Category Archives: The wandering economist

Seeing the world with the eye of an economist-ish.

Why we are e-moving our company to Estonia: Introducing Edgeryders Osaühing

“We know, the pitch looks better than reality” – says Marten Kaevats. “But we’re working on it.” I look around. They are working on it, all right.

Marten, Henri Laupmaa and I are sharing a meal in Telliskivi Loomelinnak (“Creative City”). It’s a huge Soviet-era former electronics factory in Northern Tallinn. During the boom of the early 2000s, real estate tycoons had planned luxury condos here. When the crisis hit, they rolled out a plan B of making it into a hip-and-cheap creative business hub. Now it’s home to 200 businesses and NGOs: design studios, tech startups, co-working spaces, clubs. It’s airy, colourful in the slanted light of the Nordic spring. It looks hopeful.

Marten is the Estonian government’s Chief Innovation Officer. Henri is one of the country’s foremost fintech entrepreneurs. They both used to be grassroots communities organisers. They showed up to welcome me, and point me in the right directions. I am grateful for their advice and their company. I need it: I have come to Estonia to relocate my company, Edgeryders.

Edgeryders is small, high-tech and global, a typical child of the Internet. We were born as the project of a supranational institution, the Council of Europe. We developed as an online community, with members living in 50 countries. When we built a company on top of that community, the six members of the board were citizens of six different countries. Our first clients were global too: the United Nations Development Programme, UNESCO, the World Bank.

Our loyalties are to Planet Earth, and to each other. From a legal point of view this does not fly: a company has to incorporate in one country (and almost all countries design for traditional companies, and make no provision for businesses like us). In 2013, we chose the United Kingdom. It seemed, and was, a natural choice. It has a great ecosystem of services to business. Government services are well thought through, well documented and online, from HMSC to the Information Commissioner’s Office. The main black spot is banking: expensive, dysfunctional service, ethically dubious banks. But the advantages outweighed the disadvantages.

And then Brexit happened.

This is not the place to discuss the political hows and the whys, nor am I particularly qualified to do it. I want to look at Brexit and post-Brexit from a risk management perspective. There are two kinds of risk here, and both were obvious even before the vote.

Risk number one: becoming a bargaining chip. Over 3 million EU citizens living in the UK were not allowed to vote, or even consulted. They were, in the political jargon of the time, “a bargaining chip”. The UK only cared about nationals. We are not nationals. What if the government decided to play hard and fast with the assets of companies owned by foreign nationals? Freeze our bank accounts, for example? Could we be the next bargaining chip to throw on the negotiation table?

Risk number two: taking collateral damage because of the government’s incompetence. No one knows for sure what the consequences of a hard Brexit will be. What happens to the treaties on double taxation, within Europe or outside? What to VAT on cross-border transactions? What are the consequences of the UK not being a member of WTO anymore (its WTO membership went through the EU’s collective one)? These would be hard questions for anybody. But the British establishment keeps going through “oh, shit” moments. Wait, what about the Irish border? What about Gibraltar? What about funding to research? What happens to trucks queuing up at Calais and Dover in the case of hard Brexit? All this handwaving has not done much to reassure us.

So far, I have given you the rational argument for not being comfortable as a business owned by EU nationals but incorporated in a post-Brexit UK. We also have reasons of the heart: we are not big on nationalism. Nationalisms killed a hundred million people in Europe during World War 2 alone. We believe, instead, in peace, peace and prosperity through trade. Trade is communication: to sell something, you have to put yourself in the shoes of your client, to empathise. This vision is clearest in the project of a united Europe, the more united the better. We feel united in Edgeryders: we hail from every nation in Europe, and many outside it. We enjoy our unity in diversity, and will allow no one to put us against each other.

Our minds and hearts, this time, were in agreement. We have become Brexit refugees. And we need to do what refugees do: move.

