Paternalism and the Mirage

Professor Karnani’s primary critique of Prahalad’s The Fortune at the Bottom of the Pyramid, is that it focuses multinationals on the extreme poor as consumers. Instead Karnani offers that “…we should emphasize buying from the poor. By far the best way to alleviate poverty is to raise the income of the poor.”

This is not a new idea, nor is it at odds with the idea of marketing innovative products toward the poor. Karnani’s arguments against the poor as consumers often boil down to naked paternalism:

“Holding the poor consumer’s income constant, the only way he can purchase the newly available product is to divert expenditure from some other product. If he is a ‘rational’ consumer, this will increase his welfare. However, as a practical matter, this is unlikely to result in a significant change in his poverty situation. Additionally, if for some reason, the poor consumer is irrational in his resource allocation choice, the BOP initiative might even result in reducing his welfare.”

“The poor surely have a right to buy televisions; the issue is whether it is in their self interest to buy televisions.”

So if there is a risk that poor consumers might make irrational buying decisions, who should help guide them? The United Nations? The dictator of that poor country? A local tribal leader? Religious clerics? In an ideal market, consumer choice is best left to… the consumer.

Professor Karnani emphasizes that the government should be focused on consumer protection. But we have to remember that consumer protection laws in the West have taken a century to build. Should developing nations that can’t even deliver basic sanitation, infrastructure and public health shift their focus to developing consumer protection laws? Consumer protection is a worthy goal, but it is ultimately citizens who must hold their own governments accountable when the forces in the free market are perceived as harmful to their society or environment.

Karnanai also takes issue with Prahalad’s example of a skin whitening cream that was marketed to women in India by international giant Unilever. Karnani blames it for it entrenching women’s disempowerment, writing that:

“The BOP proposition is not satisfied with just giving the company the right to sell skin lightening cream. It goes further and commends the company for empowering women and helping eradicate poverty. This is an intellectually and morally problematic position.”

He also notes that Unilver’s marketing campaign was failure:

“The All India Democratic Women’s Association campaigned against this and another advertisement as being racist, discriminatory, and an affront to women’s dignity.

“Ravi Shankar Prasad, minister of Information and Broadcasting, said ‘Fair & Lovely cannot be supported because the advertising is demeaning to women and women’s movement’. Unilever has since discontinued these two advertisements in India.”

Karanani advocates that we preemptively limit consumer choice because the poor might make economic decisions that seem irrational from a Western perspective.  But it was by giving consumers a choice in India that they considered the role of women in Indian society, and market forces ultimately drove Unilever to pull the ads. Would Karnani consider poor customers to have been rational economic actors in that case?
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Paternalism Meets Micro-Credit

Karnani also finds harm in Prahalad’s example of Casas Bahia. This Brazilian superstore facilitates the purchase of high-quality appliances by offering credit to poor consumers who have unpredictable income streams.

Karnani argues that:

“The BOP proposition again falls prey to a fallacy: providing credit does not change the affordability of a product. The finance term for Casas Bahia ranges from four months to one year, with an average of six months. All that the financing scheme does is provide instant gratification at a price. For the privilege of this instant gratification, he pays an interest rate of over 4% per month. People with ‘low and unpredictable income’ would be well advised to save and pay in cash; this will enable them to do a better job of comparison shopping too. It is not surprising that many of Casas Bahia’s customers do not understand well how to unbundle the purchase price and the interest cost and instead focus on the monthly installment payment.”

Using credit in a developing nation is rarely about instant gratification. Village groups in West Africa without access to micro-credit schemes organized themselves and made small loans to group members for the monthly interest rate of about 10%. These loans helped fund medicine for sick children or seeds for cash crops. Poverty tends to produce desperately pragmatic people. Would Mr. Karnani advocate saving money throughout the rainy season only to buy seeds for a cash crop to be planted the next year? Doesn’t it depend on the rate of return? And who is best able to judge when to extend credit?

If a poor Brazilian consumer buys an appliance on credit, isn’t it possible that this person might become more productive as a result? Washing machines liberate people from having to spend the day washing by hand. Gas stoves are more efficient that searching for firewood.

You don’t have to question whether someone will make the right rational economic choices just because they are poor. I agree that government regulation is needed, but we should not discourage the private sector from extending credit just because poor consumers might buy something they don’t need. If someone defaults on the loan at Casas Bahia, I’m guessing they won’t be issued more credit.
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Corruption - Total instances found: 0

Unfortunately this heading applies to a search for the word “corruption” in the PDF of Professor Karnani’s paper, not to the situation the facing the world’s poor. Transparency International recognizes that this is one of the gravest problems facing the poor. Corruption hurts the poor both as consumers (by distorting prices) and producers (by discouraging investment). Neither Karnani and Prahalad offer much insight into how to remedy this.

In fact, Karnani hardly even acknowledges the difficulty hurdle that corruption presents in establishing well-functioning institutions needed to turn the poor into producers. In attacking Prahalad, he seems to lose sight of the fact that billions of the world’s poor live in countries with failed governments.

