent, and when cash is withdrawn.
Originally, transfers of e-float sent from one user to another were expected to primarily reflect unrequited remittances, but nowadays, while remittances are still a very important use of M-PESA, e-float transfers are often used to pay directly for goods and services, from electricity bills to taxi-cab fares. To facilitate purchases and sales of e-float, M-PESA maintains and operates an extensive network of over 23,000 agents across Kenya. M-PESA agents hold e-float balances on their own cell-phones, purchased either from Safaricom or from customers, and maintain cash on their premises. They only have to predict the time profile of net e-float needs, and maintain the security of their operations.
M-PESA caters to a specific category of small transactions. The paper finds that the volume of transactions effected between banks under the RTGS (Real Time Gross Settlement] method is nearly 700 times the daily value transacted through M-PESA, and the average mobile transaction is about a hundred times smaller than the average check transaction (Automated Clearing House, or ACH), and even just half the size of the average Automatic Teller Machine (ATM) transaction.
The paper documents many advantagees of mobile phone money transfers. They include facilitation of trade, making it easier for people to pay for, and to receive payment for, goods and services; provide a safe storage mechanism, and thereby increase net household savings; facilitates inter-personal transactions and thereby improve the allocation of savings across households and businesses by deepening the person-to-person credit market; by making transfers across large distances trivially cheap, it improves the investment in, and allocation of, human capital as well as physical capital (say, promote migration); it enhances the ability of individuals to share risk; it enables timely money transfers and thereby provides always-on access to money; empower women, and so on.
Friday, February 11, 2011
Three examples on the Laffer Curve canard
One of the fundamental tenets of supply-side economics invokes the Laffer Curve to argue that we stand on the downward sloping side of the curve and therefore tax cuts will increase revenues. I have blogged earlier to show how it does not square up with recent historical experiences with tax cuts.
Chris Dillow points to three examples that show the economy on the positive (rising) side of the Laffer Curve.
1. Henrik Kleven, Emmanuel Saez and Camille Landais study the response of professional footballers in Europe to tax rates and conclude that the revenue-maximizing tax rate upon them in England is over 80%. This would easily put the current tax rate at the left of the Curve.
2. Orley C. Ashenfelter, Kirk B. Doran, and Bruce Schaller examined a panel dataset of New York City taxi drivers and the impact of permanent fare increases on their number of hours worked. They found a negative elasticity, of around minus 0.2 - a 10% rise in cabbies' revenue per mile caused them to work 2% less. This points to the income effect outweighing the substitution effect in the long run labor supply of males.
On similar lines, if what’s true of cabbies is also true of bankers, higher taxes on the rich will reduce their incomes. And if the income effect dominates, they will work harder to recoup the money. Chris Dillow also points to higher earners having a stronger taste for income than other people - this is why they are high earners. But this increases the chances of them working harder in response to higher taxes.
3. Pierre Cahuc and Stéphane Carcillo examined the impact on labor supply of the detaxation of overtime hours (exemption on the income tax and social security contributions that applied to wages received for hours worked overtime) introduced in October 2007 to allow individuals in France to work more so as to earn more. They found that it was costly for the public purse and did not have any significant impact on hours worked.
Conversely, it has had a positive impact on the overtime hours declared by highly qualified wage-earners, who have opportunities to manipulate the overtime hours they declare in order to optimize their tax situation, since the hours they work are difficult to verify. This again confirms Dillow's point about higher earners having a stronger taste for income than other people.
I cannot but not agree with Chris Dillow's conclusion,
Chris Dillow points to three examples that show the economy on the positive (rising) side of the Laffer Curve.
1. Henrik Kleven, Emmanuel Saez and Camille Landais study the response of professional footballers in Europe to tax rates and conclude that the revenue-maximizing tax rate upon them in England is over 80%. This would easily put the current tax rate at the left of the Curve.
2. Orley C. Ashenfelter, Kirk B. Doran, and Bruce Schaller examined a panel dataset of New York City taxi drivers and the impact of permanent fare increases on their number of hours worked. They found a negative elasticity, of around minus 0.2 - a 10% rise in cabbies' revenue per mile caused them to work 2% less. This points to the income effect outweighing the substitution effect in the long run labor supply of males.
