Negative Externalities in Nigeria

I clenched my fists tightly around my backpack as our van driver feinted around both sides of the bus ahead of us. We were straddling two lanes, looking for which side of the bus would allow us to continue our breakneck pace down the road. As we moved back and forth, horns blared behind us from the various cars we were cutting off. What is going on here, I thought to myself. Can’t they see that if they all slowed down a mile or two and stayed in their lanes, everyone would go faster? Actually, this was a common thought that occurred to me almost constantly in Nigeria.

Everywhere I looked, I saw the subjugation of societal gain to individual gain. I supposed this made sense in a country where policemen were nowhere to be seen and (generally speaking) there was no cost to the negative externalities one created. To make this concrete, let me share two examples:

1. “Can I see your papers?”, the cop asked as he waved us to the side of the road. Our driver had all of her documents in order but still the cop pondered them. He tested the waters, claiming that the license wasn’t valid, that we were missing documentation for the car, but our driver was resolute, everything was in order, everything was there in his hands. Finally, he relented and let us on our way. You wouldn’t see a cop stopping you just to ask for a bribe in the US but in parts of Nigeria, it’s commonplace. Cops don’t make much so they look for small amounts of money they can make here and there. Since no one in law enforcement makes that much, officials don’t crack down on their junior people and look to make money in a similar fashion. Would the populace of Nigeria be happier overall paying a little more in taxes and avoiding this whole mess? Probably yes, but the state apparatus is too weak to make it happen. So you get individual cops, slowing down and extorting the citizens they are supposed to protect. This introduces a huge inefficiency into the whole system.
2. Let’s go back to traffic and driving. Here, if there is a slight delay in the traffic ahead of you, let’s say a car backing out of a driveway into your lane, Your first course of action will be to swerve around the stopped cars ahead of you to try and cut past whatever the obstruction is. Once you get to the front of the line though, you are met by oncoming traffic that was waiting for the reversing car. Since you’re now behind that car, it can’t fully pull out into the lane and is stuck. No problem, it can just pull forward again and let cars past. Except it can’t because now motorcycle drivers have tried working their way past the car by moving around on the other side. So now everyone is blocked in a hopeless tangle as motorcycles attempt to eke by on either side. If each vehicle had just waited, the situation would have resolved itself in a minute. But by each trying to avoid that minute, we’re all stuck in a ten-minute snarl. In most places , you’d get a hefty ticket for attempting this but in Nigeria, the cops are back on Victoria Island (the rich part of town) asking people for their papers. Again, seeking advantage at the individual level is slowing down society as a whole.

Before I move on, I want to make clear that, in the absence of an effective state, most Americans would act the same. BUT, since examples exist of effective states, why doesn’t Nigeria focus on problems of this nature to help out the people?

Actually, they are! Two days ago, Nigerian customs authorities shut down the two air freight clearing warehouses at Lagos’s international airport as they were unable to explain how goods had been leaving their warehouses without paying full customs and without proper documentation (I have a guess how). Anyways, the government wants to put a stop to individual agents receiving bribes at the expense of tax revenue for the state and has made a strong move to stop it. Presumably, when the warehouses reopen, things will be done mostly by the book and the government will be taking in the tax revenue it is due.

Seems pretty easy so why don’t they look for other opportunities to address externalities like this? Well, in reality, I don’t think it has been easy. Many individuals are made worse off by this arrangement. The customs agents lose a valuable source of revenue, their supervisors lose their share of the payments, the company I’m working for has its goods locked up AND will have to pay more in tariffs, and the large merchants who important millions of dollars of goods will certainly face delays and stock outs. As you can understand, people are up in arms about this and calling in their political favors. Which I suppose brings me to my point. When governments seek to assert themselves in the interest of society (well, first they will look to improve their own interests, e.g. get tax revenues), there will be powerful actors that will oppose the move away from the status quo. These are the people that benefit from whatever local maxima the current situation is at. While in this instance, we’re hamstrung by our goods being locked up, on the whole, I can’t complain about this situation. Hopefully it will help the average Nigerian and maybe it will even lead to cops that do something about traffic violations here.

Indonesia Part V - A Little Visual Element

I didn't take too many photos on the trip but some of my more talented peers did!

The crew

Boaters ferrying around whities

Jumping proboscis monkeys

Baby orangutan

Rice paddy!

Indonesia Part IV - Economic Development (Past, Present, and Future)

Towards the latter end of the trip, we started to focus in on the themes of economic development and poverty alleviation.  This is of course a fascinating topic to me and one that we had ample time to explore in Indonesia.

I'm going to frame this discussion around three examples that we learned of in Jakarta, eastern Bali, and Jakarta respectively.  To me, they clearly and starkly represent the past, present, and future of development paradigms.

