Billions of Entrepreneurs: How China and India are Reshaping Their Futures an...

Uploaded by GoogleTechTalks on 13.03.2009

>> ALISHA: Hey guys, thanks for joining. We'll start late but we'll begin. Here to introduce
Professor Tarun Khanna from Harvard Business School who specializes in Business strategy--International
Business Strategy and specifically has been focused on emerging markets for the past several
years. He has an undergraduate degree in Engineering from Princeton University and his Doctorate
from Harvard, in addition, I found out this morning that Professor Khanna has been investing
in and has kind of a nice clearing house for new ventures in India and around the idea
of--or around Indian non-profits so I'm not going to give too big of an introduction because
I think Professor Khanna can introduce himself, fill the rest in as well as talk about a bit
about his book and I think that he would like to have this as a discussion today, so he
has some slides to show you and we'll start with that for about an hour.
>> KHANNA: Thanks--thanks for coming out, it's nice to--it's nice to be here. I heard
so much about Google and never had a chance to actually take the time to come so it's
nice to--nice that you should be here for a few hours and thank you to Alisha for putting
it together. You know, I'm ultimately interested in economic development, mostly in the developing
countries around the world unsurprisingly, poor countries around the world through the
private sector. And so I spend--I split my time about a third as a car caring academics
sitting in small tiny rooms and scribbling away with Mathematics and numbers and things,
exactly what you think a pointy-headed academic would do and then the rest of the two thirds,
I'm very much out and about, starting companies, I started a number of companies mostly in
India and Southeast Asia, somehow the China footprint and a couple of non-profits also
in India trying to spread some good ideas. So this is the perfect kind of group of people
to talk to and I would like to--to hear what you have to say as much as my talking all
the time. So when I thought I do is I brought some slides, there are about 20 slides, I
don't need to go through more than three or four of them maybe. So maybe I'll start by
putting up some ideas and some examples. And this is really a distillation of about depending
on how one counts 10 to 15 years of walking the streets of developing countries. Let's
focus on China and India and interacting with the--with entrepreneurs, with government officials,
in a range of industries so this is not necessary the new economy at all. But I think the number
of the principles that apply across the board and it free rides on, you know, 15 years of
my students at Harvard who now are involved in various facets of life in China and India
in different capacities. Anyone recognize this? This is a scene from Slumdog Millionaire,
I thought that would be the perfect way to start because I think it encapsulates all
the themes that I want to talk about. So in fact I don't need to put up any more slides.
I can just talk off this one. You know, it's--it's a little big of rags to riches kind of feel
good type of story where a kid from the slums--he doesn't quite get to riches but gets to find
a way out of poverty by exploiting his own human capital. That's the story that's told,
I think a little less well in the movie than in the actual book for those of you who are
readers, you'd find the book actually quite interesting and you know this is a also a
shot from the movie, it's a very--how many of you have seen this movie? Okay, it's a
dirty part of the movie right at the beginning so I won't go into describing the details.
Those of you who haven't, you should check it out, check out the movie but this is the
actual slum Harabi in Bombay which is sort of the--the inspiration for it. And the amazing
thing about Harabi--and in addition to just being a large slum is that as you can see,
it's a ramshackle kind of place but it actually is a very vibrant ecosystem. There's a lot
of entrepreneurship within it. There's' a very dense pattern of information exchange.
They are now very well established tours that take people through Harabi and everything
that I'm saying about Harabi could be true in any one of Asia's slums at this point,
I think. I don't think any extraordinary about this particular one, it's just the one that's
been focal point of attention. And there are you know so one thing, one thing that's sort
of worth puzzling over is you know why in a dense urban space does something like this
even exist. Why is it that you know countries that are reasonably fast growing at this point
cannot do something about the slums, right? Or to ask the question a slightly different
way since I think the purpose of my book was to exploit the variation if you will between
the Chinese circumstance and the Indian circumstance. And to--and to put forth the point of view
that in some sense, these two societies have evolved in such diversion directions, in some
sense of whatever China has been able to do very well, India is almost congenitally incapable
of doing and vice versa. It's a strong point that I would put forward. So you would never
see a slum like this in an urban--urban center in China. It would be removed very quickly
with some good features to that removal and some bad features to it and the opposite would
be true in Inida. Or to make it--to even personalize it more--the--the southern tip of Bombay which
is where I grew up is home to some fabulously wealthy people even by world standards and
some skyscrapers, [INDISTINCT] for those of you who are familiar with Bombay. But at the
bottom, there is a fishing village that is incredibly dirty and that fishing village
kind of looks like this--a little bit nicer than this but not much. And so you have to
sort of wonder, you know, how can you have such extreme concentrations of wealth and
extreme depravity check by jowl next to each other. Why does that persist in India but
is not allowed to persist in China? And I think it has to go--it goes to the very heart
of what one means by what one thinks of as property rights or even the rights of individuals.