“By emphatically focusing on the private sector, the BOP proposition detracts from the imperative to correct the failure of the government to fulfill its traditional and accepted functions such as public safety, basic education, public health, and infra-structure.”

Karnani and BOP advocates both want to see improvements in governance. Both want to improve the conditions facing the poor. It’s only a question of how to reach that noble goal. Making a market at the BOP gives multinationals a stake in the improvement. Surely sophisticated market analysts at the world’s corporations would recognize that a well-educated, healthy population of consumers purchases more goods?

We could, of course, step back and try to figure out what is going wrong in the failed states of the world. We just need to fix the infrastructure, education, eliminate AIDS, and end epidemic corruption. This is not a novel idea. The World Bank, UN and countless other academics, advisors and NGOs have been trying to achieve this for decades. As soon as we have that all figured out, will Karanani let companies sell approved goods to the poor?

Karnani concludes that:

Private companies should try to pursue marketing to the poor. However, the profit opportunities are modest at best and we suggest a cautious approach. Large companies that require scale economies should be even more hesitant.

Why ward off large companies? Free market innovation is an invaluable tool. Companies should try to earn a profit in developing nations. Many will fail as thousands of companies before have failed in rich nations. Just don’t wave off the LifeStraws and PlayPumps of the world while we wait for developing nations to create consumer protection laws up to our standard.

Karnani is correct to focus on establishing institutions that will help the poor earn more income. But while we wait, why not try the BOP approach?

Yesterday I wrote about the shortcomings of Prahalad’s book, The Fortune at the Bottom of the Pyramid. We left with the question of whether there was even a market to discuss. Several factors make it difficult to estimate disposable income at the bottom of the pyramid (BOP). Even if it is not a fortune, there is likely much more than a nickel a day of disposable income amongst the world’s 4 billion poor.

Most people in extreme poverty live in rural areas and derive much of their diet from subsistence farming. This means that relatively little of their income is spent of food. In family or tribe-oriented societies, there is also an income smoothing effect. Kinship networks, for example, mean that if one person in a family has a high-paying position in the government, many in the family will benefit. In addition, income such as flows from non-governmental aid, international transfers from foreign nationals living abroad, and the grey economy may be under-reported in GNP figures.

In response to Karnani’s paper, the WRI’s NextBillion.net noted that:

BOP households collectively spend money, lots of it, on a wide variety of goods and services, and are clearly willing to pay for services such as connectivity, clean water, financial services, energy, health care, and education for their children, as well as food, housing, and consumer goods. The BOP is already an economic actor, not just a passive, dependent group, and its collective actions define a market.

So there let’s assume that there is indeed a market of billions at the bottom of the pyramid. Should companies try to reach it? Karnani cautions that viewing the BOP as a vast market of micro-consumers is “potentially a dangerous delusion.” Let’s look more closely at his argument.
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Distribution and Economies of Scale

Concerned about the apparent gullibility of multinational corporations (MNCs), Karnani warns that:

“Not only is the BOP market quite small, it is unlikely to be very profitable, especially for a large company. The costs of serving the markets at the bottom of the pyramid are very high…. This increases distribution and marketing costs and makes it difficult to exploit economies of scale. Weak infrastructure (transportation, communication, media, and legal) further increases cost of doing business.”

Two words: Coke and Guinness. Both have very deep penetration in West Africa. Granted these are not going to improve the health and well-being of the BOP (though Guinness bottles do read, “Guinness is Good for You“). Somehow these MNCs have overcome the challenge of distributing and marketing their products across a large geographic area.

Regardless of infrastructure and marketing costs, the market will help align buyers and sellers if the price is right for each.
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Reducing Prices at the Bottom of the Pyramid

Prahalad’s thesis hinges on the idea that attracting more competition to the BOP will drive down product prices, thus freeing up their disposable income for other purchases. This is basically how Wal-Mart has made low-income Americans feel richer even as real income has stagnated over the last decade. But Karnani takes issue with Prahalad’s assertion that the private sector can deliver high quality goods to the world’s desperately poor at competitive prices:

“There are only three ways to reduce prices: 1) reduce profits, 2) reduce costs without reducing quality, and 3) reduce costs by reducing quality…. the only realistic way to reduce price is to reduce cost. The BOP proposition is adamant that we should not reduce quality in this process.

“Unless all the current producers are grossly inefficient, the only way to reduce cost… without reducing quality will always require a significant improvement in technology. Good examples of this are found in the areas of computers, telecommunications and various electronic products. It is difficult to find examples of such dramatic cost reduction in other product categories. It is not surprising that the BOP proposition repeatedly uses these same examples. We should also note that the ultimate impact on the real income of the poor due to these major price reductions is quite low because the poor spend only a small part of their income on such electronic products. The poor spend over 80% of their income on food, clothing and fuel – products that have not benefited from such dramatic technological changes in a long time.”

Let’s evaluate that last statement and have a look at how technology might help deliver improved food, clothing, fuel, and public health.

