Tag: business

12 Important metrics for short selling

Posted on by fqzhang

Intro:

In my previous experience in short-selling, many different quantitative and qualitative metrics were used to filter through prospective short-sell candidates. Many of these that I am about to discuss are frequently used in the entire industry, and you will definitely find a list that are even more comprehensive elsewhere on the web. Of course, as the sophisticated investors know, each fund is unique in its approach in determining what metrics are important and weigh it accordingly in their overall model. For instance, some more quant-driven funds prefer to include as many variables within their models as possible and to encompass all possible factors that can affect a company’s earnings (causing the earning to go lower, in the case of short-selling); while more fundamental funds focus on a few core variables and do more in-depth investigations to build up a story of the company and decide then whether or not to short the company’s stock.

 

Most of the information presented here can be found through one of the financial services websites/tools commonly used in the industry. Personally, I have used Capital IQ for many of the financial metrics. More sophisticated investor may decide to use a combination of different services and/or build their own tools to gather data. In this article, I have used the words “quantitative” and “financial” rather loosely and at times interchangeably; and “qualitative” and “non-financial” as well. I apologize in advance some of the confusions this may cause.

 

 

Without further ado, here are some of the most important metrics, 6 each for both quantitative and qualitative factors:

 

 

Quantitative/Financial factors:

 

  1. Short Interest: This ratio essentially tells us what percentage of the shares outstanding is held for purposes of short-selling a stock. The higher the short interest, of course, the more likely the investor believed that the stock is likely to fall in price.

 

What it means: For investors, this can be an indicator that the market is overly pessimistic on the stock or that everyone already knows that it is a bad stock. I would recommend that investors not get into stocks with high short interest for a few reasons. First, this suggests that there is likely few profits to be made if everyone already recognized the mispricing. Second, for short-sellers to profit, they must buy back their position, which causes a spike in the price. This can be a rapid increase if too many short-sellers “cover” at once, resulting in a situation that is termed as a “short-squeeze”. Investors many not profit in this case. Finally, as hedge funds and active investors in general want to “beat” the market, it is important to realize that you can’t “beat” them if you invest like what the rest of market is thinking.

 

  1. Stock Loan Fee: This is the price that an investor will have to pay to borrow a stock. This is provided in a percentage (the cost of borrowing/share price). Generally the short-seller’s prime brokers (the guys who loans out the stock) will provide the borrowing cost number to the borrower.

 

What it means: As with short-interest, a higher percentage of borrowing cost suggest that many investors are expecting the stock value to fall. Depending on the demand and supply, borrowing cost can become exorbitantly high, and investors should be aware that this interest can eats away at returns substantially the longer the short position is held out.

 

  1. Days Inventory Outstanding: This financial ratio from the balance sheet is simply how long the company takes to collect its inventory. It is calculated by (inventory/COGS)*365. This ratio – also going by the name of “Days Sales of Inventory” – generally gives a good indication of how long the inventory is held by the company before sales occur.

 

What it means: In general, the longer the inventory is stored, the worse it is for the company. This means that the company is having a ton of inventories but aren’t able to generate sales on those inventories. This can suggest that a firm is incapable of selling goods due to operational issues. As with all ratios, comparisons over time is crucial, if the firm has been increasing its in Days Inventory Outstanding, that is definitely a bad sign. Similarly, horizontal analysis between different firms within the same industry tells us how the firm is doing in comparison to its peers.

 

  1. Days AR Outstanding: like its cousin “Days Inventory Outstanding”, this ratio also measures a company’s collection period. In this case, it measures how long it takes for companies collect on their accounts receivables, and turn them into cash.

 

What it means: This ratio is frequently used in forensic accounting due to the fact that many accounting frauds involve 1) overselling to their buyers even when there are no demands, and thereby increasing their revenues or 2) companies book fictitious AR sales when in fact no such transactions happen. Higher Days AR outstanding is certainly not good, and a pattern of increase days AR outstanding is certainly worrisome.

 

  1. Comparison between cash flow from operation increases and net income increases: There probably is an actual name for this type of comparison, but the name is escaping my mind right now. Company’s net income and cash flow from operations should move in the same direction, and with some exceptions, be of the same magnitude.

 

What it means: comparisons between cash flow and net income is important because this tells us whether or not the company is truly turning those “net incomes” – which is an accounting construct – into something more tangible – cash. The general idea is that while earnings (net income) can be easily manipulated, cash flow is much harder to be tinkered with.

 

  1. EV/EBITDA: This is perhaps the most commonly used and the most important among all the ratios discussed. It is calculated by EV: (market common stock value +debt + preferred equity + minority interests – cash/cash equivalents) divided by EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization). This is the theoretical value that an outsider buyer would have to pay to by this company from the market.

 

What it means: Value investors use this frequently to find the whether or not a company is undervalued, and this offers a much more comprehensive look than the more commonly used P/E ratio, since it takes into consideration debt. It is often thought of as giving a “truer” value of the company.

 

Experienced investors will notice from the above list that several of the mostly important metrics that the long-side use to discover “value” stocks are not used; namely: P/E ratio, P/S, Debt/Equity, Interest Coverage ratios, etc. These ratios are absolutely necessary to look at as well, but for the purpose of this article, I am emphasizing only the important ones for short-selling. Value investing and short-selling are in fact two-sides of the same coin; whereas value investors want to find undervalued companies, short-selling want to find overvalued ones.

short-selling graph 

Qualitative/Non-Financial Factors:

 

This section is much more open to debate and I included only the 6 that I have come across the most often to give a sense of the wide variety of non-financial factors that can affect stock performance. Many of these can be tracked, and especially with advancements in natural language processing, these qualitative factors can in fact be quantified and placed into a model.

 

  1. Location of firm’s headquarters, region of operation, etc.: Always beware of where the company is based at, as some locations are inherently more questionable than others. An investor should also beware of constant changes in a company’s location as well.

 

What it means: Location, location, location. This matters in more than just a real estate sense of the word. Where a company is headquartered matters and having its operation based in a region with more governmental oversights versus less oversights is vital in evaluating the firms’ long-term survivability when the regulations do tighten.

 

  1. Number of years of experiences of management team: Looking at the average number of years of experience for the managers of a company can give a good idea of how the firm will be able to weather the next financial storm.

 

What it means: A younger average age for a management team is not necessarily a bad thing, as the young can always bring fresh ideas to the top. It is however, always questionable when someone with no real prior experience in managing companies suddenly becomes a more senior member of the team. Experience at the top is generally a desired quality.

 

  1. Number of documented SEC filing changes: This is a very well know one, and academic studies have been done on this subject. Firms must file to the SEC certain material changes to their operations, namely that of 8-K (current report), and other mandatory press releases. More frequent filing generally does not bode well for the company.