First, let's begin with IBEKA.  IBEKA treks into the remote reaches of Papua, itself one of the least accessible places on earth and installs micro-hydropower plants on the many rivers that course through the jungles.  According to IBEKA itself, it began as a reaction to government inefficiency and inability (which I totally sympathize with).  Many of its founding members were actually jailed by the government back in the day (potentially as suspected Communists but I really don't know).  According to our guest speaker, IBEKA is completely and totally opposed to  anyone making a profit and benefitting others at the same time.  If you don't believe me, perhaps I can dig up the powerpoint slide he presented showing the precise point at which the good social entrepreneur icon turned from green to red and became evil.  Don't get me wrong, IBEKA was doing tremendous work to lay the foundations of an electrified society in very needy areas, but I found his mentality to be completely calcified and closed to the idea that perhaps there were sustainable approaches that he might consider.  It seemed to me like the more paternalistic efforts that developed world NGOs have been trying for decades.

Okay, let's move on to the East Bali Poverty Project.  While Bali is generally an affluent region  (although nowhere near as pretty as what I imagined) due to its tourism industry, the eastern part of the island is poor, isolated, and perched on fragile soils on the slopes of the two volcanoes that formed Bali.  David Booth found this region in the 90's when he was looking for the absolute poorest place on Indonesia.  Apparently this was it so he set up shop here to start what I would describe as a series of Millennium Villages.  He raised money and then pumped in capital to build roads, off-grid electric systems, and recruit teachers.  He did a lot of cool things besides (like planting Vertiver grass to stabilize the slopes so that gardens could be grown) those large projects and today the villages are transformed.  Certainly still not well off but vastly improved from where they started.  I was impressed I must say but many of my peers were not.  Perhaps that is because the entire visit felt like a pageant, complete with children singing "Thank you all so much" plaintively as our vans / trucks rolled up.  That part was pretty silly.  I hope that the kids didn't have to wait long for us to show up.  But, not shocking I suppose that a ton of cash and concerted technical expertise can improve a system of villages but still, I thought the progress was awesome.  This system to me epitomized the type of development work that we see most often through Jeff Sachs and others.  Pump in cash and break the poverty cycle.

Okay, now to Ruma.  Ruma is a for-profit social enterprise in Indonesia that trains rural entrepreneurs to sell prepaid phone cards and electricity via mobile networks (much of Indonesia is covered by 3g and other data networks).  The company is staffed by former members of BCG, Kiva, the UNDP, Yahoo, E&Y, and many other well known entities.  I really like the model.  They train the owners of small shops how to get set up with a mobile tablet, a printer, and with the prepaid phone cards (a system that Ruma built the back end systems for).  From there, the owner hustles to sell the products to the local area residents.  They make more money, people have more connectivity, and Ruma makes more money to expand its operations.  Win, win, win.  From this base, Ruma has also expanded to offer research services to some of the larger CPG firms that are eager to design products that are valuable to the base of the pyramid market.  This to me is the epitome of the new guard of development workers.  Ideas that benefit the poor but also generate earnings for the institution, enabling it to continue operating and incentivizing it to perform well.  However, I must admit the potential for a biased perspective.  Is it shocking that I found the young entrepreneur, fresh out of consulting and an MBA, to have the best perspective?  

Indonesia Part III - Decision Makers and Decision Takers

My previous post dealt with the question that was raised for us in the first phase of our trip on the Indonesia side of Borneo, known as Kalimantan, but glossed over the particulars of the trip.  I’ll try to cover that in a later post but for now let’s turn our attentions to the second phase of the trip, our visit to Jakarta, AKA the big durian.

In Jakarta, we met with leaders from three of the largest family-owned conglomerates in Indonesia.  Just a quick aside, the biggest players in Indonesia are the massive corporations that certain families have been cultivating for decades or generations.  We met with Sinar Mas (the Widjaja family), Anindya Bakrie who runs the Bakrie family’s media empire, and BCA (the bank run by the Hartono family).  We also gave some love to the government as well, meeting one of the right hands of the President of Indonesia, the Minister of Tourism, and one of the various Transportation organizations.

From the moment we stepped into the headquarters of Sinar Mas, it was clear that we had left the dusty environs of the environmentalists of Kalimantan.  While in Samboja Lestari (on Kalimantan) we had met in old office buildings and outdoor patios, at Sinar Mas we met in a massive boardroom with a full-wall monitor that mapped their operations across Indonesia.  Here, all of the figures we met with were well-dressed, well-spoken (perfect English), and highly accomplished.  Sinar Mas is one of the largest, if not the largest, producers of palm oil in Indonesia and you could tell that they were cognizant of the perception of their industry.  Their communications team gave us a pitch on how Sinar Mas did no wrong and was really the best possible company you could ever envision.  On balance I think that Sinar Mas wasn’t really a bad company.  They had some rules in place for themselves that weren’t bad.  But really, I was struck by the idea that they didn’t really have a choice but to play in the palm oil game as aggressively as they could.  They knew that any lands they didn’t use for palm oil, someone else would.  And, most likely, that other actor would be more reckless / exploitive than Sinar Mas.  Yes, people can point fingers at them and yell about them buying up land degraded by secondary actors for palm oil but what else could they do?  If they refuse to buy that sensitive land, I can assure that none one of their competitors would share the same compunction.  I was left with the impression that the government needed to step up and enforce some legislation with teeth.

