Stealing from the poor

The people of Senegal are charming, and poor. The GDP per capita is $1,900, placing it 190th in the world. By comparison, the GDP per capita of the U.S.A. is $47,300.

Senegal’s unemployment rate is 48% and one sees indigents everywhere.

 

 Although the poverty is omnipresent, wealth is also in clear evidence.

Senegal has a population of 12.6 million people, and although it is so poor, like many of the countries in Africa, cell phones are ubiquitous. There are 8.3 million cell phone users in the country, of which Orange the large international operator services 5.1 million.

In 2010, the most recent year for which Orange has published figures, it had a turnover of €45.5 billion ($55.6 billion). That’s 2½ times Senegal’s GDP. Orange’s profit after tax was €4.9 billion ($6 billion). It’s not really struggling, even in these tough economic times.

Poor people cannot afford cellphone contracts, so most people in Senegal use recharge vouchers.

The voucher shown here says that it’s valid until 31/12/2013. What the voucher does not say is that once it’s been activated, the credit will expire after 10 days, whether it’s been used or not, unless one buys more credit.

In terms of the laws of contract, that’s a unilateral change to the contract, and if there was a small claims court in Senegal, Orange would lose the case. They have changed the contract without the consent of the other party.

Effectively, a company which has a turnover 2½ times Senegal’s GDP is stealing from some of the poorest people in the world, because it can.

When Orange in Senegal were approached for a comment, they laughed. At least someone finds it amusing.

Politics and money

As a student of the science of marketing, seeing how politicians get elected is both interesting and sad. The marketing professionals, who behind-the-scenes conduct the campaigns, are leaders in the field. They leave nothing to chance.

Understanding the target market – and ensuring that the product/service meets the needs and aspirations of the voters forms the core of these prime examples of marketing. In the case of politics the product is a person, and while psychologists will tell you that personality is formulated in the early years of childhood, it appears that with politicians this doesn’t apply. Because elections often focus on the person, and what they stand for, rather than policies, personality traits appear to be fungible. During the primaries in the United States, Republican candidate’s views move to the right, while Democrat candidate’s move to the left. Once the primaries are over both Republican and Democrat candidate’s ideas move towards the centre. Fungible! The politicians two-step.

Marketing is an expensive exercise, and political campaigns are no exception. The 2008 presidential campaign is estimated to have cost in excess of $1 billion, and now with the introduction of the super Political Action Committees (Superb PACs) the cost of the 2012 election campaigns are likely to cost even more. Where does all that money come from?

A recent episode of “This American Life” (#461) provided an interesting peek behind-the-scenes. The episode starts with a voicemail left on the telephone answering machine of a lobbyist by Eleonora Holmes Norton, a US Congresswoman sounding a lot like a telemarketer, asking for money.

It’s not an isolated incident. Here is a quote from the second in command of the US Senate, Dick Durbin, Democrat from Illinois.”I think most Americans would be shocked– not surprised, but shocked– if they knew how much time a United States senator spends raising money. And how much time we spend talking about raising money, and thinking about raising money, and planning to raise money. And, you know, going off on little retreats and conjuring up new ideas on how to raise money.”

Congress men and women complain that they don’t have enough time to read, study, and understand the issues that they are voting on. This in part explains why. There are numerous complaints that laws are not properly thought through, badly drafted, and biased towards specific interest groups. If the people who are supposed to be doing the work are too busy raising money, then perhaps one understands why.

The lobbying industry is said to be worth $3.5 billion per year, and the revenue comes from interest groups trying to influence lawmakers to change legislation in the direction the interest group would prefer. Often the interest group is able to measure the dollars spent on lobbying against the potential return if the proposed legislation follows their interests. Consider the American Jobs Creation Act of 2004. This was a piece of legislation that lots of multinational corporations spent a lot of time lobbying for because it got them a huge, one-time tax break. Some of the profits – the profits they made overseas – would be taxed at just 5% instead of the normal 35%. A massive windfall. This law caught the attention of a tax professor at the University of Kansas, Raquel Alexander who was able to calculate the return on investment: $220 in tax benefits for every lobbying dollar spent, a return of 22,000%. That’s not to say that interest groups get that kind of return every time. That the lobbying industry has not suffered a decline in the financial crisis suggests that the return on investment still justifies the amount of money being ploughed into the industry.

When the interest group gets its way, if the government is going to balance the budget, it needs to get the money from somewhere else, and if you’re not represented by a lobbyist, or a switched on politician, that’s going to be you. Of course, if the budget doesn’t balance, then your kids will pay for it.

Within the international community we try to influence the people of the developing countries that suffer the effects of kleptocracy, nepotism and corruption and suggest that they to adopt democracy, using the Western example. It’s not an easy job.

A better form of government?

In an earlier rant I suggested that the current form of democracy is an anachronism. So what?