Food: There are constant improvements in pest-resistant crops, hybrid seeds, or high volume animal husbandry. Many famers in Africa still till individual family farms by hand. Certainly technology could help them improve efficiency which would lead to lower prices.

And technology improvements in computers and telecommunications do not exist in a vacuum. There are numerous positive spillover effects that affect the BOP as producers. The Washington Post recently reported that cell phones in Congo have enabled farmers and fishermen to “…use text messaging to check market prices, eliminating middlemen and increasing profits — and preventing long trips to the market on days it is canceled.” So a technology unrelated to agriculture has helped farmers saved on input prices (transport to the market on days when it’s canceled) and output prices.

Clothes: Apparel prices have tumbled over the past decade. Much of this is due to reduced quotas on Chinese apparel imports in the U.S. and Europe. Thus, the assertion that “the only way to reduce cost… without reducing quality will always require a significant improvement in technology” is inaccurate. Clothing prices have dropped as a result of trade policy, not an improvement in technology. This does have a trickle-down effect for the world’s poor.

Fuel: Fuel has indeed become more expensive. Women have to scavenge farther for firewood. Oil prices lead Nigerians into the deadly practice of siphoning off crude oil from pipelines running through their villages. But technology can improve access to energy sources. Military applications such as SkyBuilt mobile solar power could find a market at the BOP helping medical centers or providing a short term power source for harvesting and processing crops.

Public Health: As patents expire on novel drugs, cheaper generic drugs will enter these markets. Playpump is an innovative approach to water delivery. LifeStraw promises to exploit economies of scale in order to drive down prices for its personal water filtration device.

Technology: Last week, the Wall Street Journal ran a front-page story about an American entrepreneur, Greg Wyler, who was building an Internet infrastructure in Rwanda. The focus of Terracom is to first focus on market access, then profits. Mr. Wyler might disagree with Karanani’s ideas about providing a quality product at reasonable prices for the poor. He is quoted as saying, “We’re on a mission here to see what happens when we drive prices down and quality up.”

And lest you think that Rwanda is an obvious market for an outside investor, have a look at the graph at the right.

As WRI writes in response to Karnani’s critique:

The pertinent development question is whether the BOP is well served by the present (often informal) markets, and whether there are unmet needs that could be better served by more competitive markets and broader participation by the legitimate private sector.

I believe that private sector innovation help can drive prices lower, maintain or increase quality, and help deliver goods that result in better livelihoods for those at the bottom of the pyramid. But what if multinationals start marketing products that the poor don’t need? Are BOP consumers rational economic actors? Or is Karnani correct when he says that, “The problem is that the poor often make choices that are not in their own self interest.”

More on that soon…

In 2004, C.K. Prahalad, a professor at University of Michigan’s Ross School of Business published the groundbreaking book “The Fortune at the Bottom of the Pyramid.” The basic thesis is that multinational corporations (MNCs) have concentrated their sales and marketing efforts on the richest citizens of the world while ignoring the 4 billion consumers who live on less than $2 per day at the Bottom of the Pyramid (BOP).

He asserts that introducing market choice to the poor will free villagers from local monopolists, creating a virtuous cycle of consumer access and improved product quality. MNCs that sell products in this enormous, underserved market stand to make hefty profit. And, as more and more companies turn their attention to the BOP, competition will drive private sector innovations that address the needs of the poor. By giving MNCs an economic stake in this market, they in turn will draw the attention to problems of governance.

Although the work is primarily empirical and draws too heavily from examples in India, the BOP argument is an intriguing one. It eschews the notion that concentrating on the poor should be relegated to a secondary “corporate social responsibility” initiative and takes an integrative approach to the private sector achieving what non-governmental institutions and multi-lateral lenders such as the World Bank have not: pulling billions out of poverty.

We should applaud the BOP adherents for their novel approach, an approach that too closely resembles the idealism typical of a first-year Peace Corps volunteer. It is only after the corruption, complacency, intestinal ailments, and constant economic opacity have wrung out the initial naiveté that the discussion becomes interesting.

And a dose of cynicism is exactly what Professor Aneel Karnani - also of the Michigan School of Business - introduces in a recently-released working paper, “Fortune at the Bottom of the Pyramid: A Mirage.” He asserts that:

“Rather than focusing on the poor as consumers, we need to view the poor as producers. The only way to alleviate poverty is to raise the real income of the poor.”

Professor Karnani’s basic thesis is that BOP de-emphasizes the role of government in providing basic services and that we must focus on building the capacity of the world’s poor by focusing on government failures in education, health, and infrastructure.

Unfortunately, non-governmental organizations have been focusing on failures of government for decades. Billions of dollars have been spent flying experts around the world to bolster child immunization rates, build water delivery systems, and advise on bankruptcy reform. As you can see from the map above, the last 27 years have been lean ones for many in the bottom of the pyramid. This is not to diminish individuals’ efforts or passion. It is only to acknowledge that it is a very difficult goal and multi-lateral institutions do not have a recipe, much less a consensus, of how to foster economic growth.

