Monday, December 20, 2010

Pakistan: Creating a Place for the Future

UPDATE (5/9/2011): Entrepreneurship and markets study now available on the Planning Commission's website.

Over the weekend I worked with Lance Kramer (@kramerlance) of Meridian Hill Pictures to put together a video for the Growth Strategy Conference hosted today by the Government of Pakistan's Planning Commission:

The point of the video is to introduce a study that I recently completed with Elmira Bayrasli (@endeavoringe) and Sara Shroff (@samsaradc), at the request of the Planning Commission. However, the core principles reinforce points that Nadeem Ul Haque (@nadeemhaque), Deputy Chairman of the Planning Commission, has been making for some time now, including in this 2007 paper on "Entrepreneurship in Pakistan" and in this Spring 2010 talk at TEDx Lahore :

Here's how our report begins: 
For six decades, Pakistan has faced, and overcome, conflict and calamity. Despite many obstacles, the country’s economy has grown steadily. At critical junctures, successive governments have adopted strategies suited to the circumstances of the day, and the nation has developed steadily due to these particular well-conceived initiatives. Yet, as a consequence of the reactive nature of policy formulation and implementation, the institutions of government are conditioned to think in terms of projects rather than strategies to support growth. 
Today Pakistan confronts a new round of immediate challenges and urgent demands. Yet, it is precisely at this moment of apparent crisis—in the aftermath of a devastating flood and with security concerns continuing to dominate the national agenda—that the need to change the discourse about the country’s development has become most apparent. Reactive tactics and dependence on external aid are not helping Pakistan to develop or to realize its potential. Sustained and sustainable development cannot come from a collection of projects, no matter how well intended. A New Development Approach is needed: Building markets. Building opportunity. Building cities. Building governance. Including youth.
To realize Pakistan’s 21st-century potential, the nation’s political and business leaders must not only meet the demands of the present, but also—and perhaps more importantly—create a place for the future...
More to follow on this as the Planning Commission's process moves forward.

The Coolest Thing Ever, Pt II: Science, Technology & Revolution (X2)

... If you haven't checked out the Google Ngram yet, definitely read this New York Times article about it, then try it yourself ... Endless explorations are possible. This one tells a pretty dramatic story of the history of industrialized countries since the Industrial Revolution (focus on the green peaks--eras of revolution that occurred during second half of 18th century and first half of 20th century):

science [yellow],  revolution [green], technology [red], submission [blue] -- 1750-2008 


Friday, December 17, 2010

The Coolest Thing Ever, Part I: The Millennial Discontinuity

Check out what happens at roughly the year 2000 in the charts below, created using Google's just released Ngram tool (for description, see this and this):

Hope[red] = Fear [blue] -- 1800-2008

Science [green], Technology [blue], Innovation [red] -- 1800-2008

China [blue] > India [red] > United States [green] -- 1800-2008

Truth [red] > Beauty [blue] > Hatred [green] -- 1800-2008

HT Tom Murphy (@viewfromthecave) for pointing out on the first chart that the the trend reverses at 2000, after I Tweeted this chart:
Hope[red] = Fear [blue] -- 1800-2000
 Initial verdict on Google's Ngram viewer: Coolest thing ever.

Wednesday, November 24, 2010

Afghanistan, Land of Opportunity (pt II)

There's a certain mythology built about around conflict, as if the laws of physics or economics somehow don't apply.
Our image Afghanistan is of a soldier standing in front of a mud hut. That's not what's going on...Businesses are functioning, even thriving, in a very difficult environment.
We came across a number of medium-sized businesses that are finding opportunities.
Our perception going in was that physical insecurity would be the number one concern of business... But we found that Afghans were generally more concerned about the uncertainty in the business environment than they were about security.
Business feel very threatened by the Afghan government...One entrepreneur had this to say: "Insecurity is caused by the government and the Taliban. They are the same."
Afghanistan is donor drunk. In Kabul, people were gaming the system...We frequently found international organizations nominally "trying to help" actually distorting the system.
War should not be an excuse to resurrect failed policies, such as that centrally planned growth is necessary in a chaotic environment…
These snipets are from a talk that Jake Cusack and Erik Malmstrom (two a MPP/MBA candidates at the Kennedy School and HBS) gave as CSIS last Thursday, previewing their fabulous report on entrepreneurship and the prospects for real development in Afghanistan. The report is based on interviews that Cusack and Malmstrom conducted over the summer in Kabul, Herat, Balkh, Nagarhar, and Kandahar Provinces. (Thanks to Dane Stangler for bringing me along to this event, and H/T to the Kauffman Foundation for funding the study.) The full audio is here and is a must-listen for anyone interested in entrepreneurship and development. (When you're done, read Carl Shramm's excellent essay in Foreign Affairs that provides the context for this study.)

Back in January I wrote a post titled "Afghanistan, Land of Opportunity." Drawing heavily upon the success of Roshan, the first and still the leading Afghan mobile phone company (more on Roshan here, here, and here), I made the following argument:
Roshan is an example of the sort of "positive insurgency" driven by entrepreneurship, technology, and innovation that is the real driver of development. Want to "help"? Provide local entrepreneurs with skills development, mentoring, and other essential support (yes, funding as necessary). 
The report by Cusack and Malmstrom takes this line of argument to another level, documenting that entrepreneurship is, indeed, alive and well in Afghanistan and clearly explaining why support for entrepreneurship must be the cornerstone of any coherent and potentially effective security strategy in that country.

But here's another question: Why did it take two Masters students to get these basic facts straight, and organize them in a manner that they could influence the design and implementation of policy, when the blue-ribbon task force recently assembled by the Council of Foreign Relations failed almost entirely to grasp or articulate them? Why is it that our security thought-leaders have such a difficult time getting past their fixation with the hardware of development to understand the software--entrepreneurship and business innovation in particular?

Granted, the (war) stories we hear about Afghanistan and the (entrepreneurship) stories we don't hear are linked. Entrepreneurs don't get very far under conditions of totalitarian repression, and the founding of Roshan was made possible by the ouster of the Taliban. But, there is a big difference between the systematic repression that existed under the Taliban (which is historically very rare) and the sort of everyday cronyism, neglect, or even anarchy that is far more typical of poor and poorly governed places around the world. Indeed, today's Afghan government ranks among the most corrupt in the world. However, it is precisely the failure of government to provide basic services, combined with a lack of formal regulatory constraints, that can create tremendous opportunities for entrepreneurs.

To claim, as many in development and security circles do, that an honest, stable government is a prerequisite for economic vitality is akin to claiming that a healthy, bountiful garden is a prerequisite for rainfall. 

Just ain't so. 