On similar lines, if what’s true of cabbies is also true of bankers, higher taxes on the rich will reduce their incomes. And if the income effect dominates, they will work harder to recoup the money. Chris Dillow also points to higher earners having a stronger taste for income than other people - this is why they are high earners. But this increases the chances of them working harder in response to higher taxes.
3. Pierre Cahuc and Stéphane Carcillo examined the impact on labor supply of the detaxation of overtime hours (exemption on the income tax and social security contributions that applied to wages received for hours worked overtime) introduced in October 2007 to allow individuals in France to work more so as to earn more. They found that it was costly for the public purse and did not have any significant impact on hours worked.
Conversely, it has had a positive impact on the overtime hours declared by highly qualified wage-earners, who have opportunities to manipulate the overtime hours they declare in order to optimize their tax situation, since the hours they work are difficult to verify. This again confirms Dillow's point about higher earners having a stronger taste for income than other people.
I cannot but not agree with Chris Dillow's conclusion,
"Now, this is not to deny that Laffer curves exist. No doubt, there is a point at which higher taxes would be counter-productive and tax cuts would pay for themselves... But where is the hard evidence that, at tax rates around current levels, there are such effects?"
Thursday, February 10, 2011
Outcome-based venture capital financing of social policy
Imagine this social policy experiment. Crimeland prison has among the highest prisoner recidivism rate (prisoners are convicted of another crime within one year of release) in Globonia. Then World Without Crime Foundation (WWCF) comes up with a proposal that commits to lower recidivism rate by atleast 50% (after adjusting for the national average decline) over three years. It would cost $50000 to implement the program over its three years.
So WWCF offers to finance the entire upfront investments in return for being given Prison Improvement Bonds. These Bonds would have 4 year maturity and would be redeemed with returns which are based on the percentage of reductions (over and above the promised 50% minimum) achieved with recidivism. However, if the experiment fails to yield the expected minimum returns, the investors get nothing and lose their principal.
David Leonhardt points to a real-world experiment with such bonds in Britain. The British Government has initiated a program at Her Majesty’s Prison Peterborough, where 60% of the prisoners are convicted of another crime within one year of release. A nonprofit group named Social Finance has raised about $8 million from investors and is implementing, in collaboration with the prison authorities, a program to help former prisoners find work, stay healthy and the like. Some 3000 prisoners are being covered under this, which started last year.
Investors will get their money back starting in 2014 — with interest — if the recidivism rate falls at least 7.5%, relative to a control group. If the rate falls 10%, the investors will receive the sort of return that the stock market historically delivers.
They form part of the emerging category of social policy financing - social impact bonds. It has also been called payment-by-performance by the British government officials. Non-profit groups like foundations pay the initial money for a new program and also oversee it, with government approval. The government will reimburse them several years later, possibly with a bonus — but only if agreed-upon benchmarks show that the program is working. If it falls short, taxpayers owe nothing. It is hoped that success with a few initial interventions could help build a mainstream social investment market that attracts financial institutions and retail investors.
The British government is also planning to raise about £5m to develop a further package of two or three more social impact bonds. These bonds could fund programmes reducing the number of children going into care, working with children in pupil referral units, diverting persistent women offenders from prison, and developing more effective drug rehabilitation projects. Schemes to tackle long-term health problems in the community, such as diabetes and asthma, could also produce big savings in acute hospital bills.
In the US, David Leonhardt also reports that the Obama administration is set to shortly propose seven pilot programs, costing up to $100 million, along these lines. The financing mechanism will be described as pay-for-success bonds. They are set to broadly focus on increase kindergarten readiness among low-income children; increase college completion rates; reduce criminal offenses and incarceration rates among minority youth; raise the future earnings of laid-off workers; reduce hospital readmissions among patients with chronic illness etc.
What are the advantages with such social policy venture capital funds? One, most importantly, it will bring in a culture of outcome evaluation into social policy spending. Two, governments can hedge against the downside risk of the intervention failing. It will ensure much greater bang for the buck with social policy spending. Three, the hedging against downside risks also makes it easier for governments to embrace innovative programs that would otherwise have not found the light of day for risk aversion and status quo bias.
