The reputation economy and government

We’re all familiar with the concrept of reputation and how in a world of social networks, voting and rank, it’s becoming increasingly important.

That’s not, however, to say that it’s a new concept. Information asymmetry in commerce is a centuries old problem. Solving it through reputation is equally ancient. We may associate eBay with our modern definition of online reputation but the concept is perhaps earliest associated by archival records of trading between Maghribi merchants in the 11the century. Research on these early economic transactions show that the key to curtailing “opportunistic behaviour and promoting trust between agents” in an environment of high information asymmetry was a system of reputations that was developed and shared between the agents within a trading coalition or network.

Like on eBay, success for the seller rested upon the fear of exclusion from the trading network – thus promoting honest behaviour and fair trading amongst Maghribi merchants.

Fast forward to today and we’re all aware of the use of rankings and feedbacks to vet the quality of a buyer or seller on eBay, or rank the quality of submissions from participants in communities like Wikipedia, Sermo or World of Warcraft.

But can we take this concept of applying cheap and available reputation information to offset quality and reliability problems in Government? Read the rest of this entry »

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From micro to meso finance

Microfinance is justly seen as a savior for millions around the world. As of 2007 it’s estimated that over 16 million of the world’s poorest benefit from the small extensions of credit that the over 7000 global microcredit organizations channel. The volume of loans now approaches some $25 billion, including an increasing share of direct peer-to-peer loans through sites such as Kiva, Microplace and MyC4. It’s primacy role in economic development and poverty alleviation was perhaps best showcased by the awarding of the 2006 Nobel Peace Prize to the father of microfinance, Muhammad Yunus, the founder of the now-famous Grameen Bank.

At the time of the award, the Norwegian Nobel Committee noted that, “Micro-credit has proved to be an important liberating force in societies where women in particular have to struggle against repressive social and economic conditions…Yunus’s long-term vision is to eliminate poverty in the world. That vision can not be realised by means of micro-credit alone. But Muhammad Yunus and Grameen Bank have shown that, in the continuing efforts to achieve it, micro-credit must play a major part.”

But building at the bottom of the economic pyramid has it’s limits. Indeed, microfinance can enable millions to survive where and when they could not previously. But as James Surowiecki, author of The Wisdom of Crowds, points out in his recent editorial in the New Yorker, there are definite limits to how far microfinance can go in enabling economic development.

He writes,

“What poor countries need most, then, is not more microbusinesses. They need more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation. In high-income countries, these companies create more than sixty per cent of all jobs, but in the developing world they’re relatively rare, thanks to a lack of institutions able to provide them with the capital they need. It’s easy for really big companies in poor countries to tap the markets for funding, and now, because of microfinance, it’s possible for really small enterprises to get money, too. But the companies in between find it hard. It’s a phenomenon that has been dubbed the “missing middle.”

Filling this missing middle, usually neglected by both domestic and international lending sources, has come to be termed “meso-finance” and aims at enabling SME’s to grow and subsequently expand their employment bases. One of the means of doing so is taking a Prosper/Zopa like approach to peer-lending, and aggregating small loans into $10,000 + amounts for entrepreneurs in the developing world. Evidently there are some significant risk issues that accompany the extension of such credit but with the right local structures in place, Web 2.0 lending might just offer meso-finance the channel it needs to extend the credit that small business owners the world over desperately want.