One of the positive side effects of the BOP argument is that it makes MNCs stakeholders in a new and underserved market. To be sure, there are fatal flaws in the logic and research initiated by Prahalad. But MBAs are new to development and we should embrace that wide-eyed optimism even as we critique shakey methodology.

Is there a Market at the Bottom of the Pyramid?

Karnani points out one inexcusable fallacy in Prahalad’s work: market definition.

Prahalad used the World Bank’s estimates for the number of people living on an income of $2 a day or less (poverty), and $1 a day or less (extreme poverty). Both poverty measures are at purchasing power parity (PPP).

Why is PPP important? Because no matter where in the world you spend $1 PPP it buys the exact same goods, regardless of local price. So that $1 PPP that the extreme poor earn in a day will buy you one loaf of bread in the U.S. Actual prices are much lower in developing countries, so that same loaf of bread might only cost $.10. The market at the bottom of the pyramid will not pay MNCs in PPP dollars; it will pay them in local currency, as Karnani explains:

“[Prahalad] claims that the BOP potential market is $13 trillion at PPP. This grossly over-estimates the BOP market size. The average consumption of poor people is $1.25 per day and assuming there are 2.7 billion poor people, which implies a BOP market size of $1.2 trillion, at PPP in 2002.

“From the perspective of a multi-national company from a rich country, profits will be repatriated at the financial exchange rates, not at PPP rates. In that case, the global BOP market is less than $0.3 trillion, compared to $11 trillion economy in the US alone – making the BOP a difficult place to look or a fortune.”

Another problem is that the poor spend about 80% of their income on food, clothing and fuel. Suddenly the $300 billion market at the bottom of the pyramid shrinks to $60 billion of disposable income at current exchange rates. Spread amongst 2.7 billion people, that’s about a nickel a day for disposable income.

Karnani also takes issue with the number of poor:

“Prahalad states that there are more than 4 billion people with per capita income below $2 per day at purchasing power parity (PPP) rates…. Most researchers argue that the World Bank already over-estimates the number of poor people, with some researchers estimating the poor at 600 million (The Economist, 2004).”

There’s no shortage of poor, I’m afraid. Sanjay Reddy and Thomas Pogge of Columbia University have written a persuasive paper that critiques World Bank calculation of the number of poor in the world. While they give no new estimate, it’s likely that the world’s poor have been undercounted:

“There is some reason to think that the distortion is in the direction of understating the extent of income poverty.”

So the bottom of the pyramid is left with billions of poor who have no money. Does this invalidate Prahalad’s entire thesis? More on that tomorrow.

Throughout history, walls have been built primarily for the purpose of defense (The Great Wall of China), politics (Berlin), religious separation (Northern Ireland), ethnic divide (Cyprus), or some nasty combination of all four (Israel). But rarely are walls built purely to rebuff wage invaders.

Illegal immigration is an economic issue, thus the rules of supply and demand apply. If the demand for illegal workers is cut, wages for illegals will fall, and the supply of immigrants will fall as well. Right now it is a challenge for employers to verify the legal status of some workers (although, our policy of turning a blind eye doesn’t help).

The immigration bill currently in Congress addresses this by adding $1.6 billion for a computerized system to verify the eligibility of applicants for lawful employment. Once this is in place, fines could be increased for employers caught employing illegal immigrants. Voila, demand for illegal immigrants falls and so would the number tempted to cross an open border.

But the immigration bill directs twice as much money to the Department of Homeland Security. DHS is being authorized to spend $3.3 billion on border defense that consists of 370 miles of fencing and 500 miles of vehicle barriers that will only cover 47% of our border with Mexico. Construction of one foot of the fencing alone will cost $568.

Israel has spent billions of dollars on walls, trenches, even a proposed sunken highway. Meanwhile, smugglers between the Sinai Peninsula and Gaza spent just $76 per foot to tunnel underneath. We should count ourselves lucky to only have impoverished day workers trying to cross our border (I discount the terrorism threat - terrorists could more easily cross our 5,500 mile border to the north).

By employing a historically military tactic to a primarily economic issue, we will spend ourselves into a hole.  At least there will plenty of illegal immigrants to help us dig it.

Sources: Sunken road: Cornell University, The Current; U.S. Mexico Border Fence: Congressional Budget Office estimate; Isareai Wall of Separation: Palestinian Environmental NGOs Network; Fourth generation of Berlin Wall: Berlin Wall Online; Smuggling Tunnels: Defense Update; Vinyl Picket Fence: Hoover Fence, Co.

Notes: According to Berlin Wall Online a 3.957 foot wide segment of the Berlin Wall cost 359 East German Marks in 1975. Because this was not a freely traded currency, historical exchange rates are hard to come by. However, as a note of comparison, Berlin Wall Online mentions that a loaf of bread cost 1.04 East German Marks at the time. Thus the store of value in a segment of the wall is equivalent to 345 loaves of bread. In 2006 in the price of a loaf of bread in the U.S. averaged $1.30, so each 4 foot segment of the Berlin Wall was valued at $448.75. It’s not perfect, but you get the idea.

