Author Archives: mrosidi

Need for a Minimum Standard

In an earlier post I argued that sweatshop, a shop or factory in which employees work for long hours at low wages and under unhealthy conditions, is a better choice for folks in least develop and developing countries than no place to work at all. This is why, in general, workers there do not request high standard of working condition as their counterparts in developed world do. They adapt to some poor condition even though at the same time they are not well paid.

This situation attracts many major retailers in U.S. and other developed nations to massively relocate their productions abroad, such as to China, Vietnam, Bangladesh, Indonesia, and other countries with low labor cost. A figure said that more 97 percent of apparel and 98 percent of cloth sold in U.S. are imported while in 1960an, that figure is only 5 percent.

Developing world, home for the factories, benefits from this shift. Since in general the new industries are labor intensive, they have been creating a huge number of jobs.  In 1980s, the number of garment factories in Bangladesh is only hundreds while recently, that number reaches nearly 6000 factories.

However, the world was shocked by witnessing 1134 people dead and hundreds injured when the Rana Plaza building in Savar, Bangladesh collapsed last year.  This is just a problem among many other issues involving multinational companies searching for low cost labor.

While I argue that sweatshop is one solution for the poor in least developed and developing countries, but dangerous working condition is another issue. What I mean by dangerous is a situation where it may threaten life safety of the workers.  a minimum standard has to be set up to avoid such tragedy or other accident in a smaller case. Then, the question is who should be in charge of such rules. The industry itself is not a good choice for this responsibility since a player could not be a referee.

Leaving the task to the government to regulate is also not a guarantee since low labor cost is one of its comparative advantages. Imposing too many restrictions might cause its industry less competitive and it means that investors could easily move their productions to other countries with less strict regulations. Thus, a collective action should be taken to overcome this issue. In my opinion International Labour Organization (ILO) and World Trade Organization (WTO) are good candidates to take this responsibility given their credibility among parties involved.

It is Nike’s responsibility

In recent article, Wall Street Journal told a story about how multinational company, in particular Nike, search suppliers worldwide in searching for least possible cost. One of the countries featured the cheapest production cost of apparels is Bangladesh.

However, the last year tragedy of Rana Plaza, where more than 1100 persons dead in the site has sent an effective message to the world about safety standard in many factories around developing world where most of stuffs sold in developing countries produced.  Some corporations relocate their productions while many others still stay in the country. Many multinational retailers such as Walt Mart, Hennes & Mauritz AB, and 170 others that decided to stay collaboratively funded a project in a search to improve factory safety in their factories the country. Unfortunately, Nike was not participating in that effort by saying that it can better use of its resources somewhere else where it has a bigger investment.

On the issue, Nike cut a tie with its partner in the country Liric Industries, with which Nike had worked for more than a decade, after a team visited the factory and found that the company could not guarantee a safe working condition. Nike is not a new player in outsourcing practice to developing countries in an effort to produce quality footwear at lower cost.  Since it was founded in 1964, it has done such practice when only 4 percent of U.S. footwear was imported, compared to recent figure at 98 percent.

Thus, its reason that it has not known the poor working condition in its partners seems implausible. Multinational companies such as Nike are known with tight quality control over their products even though all are produced in many locations all over the globe. Certainly they have required their partners to comply long list of procedures and systems in order to meet their standard. So, if Nike looks like surprised with the fact just found in its long-time-partner’s factory, no one will trust it. It is weird. It seems that Nike has only tried to clean its hand from that matter.

It is the responsibility of multinational companies operating in developing countries to set a minimum standard of sound production management and they cannot just blame their partners. Their search for low cost production for sure benefits both parties, but they cannot pile up profit while putting their labors in danger. Again, it is part of their responsibility to fix the problem. Just leaving the problem to be fixed by local government or industries is not a good idea since low labor is just a comparative advantage for them.

More Homes, Fewer Stores

An article in Wall Street Journal told a story about a raising shift of commercial building projects into residential project in several cities due to unpromising future of brick-and-mortar store compared to online stores. This move surely faced a constraint where city councils did not want to approve the proposals. One reason of this objection is that because commercial building would generate tax revenue meanwhile residential areas would tend to drain money from the city budget.