And one way that I like to encapsulate it and--and say it for--for an audience that
I would think appreciate some degree of abstraction would be to say that--that the very notion
of rights is--is--that societies come to terms with public interest and private rights in
very different ways and for a variety of reasons as China and India have, the rest of it is
trade-off fundamentally differently. So in China, whenever you have a conflict between
public interest and an individual's rights, society would tend to adjudicate in the favor
of public interest. In India, it's the opposite. Whenever there's a tension between public
interest and an individual's rights, India is congenitally geared both in the laws and
in the public processes to favor individual rights. Now often, that's to the detriment
of India, sometimes what happens in China is I believe, to the long run detriment of
China and sometimes if that folds. So to personalize that in this situation, you know, the private
rights of these individuals are allegedly, to some extent, I think to a large extent
being protected by not bulldozing the slum away, right? It's not in their private interest
to move them away because all the people who are living are migrants from the villages
who've come to the city over time. And they are engaged in frankly productive enterprise
that benefits them and benefits around them. Now stepping back, you would say that maybe
Bombay would be better off if we bulldoze this and created some nicer space and some
more efficient infrastructure than even this--than this is provided de facto. But the private
rights of the individuals have been protected or in the fishing village that exist in the
south of Bombay, check by jowl with some fabulously expensive real estate, it's in my interest
and my family's interest as a resident of those skyscrapers to move the fishing village
away because it's kind of unsightly. It's not nice to look out even though I don't see
the fish in the street. But it's not in the interest of--of the fisherman who've been
living there for in some cases, a 150 to 200 years for them to be moved away from there
and the Indian court system comes in, kicks in to protect the rights of those fishermen
and saying that anytime a rich guy like my family tries to get them moved away, either
by bribing them away or by getting a political process involved and my family has been involved
very much along with other families in rich areas trying over the last decades to say
maybe we could--we should move these guys out. But the Indian system kicks in to say
that no, the rights of the individuals in there are sacrosanct and so we cannot do that
even if you say that there are some broader purpose in mind. Now, I absolutely think that's
a serious cost because for the Indian economy and the one line summary as to why India,
you know, cannot build cities overnight the way the Chinese can is exactly encapsulated
in these particular examples and even in the court system which itself is notoriously inefficient
in India fails, the court of public opinion will step in to say that, no, you can't do
this. So the public--the media will kick in and say that this is not an appropriate use
of power by the elites against the masses and China is just the opposite, you know,
lots of great examples of this on a day to day basis. Obviously I'm caricaturing and
painting the situation much more extreme because there are situations where infrastructure
gets built in India and there are situations where the rights of the individuals are protected
either by--by public processes or by public opinion in China. But by and large, a set
of tendency of what I'm saying, I think I stand by. So one way to say it and I'll come
back to this is, is when you think about property rights which is a cornerstone on some sense
of how we think about economic activity happening, China will air in the direction of public
interest whenever there's a conflict between public interest and private rights and India
will air the direction of private rights. There's a similar conundrum with information,
right? And to communicate that I wanted to show you this graph which is a little bit--requires
a little bit of explanation. It's created by a friend of mine who's a professor in Singapore
now but at NYU before that. It's a--it's a graph that shows on any given day what percentage
of stock prices on the exchange that country move together. So the US is at the bottom
and China is near the top. What this says is that on any given day in the US about half
the stock prices move up and half move down on average. In China, either everything goes
up or everything goes down. In India, it's sort of in between. So think about that, what
that means is that in China, there's really no way to look at the stock price and from
the stock price, you conclude anything specific to that particular company. So we cannot look
at Google stock price and say that Google is good or bad because Google's price's moving
along with the entire economy and likewise for any particular equity that's traded on
a--on a Chinese stock exchange. In the US, firm specific activity or the particular decisions
and actions of managers, teams of people like yourself matter a great deal for the fortunes
of the company and that at the end of the day is what a market is meant to do. It's
meant to take three sources and direct them towards--towards better manage companies.
Yeah, go ahead? >> [INDISTINCT]
>> KHANNA: Yeah, it's still holes, yeah it's been replicated many times by different people.
The, the one line summary is that when you don't have that much--that much, when--when
the markets are not set up to extract credible information about the actions of individual
entrepreneurs or teams of people. It seizes to be a conduit to allocate capital. Human
capital and financial capital towards better uses of that capital, right. So the market
isn't working. But the bigger point that I'm trying to make is about information. You know,
how does information actually get transmitted in societies, there's a fundamental construct
of how societies work, right. And in China, whereas the--you know it--there's a little
bit of a glass half full and glass half empty situation here which is certainly in pockets
of China. Whether it's industry pockets or open pockets or you know, eastern sea board,
southern part of china et cetera. Information dissemination is much more rampant, in part
as the result of technology companies now than it was five years ago or 10 years ago.
But it's still a very far cry, there are lots of things that are undiscussable, right? And
the way the equity markets have been set up is, it's very hard to discern information
about particular companies from--from this. Yeah, sorry gentleman there.
>> [INDISTINCT] >> KHANNA: Yeah, the question is if I--if
I heard it correctly is it...? >> Is it reasonable to be infirm on this chart?