 

What it means: It has been found that firms that file more SEC filings have a tendency to engage in fraudulent activities, since they may be constantly trying rebrand themselves to investors. Firms, as a rule, should expand orderly and methodically, and any changes to its operations should be done infrequently and with plenty of preparations. Frequent SEC filings suggest otherwise.

 

  1. Number of CEO/Top Management changes: Technically this counts as part of SEC filings. But I would like to break this out because management is such a critical component of a company. As with SEC filings, the more frequent the management changes, the less credible the company becomes.

 

What it means: As the people in charge of setting a strategic direction for the company, we want to see consistency in the direction-setting for the company. Frequently changes at the top affects the morale down to the employee, and suggests that the company do not really have a good sense of where is heading toward.

 

  1. Executive pays in relation to firm’s performance: While it is difficult to fix a ratio to executive pay to firm’s net income, a much more realistic ratio lies with percent of executive pay increases versus earnings increases. Executive pays tie into stock performance (This is all part of the “shareholder model” of corporations where there is a perceived “principal-agent’s problem” and be partly solved by incentivizing management with stocks), and the pay can be lopsided in favor of management even when they are not really delivering value to shareholders.

 

What it means: When management team have been paying themselves a handsome salary while the firm is still deep in the red or have a lackluster performance, that should most certainly be a red flag.

 

  1. Insider transactions: SEC also requires this to be disclosed, as it shows how much stocks the company’s executives are buying or selling.

 

What it means: While insider buying almost always is a good sign for the company, as it shows the insider’s confidence in the company’s ability to generate revenues and profits in the future, insider selling can be a bit mixed. However, if all insiders are unloading their stocks simultaneously over roughly the same time period, this is certainly not a good sign.

 

Here again, I must emphasize that the non-financial factors are highly controversial and every firm approaches it differently, and these lists are far from exhaustive.

financial graphs

 

Conclusion: As we can see above, a number of ratios and metrics have been used by professional investors in identifying short-sell candidates. When using these metrics, always make sure to compare it with the same company over time (i.e. vertically), and with similar firms within the same industry (i.e. horizontally). Valuation does not mean much if you cannot compare it to another firm or the same firm over time.

 

In practice, I believe that all of the metrics can be quantified in one way or another, perhaps some can be quantified with a greater precision than others. Short-selling is certainly filled with risks and dangers, but with the right tools and the correct analysis, I do believe that “Alpha” can be generated on the short-side. Good luck investing.

 

 

 

Disclosure: This article represents opinions that are entirely my own, and should not be taken to be the opinion of any individual/company that I have worked for, past or present. I am not and do not purport to be a registered investment advisor. This is not an offer to buy, sell or market any securities. Short-selling is risky and you may lose all of your initial invested capital. Short-selling is recommended for experienced investors only.

 

 

 

Revisiting the issues of labor discrimination

Posted on by fqzhang

It is generally accepted by economists that discrimination is an influential factor in affecting the functioning of a modern day economy. Theories regarding discrimination – its impacts on the global economy and possible solutions to the problem – have been debated and argued by influential economists over the decades. A key question that we ask ourselves is: will the market regulate itself and be able to eliminate discrimination, or does the government have to intervene? If so, what is the best approach to government intervention? This question can be seen as a part of the larger debate between the neoclassical economists and the Keynesian economists over the role of government in our economies and social lives.

This problem of whether or not to regulate the issue of discrimination has been debated by politicians and economists over the years, especially since discrimination is not only an economic issue, but also a social one. Historically, governments have taken a generally laissez-faire approach to economics in society, and regulations are few, especially in the US. This changed dramatically starting in the late 19th century, with the emergence of populist movements such as women’s suffrage, and accelerated dramatically during the two World Wars and the Depression era, when governments began to take a more active economic role in society and mandated fairness in hiring in order to receive federal funding. Finally, the Civil Rights movement of 1950s and 60s pushed the issue to the forefront and the government enacted broad legislations regarding labor employment practices. Two of the most notable legislations of the period are the Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964. The Equal Pay Act have stated that firms should take into consideration a person’s gender in the determination of wages using the theory that that the same amount of work deserve the same amount of pay. Title VII of the Civil Rights Act made it illegal to discriminate based on a person’s “race, color, religion, sex or national origin”, and implemented a comprehensive list of anti-discriminatory methods.

However, in more recent years, the problem of discrimination takes on a new turn with the rise of “Deregulation” and the stepping away of government from some of its historic stances on promoting more equality in the market-place, and igniting the debates anew.

labor and management.jpgThe current consensus is, in a way, a reaction against the free-market advocates, which have become especially popular in the US since the 1980s. In fact, it has been argued by economists that discrimination has increased from the ‘80s onward, in large part due to the popularity of this line of argument. We can examine this opposite side of the argument by looking at the positions taken by two of the greatest economists of the latter twentieth century: Milton Friedman and Robert Lucas. Friedman had argued that the free market will resolve the problem of discrimination itself because discrimination is inefficient in the long-run (“Capitalism and Freedom”, 1962). In one of his most often quoted passages, he stated “It is a striking historical fact that the development of capitalism has been accompanied by a major reduction in the extent to which particular religious, racial, or social groups have operated under special handicaps in respect of their economic activities; have, as the saying goes, been discriminated against.” Friedman believed that the employer’s self-interest will cause them to overlook the other categorical attributes of an individual in favor of whoever can work the cheapest for the most amount of productivity.

On an interesting note, Friedman was himself the subject of discriminations during his times at the University of Wisconsin at Milwaukee, and one of the chief reasons he chose the University of Chicago for its PhD program was due to its open and more tolerant environment. In a sense, Friedman affirmed the idea that discrimination is detrimental to the employer (in this case the university) by “voting with his feet” to a location that was more tolerant.

Writing along a similar line, Robert Lucas stated that any irregularity in the “Market” introduces a distortion that will resolve itself over time. And in his view, government attempts in ending discrimination will simply introduce new inefficiencies in the marketplace that has to be resolved. What both of these economists suggested is that firms are very rational and they pursue the maximum amounts of profits possible. In order to do this, it only makes them to only care about costs and benefits, and since race/ethnicities/gender, etc. does not have a specific benefit or cost associated with them, firms will not discriminate. For those firms that do discriminate, in the long run they will become inefficient and the competition will eliminate them from the marketplace. The free market is the best left alone, according to Friedman and Lucas, since the mechanism of incentives in a rational society will help to eliminate discrimination and get rid of these inefficiencies.

