PopTech interview: Eduardo Porter on pricing education in India, fertilizer in Kenya and human life in Zimbabwe

Emily Spivack ( Bio  /   Posts )  |  Thursday, February 10, 2011 UTC

Eduardo Porter is the author of The Price of Everything: Solving the Mystery of Why We Pay What We Do, in which he investigates the critical role prices play in shaping our lives, from having a baby to buying a car. To illustrate, his recent blog posts have included “The price of cheap food,” “The price of a sleeping bag,” “The price of a longer life” and “The price of a beer.” PopTech spoke with Porter about determining a price tag for social change.

PopTech: What’s your take on the sea-change in thinking about social innovation that’s taken place over the past decade – a shift from traditional nonprofit approaches (Donor A pays for Service B for Constituent C, who is assumed to be incapable of paying for it themselves) to more market-friendly approaches, like microfinance and social entrepreneurship?
Eduardo Porter: There have been two extremely beneficial innovations in the way non-profits go about trying to effect social change. One is the use of market mechanisms and incentives to deliver valuable services to marginalized communities. Another is the use of field-testing to evaluate projects and determine how best to accomplish program goals.

Take education in rural India. A local NGO, Seva Mandir runs several schools in the region of Udaipur, reaching students that are not served by regular government schools. The NGO’s schools suffered enormous absenteeism [by teachers]. On any given day, 44% of teachers wouldn’t show up. Absenteeism has traditionally been combated by administrators keeping score of attendance and punishing slackers. But Seva Mandir addressed the problem in an innovative way: offering teachers an incentive to show up and introducing an impersonal instrument to monitor their presence: a camera with a time stamp.

What it did was replace the standard teacher wage of Rs. 1,000 rupees per month (about $22) for 21 days of teaching, with a base salary of Rs. 500 plus an extra Rs. 50 for each day they actually taught. That meant teachers’ wages would range from Rs. 500 to Rs. 1300, depending on their attendance. To monitor their presence, a student was asked to photograph teachers with their students at the beginning and end of each school day.

Economists from the M.I.T. poverty lab evaluated the program. They found that teacher attendance in the schools with the cameras reached 79%, compared to 58% for schools that did not participate in the program. And the intervention was very cost effective. Each extra day the teacher showed up cost only 11 cents per student. Test scores at camera schools improved and graduation rates from the schools with cameras into government schools increased by 11 percentage points, compared to schools without cameras.

I imagine those types of incentive-based cost structures aren’t the answer all the time.
Market-like incentives do not work in every context. Prices are an effective way to allocate scarce resources. They help consumers prioritize expenditures and they provide signals to suppliers about the demand for their goods. Still, using prices can backfire. The traditional non-profit approach is by no-means obsolete.

Prices are an effective way to allocate scarce resources. They help consumers prioritize expenditures and they provide signals to suppliers about the demand for their goods. Still, using prices can backfire.

For instance, the mass deployment of anti-malaria bed nets across Africa was delayed for years because of the belief that they should be sold for a nominal sum rather than given away. In the early 2000s it was believed that African villagers would not value free nets, and thus they would leave them unused. So they were sold for as little as $2. But the take-up was extremely slow until the Red Cross and UNICEF experimented with giving them away and net use soared. Between 2004 and 2007 the number of beds covered by nets rose from 10 million to about 170 million.

Do you think that embracing market-based approaches helps social services scale more readily and ensures their sustainability long after a ‘donor’ has pulled away?
How to scale successful programs is one of the main challenges in efforts to reduce poverty around the world. Microcredit provides a telling illustration: it is perhaps the most innovative anti-poverty program of this generation —providing access to credit to poor people who before its arrival could only get a loan from the loan shark at extortionate rates of interest.

Microcredit has acquired scale fast. Some 150 million people benefit from microloans. It has worked so well that for-profit lenders have jumped into micro lending as a great new business opportunity. This is perhaps a good thing. If nothing else, it proves that financial services firms could profitably serve poor under-financed populations. But while for-profit micro lending could benefit hundreds of millions of credit-hungry poor people in many small ways, it could become as exploitative as the loan shark on the corner.