>> KHANNA: That information dissemination is reasonably similar in Poland which is the
thing on top and China. No, what I would say is that the extent of firm specific information
that's encapsulated in the stock price is similar on average. In other words, you can
learn as little about the median Polish company as you can about the median Chinese company
from looking at the stock prices on a day to day--probably on average. That--that inference
would be technically accurate. But how we got to that--it doesn't say anything about
it, right? It's simply a summary statistic that's being presented up there. I'll give
you another example sort of a personal--personal story. There's an amazing lady in Beijing,
her name is Hushu Lee. Turns out to be from a politically connected family which is part
of the story at--at the end of the day. But she started something called Siging which
is a, which is a wonderful, wonderful website that anybody interested in China should--and
you know the nice thing about Siging is that the--the Mandarin, the [INDISTINCT] website
actually has the same information as the English website, right. In other words, nothing is
lost in translation. But you can actually go to the website and check out Economic news
and they have been in the business of really in effect ferreting out economic issues and
economic corruption. Investigative journalism of a sort that didn't exist in China even
five, seven years ago. But you can go to--to Siging and get all sorts of stuff and so when
I sit across and discuss with her, you know, how do you think about your job, she says
well you know my job is really to--is to be very much on the forefront of digging out
issues that have historically not been available for the Chinese public to consume about economic
activity. But to be very much on the forefront but not too far on the forefront because if
I exceed certain limits then exactly the same thing will happen to me and my team of people
that has happened to numerous newspapers and periodicals in China that have--that have
pushed the envelope beyond what it is okay to push within the constraints--political
constraints in that society. In other words, your paper will be shut down, right. So her
core skill is not a journalism per se, which is amply available to well-trained journalists
anywhere, such as--her core skill is in identifying how far that boundary of tolerance is on different
issues, right? But the very fact that she exists is a huge change from 10 years ago
and when she would not have been allowed to exist. So in some sense, things have moved
a fair degree but--but not as far as they have moved in other parts of the world, certainly
not as far as they--they would be in this country in terms of free--free dissemination
information or to put it in a different way, I've been in--in the interesting and fortunate
situation in being on a stage with a--I don't know, what a good example would be--with the
deputy prime minister of India debating and criticizing him in public with thousands of
people standing in front of me, whereas any attempt for me to debate a public official
in China, which I have tried to do, has been immediately shut down physically, often by
my being escorted away by my well-wisher, saying this is not in your interest to engage
in this debate, right? So these are sort of little [INDISTINCT] that communicate that
there is a limit to what's allowed. Now, so I want to encapsulate this in--in a simply
principle also, which is that--so I'm thinking of sort of fundamental constructs that effect
the daily--the daily lives of all sorts of people, right? So you think about copyrights
on the one hand, and you think about information on the other, I would say that information
in China, I would summarize as being noise free but biased. What do I mean by that? What
I mean is that, if you a point or if you have an issue or a point of view on which different
people have different opinions, right? The opinions that you have see, expressed in China
on contentious issues will be relatively narrower band, otherwise noise free, there's less variance
about that view. But it may not be the whole story, and that's sends us biased away from
some sort of the--the truth sounds like a philosophical concept but it's biased away
from true what--what would actually be the right representation of that issue. In India,
you'd have the opposite, every point of view will be represented, and you'd see crazy amounts
of chaos and noise but it would not systematically biased away from the truth in some ways, so
it'd up to you to figure it out. It'd be a much messier process, but it would not be
a biased representation. So these two principles for me kind of about copyrights and information
kind of summarize a lot of what happens in--in India and can be applied in a variety of different
ways. Let me pause for second, anybody want to comment or take issue with any of it or--or
suggest a interpretation of what happens, feel free to speak up, yeah.
>> [INDISTINCT] >> KHANNA: Yeah, so remember this is--this
is a particular kind of information about what's represented in stock prices and, you
know, one shouldn't conclude, so one shouldn't conclude that this is a representation of
all sorts of discourse in a society by any stretch of the imagination, this particular
kind of information--I'm trying to use different examples to, so in China, if you combined
this with the political story that I'm telling you, with some other stories, you might get
some--come closer to getting a feeling for what constitutes reasonable information exchange
in a society. Even in China, the--the reality is much more subtle, the reality is there
are alternative ways in which you get the information. So, in the old days, there used
to be particular brochures that the party would put out that were only accessible to
party officials, that's not true anymore, you can get access to that [INDISTINCT] variety
of different ways, so there are back channels to which the information is disseminating.
These days, you know, from the web and from devices and all sorts of techie things you
can get access information that you couldn't before. So, it's a lot more subtle nuance
that I'm presenting it but I'm making a caricature to make a point, yeah, gentleman in the front?
>> [INDISTINCT] >> KHANNA: Yeah, so, so it turns out that--that
particular issue doesn't matter as much in--in the summer review that I'm representing, and
that's you know, adequately explored in a lot of Googly goo papers but we don't need
to go into it--they're technically correct but the central point that I'm saying isn't
really--isn't really an issue on that particular thing. Anyone guess what this is?
>> [INDISTINCT] >> KHANNA: It's a voting machine, yeah. It's
basically preparation for the elections that are going to roll out for the next month or
so, because election season is coming by in India. So, you know, people often say that,
India is--is--one of nice things about India is that it's a great democracy, and I think
certainly one of the nice things about India is there's a huge spectacle around the democracy
because you have--you know, 500 million people--I don't know what the actual numbers, but a
large number of millions of people coming out to vote is an enormous logistic exercise,
the Indian Army and the Indian Navy, or the Indian Air force are involved in getting the
vote out to different people, it's largely free and fair, and that's the good side of
it. The bad side of it is that, it's a little
bit of a corrupted process I think, what I mean by that? It's a little bit of corrupted
process in a sense that, the rich have abdicated from the democratic process. In other words,
you would think about the situation in this country, the U.S., it's the economically deprived,
the socially economically disenfranchised that tend not to vote and we spend a lot of
time, NGOs in this country, Washington politicians spend a lot of time trying to say that, let's
make sure that the views of these different communities are represented in this election,
but nobody ever worries about educated people voting, people tend to vote. In India, it's--the
socio-economically privileged that tend not to vote if anything, and it's a poor guy industry
to make sure that he or she votes, because that is the ultimate weapon that they have
to kick the--kick the unperforming politicians out, and there's a culture that's built over
several decades, so in that sense, it's an opposite and I think that's a very bad feature
of Indian democracy, right, which is that, people who have the most to give or much to
give to the political process have tended to stay out. One of the nice things that's
happening in India is that for the first time, I think in my lifetime anyway, people who
have had successful careers in different walks of life, are voluntarily entering the Indian
political process to try to improve the quality of governance to reduce the corruption to
make--to make the government more answerable to the masses. But that is a change that's
just happening now, so that's the bad side of Indian Democracy, and the reason that some
pernicious thing persists over time, right? So, you know, another way to say this is that,
people who are actually representing some of the poor guys in Parliament, aren't necessarily
representing their actual interest, they're engaging more in patronage politics, they're
engaging in the short term needs fulfillment of a particular demographic group or a particular
caste or particular region but they're not really interested in building the public goods
that are needed to bring them to the next level. And even over here, the extent to which
there is--there is a good development happening--it's happening to the private sector, putting pressure
on the government to do more stuff, all through an expanded notion of the private sector,
civil society--being very active and people from the private sector going into civil society
to then force the government to do good things. China again is a contrast, China--one interesting
statistic that I often focus on is membership in--in the Communist Party, which of course,
these days is not communist in anything but--but name, not the traditional sense, but membership
on the Communist Party. Anyone have an idea how many members there are at the Communist
Party of China today? There are 1.3 billion people in China, 1.3 billion people in China,
the population of China roughly, give or take, give or take a hundred million here or there,
any ideas what the membership of the Communist Party are in China?
