Monday 14 January 2013

It’s all about the politics – Mexico’s monopolies



This is the fourth and final post in a series of four blog posts from my recent study trip to Mexico, with the Stanford GSB. Here’re some facts and tid-bits on the trip which provide a bit of an overall flavor:

§  The people: 35 Stanford GSBers and their partners, hailing from 14 different countries –backgrounds as diverse and unique as Air Force Officers, Social Entrepreneurs, Finance Ministerial Analysts, Film Makers, Start-up Starters, Seismologists, Sports Analysts, Chemistry Teachers, Family Businessmen … and of course … bankers & consultants

§  The places: 3 different cities over 10 days, including Oaxaca, Monterrey and Mexico City – each with a very different and unique character

§  The experiences: Discussing Mexico’s challenges in meetings with business and public sector leaders; watching Mexican soap operas being filmed, including meeting the most charismatic man in the world (not to be confused with the most interesting man in the world, whom we also met); exploring ancient monuments; eating good food and drinking giant margaritas; and of course, shouting and cheering like mariachis.



Those of you who know me also know that I love to have a good argument – I am a contrarian, and I will take any opportunity to pick a bit of a fight. There’re complex personal drivers behind this – when I give my “Talk” at the GSB, I will elaborate upon and connect them. Now don’t get me wrong – I almost always keep these fights polite and civil. And while I do often loose potential friends in these encounters, sometimes these debates can be eye-opening, providing a window into a perspective which I previously under-considered. One such fight took place between myself, and two of my fellow trip participants. The argument was over Carlos Slim Helu, Mexico’s telecom monopolist and the richest man in the world.

Now, at first, I found it downright shocking that my two fellow participants viewed Carlos Slim as an inspiration. Of course everyone has an opinion, but this one was just too far beyond my acceptable range for me to stomach. But as a result of this discussion, I now see where they are coming from, and why Carlos Slim has enjoyed political support in Mexico. Not only does Carlos Slim run philanthropic organizations which make him a popular father figure, helping support the masses in Mexico (somewhat like a Rockefeller or a Carnegie in the United States), but he also gets a lot of respect for what he has achieved. There’s some national pride to be had in having the richest man in the world be your countryman. Also, it may not be entirely inaccurate to attribute much of his success to his wits and talents – even though I clearly disagree with the ethical merits of the ends to which these wits and talents have been deployed. As one of our speakers put it – “he (Carlos Slim) has used every trick in the book to hold onto his empire”. In fact, each of our speakers, all of whom belong to a highly educated business class of Mexicans, opposed Carlos Slim. Perhaps their education shaped their ethical compass, or perhaps they are natural opponents of Slim’s interests, since as business people, high telecom costs are not good for them.




When monopolies are discussed, everyone in the room holds these sad half expressions

But either way, it shouldn’t surprise anyone that Carlos Slim’s telecom monopoly has survived for as long as it has in fact survived. The average person either supports him, or cannot connect the dots, and thus takes an ignorant, perhaps even an apathetic stand. Oh, the virtues of democracy!
But this might all be changing due to two factors.

i) As I described in my previous blog post on the media:

“The recent re-election of the PRI (The Institutional Revolutionary Party), the Left leaning party which has governed Mexico for much of Mexico’s modern history, has led to a series of tangible reforms which significantly change Mexico’s fundamentals and prospects …

… the PRI has legislated to make broadband-access “a universal right” within Mexico. While this might sound symbolic, and even vacuous, it’s a very clear first step in dismantling the telecommunications monopoly of Carlos Slim Helu. With telecommunications being a key input factor in the information and service economy, having pricey telecommunications services, because of a regulated monopoly, is a huge burden on business and development. The new Government clearly understands this, and the legislation actively begins to politicize the problem, which is an important first step towards addressing it.”

ii) The other crocodiles are circling and want their share:

In a meeting with a media broadcasting monopolist, we learnt the terrible things that Carlos Slim is doing to Mexico – perhaps the speaker feels that they aren’t obvious, and needs to altruistically push the right political agenda. Or perhaps the media broadcaster wants its own share. He criticized Carlos Slim, but also repeatedly suggested that his firm should be allowed to enter the market, and that things should be left “cushy”. This is where Democratic governance can be very powerful, and the people and their elected legislators can make the final judgments. And it’s an amazing form of poetic justice, how one crocodile can neutralize the other.

This post ends my four part series on the Mexico GSB trip.

