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Business Bytes, EconOptimisim

Money’s on the move, slowly

Money that moves grows the economy.  Moving money means people spending, which signals potential profitability from production.  Greater production then leads to a greater Gross Domestic Product.  Anything that makes it easier to people to spend money, like a standard currency in the United States or credit cards, then grows GDP.  While mobile commerce or “m-commerce” certainly provides new opportunities for individual firms to increase their revenue, it also serves growth in the macroeconomy by adding another way for money to move.

Since we in America frequently hear about $500 tablets, $200 phones, and Apple’s record market cap it is easy to assume that “over-priced” hardware prevents universal mobile commerce.  However, expensive hardware erects only a temporary barrier.  New technology is costly to develop. Companies file patents to limit competition and then charge a premium and recoup the initial outlay.  Otherwise, a competitor can take advantage of the first round of testing in the marketplace and offer the same or similar product at a lower cost.

While it is reasonable to be unaware of the hardware goings-on in Asia (things like $25 tablets), Apple’s aggressive and (occasionally) rude patent cases show a company not simply “protecting intellectual property” but a company worried about its ability to continue to charge a premium for its hardware.  Patent wars then signal new competition and likely cheaper technology.

The true barrier to mobile commerce adoption is trickier to solve: the appropriate infrastructure does not exist. The new World Bank report, “Measuring Financial Inclusion,” notes that about 50% of the world’s adult population does not have a bank account.  As with any purchase, a mobile purchase transfers funds from the buyer to the seller; the electronic nature of mobile commerce usually requires a bank account.  The limited banking infrastructure then impedes more widespread mobile commerce.

Buying physical goods  over mobile also requires a way to deliver those goods; the infrastructure in developing countries, particularly in India, is notoriously bad.  While greater financial inclusion is likely as new players and incumbents see potential profitability in extending banking, there is little profitability for a firm to capture by making infrastructure investments.

The unavoidable discussion of infrastructure makes discussions of China as a “post-capitalist” economy so important.  James White argues that unimpressive returns to capital can actually lead to more efficient capital allocation.  People usually look to invest in projects when they expect a high rate of return; capital projects have a very low rate of return.  Since the Chinese government directs capital expenditure to infrastructure improvements, instead of to projects with a higher rate of return, China then has better infrastructure than it would absent government direction.  Such capital projects greatly improve money’s ability to move, making companies and countries more profitable overall.

Money’s movement can provide one example of the various roles of the private and public sector.  The private invents the shiny new ways to move money and the public funds the dirty details.

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