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India’s War on Cash

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Late last year, India declared war on cash: It killed off 86 percent of its own currency.

More than 1.2 billion people lost their right to buy items like iPhones at the market with cash or — more darkly — hide income from the government.

As you might expect, chaos ensued. But amidst the hair-rending, there is reason to deliver hope to those wondering how to thrive in a cashless society. Because while it may be bad for the black market, it’s good news for entrepreneurs — and those who like to transact legally.

Virtually overnight, Prime Minister Narendra Modi announced a startling policy to demonetize 500 and 1000 rupee notes, the most common form of cash notes in the country. He put forward an extraordinary list of restrictions on how much new currency can be withdrawn daily and weekly from ATMs and banks, while monitoring large deposits into banks of old notes and also putting in rules to verify the authenticity of depositors and buyers. Needless to say, this was a shock to millions of people. India’s informal economy is massive, and 90 percent of all transactions are in cash.

Modi’s drastic action was designed to tackle monstrous and unbridled corruption in India, where less than 3 percent of Indians file taxes and only half pay any income tax. A “cash and carry” economy implies that businesses, in both the formal and informal sectors, do not pay sales tax or declare income. Real estate is among the worst offenders. These private transactions presumably carry the blessings of the political leaders and government officials, who possibly get a cut from the sales.

Harvard economist and Nobel Laureate Amartya Sen has criticized Modi’s assault on cash as draconian, calling it a despotic action that has struck at the root of an economy based on trust. He argues that economic development is fine irrespective of how it is achieved, giving credence to what some call the Asian Paradox, where high-levels of corruption are correlated with high economic growth.

This argument ignores something fundamental to economic development: ethics and moral judgment. Professor Sen uses the term “trust,” but trust isn’t innate. It comes as a result of fair and equitable actions, both within the government and throughout the economy. If individuals and businesses engage in legal economic activity and pay taxes, the government has more resources to invest in education, healthcare, and infrastructure, and this spurs economic development. Over time, it builds trust. Such a society also opens the door to innovation and entrepreneurship, an area in which India falls woefully behind the U.S. despite being rich in human capital.

When a majority of society is economically immoral, it hurts the people who want to conduct business ethically. India has abundant latent entrepreneurs with ideas, but they drop out from pursuing their dreams because they do not have the network, wherewithal, or the conviction to embrace unethical and immoral practices to get things done. As Peruvian economist Hernando de Soto has suggested, it is more expensive to be legal than to be illegal in many parts of the world. India is no exception.

Modi felt compelled to take drastic action because corruption in India had reached a point of no return. This includes the education and healthcare industries — the sectors that should be a beacon of trust and which provide fertile ground for fresh ideas and new enterprises.

There will be unavoidable pain, and I sympathize with my colleagues and family in India, but the pain will be short-lived and, for a better India, it will be successful. I envision a day when the clever, young innovators in my home country benefit from the same vibrant environment for new business creation that is available to my students here in Austin, Texas.

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About the Author

This article was written by Prabhudev Konana of Texas Enterprise. Prabhudev is the William H.Seay Centennial Professor in the McCombs School of Business at The University of Texas at Austin.

Entrepreneurship

Will Financial Liberalisation Trigger a Crisis in China?

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The People’s Republic of China (PRC) has been liberalizing its financial system for nearly 4 decades. While it now has a comprehensive financial system with a large number of financial institutions and large financial assets, its financial policies are still highly repressive. These repressive financial policies are now a major hindrance to the PRC’s economic growth.

The PRC is at the beginning of a new wave of financial liberalization that is necessary for supporting the country’s strong economic growth. The country’s leaders have already unveiled a comprehensive program of financial reform, which includes 11 specific reform measures in three broad areas: creating a level-playing field (such as allowing private banks and developing inclusive finance), freeing the market mechanism (such as reforming interest rate and exchange rate regimes and achieving capital account convertibility), and improving regulation.

But could financial liberalization lead to a major financial crisis in the PRC? What would be the consequences for financial stability as the PRC moves to further liberalize its financial system? If the PRC repeats the painful experiences of Mexico, Indonesia, and Thailand, then it might not be able to achieve its original goal of overcoming the middle-income trap.

International experiences of financial liberalization, especially those of middle-income economies, should offer important lessons for the PRC. In our new research, based on cross-country data analysis, we find that financial liberalization, in general, reduces, not increases, financial instability. This powerful conclusion is valid whether financial instability is measured by crisis occurrence or by fragility indicators, such as impaired loans and net charge-offs. The only exception is that financial liberalization does not appear to significantly lower the probability of systemic banking crises, although it does lower the risk indicators for banks. These results have higher statistical significance and are greater in magnitude for the middle-income group than for the entire sample.

The insignificant impact on banking crises, however, should be interpreted with caution. One of the possible explanations is that under the repressed financial regime, the government supports banks with an implicit or explicit blanket guarantee. This reduces the probability of an explicit banking crisis, although the banking risks may be even greater because of the moral hazard problem. In fact, government protection of banks could also increase the probability of a sovereign debt crisis or even a currency crisis before financial liberalization.