Many municipalities in Western State—including Arizona Colorado, Oklahoma, and New Mexico—have tried to set property tax low and rely on more to generate revenue from business activities including sales taxes generated from transaction in stores. From this view, it is understandable why they did not want to approve such proposals. “You build what there is demand for,” said one developer. On the other hand, the government took its side, “It’s our responsibility to ensure that we have a balance between residential and commercial,” says Queen Creek Vice Mayor Dawn Oliphant. “If we build all of these homes, we have to consider the infrastructure requirements and public safety costs.” Residential or homes cost the city budget from providing road maintenance, police protection and other common services by a government.

At glance, the arguments seem making sense, but if it is analyzed more deeply there are some flaws in those arguments. At least, the arguments are acceptable in very short period only.

First, it seems that when it calculated the cost the governments have to provide to new residential complex, it omitted the fact that many residents generated from those new homes would also generate new source of revenue for government to tax. Second, once established, the new resident communities would surely attract various businesses in the surrounding such as grocery stores, restaurants, laundry, etc. Or in a smaller scale, if it did not attract new business opportunity, they would improve existing businesses in the surrounding area and this means new sales taxes generated without directly restricting the proposal.

Sure, the effect through this path is longer or much longer than otherwise directly builds commercial areas instead of residential as an alternative. A breakthrough is currently taking place in some places by mixing between building residential estates and building grocery stores at the same time might be a good compromise. However, just in case that compromise never comes, building solely residential estates is much better than no build at all.

Another Hope from Connecting Africa’s Unconnected: Internet Access for Poor

Africa is a big market. United Nation reports that most countries with high level of fertility are located in Africa. It is projected that its population could increase from recent number of 1.1 billion to 2.4 billion in 2050 and could reach 4.2 billion in 2100. Report by McKinsey titled the Rise of the African consumer said that Africa has the world youngest population where more than half of the populations are youth under 20 years old and the 16-to-34 age group accounts for 53 percent of income. Around 67 percent of that group is online, follow the latest trend in fashion, trend, and also brand minded.

An article in Wall Street Journal recently reported that although only 16 percent of African population use internet, but it is also the region with the fastest growth of internet use by phone. Last year, the figure was 11 percent compared to only 2 percent in 2010. Big company such as Google and Facebook are funding some groups in an effort to push the figure of internet use by providing affordable access. For Google, this program is part of its movement to develop wireless network in some emerging markets particularly in sub-Saharan Africa and Southeast Asia. Clearly, this program is not in social context. More internet users mean creating more netters using its services such as searching engine, android, YouTube, and many more.  This in turn creates more ads for Google since its 87 percent of its current annual $50 billion revenue is derived from ads.

Effect of internet penetration to low income household on reducing poverty and other social concern has often been cited. That is why even U.S administration has poured billions of dollars into the effort to expanding internet penetration particularly among poor Americans. A study at the University of Southern California “Computer Usage and Access in Low-Income Urban Communities” looks closely on how providing technology to low-income persons affects families.  This research reported some benefits among participants relating to employment prospect.

This kind of program, hopefully, will make African people better off albeit corporate interests exist behind. Affordable internet access could give chance to the poor to get better access to information that otherwise could not. For those who are fortunate enough living in more developed nations, access to information might be not a big deal, but this is not the case in least developed countries such as in some part of Africa. Imagine a smart student in a remote area that is successful to get a scholarship opportunity to enhance his education because of the privilege of using such affordable internet through his low-end phone. Or some success story among farmers that have been gaining farming knowledge and other information through internet access such as being developed in rural poor farming community in India. This business interest will meet social interest only if governments can match their program to the opportunity.

Call for Monetary Policy Coordination

Unconventional monetary policy in advanced economies undoubtedly caused volatility in the rest of the world, particularly in emerging economies. Though many internal problems in each country took a part but clearly the policy particularly in the exit step or tapering took the most. When people are talking about this matter, they would not forget the position of current Governor of the Reserved Bank of India, Raghuram Rajan, in raising this issue and consistently proposes so-called policy coordination in monetary policy. In 2005, he delivered a controversial paper called “Has Financial Development Made the World Riskier?” Even preminent economist, Larry Summer, treasury secretary at that time attacked his view and said,”The basic, slightly lead-eyed premise of (Mr. Rajan’s) paper to be misguided.“ However, we witnessed that what his concern came to reality two years later.