It looks like a duck, it walks like a duck, and it really sounds like a duck.

Yesterday’s Washington Post editorial, “What Next?” gave a grim assessment of how a civil war in Iraq could explode into a regional conflict in the Middle East. Iraq has all of the necessary ingredients of a civil war: a growing tendency to identify with religious and ethnic groups rather than the Iraqi nation-state, valuable resources spread unevenly throughout the country, a growing perception that democracy does not reflect regional interests, and daily news of increasing civilian casualties.

A broader civil war would likely produce Iraqi refugees who could export the Iraqi conflict to neighboring countries. As we have seen in the recent Lebanon-Israel conflict, these neighboring states are willing to fund proxies such as Hezbollah, if not to intervene directly. The authors note that the foundation for a regional war could already be in place:

U.S. military and Iraqi sources think there are several thousand Iranian agents of all kinds already in Iraq…. Iran has set up an extensive network of safe houses, arms caches, communications channels and proxy fighters, and will be well-positioned to pursue its interests in a full-blown civil war.

Although Bush administration officials acknowledge privately that things are not going according to plan, Bush said publicly today that Americans “have to understand the consequences of leaving Iraq before the job is done.”

We’ve done a heck of a job so far. Insecurity has left the Iraqi economy in shambles making it easier for insurgents to find new recruits. One-fifth of the population is in poverty. Oil production is still 11% below pre-war production levels. Unemployment is as high as 40% in some regions, and inflation is rampant.

Iraq also has a serious brain drain that leaves little human capital with which to rebuild. According to a report by the Brookings Institution, 2,000 doctors have been murdered, and another 12,000 have fled the country. Internal displacement is also a growing problem: 200,000 Sunni Arabs have been displaced from western Iraq and up to 100,000 Shiites have fled cities to take refuge in the south.

Civilian deaths increased by nine percent from June to July, and have almost doubled since January, 2006. One of the more disturbing trends is that as violence has increased in Iraq, it has also become increasingly brutal.

When do we recognize this as a civil war? In the editorial “What Next?” Laura Stanton of the Washington Post produced a graphic that applied the percentage of deaths and displaced persons from recent civil wars to the current population of Iraq. Statastic used this data to gain further insight into the average number of deaths per month during these civil wars.

So how severe are the 3,438 civilian deaths reported in July, 2006? On a per capita basis, this is nearly 50% more deaths per month than averaged during the Croatian civil war. If violence in Iraq were to increase at the same rate that it increased between January and July of 2006, there would be more than 450 deaths per day in Iraq by July, 2007. This is about the same rate as the Kosovo war, but with one critical difference: Iraq’s population is 14 times larger. We would need as much as four times the current financial and military resources to quell a civil war, requiring as many as 450,000 soldiers. And that says nothing of how we would stop a regional conflict.

If a civil war does erupt into a regional war, Daniel L. Byman and Kenneth M. Pollack note that history is not on our side:

No country in recent history has successfully managed the spillovers from a full-blown civil war; in fact, most attempts have failed miserably.

Much as Americans may want to believe that the United States can just walk away from Iraq should it slide into all-out civil war, the threat of spillover from such a conflict throughout the Middle East means it can’t.

It’s time to acknowledge the Iraqi insurgency for what it is: a civil war. Quack.

Sources: Washington Post (primary sources cited include Amnesty International, Center for Study of Civil War, CIA World Factbook, Richard Holbrooke’s “To End a War”, World Bank); PBS Frontline map.

Notes: *The estimate for July, 2007 applies the rate of doubling in civilian deaths that occurred during the 6 months between January and July, 2006.

The average monthly deaths were calculated by applying the death rate per capita in each country’s civil war to the population of Iraq. This was then divided by the length of the each civil war. The monthly average was calculated using whole years for these conflicts. In other words if a civil was started in December of 2000 and ended in January 2001, its duration would counted as two years, not two months.

Why the lack of precision? Because using the monthly average of deaths during a civil war is an imperfect measure to begin with. Civil conflicts often hinge on a single event that may not have many civilian deaths (such as the February 22, 2006 bombing of a sacred Shiite shrine in Samarra), or a monthly average may understate the brutality of a shorter campaign (such as the 800,000 who were murdered in Rwanda over the course of 100 days).

This measure is only meant to lend an international comparison to the debate about what constitutes a civil war.

State fairs are in full swing, and presidential hopefuls are getting acquainted with Iowans. As the first state to hold a caucus in the 2008 presidential primary, politicians take advantage of the state fair’s 1 million visitors to test the political waters.

It’s an odd setting for DC politics. The Iowa State Fair is a demonstration of how agriculture has helped shape a quirky Midwestern culture. Today’s events, for example, include a Mom Calling Contest, hot beef sundaes, rubber stamp art techniques, “Focus on Ostrich,” by the Iowa Ostrich Association, at least two goat milking competitions, and a titillating program entitled “How’s My Wienerschnitzel?” Ambivalent fairgoers can escape to the Iowa Wine and Cheese Garden starting at 11 am.

