St. Patrick's Day? Nah !

St. Patrick's Day? Nah !

Ganga Prasad G. Rao
http://myprofile.cos.com/gangar

'Life ain't easy for a sociologist' thought Patrick. How does a problem that is entirely the onus of inefficient producers and profligate consumers in a third-world country turn a 'problem child' of a Sociologist in a developed, even environmentally exalted nation? Surely, we did not create solid waste....and spread it around....or hire children, barely toddlers, in to lifelong slavery? If we weren't consulted in the matter to start with, why would it be dumped upon us for resolution.....and that too in the evanescent 2 weeks of summer in the upper reaches of Quebec? Jeez, even Guantanamo criminals enjoyed more summer! But summer work is summer work, particularly when his sponsor, now visiting India with this family, had paid for 3 summer courses that he was cramming in to his resume to graduate by August and move to latitudes closer (but not too close) to those whom he envied.

Glad he had taken a course in Economics the past summer, Patrick scoped out the issue so he could focus on the what the right questions were before venturing to find a solution. That solid waste was an externality was well known. Firms, even households who did not pay directly and immediately for the solid waste they generated, and certainly not by the pound, generated too much of it, and spread it to every nook and corner of their land. The near free availability of recyclable material in garbage induced ragpickers, a significant fraction of whom were (involuntary) child laborers, to make it their profession, thus institutionalizing a social problem inside of an environmental externality. Child labor in the solid waste industry was temporary, low paid, and one of the extremely hazardous occupations that irreversibly damaged their physical development. The distributed nature of recyclables across the landscape and its concentration in landfills, as well as the geographical limitations and restrictions imposed upon ragpickers who could only traverse and cover a limited 'trail' on any day, perversely ensured the participation of a larger number of ragpickers, particularly children. The frequent regeneration of waste and the absence of information on 'last search' resulted in repeated collection sorties by child laborers, which were wasteful, and simultaneously, unhealthy. Firms that processed waste were small-scale, largely in the un-organized sector, and cared not for ragpickers, much less their health and safety. The recycling of (waste) materials engendered incremental pollution of the environment, both on account concentration of contaminants in the waste stream, and due the use of energy in recycling and refining. Together, these aspects pointed to a dismal state of affairs in the solid waste industry, especially in third world countries that lacked resources to protect their children, regulations to anticipate and control the menace, and the political will to enforce them.

It was the incentives and dynamics of the recycling sector that unsettled Patrick some. During periods of economic growth, both the environment and child laborers, unlike the rest of the society, suffered unmitigated, even unnoticed excesses, infractions and damages that arose from the increase in economic activity. Similarly, a short-sighted drive to increase recycled content in products, or a higher price for raw materials - a boon to primary producers -(or, even an advance in recycling technology that turned lower quality waste economically recyclable) was detrimental to child laborers who were 'incentivized' to collect more from the waste even if at a cost to their health. The tragedy compounded if parents worked in the same line of business, for they often collected wages, formally or otherwise, for their children. Further, the temporary, part-time, now-on now-off nature of employment distracted child-ragpickers from other pursuits, particularly education and cultural development. Indeed, Patrick revolted from his own survey of the issue. What unholy system had brought about this hell upon the most vulnerable in developing societies? He feared it was an inferior hybrid of, on one hand, the Western brand of unbridled capitalism and the unintended and certainly the unanticipated impacts of technology and, on the other, 'Socialist laissez faire' that had exploited the third world's unorganized labor in the cover of pursuing a low-cost economy, or worse, a green cause. And it took no messiah to foresee that as consumerism spread across the rest of the per-capita, subsidy-ridden, corrupt third world economies, the conjoint problem of solid waste and child labor would only exacerbate. Indeed, Patrick wondered what nasty policies would be necessary to solve this knotty problem that straddled engineering, economics, finance, and sociology? A born realist, Patrick quickly surmised rules and regulations that either mandated recycled content in the manufacture of products, or prohibited child labor would be observed more in the exception. Clearly, a socio-environmental crisis loomed in the future, a crisis that begged for attention and was ripe for a novel solution.

Patrick set himself to task to address the conundrum. True, he was no production engineer, industrial economist or environmental specialist, but he had heard enough of 'Closed Cycle' to understand its significance for the problem at hand. A Closed cycle economy, structured around closing the flow of materials, ensured the intermediates, products and waste stream from one process, were separated, recycled and reconstituted/refined in to inputs and intermediates/fuel for other processes in the economy. Closed cycle held special reference for resolving child labor due its immediate influence upon the volume of solid (and liquid) waste generated. But how would one induce it? Taxes, yes. Theoretically, taxing waste streams by their volume or mass could induce producers to seek incrementally environmentally-friendly production technologies but they had been tried and were either economically or politically unpalatable. Was it the ice-tea, or a brain wave from his turbaned professor, that Patrick nudged, Sociology or otherwise, to seek a solution in the realm of finance and economics. It dawned upon him that the solution to the inter-twined problem of child labor and solid waste would require multiple pots of money that could be applied, as Economists would, to induce critical outcomes in both spheres along the way to a sustainable resolution to both problems. To this end, Patrick conceived of a Closed Cycle Fund and a Child Labor Fund .... and perked up! 2 funds could be a lotta ... moooolah! Hmmm...Perhaps the sun outside was a tad too bright? Heh? Might as well focus on the task and charge the Professor for time indoors!