After Sinar Mas, we were able to get time with Anindya Bakrie, one of the richest men in all of Indonesia.  I personally didn’t speak with him at all since he breezed in late to our lunch, trailed by his entourage complete with movie camera, but he’s certainly an interesting character that bears mentioning.  I think the jury is still out on Anin but most think of his dad as a rather corrupt dude.  He created the Bakrie empire and then bankrupted it a few times over (according to Anin) before handing the unprofitable media divisions to Anin.  By all accounts, Anin has done pretty well with it.

To round out our corporate meetings, we met with BCA, one of the largest banks in Indonesia.  They had a very interesting model and approach to banking that I’d be interested to hear others weigh in on.  Primarily, they focused on making profits via transactions (i.e. as a payments processor) vs. via credit and interest payments.  I don’t know how much of this was just marketing spin but our speaker seemed quite genuine.  And, since he went to Stanford, I must assume he was being honest.  Then again, he did claim that Antarctica was the largest continent…  Hmm.  While his discussion of the bank’s operations was interesting, I most enjoyed his thoughts on the government.  He readily acknowledged the problems of corruption in the government but pointed to a new generation of leaders that showed promise of both talent and integrity, a potent combination.  He also spoke about how his bank was fighting for certain practices that would eliminate the potential for graft and corruption, like shifting to electronic payments that would be more easily traceable.

In addition to Sinar Mas, Bakrie, and BCA, we also met with some members of the government that we had been hearing so much about.  The Minister of Tourism was interesting but her power was so limited that I’m going to just focus on the right hand of the President, Pak Kuntoro (Pak just means Mr.).  This guy was a very interesting fellow and the type of guy I would expect to see in a position of this type.  He was easy-going and fly-by-the-seat-of-pants type of guy, or at least that is the impression that he gave.  He started out our meeting by asking us for any questions we had.  He followed that up by ignoring the presentation his aide had put together for him.  Clearly a smart guy (another Stanford grad) and he had achieved noteworthy success rebuilding the Aceh region that was devastated by the 2004 tsunami (and doing so without allegations of corruption).  However, what was most notable about him was the silver lining of his aides.  They hovered just over his shoulder looking ready and competent.  We met up with some of them after and found them to be highly intelligent and passionate about Indonesia.  I think they make up the second iteration of those leaders that Armand Hartono of BCA spoke.

On the topic of the government’s role in balancing development and the environment, the meeting came up a bit short.  Basically, the process of decentralization that was undertaken after the Asian Financial Crisis has taken all of the central government’s tools (at least according to Kuntoro).  This makes it very difficult for them to control palm oil, oil, or coal production.  Not a good situation and not one that the central government seemed keen to attempt to wrestle back under its control.

Indonesia Part II - Balancing Economic Development with Environmental Sustainability

Just like every party, every good trip deserves a theme.  For Indonesia, the theme we set out to explore was balancing economic development with environmental sustainability.  This is an especially appropriate question to consider when visiting Indonesia.  Again, let me do a little to set the stage on Indonesia.

While being the fourth most populous country in the world, Indonesia only has the world’s 17^th largest economy.  In my opinion, that’s not that bad.  Certainly no Japan but still safely within the G20.  GDP per capita is about $3,500 which is on par with what you would find in much of Central America or countries like Ukraine.  So… good but not great.  However, Indonesia has been blessed with being situated almost literally on a gold mine.  First, it straddles the equator and is drenched with copious amounts of sun and tons of rain and moisture.  Basically a natural greenhouse.  This is especially good for growing things like palm trees for palm oil (more on that later).  This rich biological gift existed in prior years as well and as a result Indonesia sits on top of large amounts of both oil and coal.  Until recently it was the only member of OPEC but has since become a net oil importer (hey, 240m people need oil).  Further, Indonesia has tremendous biological diversity as one might expect.  It has everything from komodo dragons to orangutans to just about anything else you might expect to find in SE Asia.  This biodiversity extends to the ocean as well.  Indonesia has approximately eight times the biodiversity of coral as the entire Caribbean.  Apologies as that stat might be slightly off the mark but I don't think it's off by much.