For anyone born and raised in Iowa, the real highlight is the butter cow. Lines typically snake around the Agriculture Building as eager Iowans wait for look at the cow crafted from 500-600 pounds of butter. While the Butter Cow Lady, Norma “Duffy” Lyon, has sculpted a new butter cow annually for the last 45 years, this year she gave up the reigns to her 29 year-old apprentice, Sarah Pratt. Over the years, Norma has also sculpted butter objects to keep the cow company in her refrigerated showcase. These butter creatures hold a funhouse mirror to Iowa culture: Grant Wood’s “American Gothic,” Elvis Presley, Leonardo da Vinci’s “The Last Supper,” John Wayne, The Peanuts Gang, Tiger Woods holding a tiger (really), and this year, Superman.

The Iowa State Fair also has another proud tradition: politicians eating fair food. Former Speaker of the House Newt Gingrich visited the fair last week and ate a pork chop on a stick. Delaware Senator Joseph Biden, who first visited the fair 20 years ago during his bid for president, was reportedly devouring a hoagie in one hand and an ice cream cone in the other.

Other politicians couldn’t help but compare the Iowa State Fair to home. Indiana Senator Evan Bayh commented that “I see you serve beer at your fair and we don’t” in Indiana. (Wait until he finds out what time the wine garden opens.) George Pataki observed that, “We have a great state fair in New York but… we don’t have pork on a stick.” Republican Senator Sam Brownback was at the Iowa State Fair yesterday and Senators John McCain and Bill Frist are expected today or tomorrow. Iowa Governor, Tom Vilsack, has also visited several times - no word on what he’s been eating, but as a native Iowan it’s unlikely to make much news.

So are the state fair visits paying off? According to WHO-TV’s informal “Cast Your Kernel” poll taken on August 16th, not really. Of the Republicans, Senator John McCain came out on top with 24 percent, followed by Rudy Giuliani and Condoleezza Rice each with 20 percent. Neither of the leading Democrats has yet paid a visit to the butter cow. John Edwards and Senator Hillary Clinton were tied at 33 percent, while Iowa’s own governor Tom Vilsack came in third with 13 percent.

It seems that the 500 pounds of butter in the butter cow are enough to sustain the hopes of at least eight politicians. It is a copious amount - about 2000 sticks in all. That’s enough buttersticks to nickname 2,000 baby pandas, or draw butter for 2,000 lobsters. Or, you could butter 4,000 tubs of popcorn, or 16,000 pieces of toast.

And if you get addicted to shaving with butter like Kramer, you can get 16,000 close shaves out of this year’s butter cow. Those 500 pounds of butter would also fuel a very successful bake sale: 20,000 pieces of fudge, 35,000 of my mother’s famous brownies, 60,000 Toll House cookies, or 64,000 Rice Krispies Treats. Of course, if you’re in Iowa, you would most likely use 500 pounds of butter on 32,000 ears of sweet corn.

In a letter about his trip to Iowa, Newt Gingrich closed with this:

“…the process of electing the President of the most powerful country on earth passes through a state fair in rural America where more than one million people come with their families to eat nearly anything that comes on a stick, compete in numerous agricultural competitions and contests, ride the rides, enjoy the shows and see the ‘butter cow,’ but that is how we do it in America, where a free people get to put their candidates to the test face to face.”

Fair enough.

Notes: According to the new butter cow lady, Sarah Pratt, this year’s butter cow is a Jersey and requires about 500 pounds of butter.

Assumptions: One ear of Iowa sweet corn only requires half a tablespoon of butter. Popcorn needs 1/4 cup per tub. Lobsters apparently require 1/2 a cup. Statastic does not advocate sautéing pandas, no matter how delicious that might be. Butterstick was blogosphere’s attempt to name Tai Shan, the baby Panda at the National Zoo.

Yesterday Foreign Policy and the Center for Global Development released their 4th annual Commitment to Development Index (CDI). This index attempts to quantify how well rich countries “help poor countries build prosperity, good government, and security.” The index measures seven policy areas: aid (per capita and quality), trade, investment, migration, environment, security, and technology.

Many countries’ own policies stand in direct contradiction to one another showing, perhaps, that internal politics are primary, and policies affecting the poorest countries on earth are secondary. Andrew Natsios, the former head of the U.S. Agency for International Development (USAID), pointed out some of these contradictions before resigning in January, 2006. As Foreign Policy notes:

“Natsios criticized a law that requires the U.S. government to buy food from U.S. farmers, ship it on American boats, and deliver it to famine-stricken regions via U.S.-based organizations. The U.S. government must deliver food aid this way even when it depresses local food prices, pushing more farmers into poverty, and even when it could buy food from farmers just outside a famine zone for much less. Some nongovernmental organizations that get a large fraction of their funding from the program defended the status quo, arguing that dropping the ‘made in America’ requirement would undermine the program’s support among American farmers and shippers. Congress quickly axed Natsios’s proposal for reform. That the U.S. government must pay off American interests to feed the starving is a sad commentary on how low the commitment to development may still be.”