We applied to Estonia’s e-residency programme before the vote even happened. We chose Estonia because:

  1. It is in the EU and runs the Euro. We don’t risk losing access to our major market. We are protected against currency turbulence.
  2. It makes explicit provision for location-independent businesses, like us. E-residents are meant to be foreign nationals, or Estonians abroad.
  3. The game theory checks out. Look: Estonia is a tiny country, with only 1.3 million citizens. They aim to have 10 million e-residents by 2025. And that’s the entire country’s business plan right there, because 10 million e-residents translate into 100,000 good jobs in finance, insurance, accounting, real estate. If the e-residents are unhappy, they will go somewhere else, and Estonia can’t afford that. The equilibrium of this game is: they give us good services, and we keep using it, and keep their business plan humming along.

The system is far from perfect. For example, the Republic’s banks and accounting firms are subject to international anti-money laundering regulation, aka “Know Your Customer”. So, the government allows e-residents to incorporate a company from a web page… but then your accountant will ask you for a utility bill as proof of residency. Banks are even firmer: either you show up in person, or no account (regulation is in the pipeline that should solve this). Also, Estonian professionals are still new at this game, and it can be difficult to get information.

But Marten is right: it will get better. Estonia wants to be a “pathfinding” country. Given how small it is, this makes sense in a way that it would not in Germany or the UK. They have plenty of vision (“country as a service”, “zero-legacy policies”, “accounting 3.0”). They have a young, energetic ruling élite. They can do this. We look forward to be part of it.

So, say hi to Edgeryders Osaühing. It is an Estonian private limited company, incorporated as of March 30th 2017. We will be phasing out Edgeryders Limited By Guarantee in the course of the next year.

Reposted from Edgeryders. Photo: Troy David Johnson on flickr.com

Bali’s spirituality market

“Ecstatic dancing. Astral plane walking. Portal opening. Crystal healing. Mestrual blood drinking. Ayahuasca ceremonies. Every yoga style you can think of. You name it, they’ve got it.” I stare at Lars as I try to digest the implications of what he is saying. Lars (not his real name) is a Swede who quit his engineering job and moved here last year. He loves it here.

It’s not hard to see why. Bali is an equatorial paradise – we all know that. Warm weather all year round, beautiful nature, rich culture, and so on. As many tourist destinations, it has given rise to internal specialisation across areas. Kuta, in the south, is very popular with young Australians who like to party and drink hard. Ubud, in the center of the island, has become a sort of cultural hub. This is where Lars and I are staying.

Ubud has no beaches to offer. Its main product seems to be what Anglos call spirituality. It is a veritable supermarket for spirituality practices. It teems with counsellors, spiritual healers, gurus and teachers of various ways. Shaman, Demon Hunter and Forest Goddess are job titles here.

All this comes in a bundle with the cheap, high-quality consumer services common in Southeast Asia: massages, scooter rentals, raw-vegan cafés and restaurant, spas and so on. So you can go on your self-discovery journey and margaritas are cheap. That’s a strong value proposition, and it has fuelled impressive growth in the Ubud tourism economy. According to some estimates, tourism accounts for 60-80% of Bali’s GDP.

Tourism here in Ubud has a strong long-stay component. Many people, like Lars, stay here months, even years at a time. They work online, generally in tech; here, they can afford a much higher level of service that they would back home. Or they take a sabbatical, and again here you can live well on the cheap while you focus on spiritual renewal.

The Ubud spirituality scene is led by Westerners, not Balinese. Most high-profile operations (resorts, central restaurants, high profile yoga centers) run on Western capital. Most yoga teachers, counsellors, druids, seers, healers and goddesses are also Westerners.

This came as a surprise to me, because the Balinese are deeply religious. Agama Hindu Dharma, the island’s brand of Hinduism, is pervasive in everyday life. There are little shrines in every home, workplace and street corner, and they are all cared for every day, with small offerings of wildflowers and incense. There are also many famous temples, all with a dense calendar of ceremonies, dances, and so on. So, the Balinese have what the spirituality crowd claims to be seeking: a constant sense of the divine in their life.

And yet, spiritual interaction appears to be minimal. No hipsters join the locals at the temples; you do not see Caucasian features among the women bringing offerings to shrines. Conversely, it seems very few Balinese have decided to start a career as spiritual healers or river goddesses.