Recently, he criticized the Fed for not expressing more concern about the financial turmoil its low rate policies has caused in emerging economies. He acknowledged that policy coordination, one thing that he proposes, is not popular among economists given that they generally view the gains from policy coordination are small. He said, ”In its strong form, I propose that large country central banks, both in advanced countries and emerging markets, internalize more of the spillovers from their policies in their mandate, and are forced by new conventions on the “rules of the game” to avoid unconventional policies with large adverse spillovers and questionable domestic benefits.” Given that the implementation of such strong form is rather hard to do, he add, ”At the very least, central banks reinterpret their domestic mandate to take into account other country reactions over time (and not just the immediate feedback effects), and thus become more sensitive to spillovers. This weak “coordination” could be supplemented with a re-examination of global safety nets The Fed.”

Clearly, his proposal gain lots of attentions particularly from the Fed itself. Many criticize his idea. Former Fed chairman Ben Bernanke is the most vocal guy among them. “A lot of what you’ve been talking about today just reflects the fact that you are very skeptical about unconventional monetary policies,” said Ben Bernanke skeptically. Chicago Fed President Charles Evan said the rather same thing, “At some point, our mandate, our responsibility is for the U.S.,” he said. “We like to cooperate as much as we can with everyone” but if considerations about other countries leads the Fed to tighten policy while the economy remains weak in the U.S., “we’re not going to be doing anybody any good around the world.”

I agree with Rajan’s proposal. He is right that monetary policies in one country, especially the big one, are spillover across borders. “To ensure stable and sustainable growth, the international rules of the game need to be revisited. Both advanced economies and emerging economies need to adapt, else I fear we are about to embark on the next leg of a wearisome cycle,” he added. Thus, his idea to raise an issue on the need for the establishment of an independent assessor in order to ensure that a unilateral action by a country will not hurt other countries is worth to be supported.  If international trade field has dispute settlement in WTO, why don’t we have the same thing in the monetary field?

Is Umbrella Rental Reasonable?

Recently, Wall Street Journal reports a sharing system in which commuters in New York City can rent or buy umbrella from boxes located around the city. If a consumer decides to rent it, she can either pick it up and drop it off at any of the available boxes or buy a disposable one, so that it does not need to be returned when she is done.  The pilot program is likely to launch in Mei or beginning of June. John O’Connor, co-founder of ‘brellaBox, the company, said, “brellaBox essentially provides a solution by giving people an umbrella when needed and not putting it in the garbage when it’s not.” It tries to answer the phenomena that some New Yorkers just throw away umbrellas after being used.

BN-CI486_nyumbr_G_20140411114656

Source: Wall Street Journal

The question then is that is the program reasonable?  First, it will face the fact that many cheap umbrellas are available at the corner store. In New York City, these made-in-China umbrellas are widely available in any deli and newsstands around the city. Such an umbrella only costs $4 and available at the first drop of rain. Given that people right now do not care about umbrella as a fashion and even often treat it in disposable manner, $15 price of a disposable umbrella at ‘brellaBox will not make sense at all. It seems that the low in quality is not a consideration here given that people treat them as disposable or use them just to go from one building to another so that sturdiness is not a main issue. The rental rate of $2.5 for 12 hours also seems not attractive enough compared to availability of low cost umbrella. The effectiveness of yearly membership, if any, is also questionable given that rainy season is only few days in a year.

This rental-umbrella business soon remind me on the car sharing system, Zipcar and the bike sharing system in New York City, Citi Bike. A lot of reasons why Zipcar gets its popularity, from practical reason to avoid taking care of a car to idealistic reason to reduce pollution and to support less congestion in a city. The rather same thing applies to rent a bike in addition to reducing cost of fuel and avoiding skyrocket parking cost in a city. Now, compare to the umbrella’s case.  Carrying an umbrella in a day when rain is forecasted is not a constraint given that the size of an umbrella is small enough to be in a backpack or handbag. Or if not, cheap umbrellas can easily be found around the city.

I do not want to be too pessimistic, but each possibility should be taken into account. Big investment has to be profitable to sustain. There is still enough time to reconsider before it will be too late.

Retail Medical Clinics Respond to the Excess Demand

Demand for retail medical clinics is expanding recently. Newly insured people as a consequence of Obamacare make it possible. Currently, there are about 6000 such locations throughout the country as of 2012 in pharmacy/drug store and supermarket chain, operated by CVS, Walgreen, Kroger, and Target. Although some physician groups reject the existence of this chain, I think this is a good trend and good also for the patients.