 

Meanwhile, the mainstream have taken the view that in order for discrimination to be solved, the markets must be regulated through governmental legislations and acts. They are essentially arguing for a top-down, command-and-control method in regulation approaches to enforce those regulatory methods. Many noted that more regulation has been the historical trends, as more legislations have come on board over the years to prohibit certain behaviors from employers. They outlined two main approaches by governments to combat discrimination. The first is what is generally referred to as “Nondiscrimination” where employers are essentially blind to race, ethnicity, or sex, and to determine that those factors should not play any role in the selection of workers (This is the principle behind the Equal Pay Act). The other approach is termed “Affirmative Action”, where employers MUST take race, ethnicity, and gender into account to ensure fair representation, especially for historically disadvantaged groups. These two approaches have proven to be somewhat contradictory, i.e. how to ask ask employers to be blind to the differences between workers while at the same time be cognizant of the fact that certain groups should be considered more highly, holding other factors constant? This contradiction made it difficult to implement some of these methods in ending discrimination, and it is somewhat flawed as a result.

In addition, Title VII also distinguished between disparate treatment and disparate impact; where disparate treatment is defined as being proof that the workers are intentionally being discriminated against, while disparate impact are defined as result from actions, however unintentional, that results in some groups being disproportionately impacted. All of these are important considerations for firms that are trying to avoid discrimination.

In cases where it can be difficult to implement equal for equal work, they introduced the idea of comparable worth to help measure employee value. Often, many noted, it is impractical to “achieve equal pay for equal work”. Therefore, some have supported the goal of equal pay for jobs of “comparable worth”, and what determines the comparable worth is market forces. Comparable-worth policies have generally relied on job-rating schemes by employers to determine or justify pay differentials. However, this job-rating scheme is highly subjective and subject to great controversies.

As a case example, many pointed to the example of the Federal Contract Compliance Program, where governments monitor hiring and promotion practices of federal contractors. This program utilized affirmative action to ensure that groups that have been historically disadvantaged received preferences. In terms of absolute numbers, the federal contract compliance program increased opportunities for minority groups tremendously. The concerns with these programs is that when underrepresented groups are given preferences in hiring, this might result in less qualified workers being hired. And since the programs only covered the federal contractors, it is possible that while the program attracted talented minorities, there might be no overall gains in employment due to other sectors of the economies being neglected. As evidence of the effectiveness of the government programs, some have pointed out that government policies have distributed new employment opportunities among federal contractors towards blacks and Hispanics. The ratio of black to white incomes has risen since the 1960s, but we cannot effective draw causation relationships between this and the governmental legislations.

Finally, the mainstream believed that it is important to continuously monitor the economy to catch discriminators. One way to do this is to conduct an audit where blind experiments are conducted, telling auditors to look at firms and measure the effects of discrimination. However, these studies are very difficult to conduct since the auditors cannot know the purpose of the experiment (since that will introduce an element of bias), while at the same time, they are very difficult to conduct due to cost constraints. In another famous experiment, which has since been replicated worldwide, experimenters send out resumes to a number of different firms. It was found that white-sounding names needed 10 resumes to receive one call back, while black sounding names required 15 resumes to receive one call back, a 50% difference in employer response rate. However, even this experiment can be subject to bias, as the names may in themselves be a signal on the quality of the workers, and not necessarily having anything to do with race itself. For instance, it is possible to have a name of “Jared” being associated with a bad worker, but not necessarily to that person’s race.

 

I believe that while the the mainstream’s position is elegantly argued for, and we agree with the general premise that the markets need to be regulated. However, I believe that regulations may not work in all cases. The solutions many economists presented are excellent, but may not be adequate since it doesn’t allow a degree of freedom to the individual to decide in specific cases of discrimination. Governments can do a number of other things that can combat the effects of discrimination, besides direct, top-down regulation. I believe that the government should embrace a comprehensive, top-down approach in fighting discrimination, while at the same time, it might work with other players in the market so that anti-discriminatory laws can be used effectively and efficiently.

Firstly, I believe that free markets are efficient in the sense that it generally can allocate resources as needed to the market actors. Markets generally have a very remarkable ability to become efficient with the right incentives. However, in the case of discrimination, it may become inefficient due to the lack of those incentives. In many cases, discrimination can be good for businesses since they are able to charge different wages to different individuals, and they are able to get the same amount of work out of some workers while costing a fraction of the wage expense. This has historically been the case with what we call the “gender wage gap”, where men and women are paid different wages for essentially the same amount and quality of work. In addition, we often see firms hire workers whom they or their employee knows well (a network effect). This can be discriminatory because the results (disparate impacts) can be discriminatory in nature. The only way to solve these issues is by having firms being regulated directly by the government to change the historic legacy.

Secondly, I believe that governments should take a leading role, but not the only role in helping to end discrimination. A government’s approach should be based on both “carrot” and “sticks”. Governments can directly punish the worst discriminatory offenders, while at the same time, they offer incentives to encourage diversity in the workplace. Governments should consult the private sector to see why they may not want to hire women/minorities, and work with them to help design incentives to help end discrimination.

Thirdly, governments can also utilize other methods that are not direct regulations, for instance through education in non-discrimination. This in fact has been promoted in the schools’ educational curriculum in the past few decades and have been credited with helping new generations of workers and employers understand the value of diversity in the workplace. Educational changes can cause the deepest changes in the way workers interact with others and in a firm’s hiring practices. In many cases, the markets simply are not aware of the potential benefits a diverse workforce can bring along, and it takes some educational efforts, in part facilitated by the government, to change the firm’s hiring practices.

Lastly, I believe that the free movement of people has been extremely beneficial for firms and discriminatory practices would stop this free movement of people. Government should do all it can to make sure that worker mobility is not impacted, as historically, workforces that move around tend to reward firms that are the fairest and most efficient at utilizing labor. For instance, during mass construction projects that are undertaken by the government or large corporations in the past, people of different ethnicities often come and work together, albeit sometimes on different parts of the same project (i.e. the transcontinental railroad). This has been very beneficial for the employers as they are able to attract the best talents due to the mobile workforce.

To conclude, I believe that our solution is a compromise between the neoclassical, free-market advocates on the one hand, and the regulation-heavy advocates on the other. Businesses exist in an environment where discrimination exists and governments need to ensure that workers do not encounter discrimination through regulations, workplace incentives and education programs. At the same time, governments need to consult with private companies to see what works best to end discrimination. A collaborative environment between governments and businesses, we believe, is often the best one in ending discrimination. Behind all of these proposals in ending discrimination is our firm belief that markets, when given the right incentives, will come to the rational conclusion: Discrimination results in an inefficient utilization of resources, firms will lose out on some of the best talents, and in the long run, only firms that do not discriminate can survive in our global, interconnected world.