With that treacherous thought, Patrick began to put together a 'structure' around the funds and their operations. He began by assigning objectives to the funds. The Child Labor Fund, CLF, instituted and monitored by an NGO, exclusively targeted the social problem of child labor. Its operations involved funding child laborers out of 'solid waste slavery' and, contingent on availability of resources, sponsoring their education until adulthood. The Closed Cycle Fund aimed to enhance material and energy efficiency so the industry would turn incrementally efficient and environmentally sustainable. And in a move barely short of genius, Patrick decided he would volunteer a fund for abating Global Warming. And why not? If Closed Cycle funded research and investment in new technology that reduced waste streams, surely there would be repercussions upon the industry and its GHG emissions as well.

Next and gingerly, Patrick explored possible sources for the money pots. Hadn't he heard about Judges recommending budgetary 'lines' to fulfill constitutional and human rights goals? Child labor being a long-pending issue on national and international human rights and social justice fora, was a logical and immediate choice for such a line, even if meant a co-ordinated, multi-lateral group of afflicted nations. As for Climate change, there already were several funds anticipating, abating, compensating for, why even exploiting the externality. He chose a variant that worked its way thru the capital markets by investing in equities and bonds, and cross-trading gains with carbon permits. That still left the Closed Cycle Fund luckless. Patrick looked to the Right, then to the Left, and was no better for it. Apparently, not many cared for a fund that would shrink today's inefficient economy and put out of work many living off that inefficiency. If adding Climate change to the 'Solid waste - Child Labor' equation was genius, Patrick needed outstanding brilliance to fill the Closed Cycle Money pot. He was aware though, of an organization, much like the ACEEE, that matched donations to its cause. In fact, the International Society for Material and Energy Efficiency, ISMEE, matched dollar for dollar contributions meant to further the material and energy efficiency of the economy. But where would he find the dollar - the 'seed money' - to double in to the Closed Cycle Fund? What if, ....but what if he put together the seed money from the 'Opposite Complement' slices (the fraction of the pie split, if unequally, with the opposite, or the 'other' side) of the GWF 'global pie' and the country-specific EPN 'pizzas' - an Environmental P-note being a financial instrument that a foreign government and its industry had together bestowed, if in lien, upon its trading partner nation toward compensation for environmental and allied damages....and then had the ISMEE match it? Wouldn't that create a money pot that expanded with the lassitude in the GWF and any lack of intent in the EPN Administrator? In other words, the more the GWF blinked, and the more the EPN Administrator winked, the larger would be the CCF seed money and the CCF pot twice as big - and justifiably! With much the same logic, the more autarkic a nation, the smaller was the EPN and the CCF money pot. And to complete the circle, pardon the pun, he 'permitted' the GWF, within each nation, to share the bakey, an equity slice, with small scale industries within the nation and 'balanced' it by assigning the EPN Bakey to the CLF. Thus designed, the (unlisted) small scale industries grew with the environmental lapses of large companies; besides in transferring the EPN-bakey to the CLF, the EPN Administrator was favored a second chance to redeem his failures in discharging solid waste obligations. So pleased was Patrick with his 'fund-raising campaign' that he almost, almost raised a toast to himself!

Finally, Patrick the methodical, set himself to design a 'schema' that strategized the operations of these funds within and without the capital markets, so they would achieve the goals of simultaneously addressing child labor, environmental sustainability, and the elusive closed cycle economy. Now, Patrick imagined that the Closed Cycle fund, despite professing to enhance the material efficiency, had sufficient self-interest in the industry to not obstruct it in its growth phase. However, in keeping with its objectives, the Fund signalled the environmental unsustainability of the industry during the growth phase by stoking and exploiting volatility in the Equity section. In this phase, the Closed Cycle Fund, CCF, exploited volatility gains and promoted the internalization of solid and liquid pollution externalities by supporting firms engaged in the environmental remediation in the equity section of the market. As the growth phase neared its peak, the Fund moved away to Bonds while issuing a 'Closed Cycle Bakey' to the extent the cause was ignored and the pot wasted. That bakey supported 'secondary producers' of recycled materials who would be under pressure as growth gave way to contraction. Since Closed cycle enhancements such as process re-design, re-tooling, even re-siting of production facilities obstructed production and imposed a substantial adjustment cost, including the opportunity cost of production lines being off-line, the CCF typically limited such funding to recessionary periods.The CLF, beyond supporting the (soft-landing of) the more materially-efficient firms and sponsored the re-training of 'child labor retirees' during the recession. Patrick, the Strategic thinker, also held back some bakey from the Bull phase to fund 'equity cheer' in the Bear phase by lending a helping hand in the elimination of child-labor, a social phenomenon whose very existence implied the failure of the fund.

