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Has India’s economy under-performed relatively to its institutions?

December 20, 2011

Douglass North defines institutions as “the humanly devised constraints that structure political, economic and social interaction.” Their primarily role in economy is to “reduce the transaction and production costs” and allow potential gains in trade. This capacity of reducing transactions costs translates nowadays into various performance factors measuring the “institutions quality”. Performance of institutions has become a hot subject, particularly
within development institutions concerned with their aid effectiveness. Several indices have been developed including factors such as severity of corruption, bureaucratic efficiency, the rule of law, and the predictability of policy making.

In India’s case, when comparing economic performance and institutions quality, I have not found any results supporting that India’s economy has underperformed relatively to its institutions. Assuming the opposite would imply that institutions in India are performing well, while its economic performance is lagging behind. This simply does not match the reality reflected by various observations. Institutions’ quality in India is in fact average to low, scoring approximately the same as Kenya on indices like the CPIA or the Global Integrity Index.

We can easily confirm the result by extending the comparison to a proxy formed by a sample of countries with similar quality scores to India, calculating their average growth and comparing it to the economic erformance of India.

Observations show, on the contrary, that the economy is over performing the institutions. In fact, businesses in India are finding ways to overcome these very institutional inefficiencies. In its special report on India, the Economist point out this phenomenon:” A weak state has given rise to a new kind of economy[…] It makes sense for businesses to sprawl because the Indian state is still pathetically weak. Infrastructure is so awful that companies often build their own. Courts are slow and sometimes corrupt, so contracts are hard to enforce and banks and businesspeople are inclined to stick with companies they know and trust. Fewer new firms have broken into the big league since 2003 and those that have done so have tended to be good at working the political machine.”

It appears in fact that institutions are not functioning as well as required by high-growth businesses.  Companies are therefore doing their best to “adapt” to these underperforming institutions. An interesting measure of this “gap” is provided by the “the Government-Business Efficiency Gap 2011”, that shows a business efficiency over-performing governmental one by seven points in India.

Furthermore, a report by Goldman Sachs on India’s future points out the great “2050 potential of India” and the ten crucial keys to “unlock” it. Governance is unsurprisingly mentioned as the first key factor to improve, confirming that the current institutional situation is alarming. Lack of accountability and centralized inefficient public services mostly explain the lack of results. “Some observers attribute India’s governance problems to its democracy”, say the authors.“We think it is the malpractice of democracy—or the ‘democracy deficit’—that is the cause of the problem.[..] If the system of governance were to respond, it would set in train a virtuous cycle. Thus, the need is for increased democracy, not less.”

India is achieving satisfying growth despite dysfunctional institutions. However, these institutions are a big achievement in themselves and should be considered as an advantage when compared to countries like China or Vietnam where traditions of democracy and accountability is still to be implemented. On the long run, this advantage can turn into a huge differentiator for a sustainable high growth, if matched with successful reforms.

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Socially Responsible Investment in the Mediterranean

November 29, 2011

ANIMA Investment Network,  a multi-coubtry platform supporting the economic development of the Mediterranean, recently released a report on Socially Responsible Investment in the region entitled: “Socially Responsible Investment: What Strategy for the Mediterranean?”
The study provides an outlook of the impacts of investment for the three cornerstones of sustainable development and then presents the stakes, strategies and tools for the four main categories of stakeholders of Corporate Social Responsibility (CSR) and Socially Responsible Investment (SRI) in the Mediterranean: the public authorities, the business support organisations, companies and financial players.
A part of the report discusses the potential of social business and impact investing in the region and guess who was mentioned 🙂

Value of a tree?

November 13, 2011

I got this question during an interview: How do you value a tree?
Quite surprising,  right?
Should we put a number on a tree as well? What for? How do we do it?

Anyways, my answer was in a form of a scorecard 🙂 :

Valuing a tree

Seedcamp: incubating start-ups on a bigger scale

October 24, 2011

I attended at London Business School, a lecture by Reshma Sohoni, founder of Seedcamp “the first European incubator”. The business model of this innovative incubator is quite simple: VCs usually spend a lot of time looking for opportunities, interacting for weeks with a couple of entrepreneurs, before making a final (and very risky) investment. Seedcamp suggests to scale and rationalize this process: screening hundred of applications from European countries, bringing them to a training/pitching camp, selecting the best ones, leveraging a network of local mentors and investing  a seed capital amount of $50000,(for 8-10% of total equity) in the finalists, to end up with a portfolio of more than 30 start-ups, and it is still going. Hopefully, the law of large numbers would lead to a superstar company among them.
There is neither “customized” due diligence nor close and regular follow-ups, so that the transaction cost is close to zero. Moreover, most of the events and trainings are sponsored by partners interested in helping find the next Facebook. It is all about running the right systems and securing the right partnerships, to bring value for both investors and entrepreneurs, at a very low cost.
Seedcamp is too young to evaluate its sucess, but the process seems to work and to have attracted regular partners and investors so far.
I was wondering whether we can adapt this model to the Maghreb ecosystem…any comment?

Sustainable Investing in Africa

October 20, 2011

I have just joined the team of AfricaSIF project to start the first forum of Sustainable Investing in Africa. The goal is to build a platform that gathers various stakeholders and investors, interested in promoting sustainability considerations while investing in Africa: who are the main players of the sector in Africa? What are the right ESG metrics for the continent? How to define “sustainabilty” in Africa?
Events, lectures and reports about the subject are expected soon!