In 1945, while he was attending the Potsdam conference, Churchill was voted out of power by the British electorate. The Potsdam conference was one of the most influential meetings of world leaders, attended by Churchill at the beginning (followed by Attlee), Truman who had succeeded FDR, and Stalin. The agenda was how to divide Germany and Austria between the powers, and the strategy to end the war with Japan. At the time, Stalin armed with intelligence gathered from spies within the Manhattan Project knew more about America’s nuclear weapons than did Truman. It was not opportune to lose the continuity of leadership. The British electorate thought otherwise.

In 1947, Churchill commented that “democracy is the worst form of government except all those other forms that have been tried from time to time”, as leader of the opposition making a speech in an attempt to prevent Attlee from disbanding the House of Lords.

Four years later the British public, perhaps appreciating the error that they had made, re-elected Churchill.

Already in 1947 Churchill understood that a better system of government in an increasingly complex world had become necessary. Now, 65 years later there has been little improvement.

So what would be better?

Firstly, if the people in government are qualified to do the job, perhaps they would do it better. Politicians are professionals at getting elected, not doing the job that they are elected for. The people running the government should be qualified to manage in the specialist roles: economics, finance, law, justice, education, defence, policing, tax, social services, communication, information technology, transport, energy, medicine and health, agriculture, mining, banking, art, history, and management.

Once the necessary qualifications have been obtained, the professionals would need to serve an apprenticeship, working with and supporting practising experienced professionals.

Then, after having served the apprenticeship, the next step is graduation to a professional consulting role, analysing working professionals and advising them on strategies that can resolve the issues that they face.

Respected consultants can then be promoted to junior roles in practice, where they themselves face the daily challenges and the responsibility of developing and implementing solutions. Candidates that establish a successful track record are promoted to higher responsibilities, while the less successful go back to consulting, or perhaps some other career.

Of course there are some practical issues. Where do the qualifications come from? Who sets the standards for the qualifications? Which organisation will manage this? Who appoints the professionals? How is their performance measured? Why would the existing politicians accept this change? Why would any country accept this change? Who pays?

This would ordinarily be a responsibility of the UN – but there are reservations. The functionality of the UN is something that William Shawcross in his books “Deliver us from Evil” questions because the Security Council is divided in principle. That won’t work.

So, if not the UN, who?

An alternative is the European Union – as an experiment to help some of its distressed members, as well as the potential candidates for membership.

To instigate the appointment of this government in any country, the electorate would have it as an alternatives to the other candidates on the ballot in an election. If elected, the voters can call for the system to be terminated by way of a referendum, which happens every five years (say) or if sufficient voters (say 5% of the registered electorate) call for one.

As soon as governance is established as a profession, the leading universities will respond to the demand from prospective students. The standards for qualification should be set by a professional body, as is the case with most other professions.

Initially, the EU will manage the process, with the intention of allowing it to devolve into an internationally recognised independent body. This same body will propose the candidates for various positions in the country. The country represented by an elected “Senate” will have the authority to select candidates from among those that are proposed by the International Body.

Measuring performance: growth in GDP, level of trade, (lack of) International conflict, (reduction in) crime rates, education performance, health, infrastructure, efficiency of transport, energy composition and supply, efficiency of government are all measurable and comparable with both past performance and the performance of other countries.

Existing politicians might be obliged to accept change as a condition of acceptance into the EU, or for financial support, or because the electorate demand it.

The electorate would want it because, once proven, it is seen as a better option to what is already on offer – in many countries it would be an easy choice.

Who pays – the country should, as they do now.

Some other thoughts – the government should not have the authority to declare war. That is under the control of the International Body, which also supplies the manpower, weapons and expertise.

Similarly the police and justice departments fall directly under the control of the International Body. This to prevent coups, and to get the benefits of scale.

Most importantly, the professionals have continuity, and their goal is promotion to a larger country, and higher pay and more prestige. Large countries will have proven leaders. Small countries will have leaders determined to succeed, so that they are promoted to lead the bigger countries. Leaders that don’t meet expectations will be dismissed.

Corruption, nepotism, and conflict become less likely.

Utopia – not by far, but it forms the framework for something to build on.

More at:
Technocrats Minds like machines

Government of the people, for the people, by the people!

Events since the start of the financial crisis in 2008 have been revealing. Politicians are being exposed for serious errors in the past and are ill equipped to provide solutions for a world in distress. This is the first in a series of discussions about why politicians are unsuited to manage, and suggestions as to how that can be fixed.

It’s common knowledge that one of the primary causes of the crisis was the crash of the sub-prime market, and the focus for the blame has been the “big banks”. And, while they continue to collect astronomical bonuses, senior executives of the big banks say that the fault lies elsewhere. Ragharam Rajan, in his book “Fault Lines” argues persuasively that the bankers may have a case, and that politicians seeking re-election are also at fault.