Tuesday, November 16, 2010

Give TODAY to Care Foundation Pakistan

Mosharraf Zaidi (@mosharrafzaidi) has a great op-ed in The International News (Pakistan) that quite incisively corrects for the overstatements in my previous post:

Zaidi starts with the following observation:
Casual observers could easily conclude that first, under the Musharraf regime, and now under the democratic government of the PPP, Pakistan has been reduced to a rentier or beggar state (or both). The country is incapable of meetings its own needs and constantly needs to seek help with the bills. Of course, this kind of an observation would have to be made by people who are either deliberately ignoring the circumstances that have produced the current situation, or who are plain, outright ignorant. Three very large and very important shocks have rocked the Pakistani economic system in recent years-natural catastrophes, violent conflict, and global price shocks. While most countries can claim to have been victimized by one of these, and perhaps some can claim to have been victimized by two, there is hardly any country on the planet that has had to take on all three kinds of shocks at the same time. Perhaps most crushingly, these challenges have been thrust on Pakistan in a global environment where the narrative of Pakistan is of a country that is fully responsible for every problem that afflicts it (true but only partly), and therefore deserves, deserves to be left to solve those problems itself (not true at all).
He then notes that aid comes in many forms, from many sources:
The most important division we need to understand is the division between humanitarian assistance and development assistance. For most practitioners, this distinction holds limited value in a country like Pakistan, where so much of the recent assistance to Pakistan has been humanitarian, and where a lot of the “development” assistance, has been supplanted, or replaced by humanitarian programmes.
The bottom line:
The most important distinction for a country that is the size of Pakistan, and with the kinds of problems Pakistan faces, is who the aid is being given to. Aid can be provided to governments, or it can be provided to non-state actors-such as contractors, firms, and civil society groups. Government aid itself can be of several kinds, including budget support, and project aid.
Without understanding these distinctions, and knowing who is giving what, and to whom, the national conversation about international aid or foreign assistance is largely a rhetorical jousting session, not serious policy discourse.
All of which is to say that being a critic of official development assistance (as I am!) is not inconsistent with getting online to give today to Care Foundation Pakistan or other effective organization working to assist the millions of victims of Pakistan's recent floods.

Friday, November 12, 2010

Time for Security Experts to Pak It In

[See follow-up post here.]

I recently found this excellent video clip of the talk that Pakistan’s Foreign Minister Shah Mahmood Qureshi's gave at the Brookings Institution last month:

Oh, wait... Wrong video! Sorry about that. This video here is of President Obama trying to get his G-20 buddies to buy into US monetary policy (..."What the world needs now is...more cheap credit!")  Anyhow, read the transcript of the Brookings event and you'll get the idea.

I was reminded of PM Qureshi's talk this morning when I attended the release of Council of Foreign Relations Independent Task Force Report No. 65, "U.S. Strategy for Pakistan and Afghanistan." Scanning the text of the report and then scrutinizing the bios of task force members, I was not surprised to find that physicians and economists were in short supply. (It also appears that exactly one Pakistani & zero Afghans were on the Independent Task Force, but, hell, what do they know?)

Had physicians been present on the CFR task force they would have been able to identify drug-seeking and doctor-shopping behaviors evident in requests for escalated bilateral aid and military assistance commitments.

Had economists been present they would have been able to remind other task force members that no country in the world has ever developed successfully and sustainably as a consequence of military and official development assistance. Countries develop despite aid directed to national governments, not because of it.

Perhaps as a consequence of these absences, or otherwise due to reasoning-by-force-of-habit, the CFR has produced a report that completely misses the opportunity to fundamentally challenge the false premises of Af-Pak (or "Pak-Af") strategy, and, as a consequence, offers an implicit but nonetheless wholehearted endorsement of the ongoing co-dependency between Pakistan and the United States that...well, just might have something to do with that country's relatively disappointing pace of development and current security challenges. What's missing from the report is the one thing the the United States is best at, and the one thing that matters most to development in Pakistan as elsewhere: entrepreneurship and innovation.

Now, I know what you're thinking. Who is this moron? Was he hiding in some cave at George Mason University when 9/11 happened? Is he really suggesting that the Security Threat featured in the CFR report and at the center of the entire Af-Pak discussion is totally the invention of an aid-seeking client state (& the willing consumers of that narrative in the US)? Of course not! Pakistan is indeed a dangerous place. In the past three years as many as 5,000 people have died there in terrorist acts--large and small--including 18 just yesterday in a dramatic attack in Karachi just outside the Marriott where I stayed three weeks ago.

But let's get real here--5,000 fatalities is not even one-fifth the toll of Mexico's ongoing drug war, which is taking place less than an hour by black SUV from Disneyland. Pakistan--a country of 180 million people, covering an area twice the size of California--tends to rank below both Sri Lanka and India when it comes to terrorism incidence. Yet such a ranking--and a decades-long civil war--did not prevent Sri Lanka from making remarkable strides in its development--for example, achieving a plateauing of its population growth rates comparable to that achieved in China, but without a coercive "one-child" policy. And India...

As for the feasibility of entrepreneurial success in a country with a weak or a failed government--well, think about it, does a relative absence of regulatory hurdles and pockets to fill make it easier or harder for an entrepreneur to get started? Conditions for entrepreneurial entry into a market can quite easily be favorable even when conditions for established, large-scale business are not. If you're still not sure, read this story of the founding and dramatic growth of Roshan, the first and still the dominant mobile phone company in Afganistan; or watch this talk on entrepreneur-led development by the current head of Pakistan's planning commission; watch this video of Iqbal Quadir describing the role of entrepreneurship in development (start at 6:20); or browse through the Kauffman Foundation's growing set of resources on "expeditionary economics."

As for Al-Qaeda, what part of global terrorist network hasn't sunk in with the Af-Pak brain trust? Islamic Fundamentalist terrorism is a global phenomenon (Philippines anyone?) It's not going to be solved in the Swat Valley anymore than it is in Times Square. As I wrote three years ago:
In the long term, our counterterrorism policy should be more focused on addressing the profound shortcomings of the U.S. domestic response and recovery capability than on action in the Middle East. The countries most experienced in fighting terrorism (Israel, Spain and the United Kingdom, among others) learned long ago that resilience through well-developed response and recovery capabilities is a critical part of effective deterrence. The actions required to build such resilience are mostly taken at home, not abroad, and they involve deep collaboration between public and private actors. As Hurricane Katrina and its aftermath decisively demonstrated, many such actions have not yet been taken in the United States.
There is one way forward for the sort of Af-Pak policy represented in the CFR report released today, and in other Af-Pak reviews released in recent months. That way is the way to the door--out of Pakistan, and out of Afghanistan. We'll get there by working as equals with Pakistanis and others in the region who share our values and are doing things that make a positive difference (e.g. 1, 2, 3, 4, 5...).

As aid and military contractors gradually and gracefully exit, they will make room for members of the Pakistani diaspora seeking to reconnect with their country; investors from Dubai; deal-makers from Guangzhou; and, who knows, maybe a few regular-old Americans looking to make some money in a place that is poised for take-off.

Questions? Ask your doctor.

Thursday, November 4, 2010

How (Yesterday's) Heroes Impede (Today's) Progress

Paul Polak isn't just one of America's most remarkable "ascending market"* entrepreneurs--having founded and built International Development Enterprises (IDE), the treadle pump design and marketing organization that has brought improved livelihoods to more than 2 million smallholder farmers.

