The Impact of Redlining

In early 1930s, Home Owners’ Loan Corporation (HOLC) was created as part of Roosevelt’s New Deal to reduce the down payment required to buy a house in hopes of promoting homeownership. The Congress then created the Federal Housing Administration, which sets standards for construction and underwriting and insures loans made by banks and other private lenders for home building, as well as insuring private mortgages. HOLC developed a system of maps that rated neighborhoods according to their perceived stability. On the maps, the areas rated “A” were marked in green areas. According to Ta-Nehisi Coates’ article in The Atlantic by, these areas were considered “in demand” neighborhoods that, as one appraiser put it, lacked “a single foreigner or Negro”. These neighborhoods were considered excellent prospects for insurance. Contrastively, neighborhoods where black people and other immigrants lived were rated “D” and were usually colored in red. This is where the term “redlining” comes from. Usually, these “D” neighborhoods were considered ineligible for FHA backing. FHA selectively granted loans to white neighborhoods and forbid the sale of properties in these green areas to anyone other than whites. The mortgage industry as a whole adopted these practices, and turned the maps into self-fulfilling prophesies. The inability to access capital in these “hazardous” redlined neighborhoods, lead to disrepair and the decline of these communities’ housing value, which in turn reinforced the redline designation. The deterioration of these neighborhoods also most likely also fed white flight and rising racial segregation. The federal government eventually retreated from the practice, and it was outlawed by the Fair Housing Act in 1968. Nevertheless, redlining left long-lasting, truly horrific consequences for black people, black families, and black neighborhoods.

The Mapping Inequality project allows online access to the national collection of “security maps” and area descriptions produced by HOLC between 1935 and 1940. By looking at where the differently rated zones falls on the map, it becomes clear how present differences in the level of racial segregation, home-ownership rates, home values and credit scores reflects the old redlining boundaries. Today, these same communities still face predatory lending, or “retail redlining”, which inversely the proportion of Black residents to grocery stores, non-fast food restaurants, and other retail resources important for promoting and maintain health. According to a Pew Research project led by NYU Sociology professor Patrick Sharkey, to this day, Black people with upper-middle-class incomes do not generally live in upper-middle-class neighborhoods. Sharkey’s research shows that black families making $100,000 typically live in the kinds of neighborhoods inhabited by white families making $30,000. “Blacks and whites inhabit such different neighborhoods,” Sharkey writes, “that it is not possible to compare the economic outcomes of black and white children.

Sources:

New York Times

Washington Post

U.S. Trade Commission Calls for Tariffs on Solar Energy Products

Officials from the United States International Trade Commission, an independent federal agency that governs trade, recently announced a range of recommendations aimed at protecting domestic manufacturers of solar equipment from unfairly priced imports, especially from China. Those included limiting the imports of certain solar components and imposing tariffs of 10 percent to 35 percent on certain products.

The trade case was led by American solar producers but fought by big buyers of solar panels. Suniva, a Georgia based solar energy company, championed the case for higher tariff on imported solar energy equipment alongside another major player in the industry, SolarWorld Americas. Suniva called the International Trade Commission’s recommendations “disappointing” in a statement, saying they were not strict enough. The company called for the administration to employ stricter restrictions “necessary to save American manufacturing.”

According to LA Times, the company had previously shuttered its solar plants in Georgia and Michigan, and claimed that they could not compete with less-expensive imported solar equipment, principally from China. Big buyers of solar energy systems, however, disagreed with Suniva, saying that a higher Tarrif will drive up the price of solar panels in the U.S., undercut the cost-competitiveness of solar and ultimately reverse the progress we’ve had in promoting solar energy.

Even some of the other manufacturers in the industry disagreed with Suniva’s idea. Twenty-seven solar mounting equipment manufacturers and their domestic suppliers wrote an open letter to the U.S. International Trade Commission in response to the Suniva’s proposal. The companies worry that the high tariffs will raise prices throughout the supply chain and ultimately cost more American jobs than they would save. They argue that cheaper solar products from China have actually been a boon to their businesses and accelerated the adoption of solar energy in the United States, where it now powers millions of American homes and businesses. A representative of these companies, Frank Maisano, says that if President Trump chooses to impose the tariff, “it will set off a chain reaction threatening workers who install solar power projects, utilities who purchase the power, major commercial users of solar power, like retailers, as well as home installers.”

The recommendations from the Trade Commission will be sent to the president by Nov. 13. He will have 60 days to decide whether to accept or to reject these ideas as he makes a final decision, which will come as Mr. Trump is preparing to travel to China next week to meet with Chinese officials on a range of security and trade issues.