I don’t know why this happens. Maybe it’s about information: the spirituality scene markets itself (in English), whereas Agama Hindu Dharma does not. Maybe the Balinese are too invested in their religion to be comfortable with the rituals of modern-day spirituality. I suspect that the market for spirituality is a classic Market for Lemons: there is no way to say if Portal Opening is going to do it for you until you try. Worse, even after you have tried it it is hard to tell if you have actually experienced cosmic harmony. After all, most people have no experience of the real thing (if it exists). Under market pressure to cheapen the experience, the more serious swamis give up on the hapless Westerners, and are driven away from the market. Only lemons remain.  We will never know – there are no data.

But, whatever the reasons, Western dominance in Ubud’s staple service bring instability to the system. Balinese are relegated to humbler mansions: they clean your your room and wait at your table. Most of your money will go to the owner of your hotel and your guru of choice – both Westerners. For margaritas to stay cheap, their salaries cannot grow all that fast: if your server earns as much as you, long stays become unaffordable. So, I predict the increased inflow of income tourism in Ubud will not increase the salaries of service staff by much.

So, where will the money go? Probably into real estate values. Already now, according to our Balinese friends,  landlords demand five years of rents in advance when renting space on Ubud’s main street.  No local entrepreneur can access that much capital, they added. The only companies operating there are Western-owned.

So, the Ubud economy seems to be moving on an unhealthy trajectory. Most of the money generated by producing its staple service ends up with foreign companies, foreign gurus and local landlords. Service salaries for local workers need to stay low for the margaritas and the massages to stay cheap, securing the middle-class clientele. The Balinese are a gentle people, but if this go too far  social tensions might ensue.

All in all, a fun place to visit, and a beautiful culture. But not a place I want to live in long-term.

Photo credit: Wikimedia

[The wandering economist] Does Egypt run on hyper-Schumpeter?

In this period I am consulting for the United Nations Development Programme and United Nations Volunteers. What it is I am doing exactly is a story for when I have finished doing it. But an interesting (for me, and for this blog) feature of this job is that it requires me to get a broad idea of employment and social inclusion policies in six countries (Armenia, Belarus, Egypt, Georgia, Morocco, Ukraine), and to do it in just a few days. To do this, I read policy documents and check statistics; and visit each of these countries, walk into government offices and ask civil servants questions; then talk to businessmen, NGOs and international development organizations and cross-check the information I get.

It will not make me an expert, but it seems like a great way to learn about these countries and what they are trying to achieve, and to do so very quickly. And there is an added bonus: by looking at how different countries, with their different economic fundamentals and policy styles, approach the same issues, I can learn much about what these issues really look like, when seen from different angles. I thought others might be interested, too, so I will be posting occasional notes from the journey – starting from my impressions of Egypt. As with everything else in this blog, views expressed here are my own and may differ from my employer’s.

Egypt seems to run on a hyper-Schumpeterian ideology. Entrepreneurship is seen as the silver bullet that will solve everything. Social problems will be solved… by social entrepreneurship. There are even talks to teach entrepreneurship in schools, in the curriculum.

Treating entrepreneurship as the critical tool towards improving Egypt’s overall social and economic health appears to be, according to interviewees, a logical move. Every year, 600,000 young Egyptians join the labour market (CAPMAS, 2013). The public sector is already bloated with more people than it can use, and cannot absorb but few of those young people. 70% of job creation is driven by the private sector; and private sector has its own labor needs, which are similar to those of most countries: more “cream of the crop” highly qualified people with specific skills that happen to be in need at this point in time, not so many middle-of-the-road graduates. Labour demand – supply matching and retraining policies can help a little, but they are already being done, so they cannot be expected to bring any additional benefits. That leaves new business as the most likely candidate for creating new jobs.