In an unrelated but equally interesting measure, Transparency International has for several years been publishing the Corruption Perceptions Index (CPI) in order to draw attention to the role of corruption in stifling economic development. When we look at corruption in rich countries, there appears to be a parallel between increased corruption and decreased effectiveness at helping poor countries. To be fair, the 21 rich countries ranked in the Corruptions Perceptions Index are squeaky-clean relative to the countries they are trying to help (with the exceptions of Italy and Greece).

Is there a link? Perhaps pandering at home - the constant political pressure from competing interests - creates economic inefficiencies that hurt poor countries. These policies could come in the form of unfair trade policies (e.g. Switzerland’s $987.58 per-cow subsidy) or environmental indifference (the United States’ ultra-low gas taxes).

Then again, it’s also easy to be small. The 5 countries “most committed to development” have an average population of 7.9 million whereas the bottom five have an average population 53.7 million. Similar ratios hold for corruption: the most transparent rich countries have smaller average populations.

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Sources: Statastic research; Foreign Policy; Center for Global Development; Wikipedia

After nearly two full seasons of Washington Nationals baseball in the nation’s capital, 1.6 Comcast cable subscribers will finally be getting Nats games at home. While DIRECTV, Cox and others in the DC area receive the Nationals games from Mid-Atlantic Sports Network (MASN) for free, Comcast subscribers will enjoy a $2 monthly fee tacked on to their cable bills for carrying MASN. This is not an optional subscription fee like DIRECTV’s NFL Sunday Ticket, it’s a permanent hike, and it will provide $38.4 million in annual revenue for Comcast.

Fewer than 150,000* DC-area residents are likely to watch Nats games on TV. But if Comcast were to earn the same $38.4 million by selling subscriptions only to Nats viewers, they would have to charge them $44 per month. That’s money they can more easily extract from all 1.6 million Comcast customers in the DC area.

It gets better. Comcast extended basic TV comes with 76 channels, which for the sake of argument, provide 24 hours of programming for the local-monopoly price of about $46 per month. So 100 hours of TV on any of those channels will cost you about 8 cents.

If MASN broadcasts all 162 Washington Nationals games each year, and we assume that a baseball game takes 3 hours, that $2 fee from Comcast will be costing it DC-area customers $4.94 per 100 hours of Nationals baseball in the 2007 season.

But Comcast is more cunning that simply charging DC residents 60 times the normal per-hour cable program rate. They also chose to cut a deal with MASN at the very end of the 2006 season, meaning that they will broadcast a maximum of 22 games this year. So for the seven months between September of 2006 and Major League Baseball’s opening day of April 1, 2007, Comcast will broadcast about 66 hours of Nats games for the low, low price of $14. That comes out to $21.21 per 100 hours of programming!

Rest assured, Comcast isn’t going to make any money from this. Comcast executive vice president David Cohen said in a statement that, “Comcast does not intend to profit from the carriage of this new network, but its significant cost makes it necessary to pass along a price increase to our customers. It will cost literally hundreds of millions of dollars over the next decade to provide MASN….”

I’m sure the shareholders are going to be pleased to hear that Comcast isn’t broadcasting Major League Baseball for a profit. So are Nats games just unusually expensive to film and distribute? Not according to MASN. They told Reuters that Comcast would be paying about $1.25 per customer per month. MASN also estimated that Comcast could make back another $.60 per cable customer on advertising. After subtracting MASN fees and adding in their advertising revenue, Comcast’s net income will be about $15 million for broadcasting 22 Nationals games between September 7, 2006 and March 31, 2007.

If you’d like to switch to DIRECTV now, click here. Statastico earns nothing from this hyperlink, just a little satisfaction.

Go Nats!

Sources: Statastic research; Washington Post; Comcast

Notes: *How many Nats TV viewers are there? It’s hard to say since there has never been full cable coverage. San Francisco had about 144,000 regular TV viewers the year after their Giants were in the World Series. This is likely a good proxy because it has a similar metro-area population and the Oakland A’s compete for viewers, much as the Baltimore Orioles do.

In May, 2006 the MIT Media Lab unveiled its first working prototype of the $100 laptop. The non-profit One Laptop per Child (OLPC) was spun out of the Media Lab to manage the design. The result is small, brightly-colored and rugged laptop that may cost as much as $140. Designed to the specifications of the world’s poorest children, they are the great hope for narrowing the global digital divide.

Before they ship the final product in 2007, OLPC will pilot prototypes in the six countries listed in the chart below. The plan is for the governments of developing nations to purchase millions of these laptops and distribute them to children through their schools.

While I applaud the goal of providing an ultra-affordable laptop to the bottom of the pyramid market, I do worry about the re-sale of these high-value items. OLPC has eventual plans to create a secondary market for the sale of $100 laptops in developed world. From the OLPC FAQs:

Will OLPC spin-off a commercial subsidiary?

The idea is that a commercial subsidiary could manufacture and sell a variation of the OLPC in the developed world. These units would be marked up so that there would be a significant profit which can be plowed into providing more units in countries who cannot afford the full cost of one million machines.