Four, Governments strapped for cash would not need to cough-up resources upfront, especially for programs whose returns are likely to show-up only after a few years. They would need to make payments only on the successful implementation of the intervention. Five, non-government agencies, non-profit and for-profit, get the platform (with all the attendant logistical support) of government agencies to experiment on their initiatives. This would marry the professional expertise and commitment of the non-government agencies with the existing government systems. Six, it will enable more effective utilization of non-government funds. Today, much of these funds are frittered away on piecemeal interventions that have little policy value.
However, there are several formidable challenges that need to be surmounted before this approach can achieve its desired objective. Which interventions to select? Which outcomes to measure, with what parameter, and how do we benchmark them? What should be the baseline and expected outcome scores? What should be the appropriate control group?
There is the possibility of external agencies being entrusted perfectly doable projects and walking away with assured returns. Ensuring the selection of parameters that, with a reasonable degree of accuracy, measures outcomes is a difficult task and one that can be very easily subverted. Both the baseline calculation and the final outcome fixation should be done with adequate care and after rigorous due diligence. The final outcome should be adjusted for changes that would have taken place even without the intervention. In the absence of clear definition of the target population, the external agency will have an incentive to cherry-pick and present a distorted picture of its achevements. Finally, the control group should be selected with appropriate care so as to be representative with the treatment.
In fact, the details of such initiatives should be arrived at only through a rigorous professional exercise carried out by competent agencies, and devoid of political and anecdotal judgements. On a note of caution, atleast for the initial set of such financing interventions, it may be better to leave out economic cost-benefit analysis (and focus on the financial benefits by way of budgetary savings) from calculations of return on investment. It may be advisable to focus on interventions (or outcome measurement parameters) where the benefits are more easily quantifiable by comparison with a relevant control group. Further, decentralized interventions are more likely to succeed, at least in the initail stages, with such financing programs.
Update 1 (22/6/2012)
Nice Fixes column on social impact bonds. It points the work of an organization One Service, which has brought together four social service groups to provide comprehensive assistance to men released after serving short-term jail sentences at Peterborough Prison near London. It informs that the idea of social impact bonds originated from various thinkers, social service experts and captains of industry in Britain who formed a group called Social Finance to build a social investment market there.
One Service raised £5 million — about $8 million — from 17 investors in Britain and the United States, and the investors will get their money back only if One Service succeeds. The bondholders are mostly charitable groups who would normally give money away. Over the next six years, the recidivism rates of men released from Peterborough will be compared to the recidivism of a matched group of prisoners elsewhere. If Peterborough’s re-conviction rates are 7.5 percent less than the control group,the British government will repay the bondholders with interest. If that threshold isn’t met, investors lose their money, which means that technically it is not a bond. The better the recividism rates, the larger the payout for investors, which is capped at the equivalent of 13 percent per year over an eight-year period.
See also this McKinsey report on Social Impact Bonds.
So WWCF offers to finance the entire upfront investments in return for being given Prison Improvement Bonds. These Bonds would have 4 year maturity and would be redeemed with returns which are based on the percentage of reductions (over and above the promised 50% minimum) achieved with recidivism. However, if the experiment fails to yield the expected minimum returns, the investors get nothing and lose their principal.
David Leonhardt points to a real-world experiment with such bonds in Britain. The British Government has initiated a program at Her Majesty’s Prison Peterborough, where 60% of the prisoners are convicted of another crime within one year of release. A nonprofit group named Social Finance has raised about $8 million from investors and is implementing, in collaboration with the prison authorities, a program to help former prisoners find work, stay healthy and the like. Some 3000 prisoners are being covered under this, which started last year.
Investors will get their money back starting in 2014 — with interest — if the recidivism rate falls at least 7.5%, relative to a control group. If the rate falls 10%, the investors will receive the sort of return that the stock market historically delivers.
They form part of the emerging category of social policy financing - social impact bonds. It has also been called payment-by-performance by the British government officials. Non-profit groups like foundations pay the initial money for a new program and also oversee it, with government approval. The government will reimburse them several years later, possibly with a bonus — but only if agreed-upon benchmarks show that the program is working. If it falls short, taxpayers owe nothing. It is hoped that success with a few initial interventions could help build a mainstream social investment market that attracts financial institutions and retail investors.