Paul also wins my vote--admittedly somewhat by default--as the country's leading development economist. (Sorry Jeff & Bill, but still more heat than light coming out of the ongoing Great Aid Debate. Not much of practical value emerging elsewhere in the academic literature on development, including RCT wave.) He recently authored a powerfully insightful post titled "The Birth and Death of Big Institutions." Here's how he starts:
The failure of development is closely tied to the ossification of big institutional structures.
The World Bank was born as a vehicle for reconstructing Europe after World War II, a task it carried out with amazing success. But when it morphed into a massive institution to address global poverty, it didn’t do so well. Schumacher launched a revolution in design with his admirable book, Small is Beautiful, but the appropriate technology institutions that emerged from it became ossified, failed to address market forces and died.
I'm about to walk over to the World Bank for the 2nd half of the Tech@State Civil Society 2.0 meeting. So I'll have an opportunity this afternoon to reflect on this specific observation. But the point Paul is making in this blog post is much bigger than the World Bank, and even much bigger than "development" as it is narrowly conceived.

What I understand Paul to be saying is that the core issue facing society is not more or less government control, or whether markets should have greater or lesser scope in the allocation of resources. What really drives societal change is the manner in which both political and economic incumbents establish and maintain advantage. That is the core point of Paul's blog post. It is why entrepreneurship matters.

Read this post twice, then reconsider your takeaways from developments of the last week, the last month, and the last year. Much about the change that surrounds us is not how it seems, or how it is sold. 

* Ascending markets are markets for the global majority--elsewhere sometimes referred to as "bottom of the pyramid" which is a term that does make any sense to me so I don't use it.

Why Democrats Lost and Republicans are Losers

Why Democrats lost:
For Democrats, the core challenge is not absence of principle but rather obsolescence of purpose. For at least three generations the Democratic Party has been, or at least has presented itself as, the party of countervailing power. Notwithstanding attempts at a course-change undertaken first by Bill Clinton and now by Barack Obama, the identity of the Democratic Party is still deeply tied to the tensions and triumphs that for decades characterized politics within the Iron Triangle: Big labor exists in opposition to large corporations, and government must be vigilant if it is to protect citizens and workers from abuses perpetrated by powerful private actors. In fact, big business and big labor are functional allies, and government isn’t protecting us from either one; rather, it is under pressure to prop both up without a justifiable economic rationale. This Democratic vision is to today’s reality what an AT&T rotary dial phone is to Gmail.
 Why Republicans are Losers:
Take the Republicans. Faced with a crisis of mammoth proportions, congressional Republicans closed ranks to reject a proposed economic stimulus package on the grounds that the bill contained, in the words of Senate Majority Leader Mitch McConnell, “unnecessary spending that doesn’t create jobs now.” This was a principled stand minus one critical element: principle. The travesty of “don’t-tax-but-spend-anyway” Republicans trying, once again, to portray themselves as advocates of fiscal discipline was actually exceeded in this case by the absurdity of their objecting to the composition of the largest economic stimulus program in history on the grounds that the money would not be spent quickly enough. At a time when we need thoughtful assessments attuned to the longer term, here were the Republicans complaining that policy was not short-term enough! Unable to make a credible case for either total inaction in the face of crisis or yet another round of broad-based tax cuts, congressional Republicans were effectively reduced to playing the role of arch Keynesians.
... from my 2009 essay with Zoltan Acs in The American Interest...

Will anti-immigration idiocy and empty blather about job-creation through budget cuts--the "NO everything" strategy absent any positive program of action--continue to be the order the day from the New Kings of the Hill? Or will Mitch & Co. see the light and decide that they are in Washington to do something other complain about people in Washington.

Will the genius trust that is still in place at the White House break free at last from the Ghost of Dems Past and craft a vision for the future that is really about creating the conditions for the "the risk-takers, the doers, the makers of things" to thrive?

Hold your breath America!
We'll first turn first BLUE
And then turn RED
If we keep it up this way
We'll all be ....

Tuesday, August 10, 2010

It's the Toilets

Not finding current data regarding global trade sufficiently depressing, a number of commentators on my weekend post sought discouragement closer to home. One impassioned observer noted that unemployment in the U.S. is now 20%; another got a bit closer to the truth by noting that the most recent broad-based unemployment number (U-6) is 16.5%. All of which seems like U.S. unemployment is getting in the vicinity of The Great Depression peak of 25%.

Well, it's not. The reason is that the 25% number is most closely comparable to today's U-3 unemployment number, which is 10%. If you apply U-6 methods to historical data, you will get an unemployment figure for the peak of The Great Depression much higher than 25%. (One attempt from the blogosphere here.) The conclusion being that...
But the picture for the present--as opposed to 1930s--is even better than would be suggested by looking at the above chart. Recapping earlier blog posts of mine, I added in a comment to my own post:
In the 1930s 1/3 of Americans didn't have a toilet, unemployment peaked at 25% (not 10%, where we are today), and the average life expectancy was about the same as it is in Ghana today. The current recession is not comparable to The Great Depression. Period.
One well-informed reader (thank you dwg) offered this response:
And your statement as regards toilets... I'm not quite sure how to address it. An apples-to-apples comparison is evaluating the drop in real standard of living; no one is saying we've moved back to the income levels of the Great Depression; your argument there would appear either a gross misunderstanding of the terms of the debate or a straw man. Even those of the Great Depression era were better off than a peasant in the Middle Ages by many terms of reference. The issue here is: how many people are suffering a diminishing of their quality of life, proportional to their baseline expectation prior to the downturn?
So to be very clear, the toilet comment isn't a straw man, it's actually a core point here. And that point is that absolute levels do matter.

Look at it this way: Is (evil, Greenwich-CT-dwelling, CDO-trading) hedge fund manager whose income drops from $2 mil/year to $200K really in the same position as the owner of a shuttered auto dealership who was making $200K/year and now is bringing home $20K? I'm sure you'd agree--No. Well, you know what fraction of the world's population makes over $20K/year? In terms of individual-wage earners, about 2%. That's us. We are to the rest of the world what hedge-fund-guy is to us.

These absolutes may not have mattered much in the 20th century but in the 21th century, they do. All those poor schmucks out there in the "developing world" who are still pissing into open sewers are--surprise!--the people who are going to be driving global growth for the next 50 years. That because growth happens where there are unrealized gains to productivity. And those people--people who matter a lot both to America's future and to its recent past (ref. Greenspan's "conundrum")--aren't taking toilets for granted.

So the really big thing Krugman's missing isn't the trend in the global trade data after all. It's the toilets.

Sunday, August 8, 2010

Krugman vs. Reality (Reality Wins)

Here's what Paul Krugman had to say about the Great Recession a year ago: “When it comes to international trade, actually it’s not the Great Depression, it’s worse." Yes, he said that.

Krugman's attempt on that occasion, in his column, and elsewhere to draw comparisons between the magnitude of the Great Depression and the recent recession and were absurd for myriad reasons then as they are now, as I noted at the time here, also more recently here and here.

Now the speculation is over and the extent of Krugman's misread is evident. As The Economist reports this week, global trade and global manufacturing are surging back:
At first, the recession did hit trade hard. Global GDP fell by 0.6% in 2009 while the volume of world exports dropped by 12.2%. But whereas the Depression saw trade decline for at least four years, this time the rebound has been quick, and sharp. By May this year, emerging-economy members of the G20 were importing and exporting around 10% more than their pre-crisis peaks (see chart). Rich-world trade has recovered from the trough too, though it has not yet made up all the ground lost since the credit crunch began.
As it turns out, there is nothing Depressing about current prospects in the global economy...unless, of course, you happen to be Paul Krugman.