On the overall tech industry from an investment perspective

Posted on by fqzhang

In this blog, I will focus on some of the recent trends in the tech industry and where I think it is headed to in the future.

  • Prospective future growth: there is still a lot of inefficiencies in different industries. For instance, the media industries, with bundled products, will face increasing challenges from pay-per-view medias. Internet will be applied to more and more company. We can save people a lot of time. Another area filled with inefficiencies is in healthcare; however, the risk in this category lies in government regulation.
  • The current tech boom: One key reason for the current boom is the result of Infrastructure costs have dramatically cut down. The bandwidth, processer, storage cost, down 25% each year. Fundamentally deflationary trend over time.
  • The competitive landscape: More competitor. The business models have all been working, unlike 1999, when so many business models do not work at all. Management team and competitive risks will be the most important as we go forward and analyze a company. This is also in part due to the lessening of the costs over time.
  • Buzzword of 2015, a “unicorn bubble”. Unicorns are defined as private companies valued at over $1 billion, and currently there are over 150 such companies in existence. The market has been generating tons of free cash flows.

 

Money generating models:

  • Ad, subscription, and retail models
    • The models are very important:

Who are the winners over the past few years?

  • The “FANGs” – Facebook , Amazon, Netflix, and Google

Who might be prospective buys in the future?

  • Top picks: Amazon, LinkedIn, Priceline , Expedia, Google
  • Negative outlooks: Twitter, Groupon, Yahoo

How to identify great value?

Successes:

  • Google and Facebook accounts for over 50% of all online advertising revenues around the world. Adverting model can be declining due to saturation. Can you come with a great advertising proposition for the company?
  • You have to catch the trend right. Google is like a tax on all internet usage, since searches are powered by Google. They need to get everything and anything they can put it online.
    • Strategic acquisitions and developments are important. Even though Motorola seemed odd, but it actually give Google significant patent protection. Google’s android development is great.
  • As identified before, we need to look at: advertising, retail, travel (revenue generating model).
  • Companies need to be willing to make long-term bets. Yahoo failed to make a long term bet while Google did. For instance, Yahoo did not jump on the train for mobile software, for social media, and a number of other things.
  • Study in failure: Ebay did not significantly innovate instead. Ebay, the only reason that the stock prices are staying high is because they are buying back shares and using other accounting tricks to boost their earnings (of course, this cannot last). Look at the company’s acquisition, Ebay made a certain number of acquisitions that are not related to its core business (they were owners of Skype at one point, what does Skype have to do with selling things online).
  • Amazon has super thin margins, but it is able to consistently generate growth to make itself bigger and more important. For Amazon, market share is key.

 

On Tesla specifically:

The unknowns about what a stock like tesla can do is enormous, and what the firm’s potentials are somewhat questionable. It generates a lot of optional value in the sense that we aren’t sure what they are doing. High volatility expected.

 

Companies that are not yet public but have interesting prospects:

  • Snapchat: key question is in how to expand snapchat, user base?
  • Airbnb: we are still looking at broad range of model.

 

Analyzing a company using the 4M framework:

  • Management team, (have to meet them face to face).
  • Business Model (social media is beautiful business model, 90% margin business).
  • Moats can also change over time (Ebay, competitive advantages are not very sustainable for too long, because they miss the next coming trend). Yahoo missed a lot of these new trends (video, social media). A lot of moats are based on the network effect. Network businesses can be undermined, but they can create a good moat for a couple of years. Are they global moats or are they local moats? Important to determine if they can be undermined.
  • Market opportunity. The greater the end opportunity the better it is. Google generated a large amount of TAMs (total addressable market). The market that Google enters contains huge amounts of end values.

 

Some specific things to be aware of when looking at these stocks:

  • Remember that each publication may have some sort of bias to them; for instance. Barron’s has more of a value bend to the articles they write, so they might exhibit bias against high growth tech companies.
  • Financial practices of companies: The management teams increasingly make up their own Adjusted Ebitda, rather than using standard GAAP measures
  • Specific example of a risk: Alibaba, it is possible that they are over-stating their numbers? Can we trust the financials? The average Alibaba user spends more with Alibaba than with the Amazon user spends with Amazon, even though incomes per person in China is about 1/3 of the US. Perhaps this goes back to the idea of the inefficiency in China? Perhaps there are simply no other choices (brick and mortar stores simply aren’t on par with online products)
  • We must also look at the industry in more detail as well:
    • Why is music a much more lousy business? There are only like 4 major labels, power is with the record labels. For instance, Pandora have gross margins of around 17%. Not much room to spend in r and d really.
    • Contrast this to the Netflix. Netflix faces significantly more players in the movie making landscape.

 

 

 

 

A musing on the word “farmer”

Posted on by fqzhang

Here in the United States, we frequently use the word farmer to describe someone who engaes in agricultural pursuits or who derive a large source of their income from farming activities. Accoding to the most commonly used definition (as defined by the Merriam-Webster dictionary): “a person who cultivates land or crops or raises animals (as livestock or fish).” Based on this definition, a large portion (over a billion in fact, according to official figure, but like with all statistics, the true figure is much higher) is engaged in agricultural pursuits. Farmers have always been recognized as one of the largest groups of people in society, and their role in the production of food is very well appreciated. But are all “farmers” created equal?

I remember hearing about people in my hometown who are considered to be “farmers” (in rural areas of California) but were in fact large landowners who owned thousands of acres of land (chiefly planted with almond trees) and whose revenue is in excess of 10 million dollars a year. Now compare a picture of this individual with a sub-Saharan “farmer” who engages in subsistence farming (like other 60% of the population of Sub-Saharan Africa), and whose produce can barely feed his own family of 7, and you quickly get a picture of the diversity in the word “farmer”.

The word “farmer” in its modern usage is essentially an American construct, as it implies ownership of the land you are working on and have to be associated, at least in America, with large estates and strong independent ownership. The millions of people who work on those farms on a contractual basis are termed “farm workers” rather than farmers, since they are merely needed for the harvesting and planting of fruits/vegetables/crops. In many ways, being a “farmer” in the United States doesn’t seem to be a bad occupation: you receive a steady source of income and derive a sense of satisfaction from working for yourself. Granted, no one in a capitalistic society is entirely free from the fluctuations on the market or the uncertainties of weathers, but with economy of scale (which many farmers in the US enjoy), over the long run, farmers seemed to be living a decent life. With increasing consolidation in the United States in the farming industry, the small family farms are increasingly becoming a thing of the past, and we entering an age where large corporate farmers are becoming the way of the future.