 

References:
https://www.nytimes.com/2017/10/31/business/solar-industry-import-tariffs.html
https://www.washingtonpost.com/news/energy-environment/wp/2017/10/31/federal-trade-panel-calls-for-protections-against-imported-solar-panels-which-trump-could-soon-implement/?utm_term=.044f208b909c
http://www.latimes.com/nation/la-na-solar-energy-tariffs-20171101-story.html

Grameen Bank and Microfinance: Debates and Controversies

Microfinance was born in the early 1980s when an economist named Muhammad Yunus came across women in poverty from the villages of Bangladesh. In face of the widespread famine and poverty, some of these women and their families were controlled by loan sharks, and had no other resource to turn to because traditional banks considered them not creditworthy. Muhammad Yunus repaid the women’s debt and helped them get loans from the bank as a guarantor. Soon, working with the poor made him realize that lending money to the disadvantaged is a great business opportunity: they were trustworthy, hardworking people. He then created Grameen Bank, what we consider a pioneering model of social enterprise, to help break the cycle of poverty.

Muhammad Yunus has received a Nobel Peace Prize in 2006 and a US Congressional Gold Medal in 2010, among many other prizes, as recognition of his contributions to the fight against global poverty. Despite the approbation Yunus has received, the concept of microfinance has been the subject of many debates and controversies. Some critics question whether microfinance is truly an effective way to lift the poor out of poverty. Others make the claim that instead of helping the poor, microfinance institutions (MFIs) make their clients poorer, as they become victims of a vicious spiral of over-indebtedness. It is important for us to understand this debate to keep us attentive to ensuring that we remain on the right track as we’re trying to fight global poverty. However, in order to understand the debate and the truth about microfinance, we need to first understand how the model works.

For over three decades, the Grameen Bank has succeeded in reaching the poor, while traditional banks ignore this population. Grameen bank established branches and sent representatives into remote areas of developing countries, and took on many clients there. The reason why Grameen was able to do that is that borrowers do not need collateral to get a loan. This policy allows access for the disadvantaged to get loans more easily to support their small businesses and livelihood. These loans are typically made in very small amounts, averaging at $200 with an interest rate below 20%, hence the “micro” in microfinance. Grameen Bank is also different from traditional banks in that it has a financially self-reliant model. In an article published in The Round Table, Yunus explained his bank’s business model: “Grameen has funded 90 percent of its loans with interest income and deposits collected, aligning the interests of its new borrowers and depositor-shareholders since 1995.” Essentially, the bank encourages all borrowers to become savers, so that their local capital can be converted into new loans to others.

In addition to the no-collateral borrowing system, another fascinating fact about Grameen Bank’s operation is that 97% of the borrowers are women. It is a brilliant business strategy because women statistically have a much higher loan repayment rate than male, for that women tend to make more conservative investments. Yunus have recognized this, and made women his target client. In an interview with The Guardian, Yunus said that he expanded the program into the US and established 19 branches in 11 cities, including eight in New York. “We have nearly 100,000 borrowers there now and 100% women. Not a single man.”

Yunus’s decision to give microloans to women isn’t just good for business, it accomplishes so much more. In rural Bangladesh, many women are essentially confined to their husband’s family compound, and are in a rather powerless position both socially and economically. Girls are usually married by 16, sometimes as young as 11. Most of the time, there are no medical professionals in attendance when women give birth. Women are expected to keep their eyes down and their voice soft, even at home. It is not considered proper for women to go to the market, or to be seen by men outside their family. Microfinance serves and empowers these women, who are often overlooked in society by giving them access to a small amount of capital so that they can buy seeds, chickens or a cow and start and grow their small businesses. Often, this allows them to earn enough to provide three meals a day instead of two for their family and their children, of whom 40% are malnourished. It also gave them a bit of cash to pay for medicines if a family member got sick.

The main criticism microfinance face is that borrowers may face abusive interest rates and end up become overwhelmed by their debt. While some institutions like BRAC have models similar to Grameen and provide services with the goal to combat poverty, other banks that label themselves as MFIs use predatory lending and collection practices. These companies charge up to 200% for interest, and some of them employ collection methods so harsh that they had driven some borrowers to commit suicide. According to an article from The Atlantic, critics often use SKS Microfinance as an example to argue that microfinance is a plot to steal from the poor and give to the rich. The company held a public IPO in 2010 that made millions for its founder, ex-McKinsey-consultant Vikram Akula. Another example is Banco Compartamos, a Mexican bank that Compartamos charges an annual percentage rate in the range of 75-100%, and raised nearly half a billion dollars in its IPO.

