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January 29, 2007

The Road To Real Development

Amar Bhide and Carl Schramm (Columbia University and the Kauffman Foundation) write on the opinion page of today's Wall Street Journal:

The Nobel Prize lectures given last month by the economics and the peace laureates strikingly emphasized entrepreneurship. But the kinds of entrepreneurship espoused by the laureates are profoundly different. The economist Edmund Phelps's lecture highlights the contribution of entrepreneurial individuals, firms and financiers in transforming stagnant societies dominated by small-business owners into dynamic economies with large and highly productive commercial enterprise...

The Nobel Peace Prize winner Mohammad Yunus also lauds entrepreneurship. His lecture mentions entrepreneurs or entrepreneurship an unprecedented six times. Mr. Yunus observes that the Grameen Bank, which he started in 1974, has made seven million microloans in Bangladesh, for housing, education -- and micro-enterprise. The bank has turned 85,000 borrowers from "begging to business." Looking ahead, Mr. Yunus envisions a new "social stock market" for investors who will support the mass-proliferation of microloans, and to "defining entrepreneur in a broader way [so that] we can change the character of capitalism radically."

Bhide and Schramm don't leave much doubt about where they stand:

Economic development does wonders for peace, but what does microfinanced entrepreneurship really do for economic development? Can turning more beggars into basket weavers make Bangladesh less of a, well, basket case? A few small port cities or petro-states aside, there is no historical precedent for sustained improvements in living standards without broad-based modernization and widespread improvements in productivity brought about by the dynamic entrepreneurship that Mr. Phelps celebrates.

In principle, microfinance does not preclude modern entrepreneurship. But in practice, we wonder if the romantic charm of the former might distract governments in impoverished countries from undertaking reforms needed to foster the latter...

Meanwhile, over at Economist's View Mark Thoma reports on some of the latest from Jeff Sachs, who contemplates the sorry case of war-torn states (like Afghanistan):

Everywhere, politicians, generals, and even diplomats talk of military strategies and maneuvers, but everywhere something utterly different is needed. Stability will come only when economic opportunities exist, when a bulging generation of young men can find jobs and support families, rather than seeking their fortune in violence...

It’s important to distinguish four distinct phases of outside help to end a conflict. In the first phase, during the war itself, aid is for humanitarian relief, focusing on food, water, emergency medicine, and refugee camps. In the second phase, at the war’s end, aid remains mainly humanitarian relief, but now directed towards displaced people returning home, and to decommissioned soldiers. In the third phase, lasting three to five years, aid supports the first phase of post-war economic development, including restoration of schools, clinics, farms, factories, and ports. In the fourth phase, which can last a generation or more, assistance is directed to long-term investments and the strengthening of institutions such as courts.

And then there is this, from Douglass North, John Wallis, and Barry Weingast (which I arrived at awhile back via Arnold Kling):

... our perspective redefines the problem of economic development. In contrast to the perspective in modern economics, our framework suggests that economic development is not an incremental process, such as gaining more education, capital, and making marginal improvements in the rule of law. Each of these can improve a developing limited access order by moving it a bit toward the doorstep conditions, but these incremental changes can take a limited access order only so far: they are not the process of development.

The process of economic development is instead the movement from a limited access order to an open access order. This process is very difficult to engineer. Despite the massive attention to economic development by international donor agencies, only eight countries have made this transformation since WWII. Our approach implies that development requires a transformation in society from a limited access to an open access basis. This transformation takes place through what we have called creating the doorstep conditions, which represent a radical change in both the state and society: rule of law for elites; perpetual life for organizations, including the state; and political control of the military.

An "open access order" is defined as follows:

The natural state strictly limits access to positions of power within political, economic, and religious systems. What we call “open access orders,” began to develop around 1700. These societies are characterized by open political and economic competition, rather than the limited political and economic privileges enjoyed solely by elites in natural states.   

The Bhide-Schramm position seems most consistent with the North et al position, but I suspect the answer from the latter is really "none of the above." And I suspect we ought to take that seriously.

January 29, 2007 in Economic Growth and Development | Permalink


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Posted by: acshoes | January 29, 2007 at 11:53 AM

It is too bad that the American tax system is not set up to encourage entrepreneurs. It is the best route out of poverty-you don't rely on anyone but yourself.

AMT and other taxes discourage risk taking. People are generally risk averse anyway. We shouldn't point them in that direction with taxes.

Posted by: Jeff | January 29, 2007 at 03:08 PM

Is it just me, or do others also think Bhide and Schramm have imposed a false dichotomy? Somehow, Grameen banking, though it has successfully lifted hte living standard of many of its 85,000 borrowers, is worthy of dismissal because it doesn't remake society on a huge scale. Well, if you define the goal as changing the face of entire societies, then raising the living standards of tens of thousands of people may not qualify. However, at the cost involved, I can't see what all the moaning is about. North and company are also talking about changing the face of society. Similar goals as those favored by Bhide and Schramm will make North and B/S seem sympatico on the surface. The questions to ask are then whether North would agree in detail with B/S (sorry, note the "/"), and whether agreement in detail between the two in any way makes improving the lives of tens of thousands of the world's poorest people a lesser goal.

If we have a micro-tool that reliably improves lives, and we have an "undertanding" of the macro-process by which we can change the face of society, but that understanding has not led to reliable tools, why should we prefer the macro to the micro?

Posted by: kharris | January 30, 2007 at 11:12 AM

I suspect that Kling includes Singapore and South Korea in his list of eight countries that have developed. But neither of these countries are what I would describe as "open access" societies. Rather,
at least in the early stages, they
were more like some form of crony capitalists.

Not that I'm trying to say the article from him is a bad article, but what we have discovered over the last 50 years of dealing with the issue is that it is a very complex problem that is still very poorly understood. The type of micro-financing Yunus is working with can be part of the approach and make a contribution. But on the other hand the type of large scale institutions Bhide and Schramm talk about is also necessary.

Both can be part of the solution and there is no need to disparage one because it does not offer the entire solution.

Posted by: spencer | January 30, 2007 at 04:51 PM

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