The power of perceptions & the media – Mexico’s drug challenge and new era of optimism



This is the third in a series of four blog posts from my recent study trip to Mexico, with the Stanford GSB. Here’re some facts and tid-bits on the trip which provide a bit of an overall flavor:

§  The people: 35 Stanford GSBers and their partners, hailing from 14 different countries –backgrounds as diverse and unique as Air Force Officers, Social Entrepreneurs, Finance Ministerial Analysts, Film Makers, Start-up Starters, Seismologists, Sports Analysts, Chemistry Teachers, Family Businessmen … and of course … bankers & consultants

§  The places: 3 different cities over 10 days, including Oaxaca, Monterrey and Mexico City – each with a very different and unique character

§  The experiences: Discussing Mexico’s challenges in meetings with business and public sector leaders; watching Mexican soap operas being filmed, including meeting the most charismatic man in the world (not to be confused with the most interesting man in the world, whom we also met); exploring ancient monuments; eating good food and drinking giant margaritas; and of course, shouting and cheering like mariachis.



The media can make or break countries like Mexico, Pakistan and India. From positive self-fulfilling prophecies to vicious cycles fueling and reinforcing negative perceptions, the media can sometimes be a tremendous help, and sometimes an inescapable curse. While it is obvious where India and Pakistan lie in those buckets, Mexico is surprisingly hard to bucket. Here’s the two sides of the spin …

Let’s start with the positives. The recent re-election of the PRI (The Institutional Revolutionary Party), the Left leaning party which has governed Mexico for much of Mexico’s modern history, has led to a series of tangible reforms which significantly change Mexico’s fundamentals and prospects (at least in my own humble opinion, and as far as I believe, in the opinion of most development experts – there are obviously some political constituents who will disagree with us, and I may of course be suffering from that “in-group bias” which they keep telling us we might be suffering from in many of our Organizational Behavior classes). The PRI has taken on the Teachers’ Unions, historically an important political constituency for them, but one which is blamed for holding hostage Mexico’s less than high quality educational system. This is clearly a huge step in the right direction, and if we believe that “Total Factor Productivity” (TFP), that old friend from Development Economics, is responsible for much of the differences in income across countries, then improving education is clearly the right step in improving Mexico’s prospects. Although it is hard to neatly account for all the components of TFP, clearly education is a big one – just intuitively, a better educated population is likely to be a more productive one.

In addition to this, the PRI has legislated to make broadband-access “a universal right” within Mexico. While this might sound symbolic, and even vacuous, it’s a very clear first step in dismantling the telecommunications monopoly of Carlos Slim Helu. With telecommunications being a key input factor in the information and service economy, having pricey telecommunications services, because of a regulated monopoly, is a huge burden on business and development. The new Government clearly understands this, and the legislation actively begins to politicize the problem, which is an important first step towards addressing it.

Then there were trends which benefit Mexico, not so much for Mexico’s own fundamental progress, but rather due to external factors. Discovery of cheap North American shale gas is a huge and highly legitimate one. Also, one trend we kept hearing about was China’s labor costs exceeding Mexico’s within the next couple of years, arguably making Mexico more competitive than China. While this argument likely under-adjusts for productivity drivers, and attributes the majority of these changes to demographics; conveniently ignores countries like Vietnam, India and Indonesia, which still have much lower labor costs than both Mexico or China; and also ignores away some of the other levers and dynamics of investment decisions at the firm level, such as “Ease of doing business”, it is clearly being cited as an important trend. We kept seeing charts where by 2016, Mexico’s exports to the US will be greater than China’s. But this is a forecast, and as the joke goes – some twenty-something year old analyst at the Economist Intelligence Unit (EIU) made it up; some businessmen believed it and invested on the basis of it; and the same old EIU Analyst, now in his thirties, was elevated to the status of Nostra-Damus, and prophesized the end of the world. But sarcastic jokes aside, self-fulfilling prophecies exist. Ultimately, while forecasts such as those produced by the EIU might seem useful, we ought to be wary of their real value.

But clearly there is something to be said for optimism and the role of “animal spirits” in promoting growth. As Guillermo, one of our trip leaders shared with us – through-out Mexico’s modern history, Mexico has always felt like it has underperformed. Not only did the early wars and the territorial losses impact the national psyche or self-confidence, since then Mexican’s have felt like laggards in many fields from football (some of you might call it soccer) to economic development. But now there is renewed hope and optimism in Mexico. Everyone in Mexico feels that it is finally their time to shine. There is something clearly beneficial and heart-warming in this development – one must appreciate the positive impact of self-fulfilling prophecies.