For the rest of the world, “peasant” is the more appropriate term. Even in advanced developing nations like China, over 30% of the labor force engaged in farming as their daily occupation, and in the rest of the developing and underdeveloped world, the peasantry ranges from 40% to 80% of the population of the area. The peasantry is a poor lot with none of the connotations that we associate with being a “farmer”. But unfortunately, this is also the state of the world that we live in. However, to capture the true state of the world’s farming community, we should use the word “peasant” a little more.

Human exploration of space: a controversial debate (Part 2)

Posted on by fqzhang

For part 1, click here.

A second key contentious point is the role of private companies and national governments in space. The drive for space exploration was mostly led by governmental agencies since the very beginning, and currently a “virtual government space monopoly” exists.  In the US, National Aeronautics and Space Administration was created in 1958 to coordinate the government’s efforts to explore space.  The exploration itself is also closely linked to military endeavors, with intelligence gathering as one of the early reasons for the launching of satellites. Some argue that we should limit the role of governments and private interests in space and place exploration under the firm control of national governments, while others believed that we should open up space for commercial endeavors and to utilize space as much as possible.Edward-Hopper-s-Nighthawks-in-Space

Anti-Space liberalization groups based their arguments on several points: first, private companies would only be willing to undertake space exploration if and only if immediate and short term economic prospects are possible, and therefore they have no long range exploration goals that can serve public interests. According to pro-space advocates, private interests cannot utilize space efficiently because space exploration requires a large amount of initial capital investments that few companies can or are wiling to afford, and the fact that any ventures in space would require years to generate any results doesn’t favor private investments either.  Furthermore, there is an incentive for company to not do any original research at all and to instead rely on imitating others by doing what others have already began or done. This is not an issue when the government is the major source of research; however, with the privatization of Space R&D, company will sought to improve on their existing research than to build new ones, since the costs will be lower. According to the anti-privatization groups, only the government can sponsor basic research, without direct considerations for profitability.

Secondly, the exploration of space also brought up the points of who owns what in space, and how can governments regulate such claims of property or intellectual property. On land, the issues of property is quite simple, like in the American West in the 19th century, where the first ones to find the area and to use it to its full commercial potential can often obtain permission from the national government to gain ownership. However, no clear international agreements have been reached on using resources in space by each nation. The Outer Space Treaty of 1967 is an international agreement that guaranteed “outer space and celestial bodies are free for exploration” and under Article VI, signatory nations “bear international responsibility for national activities in outer space… whether such activities are carried on by governmental agencies or by non-governmental entities…”  In effect, the treaty defines that space is open to all and activities in space are the responsibilities of the government. This works in the days when commercial development of space seemed so far away, however, now with humans on the moon and potentially on the asteroids or Mars, the resources on those planets can have great implications.  For instance, asteroids are known to have rare-earth minerals which are commercially valuable even given the high cost of exploration.  The question therefore is who should own these resources or if they should be exploited.space shuttle leaving earth

Anti-privatization people believed that giving up space and celestial bodies, such as the moon and asteroids, to private interests is irresponsible. Indeed, if we fully privatize space among the large companies, they can effectively dominate space and create a private monopoly and close it off to future exploration, or having power concentrated in the hands of too few people. In addition, unlike governmental research where any research generated can be shared with the public, private company’s research and the technology spillovers from R&D would not be shared with others, to the detriment of society.

On the other hand, many pro-privatization advocates argue handing over certain aspects of space exploration to the emerging Space Industry will be beneficial to society at large. Among their arguments include the cheaper ways that private companies can get humans/robots to space and to utilize space resources. For instance, recently, the SpaceX Falcon Heavy launcher can in theory deliver about 50 metric tons of payload to low earth orbit at a price of $120 million, averaging to about $1000 per pound, much less than the tens of thousands of dollars per pound that NASA’s technology can deliver.  Currently, advocates of private interests in space argue, the government’s effective monopoly on space is encouraging waste, and if more company like Elon Musk’s SpaceX can be introduced to the competition, the costs of going to space will likely decline further as a result in refinement of space technology.

space vehiclesMoreover, private property rights in space should be established because only private companies can use the resources to its greatest effect. Many pro-privatization advocates pointed to the difference between the usage of Arctic (which are fully utilized economically) and the Antarctic, which have no development; whereas the Arctic’s property rights are well-defined, the Antarctic’s is highly ambiguous. Similarly, if the resources in outer space is well-defined, many people here on earth can reap its economic benefits through the efforts of private organizations.

Finally, the third main point of contention in the space debate is the effect of space exploration on long term human health, both mentally and physically. Many people cite the facts that prolonged exposure to space is fundamentally unhealthy for human beings and long term stays are simply unfeasible. However, pro-space advocates argue that we must adjust to living in space through technological means and that in order for us to survive as a race, we must look to the solar system as a source of survival.

Ever since the first human flight to space, scientists have been carefully observing the effects of space environments on the human body. For example, scientists noticed that astronauts can develop a greater “risk of getting a kidney stone as a result of space travel since the body quickly dumps a lot of fluid when gravity is no longer drawing blood down into the legs and the elastic vessels squeeze it upward”.  In addition, the body can lose large amounts of proteins, by up to 45 percent decrease in protein synthesis. In large part this is due to microgravity environment which results in a lack of muscular activity.  Other long-term health effect includes bone loss, cellular organization and radiation.liftoff1

Given these detrimental effects on human health, many argued that human travels to space should be limited in scope and argued that human settlement in space is impossible in the long run. Therefore, we as human beings should still focus our development on our only habitable planet as our bodies are physiologically adapted to life on Earth.

However, others believed that human beings should began to adopt to space. Some talk of an “astro-civilization” , where just like humans have moved from a nomadic to an agricultural then to an industrial society, our next logical step to expand to a space-based civilization. According to the pro-space advocates, the earth’s expanding millions required more and more resources to sustain itself.  Therefore, it is necessary for us to develop technologies to enable us survive in space and to produce habitats similar to those on earth in near-earth orbit. Some have outlined strategies for monitoring human reactions in space step by step, such as Edgar Mitchell, who was an Apollo 14 Lunar module pilot. He argued that humans should first continue space exploration by landing on Mars and later establish a scientific laboratory on the Moon.  This laboratory can be used to test how to adapt humans to the hostile environments in space. Once that is accomplished, we can then consider the establishment of more permanent bases with the eventual goal of settler colonies on Mars/Moon, or near earth space.

For part 1, click here.

Human exploration of space: a controversial debate (Part 1)

Posted on by fqzhang

I wrote about this topic of human space exploration a while back, somehow, I never bothered to post on my blog. But here it is, and divided up into two parts to make it easier to read. For the second part, click here.