At least he's still got his Nobel Prize to keep him company while the rest of us enjoy the good (if not unexpected) news.

ADDENDUM: An response to all the praise for agreeement with comments on this posts.

First, Hooray for Paul Krugman. He is an elegant theoretician of international trade. Hooray again for Paul Krugman.

Now that were done with the hero worship, two additional points:
  • Yes, the quote in the first line above came from remarks Krugman delivered a year ago. My question is this: How many times does Krugman have to compare the current recession to The Great Depression before he becomes accountable for having made that claim? It is clear why Krugman wants to advance this argument ("What Paul? The stimulus package might not have been big enough? You don't say..."). But at some point, if the sky doesn't fall, it is fair to say--sky's not falling, Paul.
  • Along the same lines, but from an analytic vantage point: My 5-year old daughter can look at a chart and say "that line is pointing downwards." My 12-year old daughter can look a chart with two lines and say "Line A is more steeply sloped than Line B." Neither of them has a Nobel Prize (yet). So to say, as David more or less does (below), "He made that statement a year ago. How was he to know that the trend would reverse itself...completely. Invalidating his comparison...entirely." Indeed, how was he to know? Well that is exactly why he is paid the big bucks. That is why he has the big reputation. Because we expect that he can do more than just compare the slopes of two lines.
In scholarship, it's not what you know, it's how you know. Krugman is in a category with other macroeconomists whose projection of certainty goes far beyond the knowledge base on which such certainty can possibly be based. When events point out alleged experts' (potential, conditional even!) deficiencies in fundamental insight, it is worth noting. That is the point of this post.

(And by the way: I am not fundamentally opposed to analytically-based extrapolation based on trends. You just have be straight about what you really know with confidence, and be prepared to accept responsibility for your claims when any speculations made turn out to be wrong.)

Saturday, August 7, 2010

New Growth Theory: Not New, and Not Useful

In a recent article in The Atlantic featuring Stanford University professor Paul Romer, Sebastian Mallaby opens with the following story familiar to all economists:
Starting in the late 1980s, [Paul Romer] produced a series of papers that changed the way his profession thinks about economic growth; his most celebrated contribution, published in 1990, “was one of the best papers in economics in 25 or 30 years,” in the estimation of Charles I. Jones, a colleague of Romer’s at Stanford. Before the Romer revolution, theorists had explained an economy’s growing output by looking at the obvious inputs—the number of hours worked, the skills of the workforce, the quantity of machinery and other physical capital.
But Romer stressed a fourth driver of growth, which he termed simply “ideas,” a category that encompassed everything from the formula for a new drug to the most efficient sequence for stitching 19 pieces of material into a sneaker. In statistical tests, the traditional inputs appeared to account for only half the differences in countries’ output per person, suggesting that ideas might account for the remaining half—and that leaving them out of a growth theory was like leaving the prince out of Hamlet. And whereas the old models had predicted that growth would slow as population expansion put stress on resources, and as new investment in skills and capital yielded diminishing returns, Romer’s New Growth Theory opened the window onto a sunnier worldview: a larger number of affluent people means more ideas, so prosperity and population expansion might cause growth to speed up.
Now, just for the record, this is nonsense. Every year I have to guide one or more doctoral students through the process of unlearning this little bit of mythology--and with it the notion that New Growth Theory constitutes some sort of great breakthrough in the history of ideas (or even just economics for that matter) which we should all applaud.

I'll explain as quickly as possible because the origin of ideas in economics is a topic of almost no interest to anyone, including me. But some clarification, for the record, is in order:

1) The first clarification is that Romer's contribution to the theory of economic growth was very specific and technical: He found out how to make the mathematics of an "endogenous growth model" work. He can rightly be credited with reviving a moribund field (economic growth theory), but it is an exaggeration to claim that he created the field, and simply incorrect to assert (as Mallaby does) that "before the Romer revolution, theorists had explained an economy’s growing output by looking at the obvious inputs—the number of hours worked, the skills of the workforce, the quantity of machinery and other physical capital."

To the contrary, the ideas and a fair share of the modeling behind the model Romer developed (initially for his dissertation and then in a handful of papers on which his fame primarily rests) had been worked out more than twenty years earlier by a group of economists notably including Karl Shell, Hirofumi Uzawa, and the great Kenneth Arrow. Read the work of Schookler, Nelson, Phelps, or many others from 1950 and 1960s (see e.g this classic volume) and earlier still the work of Joseph Schumpeter, and it is evident that, long before Paul Romer was born, scores of economists had written brilliantly on the topic of how ideas create growth and development. (This history is well understood by individuals who are close to the events in question--including Romer himself, obviously--and has been ably chronicled by David Warsh of the Boston Globe here and here [e.g. pp. 155-156]).

2) The second clarification is that, of the two ideas most closely identified with "New Growth Theory," one is wrong and the other is so obvious as to be of no practical use to policy-makers or businessmen.

Let's start with the idea that's wrong, namely, that because ideas are "non-rival" and "non-excludable," economically relevant innovations (Romer actually uses the term "recipes,' as I have in work with Karl Shell and Stuart Kauffman) are characteristically subject to "knowledge spillovers." In plain English "non-rival" means that one person's use of an idea does not keep another person from using the idea; "non-excludable" means that it is impossible to keep a person from using an idea once it is "out in the open;" and "knowledge spillovers" refers to the costless transmission of ideas that are non-rival and non-excludable.

This all sounds well and good, and versions of these few lines have led a generation of economists to buy into the notion that "knowledge spillovers" are somehow the fuel that drives development and growth. But the whole construction only makes sense in the lecture room. In fact, the ideas that actually propel growth and development are overwhelming uncodified, context-dependent, and transferable only at significant cost (econ-speak: tacit knowledge dominates, information asymmetries are the norm, and transactions costs are significant, see here and here). While "knowledge spillovers" of the type celebrated by Romer certainly exist, they are of marginal relevance in the practical work of economic growth and development. (Don't start talking to me about webpages and pirated music videos here--those are a different story altogether from production recipes.) For more, see my prior post on this topic, and also this absolutely brilliant (short and readable!) book by Robert Solow--or for that matter, Schumpeter's Theory of Economic Development.

Now as to the idea at the core of New Growth Theory that is so obvious as to be useless, it is the one featured by Mallaby: "Romer stressed a fourth driver of growth, which he termed simply 'ideas,' a category that encompassed everything from the formula for a new drug to the most efficient sequence for stitching 19 pieces of material into a sneaker."

Let's be real here: Was Paul Romer really the first person to figure out that new ideas don't just fall out of the sky, but actually require effort and investment to develop? Of course not! My guess is that you would have had a very hard time finding a single individual involved in corporate research and development or technology entrepreneurship in 1986--when Romer published his first "seminal" paper-- that believed that the ideas that drove the growth and development of societies just sort of happened on their own. Indeed, consider this observation by Ralph Flanders, co-founder of America's first venture capital firm, written fully 40 years before Romer published his work:
The continued maintenance of prosperity and the continued increase in the general standard of living depend in a large measure in finding financial support for that comparatively small percentage of new ideas and developments which give promise of expanded production and employment and an increased standard of living for the American people. We cannot float along indefinitely on the enterprise and vision of preceding generations. To be confident that we are in an expanding, instead of a static or frozen economy, we must have a reasonably high birth rate of new undertakings.
Is our bar for scholarship so low that ideas obvious to everyone but scholars can constitute great advances in knowledge? I really hope not.