Look how cheery & optimistic our Mexican trip leaders are - they did an incredible job

Now for the old negative problem – Mexico’s drug wars. I personally believe that it is an impossible problem to solve. So long as drugs will be illicit, and there will be demand in the US, the drug problem will persist. It’s not a cancer which can be eradicated with law enforcement or brute military power. It’s a perpetual problem rooted in incentives, economics and human nature. In many ways, I see parallels with Pakistan, and the fallout of the war in terror being fought in Afghanistan and primarily by the US. Our cities have been turned into war zones, when we do not believe that we have much to do with the root causes, and believe further that the US is doing very little to address the root causes.

You might disagree with me, and there are many shades of grey. But what is most interesting about Mexico’s issue is that not a single business or public sector leader within Mexico cited the drug war as an issue at all – it was never brought up in open ended talks; we as a group didn’t ask any questions about it – perhaps we felt safe through-out our trip, and didn’t feel like it even impacted us as gringos from across the border, where all we hear about Mexico is centered around the drug wars. One leader, the Chairman of the FEMSA brewery, did bring it up, but in a different context. We took this particular meeting in a rather sterile “Business Club” – a large event and conferencing space, in a posh part of Monterrey. He was disappointed that the GSB, which has a tradition of visiting his brewery, and sampling beers fresh off the production line on these annual study trips, was unable to do so this particular year, because the GSB’s security advisors deemed that the brewery part of Monterrey was too risky to visit. In fact, it was clear from his tone and expression that he thought that the security assessment was plain ridiculous. Again, different opinions and risk tolerances are different – but this is certainly something to ponder over. Are the security assessments of two sets of individuals, both of whom are arguably experts in this area, clearly different? Or have the negative perceptions, biased by a sensationalist media, created such an intolerance for risk, that one party has to take a very different stance than the other?


 The chairman of FEMSA, along with his beer

I believe that all media perceptions, either positive or negative are ultimately rooted in some real fundamentals, but then fueled out of control. And it is also important to realize that the media just caters to what the Plebs want, which is difficult if not impossible to change. So if we are to truly create change, we have to begin to change fundamentals. But as Plebs ourselves, perhaps we also hold a responsibility to consider carefully what we choose to subscribe to in the media.

Such a nuanced and complicated conclusion is exhausting, so enough on the media … next post is on Mexico’s monopolies.

Technocrats can be immensely inspiring – Meeting with Pedro Aspe



This is the second in a series of four blog posts from my recent study trip to Mexico, with the Stanford GSB. Here’re some facts and tid-bits on the trip which provide a bit of an overall flavor:

§  The people: 35 Stanford GSBers and their partners, hailing from 14 different countries –backgrounds as diverse and unique as Air Force Officers, Social Entrepreneurs, Finance Ministerial Analysts, Film Makers, Start-up Starters, Seismologists, Sports Analysts, Chemistry Teachers, Family Businessmen … and of course … bankers & consultants

§  The places: 3 different cities over 10 days, including Oaxaca, Monterrey and Mexico City – each with a very different and unique character

§  The experiences: Discussing Mexico’s challenges in meetings with business and public sector leaders; watching Mexican soap operas being filmed, including meeting the most charismatic man in the world (not to be confused with the most interesting man in the world, whom we also met); exploring ancient monuments; eating good food and drinking giant margaritas; and of course, shouting and cheering like mariachis.



Pedro Aspe is very “Professor-like” – clearly a technocrat. On the first slide of his presentation, he took great pains to explain and elaborate to us the two axes on his chart, which were otherwise clearly labeled and fairly self-explanatory. It seems that his typical audience might not be as used to this sort of material. But our group of 35 Stanford GSBers was both “getting-it” and mesmerized through-out his talk, as he went on to share very detailed and personal stories from his personal life and professional career – stories which explain some of his life’s work, and his passions, motivations, beliefs and values.

Trained as an Economist at MIT, Pedro Aspe went on to become Mexico’s Secretary of Finance. He has a long list of impressive accomplishments in public service, including “crisis-proofing” Mexico (all the good stuff, including renegotiating foreign debt, restructuring the Central Bank to make monetary policy independent, and pushing a controversial privatization plan) and architecting NAFTA (the North American Free Trade Agreement). At 62, he is now in the private sector, leading a firm which I understand to be doing everything from managing its own principal investments, to providing financial and even non-financial advisory services.