As long as they only treat non-chronic disease and act as complement to the service of physician, as it is like now, the existence of these services is importance to reduce the workload of primary health service.  The flue, cough, blood-pressure measurement, vaccines, diabetes screening and other no chronic disease are among cases treated by nurse practitioners or physician assistances in retail clinics. There is no reason that they will replace traditional primary-care service as long as it is set up a set of regulations to limit services that they can provide. Moreover, as it is said by Ateev Mehrotra, an associate professor of health-care policy at Harvard Medical School, the typical patient at a retail clinic is a young adult (between 18-44), without a regular primary-care physician. That statement confirms the data of MinuteClinic, the CVS division, the largest player in this service that half of its patients, according to their report, do not have primary-physician. This fact proves that the existence of retail clinics is merely a supplement to the traditional clinics and they will widen medical service to those who have no access to primary-physician. At least, having access to retail clinics is better than just consuming over the counter medicine without prescription.

For patients, the existence of this alternative means more convenience. It is common that such clinics open seven days a week with evening service. Unlike ordinary physician services or primary care clinics that often have long waiting queue to make appointments, retail medical clinics do not require patients to make such appointments. Weekend and evening services also mean that no need for them to break from work. Thus, it is plausible if primary consumers of retail clinics are young adults that are more likely hesitant to leave work in order to visit traditional clinics. In this regard, this alternative will give convenience to them and thus will improve health of people in general.

One thing needed to be addressed is to make sure that the existence of this retail clinic chain will not replace traditional clinics by restricting services the retail clinic can provide including chronic and acute condition. Then, restricting retail clinics to provide service to baby and children is also important since their health is more vulnerable and according to the American Academy of Pediatrics, taking kids to retail clinics instead of primary care pediatricians fragments care, since the kids do not always see by the same medical provider. I believe that existence of such retail services will benefit society in general if it is handled properly.

On a Mission to Get People to Use Banks

An article in Wall Street Journal by Paulo Trivisani with title partly I use here  tells a story about Brazil’s central bank effort to penetrate banking usage to wider audience. According to the central bank, about 53 million of Brazilian or 53 percent of adult population do not have bank accounts. The number is still below the 50 percent global average, according to World Bank’s Global Financial Inclusion. As other developing countries face, this is simply because they do not have access to bank branches that usually reside in urban center areas. Other than that, in my opinion, there are several other reasons why still exist many people that are not touched by banking services.

One reason might be simply because they are so poor that they do not need banks at all. According to the World Bank, 21 percent people in developing countries live at or below the $1.25 a day in 2010. Thus, for this group they will most likely not use banks since they will spend all their money to fulfill their need for the day.

For those who have money, another reason might be because people prefer to save money in real assets such as gold, property, or other assets due to high level of inflation still there in some places. They are aware that month by month, prices rise steadily and on the other hand, low interest rate on their deposit cannot catch up the raising prices.

Moreover, in many developing countries, transaction with cash is still preferred than that with either debit or credit card. In Indonesia for example, although major merchants in big city accept card payment, many medium store don’t or if so, they will charge additional fee for using card to make transaction at around 3 percent from the total bill. Small stores rely on cash in their transactions.

Example from payment system used by online retailer in Indonesia might be able to illustrate it more clearly on how intensive cash transaction used in developing countries. From the past recent years, online shopping have been getting attractive for middle class in urban area especially in big cities. Bhinneka.co.id and lazada.co.id, two growing online retailers still use so-called cash on delivery (COD), in which customers pay the price at home when they receive their orders shipped by couriers, in addition to other payments like bank transfer, ATM, internet banking, and credit card. These methods evolve to overcome the fact that online payment using credit card is not common yet in the country.

Finally, the campaign to familiarize use of banks and electronic transaction should be focused more on the middle class where their number is increasing in developing world with huge purchasing power. Effort to educate on how to do online payment through internet securely might be effective to reduce cash transaction. The last but may be the most important thing is to keep inflation low in order to attract people voluntary putting their money in banks.

 

(Revised) Indonesian Central Bank’s Response to the Fed’s Taper in 2013

When the Fed for the first time announced to begin scaling back its quantitative easing in summer 2013, emerging economies underwent a sudden massive capital outflow, resulting in depreciation of their currencies. The graph below pictures how Indonesian rupiah, one of the five emerging economies’ currencies in 2013 so-called the fragile five, had behaved right after the beginning of tapering off issues until the end of the year.

imagerpand waterIf we use short run international finance diagram, this capital outflow is represented by the shifted-to-the-right NCO curve. People started to get rid of Indonesian assets and went back to the U.S. assets in the hope that interest rate in the U.S. will increase. This situation is described clearly by the data. Indonesian rupiah depreciated significantly against the U.S. started in May 2013.