But while for-profit micro lending could benefit hundreds of millions of credit-hungry poor people in many small ways, it could become as exploitative as the loan shark on the corner.

Is there a particular example of that type of exploitation you have in mind?
In Andra Pradesh, in southern India, the fast and furious growth of microcredit last year led to massive excess borrowing, as aggressive lenders seeking fast profits urged borrowers to take on more and more loans. Reports of suicides among over-indebted Indians ultimately allowed the regional government –which ran a competing micro-finance type program—to pass an ordinance that curtailed private micro lenders.

Careful regulation is necessary, especially to ensure lenders are transparent about all their rates and fees. Regulators must ensure brisk competition in order to avoid lenders from imposing usurious interest rates And vigilance is needed to avoid borrowers taking on excessive debts as private lenders rush in to lend as much as they can, dropping lending standards. But at the same time, excessive regulation could easily stymie the development of microfinance –which depends on millions of tiny cash-based transactions.

Taking this trend into consideration, how should social ventures think about pricing in general?
Philanthropists all over the world sometimes seem to believe that prices don’t exist or don’t matter. They focus on providing a good or service to as many people as possible without considering its impact on the relative prices and the incentives faced by its recipients. This ultimately leads to unintended consequences.

Fertilizers are a case in point. The realization that many farmers in Africa could substantially increase crop yields by using fertilizer has led to several large-scale efforts to subsidize fertilizer. But these efforts have produced some counterproductive side effects, including over-fertilization –encouraging some farmers to buy more fertilizer than they need. Subsidies have become politicized, breeding corruption. And they have often ended up helping people who didn’t really need them.

Researchers in Kenya looking at farmers’ habits concluded that farmers were victim to the same sort of procrastination that explains why so many workers in the United States fail to contribute to their 401(k), despite a matching contribution from their employers. They found that aid could have a much bigger impact if it addressed this bias. Small subsidies right after the harvest – just enough to overcome farmers’ aversion to go to the store and bring it home—could lead to enormous increases in use. And because they were too small to attract farmers who would buy fertilizer anyway, they were better targeted. In fact, the study found that offering free delivery to farmers early in the season increased fertilizer use by 50-to-60%.

The broad point is that social programs will be much more effective if philanthropists and social entrepreneurs marshal the power of prices and incentives rather than ignore them.

What’s the most unexpected news you’ve encountered recently that has had an unintended price?
Perhaps the most surprising price I’ve seen of late is the value of adding one year of life to a citizen of Zimbabwe. According to the United Nations Development Program’s Human Development Index that year is worth only 51 cents.

Only 51 cents? How was that determined?
This valuation stems from the fact that the index is made by braiding together measures of education, life expectancy and income into a single number to represent a nation’s stage of development. Combining different indicators necessarily establishes an equivalency between changes in each of them: a decline along one dimension of development –life expectancy, say—can be compensated by an increase along another –say income.

Martin Ravaillon, an economist at the World Bank, concluded that the UN’s index suggests that adding a year to the average Zimbabwean’s lifespan provides as much extra “human development” as increasing her income by 51 cents.

It’s difficult to wrap my head around how one year of human life could be valued at such a tiny amount.
It does make sense that the price of longevity would be lower in Zimbabwe than, say, Liechtenstein ($9,000, according to Ravaillon’s calculations). Ravaillon notes that the monetary value of life expectancy is lower in poor countries precisely because they have very low incomes. Increasing their income would improve their well-being a lot, even at the expense of some reduction in life expectancy. When governments of poor countries pursue economic growth at all costs, polluting their air, land and rivers along the way, they are thinking in terms of these trade-offs.

Still, it does seem rather extreme to think that an extra year of life in Liechtenstein is worth 18,000 times what it is in Zimbabwe. Or isn’t a life a life?

This interview has been edited and condensed.

Image: Martirene Alcantara

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