Two labour policy asides (not directly relevant to the project, but useful as part of the background):

  1. Labour policies seem to be, in some cases, overengineered. A scheme that was reported to us is a scheme of demand-supply matching for apprenticeships and internships directed to boys and girls who are still in school, and therefore are _unqualified_. The thinking behind it is that having a summer job can help youth develop personal and relational skills that will be useful when applying for, or holding, a job. But is there really any need to match schoolboys with farms, and paying the overhead cost of the matching structure?
  2. Entrepreneurship policies have reached the point where they risk distorting the incentives for the budding entrepreneurs. One of the interviewees reported that some young, obviously smart people perceive it as viable to just go from competition to competition, from grant to grant, and stop business when the grant or award dries up.

The Egyptian government appears to be working with the main stakeholders to build an ecosystem conducive to entrepreneurs reaching their full potential. Many efforts are directed towards building funnels that find entrepreneurial ideas and bring them to market in the form of startups. We heard of several startup programs (Injaz Startup Incubator Programme, Misr el-Kheir’s Gesr Programme, Nile University’s NU100 competition). Microsoft offers online coaching for startuppers. The main tools in use seem to be competitions, mentoring, coaching, and incubators. Most of this effort focuses on nano-bio, ICT, greentech.

There are many remaining challenges for the full potential of entrepreneurship to bear fruit. Specifically:

  • the regulatory environment for new business is stiff and unfriendly.
  • regulation on key areas pertaining to startups (patents, IPR, data protection, openness of public sector information) is still missing.
  • university research is subpar.
  • services for tech startups are expensive or missing. There are only two law firms serving startups, and no specialized accountants at all; very few consultants on the specifics of startupping.
  • angel investors are there, but they do not appear to be having a large impact.
  • private sector companies get involved in entrepreneurship competitions, but they tend to recruit the smartest competitors rather than invest in their business.
    incubated firms struggle to move forward and scale.

As a consequence, the funnel is missing pieces both at the beginning (pre-idea) and at the end (second and third round, post-incubator). There are signals that the government is working on improving regulation to make Egypt more business-friendly, but some of the interviewees expected that this would not really accelerate until a parliament is elected.

Social entrepreneurship/social innovation is attracting attention, but it does not feature as prominently in Egyptian policy as it does in Europe. We know of one already active pipeline for social entrepreneurship (Misr el-Kheir), and of another one being considered. (Injaz). The active one, however, insists on “high profitability”, so that the term “social” becomes a bit diluted (and could even be interpreted as a constraint). The Egyptian legal system does not have a specific legal form designed for social entrepreneurs, like the CIC in the UK and the cooperativa sociale in Italy.

Over the past year, we at Edgeryders have met many Egyptians involved in social entrepreneurship and other grassroots initiatives. They seem to have two main focuses. One is greentech (solar, water sanitation, waste recycling etc.), which is supposedly cared for by the fledgling ecosystem of policies directed towards entrepreneurship.

The other one is reclaiming and repurposing public spaces for the common good, with the Al-Mutamidiya ring road ramps story being the most impressive example of self-organization we found so far. UNDP itself has been involved in this scene, with a successful initiative to have young people contribute to designing the renovation of a central street in Giza (the governor of Giza turned out to have urban planning background, which makes him a potential champion for these initiatives). This line of work does not appear to be part of the startup ecosystem.

Other examples include the many coworking spaces that flourished in Egypt (many of which do not appear to have a viable business model, but they do signal a drive of youth to claim spaces), like Mesaha, Rasheed 22. Megawra and Cairo Hackerspace (learn more). Of these, at least the first one is fully grant-free, surviving on a very community oriented “pay what you can” model. The Darb al-Labbanah initiative, currently in its planning stages, strives to revitalise Historic Cairo by adaptively reusing long neglected properties as a hub for social enterprises and cultural businesses.

Cairo is also home to Cluster, an urban planning studio that achieved international fame for doing work on informal settlements and “tactical urbanism” – another sign of societal interest in the matter and a reservoir of high-level technical expertise.

Overall, there seems to some space for Egyptian social entrepreneurs to leverage the hyper-Schumpeterian ideology now prevailing in the country to gain a more central position in society. I certainly wish them my best!