The discussions around this have talked about a retail price of 3× the cost price of the units.

$100 in Nigeria is the equal to nearly two months income. To give Americans a sense of how much $100 is to the average Nigerian, imagine sending your 8 year old to school with a $6,000 laptop. Now imagine living in a country with an epidemic of corruption, in a shanty with no electricity or running water. If laptops were selling for $300 in developed nations, it would provide a strong, and unfortunate, incentive for Nigerian parents to sell their children’s laptops.

Leapfrogging technologies is a worthy goal, but OLPC has to make sure that the social institutions in their target markets can support the landing. They must concentrate as hard on issues such as corruption and cyclical poverty as they do on the design of motherboard and screen brightness. We’ve seen before with the example of SCANWATER that good technology will fail without first addressing underlying problems.
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Sources: Statastic research, Wikipedia, IMF

Notes: PPP was not used because the calculation expresses $100 in an approximated nominal US income per capita. The statastic was calculated by dividing the nominal GDP per capita in these 7 countries by $100. That percentage was then multiplied by the nominal GDP per capita of the United States.

Today’s announcement that British Petroleum would be taking crude oil production offline to make urgent repairs drove up oil prices to $77 a barrel. So what about those renewable resources we keep hearing about? We want to break the oil addiction!

Ethanol is indeed sparking renewed interest and a flurry of investment in the U.S. Most of the 3.9 billion gallons of ethanol came from corn and was used in the states where it was grown. Impressive until you realize that Brazil produces 4.8 billion gallons of sugarcane-based ethanol, providing about 40% of their annual gasoline needs.

We have been producing ethanol-based fuels in the United States for decades. Most of the Midwestern states (see charts below) that benefit from $4 billion in corn subsidies have an available 10% mix of ethanol in their gasoline. And with low corn commodity prices, high gas prices and a lack of ethanol refining in the Midwest, it has created the perfect investment storm.

Profit from Archer Daniels Midlands’ (ADM) corn bioproducts increased from $259 million to $446 million this year, and they have aggressive expansion plans. According to today’s Barron’s:

“In the past year, the difference between ethanol [prices] and corn prices has soared from less than 50 cents to about $3.10 a gallon…. That’s lifted the annual return on capital for some ethanol plants toward 50% and set off a stampede of new investment in ethanol refining.”

So it will come as no surprise that the ethanol industry has a strong lobby to protect itself. It’s a twisted relationship. The federal government’s price supports and subsidies regularly create overproduction of corn. This drives corn prices lower suppressing world prices (something the developing nation’s rightly bemoan).

Some of this surplus is used for ethanol. Why? Refineries - and consumers - are incentivized by a $.51 per gallon tax credit for 10% ethanol-based gasoline. Ethanol producers also enjoy significant trade protection in the form of a 2.5% ad valorem tariff and import duty of 54¢ per gallon of ethanol.

In August, 2006, Amani Elobeid and Simla Tokgoz from Iowa State University published a paper that analyzed the economic effects of removing these protections:

“The study finds that the removal of trade distortions induces an increase in the world price of ethanol and a decrease in the U.S. domestic ethanol price, which results in a decline in U.S. ethanol production and an increase in consumption. Consequently, U.S. net ethanol imports increase significantly….”

The Iowa State paper shows that if we were to remove trade barriers and the tax credit, we would see a 14.46% price drop in ethanol for consumers. Ethanol currently makes up 10% of our gasoline in a limited number of markets in California and the Midwest. Lifting trade barriers would allow Brazilian ethanol to more easily reach ports on the East Coast.

Yet we continue to protect ethanol refineries. ADM Chief Executive Patricia Woertz told Barron’s that “ethanol demand could triple. ‘It looks like it has room to grow to 14 billion or 15 billion [gallons per year],’ she said, ‘which is a full 10% blend in the gasoline pool in the United States.’”

Barron’s analysis of the ethanol market was about as sheltered as the heavily-protected ethanol refining industry: “Unfortunately, before ethanol refiners can reach that goal [14 billion or 15 billion gallons per year], they might reach the limits of the country’s corn supply. America’s entire corn crop would satisfy just 12% of gasoline consumption, leaving no corn to feed livestock and humans.”

No corn to feed our delicious cows? Once we remove ADM’s trade protections and give the Brazilians a new market for their ethanol, we should have plenty of corn to feed those future Big Macs. It will help our farmers counteract the predicted 1.7% drop in domestic corn prices, and it might help lift some desperate Brazilians out of poverty.

Didn’t most of us learn competitive advantage in econ 101? This may be a good time for Congress to brush up.

Sources: Statastic research; Environmental Working Group - Farm Subsidy Database

Trade model based on scenario 2 in the following paper: “Removal of U.S. Ethanol Domestic and Trade Distortions: Impact on U.S. and Brazilian Ethanol Markets,” Amani Elobeid and Simla Tokgoz, Working Paper 06-WP 427, August 2006, Center for Agricultural and Rural Development, Iowa State University