In the case like this, at least there are two measures that can be adopted to reduce the volatility and to ensure that the currency not to slump down persistently: increasing domestic interest rate and sterilized sales of foreign (U.S.) assets.

First, the central bank might increase interest rate to deter foreign investors from pulling out their money from the country and attracting others to bring their money in. During the year of 2013, the central bank gradually increased its benchmark interest rate five times: on June 13 by 25 bps (basis points) to 6 percent, July 11 by 50 bps to 6.5 percent, August 29 by 50 bps to 7 percent, September 12 by 25 bps to 7.25 percent, and November 12 by 25 bps to 7.5 percent. As can be seen from the graph above, the interest rate tied closely to the exchange rate pattern, the more the currency depreciates the more the central bank will increase its interest rate.

Second, since the initial problem of this volatility is because NCO curve shifted out, then it requires that we bring back the curve in by sterilized sales of U.S. assets and buy domestic bonds.  In a sterilized intervention, the central bank will buy domestic bonds (decrease supply of domestic bonds in the market). To sterilize this intervention, the central bank has to sell foreign (U.S.) assets so the money supply will not change. Combination of these actions will prevent the currency from depreciating. Selling U.S. assets (could be bonds, currency, etc.) by the central bank will not increase the dollar the central bank has (the central bank will receive domestic assets instead from selling foreign assets. If it does work, the currency will start to appreciate. It is hard though to find such data in order to verify whether the central bank had done this option. Thus we will just look at the data on the official reserves and look at to the pattern.

image

As can be seen, Indonesian official reserves had been depleting in around May 2013 and hit the lowest point on July 1, 2013 at 92,671.06 million dollars. If we look at the graph deeper, this pattern seems to confirm that around these months, the central bank used the reserves to intervene rupiah in the market for a while and then abandoning this measure and starting to pile up reserves again.

I believe that Indonesian central bank used both interest rate increase and intervention in the market to response to the Fed stimulus reduction last year though the efficacy of this policy is in question since rupiah often regarded as one of the worst performing currencies in the region in 2013. I reach to the conclusion that the central bank had intervened in the market since a high official in the office had also confirmed that they were ready to take that measure in case of needed to smooth the volatility rather than to strengthen the currency.

Facebook-Oculus VR, Synergy and Expected Growth in Earning per Share

Acquisition of Oculus VR by Facebook is worth of $2 billion on 3/25 have made headlines for recent days. Many ask how come Oculus VR, a startup company that has just founded two years ago worth such huge value. Even though Facebook founder and CEO, Mark Zuckerberg gave a reason for the action by saying, “Mobile is the platform of today, and now we’re also getting ready for the platforms of tomorrow. Oculus VR has the chance to create the most social platform ever, and change the way we work, play and communicate,” the fact that Oculus VR has not even made any product no doubt left confusion among many people.

One explanation by Burton G. Malkiel in his book, A Random Walk Down Wall Street: the Time-tested Strategy for Successful Investing might be suitable for this kind of situation. Malkiel explained that in the financial market, investors desire growth in earning per share. In order to achieve that goal, by the mid-1960s, creative entrepreneurs proposed an action so-called synergism. Once two separate companies with earning power of $2 million each form a synergy, the new company emerged form that synergism might earn more than $4 million as the result. This is a creation that is called a conglomerate.

It is interesting to associate Facebook’s action in the acquisition with the term of synergy. Each might expect a gain from this action. Both companies act a mutualistic relationship:  Facebook is building its supremacy in its industry whereas the founders of the Oculus VR still own the business through their holding of Facebook stocks, in addition to cash payment. Zuckerberg was smart enough to make a deal with that scheme. He was expecting to gain from expected growth in earning per share. The fantastic amount of value to exquisite Oculus VR is just a tool to multiply the effect of the synergy, though it is still in question since after the announcement of the deal, Facebook’s shares fell by 6.5 percent.

Oculus VR was also playing a crucial rule in the game. It was not surely an ordinary deal where the seller and the buyer make a deal and the buyer pay for the price. The fact that Oculus VR only received $400 million in cash in addition to 23.1 million shares of Facebook common stock valued at $1.6 million gives a good indication that Oculus VR was also betting for a good luck from the deal.

One quote might be worth to cite from Malkiel’s book, “Part of the genius of the financial market is that if a product is demanded, it is produced.” And the product here is the synergy itself, the product that was intended to create growth in earnings per share of Facebook stocks.