The middle isn’t always evil

I was out at dinner with a friend in San Francisco a few months ago, and when we were leaving, he pulled out his i-phone.  Using the Uber app, he called us a taxi.  A guy showed up in his own car, we climbed in the back, and off we went.  This is insane, I thought.  I just got in the car of a total stranger. And yet, Uber like many other online companies, Airbnb, Amazon, Etsy, and so forth, has realized that if they can gain the trust of both drivers and riders, both will become heavy users of their system.  They hold the money until the transaction is complete.  Drivers and riders rank each other and that information is shared with the entire community, creating some social accountability and potential consequences for poor behavior.  Everyone wins—except of course the vested interests that are being disrupted by this new service.

In development, we would call Uber a middleman (dalal in bangla).  It’s not a compliment. And they would have lots of company.  Poor public infrastructure, limited regulatory capacity, and weak property rights give rise to ample opportunities for creative services.  Want to get a driver’s license?  Good luck, unless you have “a guy”.

This is not the same as a bribe.  A bribe is an extra tax on a service.  Anyone can still get the service if they are willing to pay.  Dalals are about access; if your access is dependent on a third party, that’s the situation I’m talking about.  Often they are related, but in many ways, bribes are much simpler problem to address than one with social networks, multiple stakeholders, and so forth.

Here are four examples of “intermediaries”—but the list can go on.

In China, foreigners who intend to stay for some period of time must complete a registration process.  Part of it includes a medical exam.  In Beijing, only one hospital is “certified” for this required medical exam.  It’s actually a good distance outside the city.  You step inside, and find yourself in a melting pot of culture and nationality.  Many people are young and attractive—if you weren’t all there to get pricked and prodded, it’d be a good place to pick up a date.  The whole process takes 30-45 minutes, and the charge is over $100.  At most other facilities, you could easily get the same tests done for a quarter of the price.  But that won’t help with the registration form.  Really, you’re paying $25 for an exam, and $75 for a piece of paper.

Many Bangladeshis want to go abroad.  The United States’ diversity visa, known by many as the DV lottery, is perceived as winning the jackpot—it puts you on track to get a green card and eventually U.S. citizenship.  Particularly for those with limited education who have limited economic opportunities here, it’s certainly one of the most coveted opportunities imaginable.  There are companies here that go from village to village, helping people fill out the paperwork for the lottery.  The charge is minimal.  They take your name, date of birth, etc.  And since the address system isn’t well developed in the villages, they put their office address down instead.  After the lottery, if you are selected, this is where the fun begins.  They now hold your paperwork. You have to pay up if you want to get the opportunity—sometimes on the order of $5,000 or more.

Dhaka has over five million people living in slums.  Yet almost all of these people are there illegally—they are squatting.  Or more accurately, they are renting from someone else who doesn’t own the land (usually somehow these de-facto “owners” have ties to political powers).  The city corporation, seeing them as illegitimate, is reluctant to provide them with basic services—water, electricity, police protection, schools, etc.  In the absence of a formal system, strong informal powers arise.  Illegal water taps and electric lines are hooked up; some even get cable tv.  But they pay for it—often per unit they are paying 2 or 3 times what I pay.  In Korail, a slum that’s home to 75,000 people, the government is removing the illegal lines.  They claim the 500 legal lines that they establish should be sufficient.  Prices are theoretically set at affordable rates.  But residents understand the simple rules of price and limited supply.  One said, “Only influential people have got legal lines.”  The rest will hope that a middleman sets up shop and gets them access.  But fewer lines mean higher prices, inevitably.

In Afghanistan, the National Police decided to pilot a digital payment system with 250 police in Wardak Province.  On pay day, many showed up at the home of the CEO of the mobile money company, Roshan, calling him a thief.  Turns out that they didn’t understand the SMS that alerted them to the transfer they’d received.  Once they’d gone to an agent and received cash, they were back at his door, to thank him personally for the “raise.” Actually their full salary had reached them for the first time; there was no chance for supervisors and others to skim off the top before distributing it to the police officers.  For some officers, digital payments increased their actual take-home pay by 50%.  And you thought Ticketmaster charged lucrative service fees!

Last week I attended a discussion on mobile financial services in Bangladesh.  Someone suggested that the government should pay teachers using mobile money, because currently they take a full day off from school to travel to the closest bank and collect their salary.   One of the government officials said, “We want to.  But we have to go slowly.  There are a lot of vest interests in the current system, so we have to be careful.”  So, I’m guessing that the teachers don’t see a fair portion of their salaries.

Instead, I’m arguing that we need to be more thoughtful about the complexities of systems and the internal incentives.  Where there are gaps, economies will spring up to fill them.  High prices, limited access points, and weak monitoring systems are all characteristics that are bad for consumers.  Intermediaries aren’t necessarily a bad thing—kayak, amazon and increasingly foodpanda make my life much easier—but if they don’t lead to better value for customers, we should be concerned.

We should stop vilifying middlemen.  It’s the economics, stupid. They are created by a system with inefficiencies.  The best way to stop them is through disruptive innovation and better policies.  Policies seem to take a while, so I’m looking for the Ubers of the world to speed things along.

More another day on where the fair trade certification groups fall on the spectrum of value creation.