>> [INDISTINCT] >> KHANNA: How many?
>> Fifteen. >> KHANNA: Fifteen?
>> Fifty. >> KHANNA: Fifty Million, the last I checked--it's
about 83--85 million people. And but--what's more interesting about that--it's hard to
interpret that number without having a bench mark, so let me give a time series bench mark.
Time series bench mark is that if you had a graph which I unfortunately don't have,
of time and membership, it would basically go at a few hundred thousand for a number
of years then a million, then a few million, then it'll go to 5 million, 7, 10, 14 million
for a number of years, and then in the last, I would say, less than 10 years, it's gone
from 14 million to 80, 85 million, 90 million, sometimes they showed us 70 millions. So,
we have to ask, why did the membership kind of go like that? So much like an Internet
start up, going up to--going 80 or 90 million and the answer is that--part of it is a nice
answer and part of it might be not such a nice answer. The nice answer is that, good
human capital does find it useful to be affiliated with the party, not for any logical reasons,
it's just one of the ways to get ahead, one of the ways to be in the flow of things that--that
need to be done. A lot of my students from Harvard Business School are members of the
party, they don't always advertise it but that--that's one of their affiliations, their
party affiliation. And so good human capital, unlike in the Indian situation where good
human capital is not going in to the state and therefore the state is not functioning
very well in the long run. Good human capital is somehow going into--into the state apparatus.
And generally, trying to operate in a meritocratic fashion within the confines of the party.
The bad news of course is that there's no way to engage with the state unless you agree
to do it through the party, so there's no room for completely alternative points of
view, as they frequently spill out into the streets and protest and so on and so forth,
right? So, it's a good news, bad news type of story. So, you know, stepping back for
a second, if you think about the state and the private sector, the state generally works
pretty well in China, the state is efficient, the state works well, public goods are invested
in, by public goods I include basic education, that includes roads, power plants, telephone,
things in that nature. India is the opposite, the state is a disaster. What works I think
much, much better in India, in the aggregate is Decent Lives Private Initiative and I don't
just mean big companies going public I mean just the act of doing exactly the way you
think of it in this country which is people getting information that they need, getting
the resources that they need and starting up and doing something of interest. That works
much better in India than in China. And the reason it works better is that ultimately
public rights are better protected and information is more freely available. Which is--are two
pieces that you need to make--make things work. People have asked me you know, which
one do you--which system do you like better? And that's actually and analytically impossible
question to answer if you--if you accept all the pieces that I--that I offer because it's--it's--it's,
you know, good things have different sorts in--in--in both places. My own--my own view
is that, in the--in the short run, by short run I mean ten years, I--I would bet on the
Chinese system. It's much more efficient, much better organized, better human capital
going into it. In the long run, I would bet on the Indian system because I believe in
the Decent Lives Initiative. And I think there are limits to top down--top down action of
this sort that's. So anyone want to comment--comment on that? Or--or object to it or offer a different
characterization, yeah sir? >> You're statement about the [INDISTINCT]
process. >> KHANNA: In--in India yeah.
>> In India. [INDISTINCT] division you know [INDISTINCT]
>> KHANNA: That's fair, yeah. What I meant--that's a very--very good--very good--very good correction
thank you. I didn't mean to say that their issue in participate in the sense of not being
active and bribing and financing politician and so on, of course that happens. What I
mean is that they don't participate in the way that one would think in a--in a democratic
process that they would. That isn't [INDISTINCT] board of participation of educated people
is very low in India for instance. >> So this people you're speaking of make
up less than one percent, so it's not the vote is more [INDISTINCT] it's not on a team.