However, these banks do not fit the microfinance model Yunus proposed. In fact, Yunus himself is outraged by this kind of microfinance companies that make huge profits off of the backs of the very poor. He blasted Compartamos, saying, “microfinance was created to fight the money lender, not to become the money lender.” The majority are still small or very small entities that are working hard to achieve financial self-sustainability. A BYU study found that among the 148 MFIs they interviewed, only 57 are self-sufficient, and fewer report profits. The majority of the MFIs around the world are not influenced by the predatory model mentioned above, and are operating as non-profits. For-profit MFIs that uses abusive interest rates are only a small fraction of the microfinance market, and should be a reason to motivate more effort put into regulation, instead of being used to denounce microfinance as a whole.

Moreover, Aneel Karnani, a professor of strategy in University of Michigan comma published an article in Stanford Social Innovation Review, in which he argues that microfinance is not an efficient way to alleviate poverty. He claims that instead of microfinance, best way to eradicate poverty is to create jobs and to increase worker productivity. Karnani points out that most microfinance clients are not “micro-entrepreneurs” by choice, and that these borrowers would “gladly take a factory job at reasonable wages if it were available.” Therefore, he believes by people are strying away from the real effective way to fix the economy. It is true that on a macroeconomic scale, most people agree that employment is the fundamental link to poverty reduction.

However, the problem that MFI clients face in these rural areas of Bangladesh is precisely the limited opportunities for steady employment at reasonable wages. Within the status quo, microfinance is still the best opportunity for people who seek temporary financial relive and are hoping to kick start their small business. The story of Manjira who, years before, was living in extreme poverty in Bangladesh, illustrates the impact a Grameen loan can have. She had lost a young son to a sudden illness. She told the reporter at New York Times that her most painful memory was the day before her son died. He asked her for an ice cream that cost one taka (about 2 cents), but she didn’t have the money to give him that. A few years later, she managed to get a small loan through Grameen, and had become a successful seamstress. Now, she is one of the board members of Grameen Bank, along with three government representatives and eight other village women elected by the bank’s more than 8 million members.

Over the years, many other women like Manjira have found means to provide for themselves and their family with the help of microloans. As women build up their business, overall consumption increases and its benefits also extend outward to the entire community, including those who are participating in the program. However, it is important to keep in mind that microfinance does not automatically empower women. Governments and international organizations in developing nations should tighten regulation over microfinance institutions and be sensitive to the country-specific and cultural factors that play a key role in determining how microfinance interacts with the local community.

Grameen Bank: Empowering Women through Microfinance in Bangladesh

Microfinance was born in the early 1980s when an economist named Muhammad Yunus came across women in poverty from the villages of Bangladesh. In face of the widespread famine and poverty, some of these women and their families were controlled by the loan sharks, and had no other resource to turn to because traditional banks considered them not creditworthy. Muhammad Yunus repaid the women’s debt and helped them get loans from the bank as a guarantor. Soon, working with the poor made him realize that lending money to the disadvantaged is a great business opportunity for that they were trustworthy, hardworking people. He then created Grameen Bank, what we consider a pioneering model of social enterprise, to help the poor break the cycle of poverty.

Why has the Grameen Bank succeeded in reaching the poor, while traditional banks have not? The most prominent reason is that borrowers do not need collateral to get a loan. This policy allows access for the disadvantaged to get loans more easily to support their small businesses and livelihood. These loans are typically made in very small amounts, averaging at $200 with an interest rate below 20%, hence the “micro” in Microfinance. Grameen Bank is also different from traditional banks in that it has a financially self-reliant model. Yunus explained his bank’s business model in an article published in The Round Table: Grameen has funded 90 percent of its loans with interest income and deposits collected, aligning the interests of its new borrowers and depositor-shareholders since 1995. Essentially, the bank encourages all borrowers to become savers, so that their local capital can be converted into new loans to others.

The most fascinating fact about Grameen Bank’s operation, however, is that 97% of the borrowers are women. It is a brilliant business strategy because women statistically have a much higher loan repayment rate than male. Yunus have recognized this, and made women his target client partially for this reason. In an interview with The Guardian, Yunus said that he expanded the program into the US and established 19 branches in 11 cities, including eight in New York. “We have nearly 100,000 borrowers there now and 100% women. Not a single man.” However, giving microloans to women isn’t just good for business, it accomplishes so much more.