All of this matters because the slavish and uncritical repetition of the New Growth fable (ref. Mallaby article above) has led even the most thoughtful economists to believe that this fable somehow corresponds to reality and the ideas of New Growth Theory are of practical relevance. A recent post by Bill Easterly serves as an illustration:
Response to RT @auerswald People r (Not) Statistical Noise

on objection that small bursts of creativity can have very large effects. Um, yes, it’s called non rivalry of ideas (and music scores). Many people can simultaneously use the same idea/score. And everyone wants to use the best ones. So the scale effects can be Gigantic. I guess I had noticed I’m not the only one who likes Mozart.
Easterly misses what macroeconomists customarily miss: that the process by which "small bursts of creativity" have large effects has a name, and it is not "non-rivalry".  It is entrepreneurship.

Entrepreneurship involves the search for ideas that are in fact, rivalrous and excludable (at least temporarily) out of which ventures with proprietary value can be created. The impediments to entrepreneurship that matter most are not lack of appropriability of returns (as New Growth Theorists almost invariably preach) but rather the everyday battles involved in communicating ideas, building trust, and making deals (more here and here.)

Of course, the most remarkable achievement on Paul Romer's vita is that he is economist who has also managed to become a successful entrepreneur himself--having founded and sold the online economics teaching company, Aplia, which I have used in my own courses. So Romer certainly knows all this, and can't be held responsible for the creation of fables in which he is a featured player.

But to everyone else: enough with the New Growth Theory already. It wasn't new even 30 years ago, and it's not useful now.

ADDENDUM: Lest my macroeconomist friend--oops, that should "friends"--think me too ungenerous, here are five papers and one book written about economic growth in the past three decades that I do think contain real insights of conceivable value to business strategist or policy-makers:
  • Robert Lucas, "Making a Miracle" because of its integration of insights regarding firm learning curves and its clear articulation of the fact that sustained growth requires the constant innovation of new goods and services
  • James Schmitz, "Imitation, entrepreneurship, and long-run growth," great paper addressing limits to appropriability of knowledge in entpreneurship and implications for growth theory
  • Robert Solow, Learning from Learning by Doing, absolutely brilliant summary of the drivers of growth and how they have been represented by economists (including insightful critiques of the "New Growth" literature)
  • Claudio Michelacci, "Low Returns in R&D Due to the Lack of Entrepreneurial Skills," a rare paper in the growth literature to explicity address the role of entrepreneurs in converting basic science inventions into market-ready innovations (see this for description of the practical realities)
  • & best of all, Martin Weitzman, "Hybridzing Growth Theory" and "Recombinant Growth," for linking combinatoric possibilities (ref. Schumpeter's characterization of entrepreneurship) to growth, and connections to earlier, highly prescient work by Weitzman on the Soviet Economy.
These are but a few among many others, of course.

Friday, August 6, 2010

Non-rival ideas: Great for growth theory, but not for growth practice

This long post is drawn in part from prior work of mine on entrepreneurship and economic growth including "The Simple Economics of Technology Entrepreneurship: Market Failure Revisited."I was prompted to write it by this article in The Atlantic, which put me over the limit of exasperation with uncritical views of the actual contribution to the study of development made by "new growth theory." 
If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea… He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition, seems to have been peculiarly and benevolently designed by nature…
—Thomas Jefferson, Letter to Isaac McPherson, August 13, 1813

As anyone who has been within a mile of a macroeconomics course in the past two decades is well aware, the big idea in growth theory in the past 20 years is something called endogenous growth. This is the insight that economic growth to technological and organizational innovation doesn't come out of nowhere. It actually requires work and investment.

Yes, that's the big insight.

Anyhow, the device that allows societies to escape the inevitable boundedness of any given project or set of projects and grow far into the future is something call "increasing returns to scale." This property allows some outputs of human intiative--notably, new ideas--to add more to economic outcomes than it takes to produce them. Ideas are particularly interesting because they are, in technical parlance, "non-rival": one person's use of an idea does not diminish its usefulness to someone else. As Thomas Jefferson noted two centuries ago (see above): "He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me." Credit for this insight usually goes to Stanford economist Romer, on the based of set of more-or-less papers based on his dissertation that he published between 1986 and 1994.

This concept of non-rival ideas is intuitively obvious and seemingly interesting--even if it wasn't really Romer's. (Ref. the work of Karl Shell.) Only one problem: In it's usual application to growth, it's mostly wrong.

Here's why: While codified knowledge (books, published patents) may be non-rivalrous, in most cases it is either excludable (patents, documents protected by trade secret) or not directly applicable to production (basic research papers). The exceptional cases of published, unprotected "designs" are for obvious reasons, not likely to offer significant opportunities for entrepreneurs--unless combined with other information in novel and not easily imitable ways. (The phenomenon of "orphan drugs" is illustrative.)

Furthermore, patent protection is available to innovators in all industries, yet significant inter-industry differences exist in the extent to which patents allow persistence of profits. The differentiation is due to ease of imitability, which in turn relates to technological complexity. As MIT economist Rebecca Henderson and colleagues noted in a paper a decade ago:
[R]apid imitation of new drugs is difficult in pharmaceuticals for a number of reasons. One of these is that pharmaceuticals has historically been one of the few industries where patents provide solid protection against imitation. Because small variants in a molecule's structure can drastically alter its pharmacological properties, potential imitators often find it hard to work around the patent. Although other firms might undertake research in the same therapeutic class as an innovator, the probability of their finding another compound with the same therapeutic properties that did not infringe on the original patent could be quite small."
With regard to codified knowledge that is partially excludable, a critical issue is the extent to which partial imitation, or copying, preserves the quality of the original. In many, perhaps the majority, of economically important contexts, it will not.

In recent years economists, sociologists, geographers, and historians have addressed the transmission of knowledge, particularly increasing returns due to knowledge spillovers, in a large and varied literature. The empirical work on knowledge spillovers and parallel historical work have documented what the theorical work largely missed: the decline, during the twentieth century, of small scale craft-based production, and the corresponding rise of science based innovation and complex system development projects.

Consider Alfred Marshall's formulation of knowledge would be "in the air," frequently cited as the original articulation of the concept of knowledge spillovers. For craft-based production---glass making in Bohemia (Czech Republic), Champagne in Rheims (France), windmill production in Herning (Denmark)---there are solid reasons to believe that knowledge is "in the air." Masters share tacit knowledge with apprentices, whose core capability lies in replicating centuries-old techniques. New approaches are viewed with suspicion, and are accepted in to common practice only after considerable scrutiny. Science-based innovation and system development are another matter.

That Marshall's observations predated Romer's by nearly a century is of significance. The introduction of new products today (as opposed to a century ago) typically involves overcoming both technical and market risks. When products are based on truly novel technology, or create new markets, their introduction often requires new organizational forms. The knowledge that drives long term growth in a modern economy is thus detailed, highly technical, and context specific. It is an asset of the firm, whose development may be a consequence of explicit investments, "passive learning," or both. Ideas that are easy to copy will do not represent opportunities for entrepreneurs.