>> KHANNA: That's right I'm talking about proportions which is normalizing--so that
if we look at percentage of say the upper ten percent of the income spectrum of India
and you say what is their political participation, the participation rates are much lower than
people lower down the income spectrum. That's just a--this is a descriptive statistic that's--that's
both factually correct, but also the opposite of what you see in the US. So the question
is how do we interpret that? One retort would be it doesn't matter because they're so small,
they're inconsequential. I disagree fundamentally with that--with that statement that they're
inconsequential because of the numbers. And a second retort would be that maybe it doesn't
matter because they participate in different ways, like behind the scenes and so on. Which
I think is factually correct and worth--worth discussing and thinking about. But I also
think it's changing a lot, you know. I mean for the first time I'm seeing--just looking
at my parochial view of the world, which is through my students and the companies that
I--that I work with and so on, I'm seeing a number of people doing what is actually
reasonably common in--in this country, in America but has historically not been common
in India. Which is if I had a room full of young executives in India, and ten years ago
I would ask--so there's maybe 40 or 50 people here. I would ask 40 or 50 people, how many
of you would advice your kids, so these are all Indians in India, how many of you would
advice your kids to go into politics in India? Zero hands would go up. Right? It's not just
a respectable thing to advice--advice your kids to go into. Today if I ask a room of
50 people in Bangla Hyderabad, how many of you will advice your kids to go into politics?
Out of 50 maybe three or four people would raise their hands and say it's certainly something
that they could consider in particular ways, right? And to me that's an important--that's
an important sort of mention change of what constitutes relevant things for human cath--to
be doing in the interest of society and a nice change, a hopeful change. Sorry, you
had--you had--up--yeah, good. >> So do you intend to kind of poor person
[INDISTINCT] work in India and they use like [INDISTINCT] politicians that's kind of [INDISTINCT]
because I don't think the normal family people will be talking of.
>> KHANNA: Is thinking of that, yeah. >> [INDISTINCT] information most occasions.
>> KHANNA: I think you're right. >> Most occasions like I'm involved with small
organizations, [INDISTINCT] some other things [INDISTINCT] they don't like more than able
to [INDISTINCT] you want to go and put a stamp on so and so skips the authority they [INDISTINCT]
more than able to handle [INDISTINCT] >> Could you rephrase the question?
>> KHANNA: Yes, so let me, let me, let me restate the question. What he's saying is
that my statement that the poor person could use a vote as a disciplining device on the
political process is inaccurate because, the poor person actually is not informed about
anything about the political process. Actually that is what I said. What I said is that the--the
reason they vote is that they're psychologically so upset with the government, that this is
very strong anti-incumbency effect, right? But the question is the anti incumbency effect
justified or appropriately corrected, you know, are you kicking out the right kinds
of rascals when you kick them out? And you're absolutely right, which is the reason why
the whole process doesn't work. Is that ultimately it's patronage politics at the local level.
If you ask a poor person any part of India, your community or mine, it doesn't matter.
And you say why do you vote for this person? The typical poor person will say, "I voted
for them because he gave me a job." or "He helped my mother when they were sick." or
"He's, you know, he's sort of the person who takes care of things in the immediate environment."
It would not be about some basic long run thing. Like they invested in some public policy
action et cetera, right? So you're absolutely right I agree actually with this, with this
sentiment that you expressed, go ahead. >> It might be on the small [INDISTINCT]
>> KHANNA: Yeah. Okay. Yeah. Yes, that's correct. You're actually correct. That's fine, so you're--you're
embellishing the point that I'm making and I agree with you, I agree with you. That at
the end of the day that you know, so let me--let me repeat the basic point. The basic point
is the state in India does not function. So I said that they're--when people talk about
Indian democracy in the west, they tend to portrait as something nice and romantic. And
there is something nice and romantic about 500 million people coming out to vote. That's
the good news side. The bad news side is a couple of things I think, one is, that the
people who have a lot to contribute to the state are disenfranchised and refuse to participate.
I'm including people like me or people like you who are not participating in--in that--I
mean people like us not literally you and me necessarily. And the second that the people
who are participating are not doing it on the basis of accountability, or information,
and things of that nature. They're doing it for a variety of other very parochial concerns.
So when you have a society and you step back and you say "Well, where is all the growth
that you see in the last 15-20 years coming from?" It's coming almost entirely from Decent
Lives Private Action. Compensating for the inadequacies of a mis--mismanaged government.
In China it's the opposite, it's the sense that the government has per force, become
the entrepreneur in the sense the government agents are doing a number of things that are
in the interest of society. However if you--if you had genuine private enterprise in the
sense that people could say what they want, do what they want, get information that they
need have private property rights, in the sense that we interpret it in the West, that
sort of thing is not unfolding. There's entrepreneurship in both countries just unfolding in very different
ways and different and--and different--different contours and structures on it are--are in
place. Let me see what else is worth talking about. One--one kind of way to restate the
same things that I state was to ask--ask the following simple question, how many of you
are familiar with micro-finance? Lots of people, it's been popularized by Mr. Yunus and his
Nobel prize a few years ago, and the basic ideas is that you find ways to make small
loans to people who are outside the former financial system, in the hope that they'll
use it to invest in some productive asset and build a livelihood for themselves, right?
So the question that I would like to post to you is, why is there no micro-finance in
China? China has poor people just like many other parts of the world, by latest estimates
250 million people, 300 million people are still in poverty in China, it's much better
than India which is 700 million people in poverty. But China has almost has no micro-finance.
Now, the various ways to respond to the question; one is that I'm wrong, that there is a lot
of micro-finance which is often the response that I would get, and that response would
be incorrect, it would be sufficiently correct in the sense there are a lot of micro-finance
organizations, just that none of them are very scaled. And anytime that anybody has
try to scale, the government has basically come down and prevented it from doing. So,
either explicitly or by promoting things like rural banking and so on that are within the
government apparatus, that are meant to do the same thing but in fact, this will actually
do it. I think the answer is, that ultimately, it points to a feature of China that is a
huge weakness, which is that there is no alternative to the existing political fabric, right? And
any agglomeration of interest that is perceived to be potentially at odds with the party structure
is treated with enormous suspicion. Now, whether that's an agglomeration of interest for social
reasons, political reasons, religious reasons, it doesn't matter, if it exceeds a critical
size then it's treated that as--as being inherently suspicious and therefore to be contained.