The British government is also planning to raise about £5m to develop a further package of two or three more social impact bonds. These bonds could fund programmes reducing the number of children going into care, working with children in pupil referral units, diverting persistent women offenders from prison, and developing more effective drug rehabilitation projects. Schemes to tackle long-term health problems in the community, such as diabetes and asthma, could also produce big savings in acute hospital bills.
In the US, David Leonhardt also reports that the Obama administration is set to shortly propose seven pilot programs, costing up to $100 million, along these lines. The financing mechanism will be described as pay-for-success bonds. They are set to broadly focus on increase kindergarten readiness among low-income children; increase college completion rates; reduce criminal offenses and incarceration rates among minority youth; raise the future earnings of laid-off workers; reduce hospital readmissions among patients with chronic illness etc.
What are the advantages with such social policy venture capital funds? One, most importantly, it will bring in a culture of outcome evaluation into social policy spending. Two, governments can hedge against the downside risk of the intervention failing. It will ensure much greater bang for the buck with social policy spending. Three, the hedging against downside risks also makes it easier for governments to embrace innovative programs that would otherwise have not found the light of day for risk aversion and status quo bias.
Four, Governments strapped for cash would not need to cough-up resources upfront, especially for programs whose returns are likely to show-up only after a few years. They would need to make payments only on the successful implementation of the intervention. Five, non-government agencies, non-profit and for-profit, get the platform (with all the attendant logistical support) of government agencies to experiment on their initiatives. This would marry the professional expertise and commitment of the non-government agencies with the existing government systems. Six, it will enable more effective utilization of non-government funds. Today, much of these funds are frittered away on piecemeal interventions that have little policy value.
However, there are several formidable challenges that need to be surmounted before this approach can achieve its desired objective. Which interventions to select? Which outcomes to measure, with what parameter, and how do we benchmark them? What should be the baseline and expected outcome scores? What should be the appropriate control group?
There is the possibility of external agencies being entrusted perfectly doable projects and walking away with assured returns. Ensuring the selection of parameters that, with a reasonable degree of accuracy, measures outcomes is a difficult task and one that can be very easily subverted. Both the baseline calculation and the final outcome fixation should be done with adequate care and after rigorous due diligence. The final outcome should be adjusted for changes that would have taken place even without the intervention. In the absence of clear definition of the target population, the external agency will have an incentive to cherry-pick and present a distorted picture of its achevements. Finally, the control group should be selected with appropriate care so as to be representative with the treatment.
In fact, the details of such initiatives should be arrived at only through a rigorous professional exercise carried out by competent agencies, and devoid of political and anecdotal judgements. On a note of caution, atleast for the initial set of such financing interventions, it may be better to leave out economic cost-benefit analysis (and focus on the financial benefits by way of budgetary savings) from calculations of return on investment. It may be advisable to focus on interventions (or outcome measurement parameters) where the benefits are more easily quantifiable by comparison with a relevant control group. Further, decentralized interventions are more likely to succeed, at least in the initail stages, with such financing programs.
Update 1 (22/6/2012)
Nice Fixes column on social impact bonds. It points the work of an organization One Service, which has brought together four social service groups to provide comprehensive assistance to men released after serving short-term jail sentences at Peterborough Prison near London. It informs that the idea of social impact bonds originated from various thinkers, social service experts and captains of industry in Britain who formed a group called Social Finance to build a social investment market there.
One Service raised £5 million — about $8 million — from 17 investors in Britain and the United States, and the investors will get their money back only if One Service succeeds. The bondholders are mostly charitable groups who would normally give money away. Over the next six years, the recidivism rates of men released from Peterborough will be compared to the recidivism of a matched group of prisoners elsewhere. If Peterborough’s re-conviction rates are 7.5 percent less than the control group,the British government will repay the bondholders with interest. If that threshold isn’t met, investors lose their money, which means that technically it is not a bond. The better the recividism rates, the larger the payout for investors, which is capped at the equivalent of 13 percent per year over an eight-year period.
See also this McKinsey report on Social Impact Bonds.
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