If financial liberalization significantly reduces the likelihood of financial crises, especially in middle-income economies, then why did some middle-income economies experience financial crises following liberalization? We further investigate whether the pace of liberalization, the supervisory structure, and the institutional environment matter for outcomes of financial liberalization.

We obtain three main findings. First, an excessively rapid pace of financial liberalization may increase financial risks. The net impact on financial instability depends on the relative importance of the “liberalization effect” and the “pace effect.” In essence, what the “pace effect” captures could simply be the prerequisite conditions and reform sequencing that are well discussed in the literature. Second, the quality of institutions, such as investor protection and law and order, also matter. International experiences indicate that investor protection can significantly reduce the probability of financial crises. Third, the central bank’s participation in financial regulation is helpful for reducing financial risks during financial liberalization. This is probably because central banks always play central roles in financial liberalization, especially in the liberalization of interest rates, exchange rates, and the capital account. If a central bank is responsible for financial regulation, its liberalization policies might be more cautious and prudent.

Our research findings offer important policy implications for the PRC. (1) Further financial liberalization is necessary not only for sustaining strong economic growth but also for containing or reducing financial risks. (2) Gradual reform may still work better than the “big bang” approach, and sequencing is very important for avoiding the painful financial volatilities that many other middle-income countries have seen. (3) The government should also focus more on improving the quality of other institutions, especially market discipline, to contain financial risks. (4) It is better for the central bank to participate in financial regulation. The new regulatory system should focus exclusively on financial stability and shift from regulating institutions toward regulating functions. It should also become relatively independent to increase accountability.

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About the Author 

This submitted article was written by  and  of Asia Pathways, the blog of The Asian Development Bank Institute was established in 1997 in Tokyo, Japan, to help build capacity, skills, and knowledge related to poverty reduction and other areas that support long-term growth and competitiveness in developing economies in the Asia-Pacific region.

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Entrepreneurship

Understanding Cryptic Startup Terms

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The startup world throws around a lot of jargon.

Some of it is fluff, some of it is important.

Rather than pretend like you know what people are talking about, I’ve found it’s good to make sure I actually understand the terminology.

So, here’s a few essential startup terms you should know.

KPI

Stands for Key Performance Indicator. This is a measurable value that indicates how effectively your company or product is achieving its business goals.

Example: I would guess a main KPI of AirBnB is guests per night (how many people are staying on an AirBnB property on any given night).

The idea is that you can focus on improving key indicators, which should then directly influence your company’s goals.

Churn Rate

Your churn rate is the percentage of customers who stop subscribing to your service in a given time period. You can calculate the churn of anything (like revenue or employees), but it’s most often referring to customers.

This is considered the main enemy of any subscription company.

Example: As of this writing, Buffer’s monthly user churn is 5.9%.

Your acceptable churn rate depends entirely on your specific industry and company.

OKR

Stands for Objectives & Key Results. This is a framework for setting, communicating, and monitoring goals.

Objectives are goals, which tell you where to go. Each objective has key results, which indicate how you’ll get there.

Example:

Objective: Increase our recurring revenue.

Key Results:

  • Share of monthly subscriptions increased to 85%.
  • Average subscription size of at least $295 per month.
  • Reduce churn to less than 1% per month.

More examples.

MRR

Stands for Monthly Recurring Revenue. This is income that a company an reliably anticipate every 30 days. MRR is intended for products or services that have a defined price and recurring term.

Example: As of this writing, Treehouse’s MRR is $2M+.

To put two terms together, your MRR churn is the erosion of your monthly recurring revenue.

There is also ARR: Annual Recurring Revenue, not to be confused with Annual Run Rate (below) which even uses MRR in its calculation.

USP

Stands for Unique Selling Proposition. This refers to the unique factor of your company or product that sets you apart from all your competition. It’s the answer to the question, “Why should I do business with you instead of anyone else?”

Example: M&M’s “Melts in your mouth, not in your hand.” M&Ms use a patented hard sugar coating that keep chocolate from melting in your hands.

ARR

Stands for Annual Run Rate. This is a method used to project future revenue based on your current revenue. To get it, simply multiply your MRR by 12.

While that might seem inaccurate, ARR is a helpful tool to get an idea of long term growth and visualize the size of your business.

Example: If a company’s MRR for last month was $100k, its current ARR $1.2M.

Burn rate

Your burn rate is the rate at which your company spends money in excess of income. It’s a measure of negative cash flow. It is usually quoted in terms of cash spent (lost) per month.

Burn rate a good measuring stick for a company’s runway — the amount of time it has before it runs out of money.

Example: If a company has $1 million in the bank, makes $100k per month, and spends $200k per month, it has a burn rate of $100,000/month. It also has a runway of 10 months.

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About the Author

This article was written by Jordan Bowman. 

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