Now, the thing about micro-finances, that it's something that can truly can scale, the
biggest micro-finance companies in the world have--well, the biggest of all is--is one
in Bangladesh, because that's one of the earlier ones. It has about eight or nine million--million
women who borrow from it. The ones in India are probably going to be much bigger than
that in just two or three years because it's scaling very fast. But they tend to be millions
and millions of people, and in China, if you had an NGO or a social organization, religious
organization that aggregated to several millions of people, it would be shut down very quickly.
I've done the following experiment, just as a way to, to just--to communicate the same
idea. What if you went in front of the--what's it equivalent in America? In the front of
Lincoln Memorial, that's right. Washington D.C. open space, public, public, public memorial,
lots of tourist, lots of--lots of American citizens, and you stood in front of the Lincoln
Memorial early in the morning or early in the evening, and you just stood there and
did nothing except look at it for a while. And five people gathered around, and you all
stood and looked at it for a while, and then 10 people gathered around, looked at it for
a while, do you think anybody would care? Nobody would care. If you went and stood in
front of India's parliament, right, or the Taj Majal or something, and you stood and
did the same thing, most part nobody would care, right? But I did the following experiment,
just to see if my intrinsic intuition is correct, I went and stood in front of Tiananmen Square,
at--early in the morning they unfold the flags, in the evening they would roll down the flags
and so on. Early in the morning, I went to Tiananmen square, on my own. Indian, obviously
out of place, I just stood there. It took about 15 minutes before somebody came and
said "It is not a good idea for you to be standing here." You know, a police--police
officer, and I repeated that two-three years later. I went with a Chinese--Chinese student
who is from Beijing, is a local, and we stood there. It took a little longer but 20 minutes--after
20 minutes of just standing and doing nothing, and looking at Tiananmen Square, somebody
came and said, you know, "Why are you standing here? You should not be standing here, you
should be moving on and doing something else." And maybe I'm--maybe I'm over interpreting,
and you can--you can sort of see this when you have tons of people sort of, showing up
in public spaces. If, you know, there is a degree of suspicion built into the state apparatus,
that comes from--there's a good interpretation to it, which is it's a concern with public
order and public stability and making sure that things are proceeding as actually the
way that people like to see them proceed. And there's a sinister interpretation to it,
which is it's just an extrinsic suspicion of any organized interest group, legitimate,
not legitimate doing constructive things, not doing constructive things, but the state
has the capacity to contain, right? And I think the reason that there is historically
no micro-finance in China is that anytime you have an opposition that scaled, and there
have been some, they had been contained very quickly. And said that, "No, we don't want
you to be the source of economic goodies so to speak to large numbers of people in rural
China." That would in some implicit sense, the interpretation is threaten the legitimacy
of the state, I'm not sure it would but they--the interpretation is that way. Now, interestingly,
this is changing also, I sit on the board of India's biggest micro-finance company,
which is why I am sort of aware of some of these things, and what was really interesting
is that, about a year ago, we received this invitation to come and work with one of the
leading--leading--they call "The government affiliated non-government organizations" GONGOs
just kind of a funny name, right? They're government but they're not government, and
that all--that--that acronym itself summarizes the intrinsic tension, is that you cannot
be an NGO unless you're a government affiliated NGO, right? So the GONGO, it's a GONGO. There
is a--there is GONGO in--on the Eastern Seaboard that is, you know, within the scheme of legitimacy,
seen as reasonably legitimate and--so we, we are invited, we the Indian NGO, I'm sorry,
we the Indian micro-finance company which I think will be the biggest in the world very
shortly, has been invited by the Chinese GONGO to come and work with them in technical--technical
issues, find a joint venture, et cetera, work it out. So, I'm hopeful that at least in some
spaces the, the skepticism is, is declining. So, just like, you know, siding the journalistic
outlet exist and didn't exist ten years ago, maybe some of the NGO's would be allowed some
greater space over time. But that's a, that's a, that's a recent development, and I think
it's really--has to do with suspicion of anything alternative to the party. So, the strength
of the party, the strength of the government it's ability to continue to attract good human
capital is what allows the state to deliver incredible public goods delivery, particularly
the hard stuff that you see when you fly into Shanghai or Beijing or Guangzhou or into any
number of these cities. Nice highways, better than [INDISTINCT] bike in my--in my backyard
in Boston, you know, electricity, cell phones, the whole nine yards. And that's exactly what's
missing in India, because the state is bankrupt. Is--is physically bankrupt almost, that's
an overstatement but physically compromised, and certainly, you know, professionally it's
not up to snuff at all in delivering good in India, delivering the goods. And the opposite
I think is true for untrammeled private enterprise and civil society. In India you can absolutely
be an NGO or be engaged in a really public dissent if you don't agree with what's going
on, so there's nothing that stops me from going to the, from going to the cabinet, there's
a freedom of information act that allows you to get information on some pretty unsavory
things if you need to--it's sort of a noisier version of the United States I think, is the
way I think of it. Whereas the Chinese system is organized quite differently in a way that
I'm not prepared to say it's better or worse than the aggregate but is fundamentally different
in the way things--things are working out. Yes?
>> [INDISTINCT] micro-finance in India [INDISTINCT] >> KHANNA: In India? I think the--the reason
you know, there are a lot of micro-finance organizations in both China and India in name.