However, it’s already fully in the throes of cashing in on these resources.  Indonesia is the world’s fourth largest emitter of greenhouse gasses in the world.  Yeah, I know, finally punching its weight!  But in this case that’s really not great.  Especially since emissions will grow as Indonesia continues to develop.  Mostly this is due to the clearing of land for palm oil.  Small or large actors will clear virgin forest (that stores literally tons of carbon) and peat bogs with bulldozers and fire to make the way clear for the incredibly lucrative palm oil plantations that cover large swaths of Indonesia.  This releases massive amounts of carbon into the atmosphere while also wreaking havoc on Indonesia’s forests and biodiversity.  To boil it down to a Greenpeace campaign, glaciers and monkeys vs. palm oil and cash money.  Worse than this is the coal mining that goes on in the northern reaches of Indonesia.  Unlike coal reserves in the US, that lie far below the ground, Indonesia’s lie just under the surface and lend themselves to strip mines that literally uproot every tree in sight.  Not surprisingly, this is devastating to the local ecosystem.  These operations lead to massive runoffs, contamination of the water supply, and devastation of the region’s topsoil.  There is also significant oil production but it almost pales in comparison to the effects of palm oil and coal operations

Knowing all of this, you have to ask, what should Indonesia do?  It’s easy for us in the developed world to say that this type of reckless development is indefensible but it would ring pretty hollow considering the wanton use of the environment that we’ve shown in the past.  Plus, how do you really tell a poor Indonesian not to cut down some trees to provide for his family?  I know what decision I would make if it were between my children and the trees (or peat bogs) in my backyard.  Next, I’ll discuss this question from the perspective of government and corporate leaders in Jakarta.

Indonesia Part I - Setting the Stage

Stanford GSB, in its wisdom, insists that all students must complete at least one structured, global experience before completing the MBA.  At first I was a bit skeptical of the logic behind this requirement.  It seemed like insisting that all students, regardless of past experience were in need of a trip of this nature was wrongheaded and would lead to a misuse of some students time and resources.  However, as the pre-trip meetings gathered steam, I began to change my mind on the topic and upon reflection, I'm glad for the policy.  I'm certainly still digesting the lessons that I learned over my time in Indonesia (the subsequent blog posts will do something to address this) but I wanted to get started with laying the background before I jumped into my thoughts from the trip.

First, the trip.  Stanford offers 15 or so trip options for the first year students.  The trips must be to a country that you haven't spent serious time in before and are usually about 1.5 weeks in length.  The nice part is that second year students plan the entire trip covering country selection, travel logistics, and meetings.  All we need to do is rank the trips we find most appealing and cross our fingers that we get it.  Typically, you'll be matched with either your first or second preference and grouped with 17 of your soon-to-be-best-friends.  At that point, only a few meetings and some paperwork stand between you and a country you know nothing about.  In my case, Indonesia.

Okay, time to move away from logistics to start talking Indonesia.  The first thing to understand about the country is its scale.  As I learned in literally every meeting, Indonesia is made up of 17,000 individual islands stretching over 3,000 miles (greater than the width of the continental US.  Indonesia is home to 240m people making it the fourth most populous country in the world (just after the US).  Stretching the word scale a bit, Indonesia also houses incredible demographic diversity.  The archipelago supports over 300 ethnic groups speaking 700 languages / dialects.  Can you imagine trying to make generalizations to cover a country like this?  I hope so since I'll be making some later on...

Next, we should turn our attention to Indonesia's recent past.  Well, recent-ish.  In 1600, the Dutch laid their claim to Indonesia via the Dutch East India Company.  They didn't control much beyond the coastal regions until the 1900s but at that point the end was already bearing down on them.  In WWII, Japan invaded Indonesia and expelled the Dutch.  Then, when Japan surrendered, the founding father of Indonesia, Sukarno (not Suharto) declared Indonesia independent.  The Netherlands tried to get Indonesia back after but colonialism was so passé at that point.

Sukarno ruled Indonesia as an authoritarian until an attempted coup d'etat weakened him politically (despite a violent purge of Communists) and General Suharto assumed control in 1968.  Suharto made a number of reforms to Indonesia's economy but ruled with an iron fist and allowed tremendous corruption.  Finally, in 1998, he resigned amidst the instability of the Asian Financial Crisis.  Transparency International estimates that Suharto embezzled $15-25 BILLION over his 30 year reign.  

Sukarno

Suharto

Since the financial crisis, Indonesia has been steadily regaining lost ground.  Since 2007, its GDP has grown at over 6% a year.  Given the Global Financial Crisis, this is an incredible statistic.  Corruption still plagues the country but it is currently rated investment grade so... not too terrible at least.

Okay, that is a basic grounding in Indonesia that in no way does it justice but that should suffice for our purposes.  In my next posts, I'll dig into some of the reflections from my trip.