The question of whether or not we should sponsor human space missions had been controversial ever since the modern exploration of space began in the 1950s. A variety of arguments have been made either in favor or against the exploration, and two opposing sides developed in this debate.  My thesis for this essay is that the human exploration of space is a controversial issue since the costs of sponsoring space exploration is extremely high and the money can be better spent elsewhere, the unclear role of government and the power of private (commercial) interests in space, and the long-term and unknown health effects that traveling to space have on human beings. Key questions like property rights in space and the extent of government funding has been debated, and while some supports the private funding of space, others are more reserved.  Moreover, the possibility of human settlement of space is hotly debated as well, with some believing in the future destiny of mankind laying in space, while others believed we should focus more on planet earth, using some of the technologies we gained from space exploration. space-exploration

Firstly, the costs of going to space is enormous, and specific criticisms includes the national funding for space exploration, the real scientific need for such funding and the alternative good that the money can be used for. Many criticize the decisions by national and private organizations to sponsor such an endeavor to space. It has been estimated that the launch of a space shuttle costs about 450 million, and there have been over 130 launches from 1982 to 2011.  Not to mention the 140 billion plus that the space station has been spending. Such costs indeed add up to astronomical numbers. Currently, the vast amount of the space exploration is funded by governments of various countries. Here in the US, the federal budget funds 17.7 billion for fiscal year 2014 to NASA . The federal governments reached this number after vigorous debate and many wanted NASA to focus on more tangible results in the near-earth orbit instead of pursuing large projects that have no direct results. In today’s world, where the fight for national budget is increasingly acrimonious, spending such a sum of money on science that have little practical values is useless according to many critics. The bottom line is simple: our national economy simply do not have the necessary resources to continue the space program on a regular basis.

Regarding the amount of money being spent in human space explorations, many critics also pointed out alternatives to human exploration for the advancement of science. Chiefly, they argued that many of things that require human presence can also be carried out by robots. Robots can reach far more different places than humans, and can conduct research in a variety of different (often hostile) environments. The Curiosity spacecraft currently exploring Mars is a great example of having robots do the exploration for humans, where it has continuously been sending back data for scientists based here on planet earth, without the need for humans to travel.  The costs of these development in space is cheaper and can achieve more scientific results. In addition, critics attack the argument that scientists can use the opportunity in space to perform experiments otherwise not available on Earth. Many simulated laboratory conditions achieve the microgravity and other conditions of space, without the need to send scientists into space to perform the experiment itself. Critics argue that it will make more sense to fund laboratory facilities than to build ones in space and requires travels to space to perform the experiment.Space-EXploration-Puzzle-900x1600

Finally the money being spent in space, many argue, can be best spent here on Earth. With food and water shortages in Africa, a global environmental crisis, a lack of healthy standards of living in many places, many argue that the billions spent in space can be used to directly improve life and living conditions on earth. As the CBS news anchor Katie Couric stated in October of 2006, “NASA’s requested budget for 2007 is nearly $17 billion. There are some who argue that money would be better spent on solid ground, for medical research, social programs or in finding solutions to poverty, hunger and homelessness… I can’t help but wonder what all that money could do for people right here on planet Earth.”  Money spent in space, some argue, is a long-term discretionary spending that can be eliminated to provide money here on earth.

In contrast, pro-space organizations argued that such costs are justifiable and can be brought down to more affordable levels as our investments in space R&D and infrastructures pays off in the future, and that our investments in space can bring tangible economic benefits to planet earth. Currently, the annual budget for NASA which amount to about 17 billion every year, is indeed a tiny fraction of the overall public spending. Indeed, “For every $1 the federal government spends on NASA, it spends $98 on social programs. In other words, if we cut spending on social programs by a mere one percent, we could very nearly double NASA’s budget”.  The costs of space exploration, when put in perspective is indeed not that great, and the 16.143 billion spent on NASA in 2007 is merely 0.58 percent of the total federal budget. Pro-space exploration advocates argue that even if all the money spent on space is allocated to other spending, the differences on our society would negligible. In addition, a key role of government, many felt, is to promote the arts and sciences and NASA argues that it is fulfilling this role. NASA provided an enormous amount of scientific knowledge about space and scientific endeavors in general, and helped to educated millions of students on science.  The scientific and educational value of space exploration can never be truly quantified, for such an investment in our nation’s scientific future and the education of the youths is something that goes a long way.satellites

Moreover, many scientists argue that the investments in space can bring tangible technological and economic benefits to here on earth, many of it in the forms of spin-offs from the products initially intended for space use, or as a result of space research. Some examples include cell phone cameras based on space cameras, memory-foam mattresses, aircraft de-icing, etc.  These new technologies spurred new industries, improved the quality of life and encouraged economic growth.  “A number of studies conclude that about 90 percent of the long-term increase in output per capita in the U.S. has been attributable to technological change, increasing educational achievements…”  The spin-offs from NASA research contributed enormously to economic growth in the US and the world in general.

For part 2, click here.

Investment Analysis: Struggling industries and prospective short-sell candidates

Posted on by fqzhang

As 2015 is starting, many in the investment circle are looking at what new industries and companies are presenting opportunities. While this is important, it is just as important to note what industries not to pick for this upcoming year. Here is my short list (no pun intended) of what industries are facing some significant headwinds and is good to avoid in this coming year. (If you are long (i.e expecting the value to go up), that is. But if you are looking for shorts (trying to profit by a falling in stock price), feel free to be as aggressive as you like; but be warned, as the great the economist John Maynard Keynes said, “The market can stay irrational longer than you can stay solvent”.)

  1. Small Oil and Gas companies with high fixed costs

Oil and gas are among the largest industries in the world (with an estimated 5 trillion dollars in revenue, rivaling the tech industry). Due in part to the massive stock market boom in the last few years, many small oil and gas companies emerges in the public markets. They range from extraction companies to oil exploration to small manufacturers of drilling equipment. With a falling oil price that is not likely to rise any time soon, these small producers with limited resources will likely falter. Moreover, natural resources extraction is a highly capital intensive industry and the firms will likely take on massive amounts of debts to finance its projects. It is estimated that drilling each oil well costs about 3 to 4 million dollars and small companies with a highly leveraged structure and few prospects for growth will be the likely victim in 2015. (Interested in Big Oil and corruption? click here For more on how the falling oil prices are affecting nations around the world, see here)

  1. Small tech companies that have no prospects of being bought up by the big guys

In this category, the companies that come to mind will be the small software development firms, such as app-makers that makes their business around a single app. For example, Zynga, the maker of the popular app game “Farmville”, is one such company. The company is involved in the social gaming category and have not expanded by much in the last couple of years, and are instead are trying to monetize its existing products. For a company involved in app-development, if no new apps are introduced continually, then the firm will simply wither away when demands for the current app disappears (as it most certainly will since consumer tastes are constantly changing). Monetization will be difficult, since a majority of the company’s revenue still comes from selling of advertising space and the market is increasingly saturated by the amount of advertisings out there, and increasing diminishing rates of return. Of course, the best that these tech companies can hope for is to be bought up by the larger players such as Facebook. However, with the proliferation of software companies, larger tech companies have more options to choose from and will take care to only add firms that adds value to the company’s operations.