In China, none of them have scaled, in India maybe one in Hyderabad, SKS micro-finance
which is the one that who's borne them on--has--has scaled, that is scaling very fast. You know,
I don't think it's any different from--from Google for instance or any large company that
scaled which is just standard business processes that good--good attitudes towards getting
better people into the organization, treating it as a, treating it as a real business. It's
a for-profit company, it's profit rates are very healthy, it has all the venture capitalist
who would invest in Google are invested in SKS micro-finance. Which has been a sea of
change from micro-finances in industry. I should say that there was an interesting precedent
in Mexico City, there's an institution called "Banco Compartamos" which went public, Credit
Suisse took it public few years ago, and it IPOd for, you know, a few billion dollars,
which in the Mexican exchange was the--was one of the biggest stocks at the time. And
there was massive backlash against it's saying "That you're getting rich off the backs of
the poor." So, there are two points of view in the micro-finance community. One is that
you should only be organized as a pure NGO, you should not be making money from poor people
and using it to enrich the investors, and there's a fall profit wing that says that
"Actually that's the only way that we can do it in scale, because if we leave it at
the level of the NGOs then it would remain a smallish organization, whereas if we returned
sufficient capital to make it attractive to mainstream investors, they would plow back
more capital into it, we can invest and we can reach out". In India for instance, the
percentage of poor women, because all the loans are going to women in India for the
most part, the percentage of poor women who, who, we estimate--would be very sensible recipients
from micro-finance loans, that we actually reach as an industry is maybe 1% or 2%, right?
So, 98% is to left, to left to be done. So, I think it's pretty conventional business
practices, but there's a, there is a vicious debate in public with Yunus and One Extreme
and the founder of the company that I was talking about, the founder of the Mexican
Company and the other extreme, as to whether for-profit orientations to doing, to accompany
that ultimately is in the business of social good is appropriate or not. And it's worth,
it's worth acknowledging than debate and saying that there are--there are--there are people
who are ideologically inclined on both ends of the spectrum. I don't .think of myself
as a pragmatist. I think that this is the only way that we can get enough money to roll
out from, you know, in India from three million women to 30 million women to 50 million women
over time, that absent getting the money from the investor base and the public markets,
isn't going to happen, and so therefore we should do it, is my thinking, if somebody
gets rich in the process, that's fine. >> [INDISTINCT]
>> KHANNA: Human capital attraction to give you a sense, I think there is 10 or 15 thousands
people who work--sort of feel forced to go out and--you know what, this, this is a very
intense business in a sense that the way it works is you make tiny, tiny loans to groups
of women in different remote parts, and then every week somebody goes and visits every
single groups of women in remote parts of the--and so the sheer you know, SGNA, Selling
and General Administer of expense is a percentage or sales that this involves, it's extraordinary,
right? It's extraordinary. And when you think about rolling out to three, four, five, ten
millions possible clients, each borrowing $200, $300, you know, things like that, you're
talking about a field force of 10,000, 20,000, 50,000, 80,000 people who's out there. That's
the challenge, is building the systems to do that, having the, having actually an IT
system that captures the learning from it. And then an experiment that we're trying to
run is trying to figure out if this informational asset that you build up, right? Over time,
by reaching all these end-consumers in the deepest parts of the country, is there any
sensible monetization of that informational asset that can accrue to the benefit of the--of
the people borrowing the money as well as to the company itself? And so that's a tricky
experiment and that's not different from the experiments that you are engaged in on a daily
basis to the information that you tap into. It's just a different space. Yeah.
>> [INDISTINCT] >> KHANNA: This is--so, given--given that
difficulty of the cost structure that I just articulated, how do you get investors interested?
At the end of the day, you know investors will only come in if the returns are extremely
high, you know, without revealing numbers, I would say that this is probably amongst
the most profitable financial institutions around the world, bar none. Including the
investments banks in--before the current meltdown. Right? So, before the current meltdown. So
if you run it like a good business and it scales the unit cost just goes down asymptotically,
you can actually make a killing on it and plow the money back into--into expanding--expanding
reach to meet. Remember at the end of the day, it's really--literally the difference
between professional life and professional death for the poor women. I mean these three
examples up here, this is a woman who's borrowed, you know, $227 and that's what's allowed her
to put three--three of her children, three of her daughters through something productive.
That guy out there has borrowed $30 to buy a fishing net, to have a life, all right?
So this is the difference between professional life and professional death for all these
people. So what--interestingly you know, what--it's just like a business, right? I mean you have
a cost structure and then you want to make it so the cost structure reduces over time,
but you also want to be able to go out and price your product at a rate that covers your
cost and earns you a descent return capital so you can re-invest and return some to the,
to the investors, right? The price over here is the interest rate on the loan, that's the
price because you are providing the loan, you're pricing the interest rates, the interest
rates are going to be higher than the interest rates that you and I would pay if we went
to the local bank, right? Why? Because the cost structure of serving these people is
incredibly high, right? But the trick is that you want to get that interest rate down. Their
alternative is the local money lender who's charging the equivalent of an interest rate
of 500% or 600% a year, right? Because their alternative is either not to have a livelihood
or to borrow from the money lender and pay 500-600,000% and the way that works is you
borrow $50, you have to pay me back $60 next weekend. So that's 20% in a week. To analyze
rate of interest is stratospheric right? That's how it works. So if we come in or a microfinance
company comes in and says, "We can lend this money to you, we have a high cost structure
but our interest rate is not going to be 500%, it's going to be 70%," that's a win for all,
for them, that's a win for all. Now the better microfinance companies are able to say, "Okay
let's start with 70% but we put pressure on ourselves as a well-managed company to say
that if we are more, more efficient over time and in fact we can, we can capture economy's
scale, we ought to be able to reduce this interest rate over time." And in fact for
the company that I'm affiliated with, our interest rate now is down to 20%, which is
less than what you pay on your credit card debt here now. So think about that. And so
despite the high cost structure, so we have investment from Sequoia and all the major
BC Firms or invest in them. Because they see--they see--oh a customer base that's 1% penetrated,
a model that spreads to Africa, China, everywhere else, well-managed processes, scaling, return
of equity higher than most financial institutions in the world. This is almost a no-brainer
actually as it turns out. So that's--that's--so really it's a conventional business, it's
just in the business of spreading development and finding a way to--finding a way to do
it. I'm making it sound easier than it is, I mean the guy who started doing it is really
an incredible entrepreneur also but that's--other thoughts or comments? Yeah, at the back?