Here's Pedro Aspe, with all his joy and intensity

Even though he has been associated with the PRI (The Institutional Revolutionary Party), the Left leaning party which has governed Mexico for much of Mexico’s modern history, his political views are clearly very centrist. Not only did he state this explicitly, but he also described how political dynamics in the United States have traditionally been very centrist, despite the presence of two different parties, and how the US is in a bit of trouble currently, having moved away from this in recent years, with the advent of movements like the Tea Party. I would say that this position is “the hallmark” of a successful technocrat – willing to associate for pragmatic political reasons, but ultimately understanding that all things will be rational and real, and certainly over and above petty ideologies. It’s easy to get political and feel like you might be “selling out” – Imran Khan from Pakistan, for example, wouldn’t associate with Musharraf, even though there is strong centrist and even populist potential there. Egos come in; personalities clash – ideologies kill the potential for pragmatism. There is so much humility and tangible benefit in being a centrist technocrat. 

Pedro Aspe demonstrates this humility in more than one way. When asked about his role models or leaders that he admires, Pedro Aspe cited the Finance Ministers of Chile, New Zealand and Singapore, as he went on to “sell-us” on the TPP (The Trans-Pacific Partnership), a next generation free-trade agreement which aims to address such complex and thorny issues as how to deal with intellectual property or duplicated regulatory approvals in free-trade regimes. Perhaps this was a very elegant way to sell the TPP to us, and answer the question – and we were all clearly sold and wowed. But what’s amazing about this answer is that he picked his peers – he did not cite any larger than life figures like Gandhi or Mandela. He picked individuals with whom he’s interacted on a personal basis. That’s very special, and goes on to show just how pragmatic and authentic an individual he truly is.

Finally, it was very clear that he took a stand on tough issues and spoke it like he saw it. Catapulting a highly protected economy into a free-trade era is not an easy task. At the time that he made this happen, the vast majority of Mexico opposed him. But today, 70% of Mexicans believe that NAFTA is beneficial for Mexico. It takes not only a man of strong intelligence and vision, but also of courage and character to push through on unpopular policies like NAFTA. When asked how he dealt with self-doubt, it was clear that he constantly questioned his own beliefs. And it was perhaps in the process of questioning his own beliefs that he gained the courage to go ahead and push them. As a “contrarian”, I find this to be particularly inspirational – the need to keep questioning is just so important.

We met many inspiring leaders on our Mexico trip, but for me, and also for most of my fellow participants, Pedro Aspe was far and ahead the most inspirational of them all. Life as a technocrat can be very hard – you have many potential good answers, but very few of the levers to create the political space to put those answers in place. It’s almost sort of a thankless job – if you do well, you only did what was obvious and right, and if you screw up you’re political toast. But leaders like Pedro Aspe reassure me that technocrats and public servants can find immense purpose and meaning while changing the world.

My next post in this series will deal with public perceptions of a country like Mexico … get ready for some criticism of the media, and us gullible consumers of the media.

Adding controversy to small scale microfinance in Oaxaca



This is the first in a series of four blog posts from my recent study trip to Mexico, with the Stanford GSB. Here’re some facts and tid-bits on the trip which provide a bit of an overall flavor:

§  The people: 35 Stanford GSBers and their partners, hailing from 14 different countries –backgrounds as diverse and unique as Air Force Officers, Social Entrepreneurs, Finance Ministerial Analysts, Film Makers, Start-up Starters, Seismologists, Sports Analysts, Chemistry Teachers, Family Businessmen … and of course … bankers & consultants

§  The places: 3 different cities over 10 days, including Oaxaca, Monterrey and Mexico City – each with a very different and unique character

§  The experiences: Discussing Mexico’s challenges in meetings with business and public sector leaders; watching Mexican soap operas being filmed, including meeting the most charismatic man in the world (not to be confused with the most interesting man in the world, whom we also met); exploring ancient monuments; eating good food and drinking giant margaritas; and of course, shouting and cheering like mariachis.



Having spent a year working in microfinance in Kenya, I was very excited to see microfinance in action in Mexico. Banco Compartamos puts Mexico on the global microfinance map – it is extremely successful and highly controversial, both of which make it such an interesting case-in-point. In fact, it was a case study in our Ethics Class – and while I support Banco Compartamos, overall, my class section was quite divided, even after a rich and spirited discussion. 