The Child Labor Fund, CLF, appreciating the hand of co-operation, pooled resources with the CCF in recessions to sponsor a bid-based auction in which child laborers of various ages were given the opportunity to bid for a lottery-lumpsum (various amounts adding up to the sum total available for this sub-cause) that would be offered to them in multiple draws along with a 'release' from child slavery. Child laborers of various ages, in various locations with different wages and 'earning potential' would bid themselves for the lumpsum. Typically, the Fund would seek to release the youngest of the lot for any arbitrary lumpsum lottery. The child laborer bidders, to the contrary, would seek the highest lumpsum for any given age, or equivalently, offer the oldest child laborer for any given lumpsum. Thus, the auction would achieve a 'half-way age compromise' in the choice of candidates released that excluded those at the extremes of the age profile of child laborers. In boom time, however, the CLF would offer a 'cumulative weighted' scholarship lottery. 'Released' child laborers, now endowed with the annuity from the 'release lumpsum', would bid in successive rounds of scholarship lottery with cumulative disappointment points from previous rounds, thus enhancing their chances of securing the scholarship in future rounds. Between the 'release lumpsums' in recessions, and 'scholarship lumpsums' in boom time, the CLF with  help from the CCF, secured the release of 'indentured' child labor and, after a delay, even their scholastic rehabilitation. (Patrick presumed the NGO would have anticipated the enlistment/identification as well as annuity and scholarship-related bank formalities before, during and after the auctions).

As Patrick conceived it, the Global Warming (Climate Change) Fund, GWF operated in a 'zero-sum returns', gross of inflation and currency valuations, across booms and busts (and across Equity, Carbon Permits, and Bonds). In boom time, it exploited the surge in equity valuations to exit with gains. Simultaneously, the Fund sold carbon permits in the Permits market to induce volatility, thus signalling the environmental unsustainability of the economic growth. It  used a fine balance between banking gains from the sale of Carbon Permits following price surges and 'using' them on behalf, and to support (unlisted) small-scale industries that ensured competition and aided in the controlling inflation. Ahead of recession, the fund strategically distanced itself from the industry, and moved in to bonds. During the recession, the GWF bought carbon permits and equities to sponsor Green-IPOs - IPOs of firms that surpassed the highest energy efficiency benchmark in the industry, and simultaneously  force the (involuntary) de-listing of waste-intensive, polluting firms. In this context, the CLF perceived an opportunity to co-sponsor with the GWF those IPOs that involved the introduction of superior closed-cycle/recycling technology, to jointly achieve mutually compatible goals.

These financial moves by the three funds brought about, as Patrick anticipated, various incentives upon the different stakeholders in his schema. Foremost, the reduction in the number of child laborers was a welcome outcome for the NGO albeit it excluded those at the extremes of the child laborers age profile. Perversely, the reduction in the number of child laborers in the pool would tend to increase 'wages' and therefore reduce the value of 'marginally recyclable products' which would turn 'non-recycled garbage'. Parents, who until then /previously explicitly or implicitly permitted child labor in their family, would be enthused by the regular income that the CLF annuity provided, and the prospect of a scholarship, and buy in to the scheme enthusiastically. On the Social front, the implementation of the periodic 'child-labor release' auction and the 'child scholarship lottery' along with retraining, would infuse a sense of hope and excitement among the most oppressed among third world societies. Why, Patrick believed he had even provided for a novel way to weigh equity and efficiency by having child labor release auctions compete with funds for process improvements. Elsewhere, the distribution of a 'bakey' in the CCF was perversely incentive enough for firms to turn efficient and take advantage of the 'efficiency pot'. Although the CCF recompensed the society for solid waste damages, that 'freebie' would be balanced against the possibility of involuntary de-listing from the stock market should firms turn waste-intensive. The prospect of a 'soft landing' in recessionary periods when the reversal of growth pulled the floor from under the stock price, was further incentive for investors to force management to adopt CC technologies. The voluntary listing and involuntary de-listing would serve to remind managers to improve upon their material-efficiency and reduce waste discharges. The GWF (in partnership with the CCF), between inducing volatility and supporting the SSIs environmentally ensured that the industry moved in the general direction of full cost internalization and environmental sustainability.

Patrick was astounded at how 'well-behaved' his idea was turning out to be. The three funds worked simultaneously to achieve a goal higher than their individual purposes. Beyond abating child labor, climate change and solid waste pollution, the system monitored and exploited any laxity due 'Agency problem' in the NGOs and Fund administrations. It anticipated and benefited from excessive profiteering in equities and carbon permit markets that might result due the pursuit of Keynesian stimulus programs, and even had an in-built incentive to ensure minimal inflation and true currency exchange rates. And all this without interfering with prices via taxes or subsidies (and exploiting each other's strengths). Patrick was no 'efficiency afficianado', but his 3-in-1 achieved multiple goals exploiting their scope economies in Capital markets.

Not a bad way at all to wrap up his summer work .... and look forward to Graduation in the Fall!