In rural Bangladesh, most women are essentially confined to their husband’s family compound, and are in a rather powerless position both socially and economically. Girls are usually married by 16, sometimes as young as 11. Most of the times, there are no medical professionals in attendance when women give birth to children in these areas. Women are expected to keep their eyes down and their voice soft, even at home. It is not considered proper for women to go to the market, or to be seen by men outside their family.

 

Microfinance serves these women, who are often overlooked in society, and empowers them one small loan at a time. This access to a small amount of capital made it possible for women to buy seeds, chickens or a cow and start and grow their small businesses. Often this allows them to earn enough to provide three meals a day instead of two for their family and their children, of whom 40% are malnourished. It also gave them a bit of cash to pay for medicines if a family member got sick.

Here’s the story of Manjira who, years before, was living in extreme poverty in Bangladesh. She had lost a young son to a sudden illness. She told the reporter at New York Times that her most painful memory was the day before her son died. He asked her for an ice cream that cost one taka (about 2 cents), but she didn’t have the money to give him that. A few years later, she managed to get a small loan through Grameen, and had become a successful seamstress. Now, she is one of the board members of Grameen Bank, along with 3 government representatives and 8 other village women elected by the bank’s more than 8 million members.

Like Manjira, many women in Bangladesh have found means to provide for themselves and their family with the help of microloans. The impact of Microfinance, however, goes far beyond providing women with business opportunities. More importantly, it help increase access to education for the next generation.

Statistically, children living in poverty have a higher chance of missing, dropping out, or not enrolled in schools. This is because the majority of families who live in poverty work in agriculture. The families need the children to be working and productive so their financial needs can be met. Microloans can help ease the financial pressure of these families, which means more opportunities for children to stay in school. This is especially important for families with girls. When girls receive just 8 years of a formal education, they are four times less likely to become married young. This makes these girls more likely to achieve higher level of education and then become a more productive member of the society.

Yunus claimed that part of the reason why he focused on serving female customers is that he wanted to protest the traditional banks that refused to lend money to women. As more and more of these women succeed in building their businesses, Bangladesh and many other developing countries reached by Microfinance firms are now forced to a new look at women’s role in the society. A recent study done by RMIT University has shown that Microfinance has effectively reduced gender inequality in developing countries. The study measured gender inequality using Gender Development-related Index and Gender Inequality Index. These are UN indicators that calculate gender inequality based on measures of differences in factors like health, education, and economic status, as well as living condition and empowerment. The researchers found that in the average developing nation, an increase in Microfinance by around 15% is associated with a decline in gender inequality by about 50%.

Some critics of Microfinance claim that many become overwhelmed by their debt. However, it is important to distinguish the different types of Microfinance organizations. Some institutions in Bangladesh like BRAC have models similar to Grameen and provide services with the goal to combat poverty. Unfortunately, there are also some profit-oriented organizations that use predatory lending and collection practices. Some of these institutions charge up to 200% for interest, and their harsh collection methods had driven some borrowers to commit suicide. This type of Microfinance lenders does their business on the client’s doorstep, meaning that representatives are encouraged to travel to rural villages to make the loans and then come back weekly to collect the payments. Yunus himself is outraged by this kind of Microfinance companies that make profits of the backs of the very poor. Sadly, the Bengali government offer few regulations in this type of predatory business.

Some academics, including Dean Karlan, insist that the success stories of women who received help from Grameen Bank is overrated, and paint an unrealistic picture of the effectiveness of Microfinance. Karlan conducted randomized controlled trials of Microfinance programs in different developing countries, and in each case they compared a randomly selected group of people who had been offered the loans to an otherwise identical group that had not. Their research suggests that Microfinance does not have much effect on improving the level of income of the loan recipients. However, it is worth noting that in some cases the overall income stay unchanged because borrower decrease their work at a wage-paying job as they start to gain more income from their own business, and the assets they own are not counted toward their income.

Aneel Karnani, a professor of strategy in University of Michigan published an article in Stanford Social Innovation Review, in which he agrees with Karlan and argues that despite its noneconomic benefits, Microfinance does not significantly alleviate poverty. He claims that instead of Microfinance, best way to eradicate poverty is to create jobs and to increase worker productivity. Karnani points out that most Microfinance clients are not “micro-entrepreneurs” by choice, and that these borrowers would “gladly take a factory job at reasonable wages if it were available”. On a macroeconomic scale, most people agree that employment is the fundamental link to poverty reduction. However, the problem that the clients face in these rural areas of Bangladesh is precisely the limited opportunities for steady employment at reasonable wages. Within the status quo, Microfinance is still the best opportunity for people who seek temporary financial relive and are hoping to kick start their small business.