  1. Small biotech or pharmaceuticals purporting to have “wonder drugs” or new “breakthrough technologies”

For those of you who subscribes to some form of investment newsletters (it doesn’t matter if they are free or charge you hundreds of dollars per year), you have no doubt saw a number of different promotions that talks about how a certain company is on the verge of growth. With a booming biotech sector, a lot of less credible companies have been swept up as well. These companies can have the following traits in common:

  1. Involving cancer-curing or purporting to cure multiple diseases at once with a single drug. These are often simply scientifically unsound, and investors should do some basic research on the subject and use common sense in sorting some of these issues out.
  2. Often in the early stages of the clinical trials, often Phase I and II. The early trials is to simply establish the safety of these medicines and their efficacy; these can often be subjected to statistical manipulation. (ex. in a trial for breast cancer treatment intended for women, the results show that no significant results have been found. However, the company claimed that the results work for a sub-group of that population. The population becomes much smaller and perhaps is simply the results of random chance.)
  3. Long clinical stages and delays in pushing forward to the next stage or toward FDA approval. If a company is a scam or have a drug that is on the verge of failure, the company will likely take as long as possible to “test” the drug. They will take their time for as long as possible in order to reap profits for insiders. Sometimes, some of these companies will even “retest” their drug once more for a certain stage, claiming insufficient data. This is a huge red flag, for a successful drug company will want to rush forward to start monetizing the drug by getting FDA approval. Delays to do so could suggest that the company is nothing but an elaborate promotion.

Note, I am not suggesting the biotech sector as a whole will do poorly this year; after all, the biotech sector, as measured by NASDAQ Biotechnology Index (ETF), is up around 30% from over a year ago and there is no reason to think such a trend will not continue, albeit at a slower pace.

  1. Restaurants and related services that are heavily dependent on consumer cyclical spending

Last year, several newly IPOed restaurants have taken a hit following the miss in expected earnings (ex. Potbelly’s, El Pollo Loco). The struggles in the restaurant industry is not lost upon many professional investors; in fact, some of the most heavily shorted stocks (as measured by short interests) in the US are in the restaurant sector. Restaurants in general are low-margin, with high fixed costs, with tremendous competition, and susceptible to variances in consumer sentiments. All of these makes them good companies to avoid investing in at any given time. But in 2015, there are macroeconomic factors at play here as well. Even though the US economy have outperformed its peers in the developed economies, consumer disposable incomes have not risen appreciably over the past year or so. Americans simply aren’t spending as much on restaurants as before, and the growing competition for healthy food options left many traditional restaurant chains and fast-food restaurants little options but to change what they are offering to clients. These changes will take a long time to implement, and will be extremely costly, even if they are successful at all. (McDonald’s recent advertising campaign is a good example of a restaurant trying to reshape their brand image).

Then there are these companies that have certain characteristics that makes them a bad investment in any scenario, but especially so with the bull market that we have been having for the past few years.

Among many economists, the longer the bull market runs, the more likely the crash in the market will be severe. Therefore, the companies that have been swept up in the bull market ride will be the first ones to fall.

  1. Companies in industries with low barriers to entry and no competitive edge that cannot be replicated

A name that comes to mind in this case is GoPro. The company essentially does one thing, which is to produce cameras that are frequently used by outdoorsman. This sole area of operation is inherently risky in itself. However, with the passage of time if the business is successful, there is no reason to suspect why larger companies with significantly more resources will not pursue a similar line of business and crush the competition. Companies that are reliant upon a single product or service are extremely vulnerable.

  1. Foreign based companies with obscure operations

The stock market boom not only attracted bad domestic companies to IPO. Many foreign companies are also taking notice of the market and want to raise money as well. Some of these companies may indeed have good intentions of raising money to fund their operations. Or they may simply be a fraud and simply want a piece of the actions in the market and enrich themselves. These companies can have names that sound grand, invoking their national titles and inflate their own importance. (They may have a naming structure like “‘name of country’ – ‘industry’ corporation”. i.e. Sino-Forest Corporation). Many of these companies claimed that they have great growth potential in their respective home country and it is next to impossible to ascertain what they are saying is true. A few years back, there was a huge wave of Chinese reverse mergers (i.e. a private company is taken public by purchasing a public shell company) that IPOed in the United States. Many of these companies banked on the investing public’s optimism in the economic growth of China and cooked their books to paint a rosy picture for themselves. Eventually, the frauds were eventually exposed. Many of these companies have complicate structures with unclear relationships with their parent company or its subsidiaries. Sometimes, it is also unclear how the companies make their money or the level of their debt obligations (often disguised as other business segments).

One of the things you might have noticed is how many times I have used the word “small” in the preceding passages. This is key. Smaller companies in all the industries mentioned have a much higher chance of going bad or simply being fraudulent that the large ones. I believe that the market is efficient for the large-cap companies that have been carefully scrutinized, and the prices are likely where they should be. (Of course, there are cases like Enron, but in that case, the business is so indecipherable that it is bad idea to be even thinking about it). So when investing, remember to keep the company’s size in mind.

Note: The above article expresses solely my personal opinion. This is a blog, after all. Please do not utilize the articles as investment advices; or if you do (I will be sincerely flattered that you would listen to a sophomore in college), please do your own due diligence before investing. I do not hold any stocks or any form of investments whatsoever.

Labor market in Japan: Is female participation the key to economic recovery?

Posted on by fqzhang

I came across this article quite recently on NPR news, “Is ‘Womenomics’ The Answer To Japan’s Economic Woes?” http://www.npr.org/blogs/parallels/2014/12/03/368143686/is-womenomics-the-answer-to-japans-economic-woes . The author posed the question of whether or not Japan’s recent policy, dubbed “Abenomics”, is going to pull the nation out of economic stagnation. One key component of this economic revitalization is to introduce women into the workplace and to provide a more talented pool of workers for the economy to draw upon. However, his policies have been controversial as well, since he is accused of helping only a small group of women, and not doing enough to help advance the careers of others. The debate, therefore, revolves around what is the economic role for women in a society such as that of Japan’s?