Entrepreneurs Night Out in London – Crowd Funding

September 23, 2011

“ Crowd funding describes the collective cooperation, attention and trust by people who network and pool their money and other resources together, usually via the Internet, to support efforts initiated by other people or organization” (Wikipedia)
On my first week in London, I attended an “Entrepreneurs Night Out” event, with Slava Rubin, founder of indiegogo.com, as the guest speaker. www.indiegogo.com  is one of the world’s biggest crowd funding platforms and since it started in in 2008 it has distributed millions of dollars to over 35,000 campaigns in 200 countries. Anyone in the world with a passion can fulfill their dreams and fund creative, entrepreneurial, or cause campaigns.
Since I am working on a crowd funding project targeting the Tunisian diaspora, this event was of a particular interest to learn more about the “crowd funding secrets” as his presentation was amusingly entitled.

Why do people get involved in crowd funding? What triggers thousands of people to finance one very project on internet? According to Salva, there are 4 main (and only) reasons to it:

  1. Because they care ( I care about environment so I will support projects that protect it)
  2. Because they want the service or the product ( I want a theatre in my street so I will support it)
  3. Because I want to be part of something big (I want to support the construction of the first spacecraft to Mars)
  4. Because I want a share of the profits (I want 1% of the profit generated by this company)

Salva also believes there must be many more factors than just raising money behind any crowd funding campaign:

  1. Gauging demand an mitigating risks: if your project is not successful in raising funds, it might be a good idea no to do it now, and therefore save money and efforts;
  2. Test marketing: raising funds is an opportunity to see which messages, stories, pitches really appeal to people;
  3. Extra promotion: starting a crowdfunding campaign is always a way to get extra promotion if not money;
  4. Raising money (hopefully!);
  5. Customer data: a funder is a future customer so you better save his data for future interactions, deals etc;
  6. Curry Serendipity: Sharing a project online might expose it to copycats. But as Salva said “if someone steals your idea and do it better than you, than too bad”, i.e it might be better to face competition before even developing the product or service.

Followed some “best practices” for a successful crowd funding campaign:

  1. Explain the story behind the idea;
  2. Give a honest pitch;
  3. Be proactive by email, twitter, Facebook (updates, updates and updates);
  4. Find an audience who cares but get your people first (usually 30% is funded by relatives and friends);

The discussion then switched to the business model of the platform.  Salva thinks that given the benefits of crowd funding in terms of testing new products and marketing them,  more and more companies will start using crow funding as a financial and/or a marketing tool. Everyone is using existing platforms such as WordPress and Blogger for blogging now (instead of creating a website from scratch). The same thing is also expected to happen for crowd funding.
To my question “ Who will buy indiegogo.com? ” Salva gave a hint by saying “the platform is an amazing source for marketing data. If you fund a movie related project, then we can assume you are interested in movies, and we might use it for customized ads. Google bought Blogger for the amazing amount of similar marketing data it offers about bloggers and viewers”

My stop in Egypt

August 21, 2011

Second stop: Egypt!
Visiting Egypt, my first reaction was to assess the entrepreneurship situation, before looking into the social sector. I met business organizations and VC investors and asked them questions such as: do people like to take risks and start ventures in Egypt? How is the innovation process? How do you evaluate the deal-flow and the start-ups?
“The informal sector is very big in Egypt. In this sense, we have a large number of micro-entrepreneurs; some of them are very creative “says Amr Rezk from Pylon Holding. “Interesting initiatives and good deals do exist but they are very scattered. There is no established ecosystem”.
Moreover, part of the society view businessmen with suspicion, especially after the collapse of the Mubarak regime, where many of them were involved in corruption.   An assessment that I also found in the Economist:”Economic liberalization has a poor reputation, thanks to reforms earlier this decade whose fruits flowed largely to the well-connected. Indeed, a desire for vengeance against fat cats helped to bring the crowds onto Tahrir Square” (The economics of the Arab spring: Open for business?)
I made very interesting discoveries when I stepped in the social innovation world in Cairo:

Hot spot for social entrepreneurship: Cairo appears to be the capital of social entrepreneurship in the region. Ashoka Arab world has its office there with about 55 fellows (40 of them are from Egypt). Nahdhet el Mahrousa, the first social incubator in the Middle East, has been active for 8 years , supporting and developing social ventures in the areas of youth development,  health services,  environment, linking education to employment etc.

Success stories: I discovered several sustainable social enterprises in Egypt. Many are non-profit but some of them are adopting a model close to what social impact investors are actually seeking:

·   Magda Iskander  (who I later met in the Paris Ashoka Changemakers Conference) is creating the profession of home healthcare in Egypt and training a cadre of providers to offer high-quality and affordable services to the eldery, while creating new jobs;

·   Maged Hosny is providing career counseling to high school and college students to better prepare them for the realities of the labor market;

·    Sameh Seif Ghali received a $250000 investment from Siemens to start implementing his business model of installing a low-cost, effective community-based sewage system in the villages.

These successful initiatives raise other questions: Do these entrepreneurs want to take it to the next level? Do they have the ambitions, the skills and the capabilities to scale up and to attract investments?
“Many of our fellows are more comfortable with donors and writing proposals than with business plans and investors” says Iman Bibars, regional director at Ashoka Arab World. Ehaab Abdou, co-author of the Social Entrepreneurship in Middle East report, is working on the feasibility of a “replication fund”. It would be a mechanism that identifies successful social enterprise models, assess them and mobilize technical support and funds from donors and investors. We hope he can help answering those questions.
BoP opportunities: Egypt is a relatively large market in the region. It is the most populous country in the Middle East and the third-most populous on the African continent after Nigeria and Ethiopia, with a population of nearly 83 million.  Almost 45% of the Egyptian population are in the range of extreme poor to near poor. Therefore, social ventures targeting low-income communities would have a market of almost 40 million people. Those tackling urban issues would have a market of about 15 million in the mega-city of Cairo. BOP opportunities and room for high social venture growth do exist, in contrast with other countries of the region like Jordan, Lebanon or Tunisia.

Hatem Mahbouli