>> [INDISTINCT] >> KHANNA: Yeah, yeah, on--on occasion--on
occasion they have--we have not much is what I would say because the benefits is so palpable--the
benefits is so palpable. And there is no stronger group than a group of women who really want
it done. Then--I would not stand in the way if they really want it done because they would
steam-roll anybody. Where it has been a problem, has been more of where people have used religious,
have appealed to religious issues as a weapon against it saying somehow this doesn't conform
to some old practice. And then occasionally there's political turmoil or sometimes the
politician is the money lender. And that--that becomes a problem because a local politician
is basically skimming a lot of money off the top of the loans and doesn't want a more efficient
turn of events, they will find a ways to sabotage them, but there are ways around that. So we...
>> [INDISTINCT] >> KHANNA: Just very conventional boring ways
of keep at it, keep at it, keep at it, don't pay the bribe, keep going back, keep going
back, and eventually it breaks down. So we haven't been stopped anywhere, so far. This
gent--you had your hand up sir. Very well sir. Others for comments? I make one, one
certain last--one certain last big observation which is that, I think there's a, there's
money on the table to optimize between China and India. This is a talk about China and
India. For the simple reason is that if you start with a proposition that, what's--what's
good in China--what's worked--what works in China doesn't work in India and vice versa.
If you can somehow figure out a business system that--that leverages China, strengthens China,
and India--further strengthens India, and use it either to serve those markets, than
serve any other markets. There are--there are dollars in the table in the sense that
you can optimize the cost structure to do it. In some ways everybody's doing it, Google
does it. Google has labs, and China has labs and India has service centers in India, et
cetera. So in a sense that everybody is doing it. But there are--but there are companies
that are building their entire processes around these because of the scale of the opportunity,
and the scale of the talent forces that there are available in both countries. One nice
example that I like to use in this part of the world, is you know, if you drive around
the South-west of this country, or increasingly even on the Eastern Coast now, to the agricultural
communities not so much in Iowa and so on when John Deere is still very strong and has
it's--has it's historical Heartland, you will see little tractors that don't look like the
conventional tractors. Those little tractors are made by Mahindra which was an Indian company,
and they're very small horse power tractors. Exactly the kinds of tractors that worked
in China where the farm sizes are small and in India where farm sizes are even smaller.
Those are now being designed in--I wanna say in Nasik, maybe in some place in Eastern Europe.
Nasik is a city in western India, and they are made in--the main facility I think is
a city that is halfway between Guangzhou and Shanghai. So they're designed in these two
places. They're made there and they're shipped over here and assembled and sold. And they
have gone from essentially from a zero market share in the United States against the most
competitive tractor market in the world, the John Deere International Harvester, Kubota,
Caterpillar, everybody's in that market. But from a standing start, they've gotten a share
of 20%-30% at the low end segment in no time. And that whole thing is just a simple example
of saying "Let's--let's piece together the system for building a small low-end efficient
tractor by doing what's good in China, and doing what's good in India." There's a great
ad that they use, I don't know if I brought it, let me see. Oh, here it is. Yeah, okay.
This is the Mahinder tractor. This is an ad from I think from Scottsdale Arizona and it
shows, shows a young attractive lady in a--sometimes I use the term hobby farmer and that's probably
a little bit unfair. But this is the tongue in cheek thing saying "Deere John, I found
someone new," and that's a reference to the Deere John--Deere John letters in the wartime--wartime
era in this country for those of you who might remember that. But that tractor is--has a
lot of traction in Huston, Sacramento, Harrisburg, Pennsylvania, Atlanta, Georgia, places like
that you would never have thought. So--so that symbiosis I think is just starting, and
I think that's a piece of what might--might happen in the years to come. By the way if
you look at world--world--the entire world as a system, what's happening between China
and India, there's a lot of political tension between the countries and that isn't going
away any time soon. But the economic opportunity can help to contain that I think, it's--it's
what one hopeful for. But also if you look around the world, what you see is that the
pockets of interconnected economic activity, whether it's in Latin America or the Middle
East or the [INDISTINCT] or in China and India, and East Asia. The pockets of activities are
intensifying and growing much more than world--than the world as a whole. In other words if you
had--what's a good statistic--a statistic would be percentage of world trade that's
intraregional as opposed to interregional right? As a fraction of total world GDP or
world trade has been rising very steadily. So you will see pockets like this building
up overtime. That's sort of the--that's sort of the story. They have very different development
paths, pluses and minuses, opportunity for combination and also fun stuff. Thanks, it
was great to--great to chat. Thank you.