Yet to the extent that the knowledge developed by an incumbent firm is the solution to a complex problem, even slightly imperfect copying will likely lead to substantially degradation of performance. Active investment may be required to develop the "absorptive capacity" needed to make use of the information.

Whether knowledge about modern science based innovations is "in the air" or not is---literally and figuratively--immaterial. Only specialists will understand what it means.

A Response to "Why Sharing the Wealth Isn't Enough"

In his column today prompted by the Billionaire's Giving Pledge, Steven Pearlstein of the Washington Post kindly referred at length to an essay that Zoltan Acs and I published in The American Interest last Spring. Here's what Pearlstein had to say:
In an article last year in The American Interest, Philip Auerswald and Zoltan Acs of George Mason University suggested that the defining characteristic of American capitalism is not only an entrepreneurial culture that generates great wealth but also a philanthropic infrastructure that recycles that wealth in ways that create more opportunity, more growth and more wealth. This virtuous cycle, they concluded, is the "inner dynamic of American capitalism and the source of its prosperity." They contrast that to socialist countries, where philanthropy is weak and government takes on the recycling role, or less-developed countries, where oligarchs' fortunes are not recycled at all.
That's a pretty good summary. But Pearlstein isn't buying our case that philanthropic giving is a cornerstone of American capitalism:
Auerswald and Acs are known as institutionalists because of their focus on institutional arrangements and behavioral norms in explaining why economies work. Not surprisingly, their views have been embraced by business types and free-market conservatives who shamelessly use them to justify small government, low taxes and minimal regulation.
... Yes, philanthropy has been important, but so have unions, which ensured a fair distribution of corporate profits. So have antitrust laws that prevented successful companies from snuffing out entrepreneurial competition. So have norms of corporate behavior that made it socially unacceptable for top corporate executives to pay themselves 350 times what their workers made. And so have tax-supported schools, playgrounds and hospitals that were good enough to be used by rich and poor alike.
He goes on to point out that income inequality is increasing, the middle class is disappearing, and " it will take much more to revive the virtuous cycle by which wealth begets opportunity which in turn begets more wealth."

Considered in an historical context, I really don't disagree with much of what Pearlstein has to say. Indeed, I agree that "Sharing the Wealth Isn't Enough." Dewey the development of American public education? All for it. Unions, "the people who brought you the weekend"? Kudos.

But systems of public education are not distinctly American. Neither is organized labor. (Furthermore the same unions that once brought us the 40-hour work week have more recently shared culpability in bringing millions of U.S. manufacturing workers the less-desirable zero-hour workweek.)

What is distinctly American is a system of institutions--didn't really think of myself as an institutionalist, but I guess I am one--that allocates resources to successful entrepreneurial initiative, allows for the accumulation of wealth, and then--importantly--encourages the transfer of wealth back into the economy not only through consumption and investment (that was trickle down), but also through philanthropic giving. This is the process that brought us the National Gallery of Art, Harvard, Stanford, and now an expanding world of philanthrocapitalism that is funding some of the world's most promising entrepreneurial solutions to global challenges. But, of course, such a system does not arise out of nowhere. Political leadership and policy define the context and can be important drivers in advancing entrepreneurship and innovation. As Pearlstein himself has recently noted, even regulation and standard-setting--often incorrectly cast as an enemy of entrepreneurial initiative--can serve to drive innovation.

That's one thing. Another is that Pearlstein's lament about the hollowing-out of the American middle class--while accurate as stated--misses a bigger trend moving in the opposite direction. The fact is that, on a global scale and using measures that mean more than income, inequality has been shrinking dramatically. Skeptical? check out this 2007 talk by Hans Rosling (yes, I know I'm big into Hans Rosling right now):

The entirety of the experience of the United States over the last decade has been a sideshow to this larger global change, driven by increasing wealth in previously poor places (ref. e.g. Greenspan's "connundrum" and role of China's savings in our real-estate bubble).

Bottom line: Do I think that the U.S. at the moment could benefit from looking a tad bit more like Canada or (God forbid!) France? Along some dimensions, such as health care and standards for energy efficiency, I would say yes. But over the next quarter-century most of the world will benefit hugely from looking a lot more like the United States in at least this respect: building institutions to support entrepreneurs and celebrating philanthropists the put their wealth in the service of society.

People Are Not (Statistical) Noise

Bill Easterly had an interesting post yesterday about individual creativity and economic growth. It concludes
I learned from Herr Mozart that musical creativity, like economic growth, proceeds in fits and starts, and we should not be so obsessed with short term fluctuations.

Also I would not dare apply the words “random” or “lucky” to The Marriage of Figaro. Bursts of creativity, like bursts of rapid growth due to, say, entrepreneurial breakthroughs, may be temporary but they are not “random” in any mechanical sense. They reflect the best of humanity’s purposeful activity, and they stay with us forever even if the original creative moment is fleeting.
Bill's post is written at the level of analogy, which is fine. But there is in fact a real-world connection between individual creativity and change at the scale of particular communities or even entire societies. The nature of that connection is not only an interesting puzzle to ponder, but in my view the fundamental question in the study of economic development.

There are at least two ways of posing the question. The first is: Are people just noise? Creativity fluctuates at level of individual, but simple laws of statistical aggregation might seem to imply that societal outcomes should be smooth. They are not. So why does the law of large numbers not apply in cases of discontinuous societal change prompted by individual action? How is it that small-scale fluctuations in talent and creativity, both among people and within a single life, end up having large-scale impacts?

There a lots of answers in theory to this version of the question--herding & other types of increasing returns, chaotic dynamics, self-organization. There is also a rich tradition of addressing something like the same question in philosophy and literature (best in my view: second epilogue to War and Peace and Nietzsche's "Philosophy of History"). I also started in this direction using a culinary, rather than musical metaphor, a while back. These ideas could the be subject of multiple future posts, essays, or books...or, maybe, none at all. Because I don't think that this version of the question is the most interesting.

The interesting version of the question is a much more practical one, namely: Are entrepreneurs just noise? Easterly's earlier post re. system change suggest that they just might be. His link bait for that post: "The most important thing I can ever say: development is NOT about solutions, it IS about problem-solving systems."

An excellent recent post by @penelopeinparis gives solution-finders a bit more credit:
I don’t know for sure, but I suspect that when a bunch of crazy French doctors decided to create Doctors without Borders during the Biafra war, everyone around them must have thought they were absolutely off their rockers.

What about Henri Dunant, the idealistic businessman whose disgust with the horrors of Napoleonic wars lead to the creation of the Red Cross? (Did you catch that? Henry Dunant was a businessman with no experience in anything remotely connected to humanitarian aid)

There are several types of aid entrepreneurs; a fact that sometimes seems to get lost on critics and supporters of NGO entrepreneurs alike. Not everyone is an Henri Dunant, Bernard Kouchner or Greg Mortenson,...

The real question, for me, is how do we support the kind of innovation that does create positive change, all the while weeding out all the useless and potentially harmful amateurish initiatives?
I fully concur that this is the real question. Indeed, the direction @penelopeinparis appears to be going is, well, music to my ears.

UPDATE: @bill_easterly offers this pithy rejoinder via Twitter: "My response on giant potential scale: hello nonrival ideas"

Friday, July 16, 2010

People + Employment = Prosperity

Hans Rosling makes the population connection...