Unfortunately, due to a last minute scheduling change we couldn’t take this debate to the very founders of Compartamos. But we ended up seeing another microfinance organization in Oaxaca. I will not name names – I wish to protect their name because I wish to generate controversy at the same time – I need my controversy fix. It’s a small organization which takes tourists on guided tours to microfinance borrowers, and solicits tour fees and additional donations as capital to make loans to the same microfinance borrowers. There are two tiers of loans – smaller loans of less than US$ 100 are interest free, and any larger loans of up to US$ 1,000 are priced at 15% APR, which is still rather inexpensive. They currently have 250 active borrowers, across 5 villages around an hour away from Oaxaca, and are staffed by 2 full-timers, and an additional 15 or so part-time volunteers, who serve primarily as tour guides and translators. As you can tell from these facts, their size is pretty small, and such an operationally intensive volunteer staffed organization is probably not very scalable. Their borrowers are engaged in small businesses – cottage manufacturing of everything from traditional rugs, to chocolate; and small scale retail and trade.


A microfinance borrower grinding fresh coco beans or cho quatle, as the Aztecs called them

Overall, I had a very positive impression of the organization, and their borrowers seemed to be doing well. Two in particular were notably inspirational. One had a rug store, which she expanded into a cafĂ© and snack bar. This is an ordinary, uneducated lady from a very small town but microfinance capital made her dare to dream bigger and bigger – and indeed she had a highly entrepreneurial vision to run a much larger business – a large full service restaurant for tourists who visit the village, by adding an additional floor to her store. The second lady was a widow who lived on top of a hill, away from the tourist town-center. She spent her adult life supporting her entire family including her husband who was an alcoholic. Her husband never had a stable job due to his addiction, and also his alcohol habit was a huge drain on the family budget. He passed away a few months ago. It was clear that microfinance made this incredibly strong lady support her family, not only due to the interest free working capital she used to make traditional rugs and purses, but also due to the influx of customers coming in on tours, who would otherwise not visit her, since her place was tucked away from the main tourist town-center.

Enough of the positives – now let’s get on with the controversies …

i) What are the ethics of “Poverty tours” or perhaps to frame it extremely negatively “Poverty pornography”? On the one hand, I really enjoyed meeting these ladies and getting to see their lives – my fellow trip participants perhaps found this to be an even more unique and enjoyable experience, because for many of them it was their very first such experience. It helped us obtain a real and informed view, which we need to develop as thoughtful and impactful donors and suppliers of charitable money. On the other hand there is something deeply unsettling about the entire set-up – having to do with the dignity of the borrowers; the guilt generated in the lenders; means versus ends sort of considerations; and getting a superficial, highly staged view versus a real and candid one. Staging in this particular instance might not be a huge deal – I get the sense that our experience was fairly authentic and representative, although I cannot make this claim with full certainty. The bigger issue though is in generalizing or universalizing this practice – charities and charitable causes routinely stretch the truth in their marketing practices to attract donors. The entire development sector for the longest time understood the population of Kibera, the largest slum in Nairobi, Kenya, where many “Poverty tours” are on offer, to be four times what it actually is. And because the ends justify the means in the minds of some, or because of the entire “guilt” factor, outcomes in philanthropy are sub-optimal. 

ii) Why such a big subsidy, and what are the trade-offs? At zero interest, and even at 15% APR, it is clear that these borrowers are benefiting from a substantial subsidy or “transfer of wealth”. Their real market-based alternatives e.g. borrowing from Compartamos, would price the loans at between 50% and 90% APR, which adds a significant amount to their cost of capital, and seriously changes the economics of their underlying businesses. In my view it is worth asking why they need money at such cheaper rates. Would their underlying businesses not be sustainable otherwise? And if so, what needs to change, in order to make them truly sustainable? What if the microfinance organization was to leave or fall-apart tomorrow? Would these women have to go back to square one?

I can of course see the argument on the flip side – the microfinance model seems somewhat sustainable, with the key ingredients, namely tourists and volunteers likely to be in plentiful supply for the indefinite future. And even if it were all to fall apart, giving some subsidies while the subsidies last, might be better than giving none at all. But still – I believe in teaching someone to fish, not giving the fish away. And while this model is not clearly in one camp or the other, there is a strong element of giving fish away which makes me uncomfortable.

Enough on microfinance … next post’s on Pedro Rocha, an inspirational public sector leader in Mexico.