It is no secret that the Japanese economy is in a sluggish condition, with many structural problems present. Personally, I believe in the importance of sustained economic growth to bring benefits to society, and if having greater participation can contribute to the economic development, then I believe it is the duty of a government to help women assimilate into the workforce. This will no doubt face considerable resistance from many in a traditional society such as that of Japan, where women in the workplace, especially in jobs like manufacturing, is still something rarity, and women are expected to become the child-bearers and homemakers in society. But we must not forget the fact that the Japanese workforce is shrinking due to population decline, and immigrations are still being severely restricted in the nation. Therefore, it is imperative for Japan to increase the size of its labor force by including more women than before in order to save many of the industries in the country from being relocated elsewhere.

This sort of change requires a fundamental shift in the way a society views how their economy should be organized. If we look back at the history of Japan, we see that Japanese society reorganized itself from a feudal agricultural nation into an industrial one in the late 19th century; and post-World War Two, when Japan orientated itself to become an exporting nation, with an emphasis on electronics. These sort of changes did not happen overnight and had to overcome challenges within society, the landowners and domestic industrialists respectively. Also in each case, the government, in the form of a centralized bureaucracy and the Ministry of Economy, Trade, and Industry (METI), helped to propel the nation into greater economic advancements.

In today’s Japan, societal views of women have not changed in decades, even though the economic fortune of Japan have shifted considerably. In response to this new crisis in the labor market, I believe that the government has the opportunity to once again take a proactive role in society, and to encourage economic development by making drastic changes in the social framework. By providing subsidies to industries that hire women, by giving better childcare and social benefits, by opening technical training programs for women, the Japanese government can introduce more women into the workforce. Japan has done it before, spear-heading changes in its economy and transformed itself into the 3rd largest economy in the world today. I believe that with the right amount of political will to foster these social changes, Japan can once again become an engine of global economic growth.

The return of manufacturing jobs to the US: challenges and responsibilities

Posted on by fqzhang

In a recent article from NBC news, a report came out that suggested that manufacturing jobs are returning to the United States, mostly in the form of work in auto-plants and other machinery manufacturing plants. However, the article also pointed out that even though the jobs are returning to the US, the quality of the job simply is not the same: the pay is lower and job security is also far less, with many temporary and contract workers. This poses a dilemma for both policy makers as well as auto manufacturing firms: while it is good to have jobs returned to the United States, is it okay to pay workers poorly and not offering other forms of benefits? Or should companies also have a responsibility to give “good” jobs to Americans?

I believe that the first order of business for a government is to ensure that jobs exist for the vast majority of its peoples, and while things like health benefits for workers and higher wages are important, this should come after jobs have been secured. Of course, that is not to say that in our quest for jobs, we can let businesses have a free rein over what they want to do; they must still adhere to legal regulations and other government regulations. As the cost of fuel have risen dramatically in the past decade (the current dip in prices of oil may only be temporary), and the cost of labor have risen elsewhere, it makes more sense for firms to manufacture in the United States, which remains one of the largest consumer market for products in the world. This is a historic opportunity that our government should not ignore, for a couple of reasons. First, millions of Americans are still out of work, and often manufacturing jobs can provide for those lacking skills in other fields. Secondly, and more importantly, a manufacturing base here in the US can help us wither more business crisis in the years to come. A more-manufacturing based economy can help in the following way: suppose an economy is in a recession and aggregate demand is down. A government stimulus can help the economy by ordering more goods even though there is no demand, and this in turn triggered greater output, greater employment, greater income, and kicks off a multiplier effect. A more service-oriented economy simply cannot do that, since government cannot purchase a service when there is no demand, and government spending can have a difficult time stimulate spending. So, in this sense, the return of manufacturing to the US, even at lower wages, can help us recover from a recession faster in the future.

Moreover, we must adjust our mindset toward large manufacturers like GM. Gone were the days when a factory worker can have enough wages to support a family of 4 and enjoy middle-class living standards. Manufacturing is no longer what is used to be because of the increased competition from overseas markets and greater automation in the workplace. But we must not let this fact deter us from taking advantage of opportunities that comes our way. After decades of “de-industrialization”, with industrial capacity being moved offshore, perhaps it is now time to “re-industrialize” and to leverage our country’s unique advantages to form a new, rebalanced economy.

Reflections on India’s hydroelectric project

Posted on by fqzhang

According to a recent article on Reuters, “India approves projects in dash for growth, alarming green groups”, author Tommy Wilkes discussed the Indian government’s approval to build the country’s largest hydroelectric power plant. The construction of this dam will upset the ecological environment of the area considerably by cutting down trees and reducing biodiversity. Therefore, the debate in this case is whether or not the government should allow a plant to be built in the state to promote the economic growth of the area and the nation, or should they look to protect the environment and to help promote the long-term environmental welfare of the region?

While it is easy to simply blame the shortsightedness of greedy industrialists or government officials only interested in tax revenues, we must bear in mind that India is a large developing nation with its own needs. For us here in the United States, which enjoys a high standard of living and free from most material needs, it can be inappropriate to pass judgment upon others that are less fortunate and are behind the American standard of living. Imagine telling the American or British industrial worker of the late 19th century to leave their jobs behind and their families starving because of concerns for the environment! We can think of society as being in a long series of progress, just the US and Western World had undergone significant environmental degradation in the past, and moved beyond that stage to the present, I believe that the rest of the industrializing world will undergo a similar process, eventually becoming more green-conscious once they had developed to a certain level. For the government of a developing nation that is responsible to the people, protecting the environment should not be on the top of the list at the present.

I know some may find this view extreme, and may offer several counterarguments. For example, they may reason, when the West was industrializing, we do not understand the impacts of pollution on the environment – but now we do, and therefore we need to tell the nations of the developing world to place the environment at the top of their priority. However, recall that Abraham Maslow, the famed psychologist, once came up with the “Hierarchy of Needs” for human beings and I would extend this logic to society as well. When a society still has its “needs” unmet – clean water, reliable source of enegy, etc – they cannot be worrying about things in the “self-actualization stage”, such as environmental justice and minimal carbon footprint.

To use the terms of ethics, we can see that what India is doing by building the dam is to maximize the most amount of benefits for the most amount of people, an utilitarian approach. This approach (first expressed by John Stuart Mill and Jeremy Bentham in the 18th century), despite its many drawbacks, do have the important advantage getting the most amount of benefits for a given limited amount of resources, something that is crucial for developing nations. However, this is not to suggest that we can simply let them off the hook for all environmental degradations, for in the interconnected world today, pollution from developing nations affect the world as much as developed ones. But we cannot judge countries in the same standards because each one has its own historical needs and priorities. As India and the rest of the world close the gap between themselves and the West, we can expect more from these countries and how they can start to make a positive impact toward the environment in the framework of their overall development.