Alice Amsden makes the employment connection
Falling population growth rates---a plus for development---tend to respond more to changes in paid employment than to changes in poverty alleviation.
People + Employment = Prosperity

Saturday, May 29, 2010

The Truth About "Free Markets" and "Market Failure"

Slide 12
[I]t is possible to conceive of better worlds that the one in which we live. But the problem is to devise practical arrangements which correct defects in one part of the system without causing more serious harm in other parts.
Ronald Coase, "The Problem of Social Cost"

These days everyone has an opinion as to what's wrong with "free markets" and what government should go about it.

On one end of the spectrum are those who remain persuaded that government intervention in the economy inevitably distorts private incentives, and thus that "free markets" function best when they are left alone. In other words, "If it ain't broke, don't fix it."

On the other end are these who believe that government must act assertively to curb market excesses and rein in corporate power. In other words, "It is broke. Fix it now."

A technocratic middle reconciles these two extreme viewpoints by invoking the concept of "market failure." The logic is presumably simple: a role for government exists if, and only if, a market failure exists. The burden to policy lies in establishing the nature of the market failure, and then specifying the mechanisms by which it can be corrected.

Unfortunately, none of these three rules of thumb is of much use as a guide to policy making in a world where markets are as temperamental as a tent-full of toddlers and market failures are as abundant as a bankrupt banker's bonus bag.

This is a problem. To illustrate with an analogy, let's say that the issue under consideration were treating cancer, instead of fixing markets. Suppose scientists understood what cancer is, and how to treat it. What if, instead of working with a definition based on science, every doctor decided to make up her own definition of cancer. For one doctor, it would be any illness that makes people suddenly lose weight. For another, it would be any illness resulting in death. Using the first definition, healthy people would be treated with chemotherapy. Using the second, treatment would only be offered to patients when already dead. Not good.

Similarly economists know what market failure means. However, at least some legislators in charge of its treatment exhibit a persistent disregard for the term's correct definition. As a consequence, where some may see potential government programs everywhere they turn, others only see them when conducting economic post-mortems--of which we have witnessed more than the usual number in the two years.

In its usage by economists, market failure is a concept that is defined in terms of "perfect competition." Contrary to caricature, perfection in this context here means a state of the world that is fundamentally unattainable, not one that is ultimately desirable. The conditions defining perfect competition are numerous: everyone is small relative to the market (no monopoly); all information is public (no secrets); there is no uncertainty or inter-dependency (no surprises); and transactions costs costs are zero (no lawyers). In another words, a fantasy land.

The entire point of creating such an idealized, fundamentally unrealistic model of markets was to provide a stable point of reference for the study of the real world, in all of its astounding diversity and complexity. Indeed, after the early 1970s, economists more or less stopped studying perfect competition. There was nothing left to study. Attention turned almost entirely to another topic: market failure. And what is market failure? Quite simply every situation that isn't perfect competition.

The first takeaway, then, is that the "market failure" test for government intervention is a misleading one. Market failures so permeate economic reality that "correcting" every one of them to arrive at a frictionless, riskless, perfectly efficient alternate reality is a dangerous fantasy.

The second takeway is those who seek naively to equate "free markets" with economic efficiency are engaged in horse-and-buggy reasoning that has no place in any serious, 21st century discussion of economic challenges and their solution. From the standpoint of economic theory backed up by decades of empirical analysis, there is absolutely no reason to presume that "free markets"--markets in which, for example, business opportunities exist and companies pursue them--are "efficient." This is because, under conditions of rigorously defined "perfect competition," business opportunities simply do not exist; there are no proverbial $20 bills lying on the sidewalk. Consequently, even in the total absence of any government intervention, substantial inefficiencies in market outcomes are to be expected whenever participants in markets don't share the same information, the practices of firms differ, and the environment is characterized by significant uncertainties.

To paraphrase the Nobel laureate Ronald Coase, well-designed policy must begin with a situation approximating that which actually exists. The situation that exists in any real-world market is one rife with "market failures." From such a starting point, a change in the market environment created by government may move the market either towards, or away from, efficiency (to say nothing of equity!). It certainly is possible to conceive of worlds in which market failures were less dominant. But the problem is to devise practical arrangements which correct defects in one part of the system without causing more serious harm in other parts.

Unsure? Ask your doctor.

(More to follow on the closely related topic of why "business-friendly" and "entrepreneur-friendly" environments are not the same.)

Friday, May 7, 2010

The Smartest People in the Room

I'm a person of simple pleasures. For instance, I count any day a success when I have the opportunity to use the word "eviscerate." Take Thursday. That was the day when I wrote this blog post about Presidential Study Directive 7 (PSD-7). In additional to employing the word "eviscerate," the post expresses considerable enthusiasm for the direction of the global development rethink currently going on at the White House.

Yesterday NYU development luminary Bill Easterly had the kindness to not only take notice of the post but also to point out to me that I managed to misrepresent a blog post by Aid Watch staffer Laura Freschi as one by the Maestro himself. (Arrghh. Guilty! Though, in my defense, how was I to know that anyone under the age of 50 could so persuasively convey the jaded air of a veteran development insider? Easterly trains his people well!)

It turns out that Easterly is considerably less sanguine than I am about the potentially transformative potential of PSD-7:
Professor Auerswald (sorry for my teasing you in this post), you do seem to have a theory of social change in which promises about government intentions to someday change priorities are a major force. My experience of many years of observing such statements is that they are more like New Year’s resolutions that are repeated every year.
My rebuttal to this? My counter-attack? None whatsoever. Easterly is right. My last post is probably mostly wishful thinking. What is the likelihood that awareness of the exigencies and opportunities of the moment will be enough displace entrenched bureaucracies and transform decades-old habits of thinking? What is the likelihood that an esoteric administrative exercise like PSD-7 will turn out to have made a difference in the lives of actual human beings? Even people like me who were actually born in Washington DC (yes, some of us exist) recognize the obstacles that stand in the way of such outcomes.

As Easterly is, I believe, aware from any one of my six previous posts calling into question the coherence--indeed the very existence--of his own theory of social change (1, 2, 3, 4, 5, and 6), I do not in fact hold the view that the United States government (USG) is likely to be a "major force" in global development. If anything, I would say that the causality is reversed: the point of my post, and a core point of this blog, is that global development will almost certainly be the major force affecting the United States in the next quarter century, whether the USG plans effectively for this eventuality or not.

So what was it about Freschi's post that motivated me to drop deadlines on that particular day and go on the offensive? It's pretty simple: I find it more than a bit depressing when The Smartest People in the Room refuse to leave the room in which they are the Smartest People. For instance, from Easterly:
I vaguely remember that I was invited to a meeting with a US government big shot on development whose name I’ve forgotten, to take place in Washington. I failed to do my patriotic duty, using the lame excuse that the meeting was two days before Christmas, and I unreasonably treat the days around Christmas as belonging to Family Zone.
After a lifetime working on development, might not Easterly have made it a priority to influence the most sweeping review of priorities in global development undertaken by his country's government in a decade, if not longer? After all, the government of the United States may not be much to Bill Easterly, but it's got more resources at its disposal than he does. No way to find an alternate time? Schedule a call? Write an email? Post a direct Tweet? Undertake a pinkie lift?