The growth in the disparity of wealth forms the foundation of Rajan’s argument. In 2007 23.5% of all American income flowed to the top one percent. The earnings of the top 10 percentile increased by 65% more over the period 1975 to 2005 than the wages of the other 90%. That the majority of voters has not benefited from the income growth in America encouraged politicians to intervene.

Simply put, economic data shows that the country is getting wealthier and wealthier, and that wealth is mostly concentrated in the hands of a select few.

So, to create the appearance of wealth, the solution for the politicians appeared in the magic of finance. If mortgage rates decline property values increase.

Let’s see how that works. On a $100,000 loan, If the mortgage rate is 12%, the repayment will be a little over $1100 a month, and the total interest paid over a 20 year mortgage amounts to more than $164,000. When the mortgage rate drops to 2%, the repayment drops to $505 a month, and the total interest over the period of the loan is a more reasonable $21,400. People who need to borrow money to purchase their homes look at the affordability of the monthly repayment. As interest rates drop there is more money chasing the same number of houses, and property values increase. The increase in house values encourages some people to buy new homes, and others to borrow against the increased value of their existing property. People have an increased sense of prosperity, founded on an illusion.

The increase in house prices lags behind the drop in interest rates by a number of months, sometimes years, and so improved affordability also affects those who have never owned their own homes, including the sub-primes.

At first the sub-prime market was very attractive. The new borrowers with little credit history attracted higher rates of interest (but not so high as to impact affordability) in recognition of the greater risk of default. But in the minds of the bankers, these loans were secured against properties, the values of which were increasing, negating the perceived increased risk. Showing massive returns, the market grew exponentially, attracting investors from all over the world. That was fine while property values increased.

Then economists started saying that it was unsustainable. And as Herb Stein said, if something cannot continue, it won’t.

The markets froze. The banks stopped lending to each other, and suddenly there was a liquidity crisis. Lehman Bros failed, and the potential for a widescale bank run seemed imminent. The Federal Reserve stepped in and the initial crisis was averted.

But the cat was out of the bag. Stock markets and property prices around the world crashed. Economies, especially those in the developed world, went into recession.

Then another financial fiction was exposed. For risk purposes the countries making up the Eurozone had all been given the same credit rating. The cheap funding encouraged governments to spend lavishly. The responsible governments contained borrowings, spending mostly on necessary infrastructure improvements. Others wasted money, often buying votes through unnecessary government employment. Greece being the worst example.

Realising that the credit risks of the various Eurozone countries were unequal, the markets reacted. Interest rates for the delinquents rose, and rose. An interest rate above 7% is considered to be unsustainable. Greece’s rose to more than 20%. Analysts confirmed that the country was insolvent and uncompetitive. Constitutional flaws in the concept of the Eurozone prevented both the Greek government and the technocrats in the European Central Bank (ECB) from providing the conventional solutions.

The Euro politicians, led by Angela Merkel, muddled and prevaricated, making a bad situation worse. The politicians were unable or unwilling to suggest the solution: the creation of Eurobonds and empowering the European Central Bank (ECB) to intervene. The solution requires a devolution of powers that the politicians are unwilling to relinquish.

In 1947 Churchill said that “democracy is the worst form of government except all those other forms that have been tried from time to time; but there is broad feeling in our country that the people should rule, continuously rule, and that public opinion, expressed by all constitutional means, should shape, guide, and control the actions of Ministers who are their servants and not their masters”.

Democracy is not a meritocracy. In the 1980s Jackson Browne groaned that “they sell us the president the same way they sell us our clothes and cars. They sell us everything from youth to religion, the same time they sell us our wars.”

Politicians on both sides of the Atlantic have focused blame on each other, rather than developing solutions through consensus. Voters in Greece, Spain, Ireland and France voted for the most popular alternative to the incumbent, voting in untried novices whose policies and solutions, if they exist, are unknown or at best vague.

The accounting principles adopted in the production of national accounts add to the difficulty in developing the solutions. Improvements to infrastructure, especially those leading to capacity improvements are expensed in the year in which they are incurred. In a commercial enterprise such capital expenditure would be allocated to assets on the balance sheet and expensed over the lifetime of the asset. Accounting for improvements in the year they are incurred acts as a disincentive towards what is often beneficial and necessary expenditure, especially in the long term.

The much bandied term of austerity should distinguish between expenditure which can elicit growth, and expenditure which is unnecessary and wasteful. That the politicians dealing with the crisis have not made this distinction suggests that they either do not understand it, or worse, believe that the electorate won’t.

We would never allow the executives of leading corporations to be appointed for their public appeal, like some bad reality TV show, and yet that is how politicians in Western democracies are elected to run the world’s leading economies.

The appointment of world leaders should be based on proven merit. Government of the people, for the people, by the people needs to take a better form.