Granted, Yunus’ hopes for Microfinance had always been rather grandiose. Poverty is a complex issue, and Microfinance isn’t a “silver bullet” that can magically solve it. With that said, well-intended Microfinance institutions remain one of the best tools available to developing countries to alleviate poverty. A 2015 report from advocacy organization Microcredit Summit Campaign claims that between 1990 and 2008, Microfinance has lifted 10 million people out of poverty in Bangladesh alone. However, there’s no denying that Microfinance has now become a worldwide movement. By 2013, some 3,098 microfinance institutions had reached over 211 million clients worldwide, just under half of whom were living in extreme poverty.

Clearly, more Microfinance in developing nations is good news for women. There is an immeasurable effect that occurs when women are empowered to do something in their society that they weren’t normally allowed to. As women build up their business, overall consumption increases and its benefits also extend outward to the entire community benefits, including those who are participating in the program. However, it is important to keep in mind that Microfinance does not automatically empower women. Governments and international organizations in developing nations should tighten regulation over Microfinance institutions and be sensitive to the country-specific and cultural factors that play a key role in determining how Microfinance interacts with the local community.

 

What the Market Telling Us about the Korean Peninsula Conflict

A rogue state testing hydrogen bomb sent a missile over the territory of a neighboring country. The American president promised “fire and fury” if threats continue. Sounds a lot like the plot of a Hollywood thriller, right? Tthe Market, however, doesn’t seem to think the world is heading for to conflict and chaos. International investors are relaxed about the potential crisis on the Korean peninsula, and the market stays undisturbed. According to the recent data collected by the Economist, economic indicators including the yield on Treasury bonds and the MSCI World equity index fell, while the Gold price rose in the recent month. However, these movements are not big. In fact, the South Korean stock market, which should be most sensitive to the risk war, is doing better in comparison to the start of the year.

Let us consider the terrible possibility of a conflict on the Korean Peninsula. In addition to the tragic humanitarian loss, the global economy will also suffer. Capital Economics points out that South Korea produces 40% of the world’s liquid-crystal displays and 17% of its semiconductors. If Japan was the target of missile strikes from North Korea, as it might be, the disruption would be even greater for that Japan is the world’s third largest economy.

So how can we justify the market’s insensitivity to this delicate political situation? Some propose that the market is simply not very good at assessing political risk. A recent example would be when the European market failed to foresee the result of Brexit. The vast majority of polls and markets had “remain” with a solid lead. It was only when the polls shifted towards “leave” in early June 2016 did the market moved in the same direction. Still, never once did “leave” come close to taking the lead.

Another explanation is that investors have learned in recent decades that geopolitical events tend to have only very short-term impacts on the markets. In comparison to political risks (e.g. the result of a presidential election), economic growth and corporate profits are far more important factors to consider for the investors. The reality is, no one can run enough analysis to properly assess and predict the situation with North Korea based on polls or past data.  Nevertheless, the market has made a decision that for now, they do not believe a serious incident will happen on the Korean peninsula. So let us all hope that the “wisdom of crowds” wins this time.

 

Higher Heels = Worse Economy?

From lipstick to ties, people have long considered fashion items as indicators for the economic climate. According to researchers at IBM, the height of high heels is another economic indicator that has a correlation to economic health.

A team of researchers at IBM led by consumer product expert Trevor Davis used social media sites and blog posts to find that the popularity of flats and low-heeled shoes is a possible sign that the economy is growing, whereas higher heels indicate the opposite. According to an IBM report, low-heeled flapper shoes in the 1920s were replaced with high-heel pumps and platforms during the Great Depression. Although low-heeled sandals were big in the late 1960s, platforms came back again during the 1970s oil crisis. More recently, the median height of women’s heels peaked at seven inches in 2009 during the recession, and then dropped to two inches by 2011 as the economy recovers.

Davis suggests that the reason women turn to higher heels during economic downturns is that more flamboyant fashions serve as a means to escape the harsh reality. There are, of course, other possible explanations for women’s preference of lower heel heights. Women may simply be embracing a more pain-free walking experience, or the natural cycle of fashion trends sometimes happens to coincide with the economic cycle. However, there is still a great possibility that low heels may actually indicate longer-term economic.