No. None of the above. Just not worth the time.

(Note: Bureaucrat appears to have been working two days before Christmas. Not everyone has the benefit, as Easterly and I do, of living by the academic calendar.)

In any process that involves difficult decisions with uncertain outcomes, those seeking solutions should welcome, even celebrate, the views of astute critics (in this case, Easterly). But when critics hold themselves apart from engagement in anything that might resemble positive action, one is sorely tempted to make sausage of their studied detachment.

Step 1: Eviscerate...

Thursday, May 6, 2010

What it Means to "Elevate Development"

The White House process aimed at redefining U.S. development policy for the 21st century (known internally as Presidential Study Directive 7, or PSD-7) is coming to a close. Earlier this year some colleagues and I had the opportunity to offer input to Gayle Smith in the National Security Council, who was tasked with leading PSD-7, which we did.

On Monday Foreign Policy blogger Josh Rogin leaked a copy of the document that is coming out of PSD-7. Item one on the proposed new agenda for global development policy, as advanced in this draft, is this:
Moving forward, the United States will foster the next generation of emerging markets by enhancing our focus on broad based-growth and democratic governance.
To begin with, consider here what is not listed first on the nation's development agenda: "Poverty alleviation." "Nation-building." "Global threats." "Counter-terrorism." And other code words allegedly relating to "development" that are based alternately about fear & condescension.

Notice further that in this sentence "broad-based growth" is listed before "democratic governance." What does that mean? It means that the people who wrote this draft get it: expanded economic opportunity precedes democratic change. Both together lead to increased prosperity. That is development. (Elaboration here.)

Now as a counter-point, Bill Easterly [actually, Aid Watch staffer Laura Freschi, see below] offered his comments today. He focused on administrative structure:
The most significant change in the draft is the creation of interagency committee reporting to the President to run US development policy.
He wants to know what it means to “elevate development” as a “key pillar of US foreign policy.”

Here's my attempt at an answer to that question. "Development" today refers to the process by which the majority of the world's population is joining the global economy. It is a process whose momentum is going to overtake and obliterate puny debates about "aid" (pro and con) and eviscerate stale discussions about donor coordination and accountability.

"Elevating development" means taking (at least some!) decision-making away from those alleged development experts who pay no attention to entrepreneurship and global business (the actual drivers of development) and instead continue to devote their energies to making failed approaches less failed. (Yes, I am talking about pretty much every "development economist," Easterly included.)

It means that people who have not been accountable or serious about advancing actual development may potentially lose their authority, and then their jobs, because this is too big an opportunity for this country to be entrusted to people not determined to make the most of it. It is not only too big for one agency. It is also much too big for the entirety of the U.S. federal government--which, incidentally, will have succeeded if manages to remain relevant to global development in the next quarter century, much less dominant.

That is what this process is about. That is what the draft PSD-7 memo from the White House is about.

Now if you don't care about the role of the U.S. government in the world today, don't read this memo. If you do, its message is worth considering carefully. There is not an organization in this country that would not benefit from its own PSD-7 process, and that wouldn't also be moving forward if it similarly found a way to "elevate development" in its strategic planning.

Correction: ... Ummm ... well... as it turns out Bill Easterly didn't quite exactly write the post that I attribute to him in this blog post. As kindly pointed out to me by Bill, the post was actually written by Aid Watch staffer Laura Freschi. Apologies to Bill... and to Laura!

Wednesday, April 21, 2010

Why Entrepreneurs?

Among all the riddles of economic life, none perhaps is greater than the existence of a market for new cookbooks.

Consider TED prize winner and celebrity chef Jamie Oliver. Last night Skoll Centre Director Pamela Hartigan, her husband Martin Hartigan, and I shared a meal at Jamie Oliver's Italian restaurant in Oxford. (In case you're wondering, it's called "Jamie's Italian.") Martin and I both ordered "fish in a bag" which the menu describes as follows:
The freshest sea bass fillet from Brixham market, Cornish mussels and clams steamed in their own juices with smashed fennel, heritage potatoes, capers, arrabiatta sauce and zesty Amalfi lemon.
To accompany my fish in a bag, I had a glass of Merlot. The meal was delicious and the three of us had a great time.

But here's the point: For how long have human beings been drinking fermented grape juice? For how long have we been steaming fish and mussels--potentially in combination with available fresh vegetables? Answer: A very long time.

Now granted, there is some skill involved in organizing raw materials (sea bass, fennel, lemon, etc.) into a meal--which is to say, cooking. Very good cooks may be able to profit from their skill by, for example, charging for the meals that they prepare. (Ergo, restaurants.) Alternately, they may painstakingly document their techniques so that others can duplicate their skill. (Ergo, recipes.) Yet, even when a recipe is well spelled out, dimensions of discretion that inevitably fall to the cook can lead to very different outcomes. As Joseph Schumpeter observed a century ago in The Theory of Economic Development:
The necessity of making decisions occurs in any work. No cobbler’s apprentice can repair a shoe without making some resolutions and without deciding independently some question, however small.
All is well so far. Where we run into a problem is with Jamie Oliver, as well as with Nigella Lawson, Thomas Keller, and all other celebrity chefs. Indeed, the very existence of cookbooks is a bit vexing. How can it possibly be that, after the trillions of meals that human beings have prepared and consumed over millennia out of essentially the same fundamental set of ingredients, individual people to not only come up with new recipes, but in fact to become famous doing so? A new recipe here and there, sure. But an entire cookbook full of culinary novelty? Such a thing would seem to be a statistical impossibility.

The answer is, of course, that cookbooks aren't impossible. Indeed they are not only possible, they are ubiquitous. That is because there is no limit to humanity's appetite for novelty, just as there is no limit to human creativity. In fact, if Chicago's Moto Restaurant and Disruptive Food are any indication, we're just getting started...and that's just with the recipes.

In economic life, managers are cooks. Some are better, some are worse. Good ones can make money from their skill. Bad ones botch even the easiest recipes. Variance among managers makes it difficult to sort out, when assessing a project (as when eating a meal) whether any shortcomings experienced are due chef's lack of skill, or to the recipe employed. As Bill Easterly tweeted a while back
Nothing works everywhere, depends on how implemented RT @Transitionland: Microfinance meltdown in Bosnia -
Even in medicine, with its highly routinized protocols, over 1 million deaths per year occur as a consequence of medical error. (That number is for the United States alone. Ref. Atul Gawande's Checklist Manifesto. In 1994, that 1 million included my father, who died due to complications in the course of a "routine" surgical procedure.) When surgery fails, is the fault with the surgeon, or the technique? This is a difficult enough question to answer in a medical context, but it is even more difficult when applied to a development project.

That said, the remarkable persistence of markets for cookbooks suggests that nourishment depends on much more than ensuring that existing recipes are properly prepared--as important as that can be. It also, and perhaps more fundamentally, depends on the creation of new recipes.

Or, to get past the metaphor: sustained prosperity depends on more than capable managers. It depends on more than blueprints, manuals, and franchises. It depends on more than projects with goals, targets, and timetables.

Instead, sustained prosperity depends on novelty. It depends on invention in the face of change. It depends on creativity with limited resources.

More fundamentally--most fundamentally--sustained and sustainable prosperity depends on entrepreneurs.