Reading is Fundamental

... and if you don't think so, it might be time to enroll in this school...

Rajiv Shah has chosen a set of his favourite development books over at The Browser. It’s obviously a selection designed to stimulate a bit of interest in USAID’s current approaches to development, and it’s a pretty good one (though Chris Blattman has a legitimate beef with one of his comments).

One thing I like about the list is that it goes outside the standard development texts, with one selection about the development and impact of fixed nitrogen fertilizer. He also selects a work of economic history, Gregory Clark’s A Farewell to Alms. I’m glad to see some economic history here, but I probably would have chosen some different ones. Here are some suggestions:

The Great Divergence by Kenneth Pomeranz, which looks in detail at the Industrial Revolution, and why it didn’t occur in Japan or China. I can’t stress enough how important it is that we understand why massive economic transformations occur, because every country that goes from poor to rich goes through one. Why did China not have its own in the 19th Century? Pomeranz looks at some of the reasons.

Of course, one of the seminal papers about the Industrial Revolution was Jan de Vries’ The Industrial Revolution and the Industrious Revolution, which makes great play of the importance of increased output and consumption powered by effort and extended working hours – these provided a kick that supported deeper processes pushing an Industrial Revolution. It’s been criticised since its publication, but it injected a layer of complexity into the analysis of the industrial revolution that was missing. Its ideas contribute to Chris Bayly’s thinking in The Birth of the Modern World, probably the most impressive work of history I’ve come across.

Another cracking book, again flawed, is David Landes’ The Wealth and Poverty of Nations, again explicitly looking at the role of cultural norms in generating industrial transformation. I don’t agree with this 100% or even close to that, but it’s a thought provoking and excellently written work.

Finally, I’m going to cheat a little with my last two. The first is one I haven’t actually read yet: The Origins of Capitalism by Ellen Wood, subtitled A Longer View. This looks absolutely fascinating, bringing together history, economics, culture, philosophy and ideology into a wide-ranging analysis of modernity and capitalism in Europe. I can’t wait to read it.

The last book I would select as an economic history is actually a work of fiction (harking back to a previous post when I suggested five non-standard sources of learning on development). I read North and South by Elizabeth Gaskell on the recommendation of my brother-in-law and I couldn’t agree more with his high estimation of it. Written in 1855, at a time when industrial capitalism was just taking root in England, it offers remarkably thoughtful critiques of the cultural and economic impacts of industrialization and the ways in which capital and labour interact and would continue to interact under this system. It’s astonishing to think it wasn’t written with a century of hindsight. It recognizes the transition to capitalism for what it is: messy, violent, hugely beneficial and all-encompassing: no one can opt out.

Any other favourite development books out there? Always grateful for new suggestions, especially those that are well written as well as intelligent.

Catalysis and Consumption

You mean this might actually be a *good* thing?

A couple of weeks ago, I took sceptical aim at a post by Nancy Birdsall at the Center for Global Development in which she revealed that she and her colleague Andy Sumner would be initiating a research programme looking into the middle classes, and in particular, what she calls ‘the catalytic class’. I (with all the subtlety of a steroid-guzzling sledgehammer with STUDENT OF POLITICAL ECONOMY embossed on its head) made the point that ‘the catalytic class’ was merely a synonym for capitalists.

In this post, I want to draw out some of the subtlety from the sledgehammer, because there’s value to the research agenda they speak of: it’s true that the middle classes and capitalists have a hugely important role in the development of an economic system that successfully employs large numbers of the poor and provides the resources required for the state to provide public and market sub-optimal goods it must. However, I would strenuously argue that to focus on the ‘catalytic class’ is incorrect: rather, we must understand the conditions under which catalysis occurs.

Further, the role of the middle classes in general and how they function, and the role of capitalists and how they function are quite different, though they are profoundly connected as well, and its important to understand both the differences and the connections.

To start with, it’s very important to be clear about who I am talking about when I say ‘middle classes’ and ‘capitalists’. After my first post, a really good response came up from Chris Prottas. He’s quite critical of my initial shot at the CGD, arguing that the catalytic class were a very special subset of the middle classes who, in fighting for their own betterment, inadvertently improve the lot of the poor as well. The key passage:

Yes, the emergent bourgeoise are capitalists … but what makes them (potentially) a special ally of the poor is that they economically support a new set of public interests to compete with those of the existing elite… To the extent this new class’ power benefits from public goods that benefit the poor, the emergent bourgeoisie may indeed catalyze positive change that would not otherwise occur…

The catalytic class are a special subset of bourgeoisie: bourgeoisie that happen to have interests that align with the poor. It is a happy accident that they benefit from the same public goods. It is a happy accident that their source of wealth increases demand for labor from the poor. To call them simply capitalists is to lump them with the bourgeoisie that make a fine living virtually detached from the poor.

Emphasis mine. Much of this criticism stems from confusion of terms. A capitalist, according to the classical definition, is a very special case of the middle class: a person who holds a large volume of capital and extracts value from wage-labour by using this capital. This is very important. It’s not sufficient that he is middle class, or bourgeois, or that he is rich. What is necessary that the source of the profits he makes is the use of wage-labour and capital together, to increase the value of the goods he or she produces over and above the cost of the labour he hires. It’s for this reason I highlight the sentence above: using the term capitalists is therefore serving to do the exact opposite of what has been suggested: it isolates those members of the economically powerful classes who employ the poor. People whose livings are made through feudal structures of landholding, or through speculation are not in the classical sense capitalists.

The middle classes more generally are those with means in the middle range of society – not the very rich (be they capitalist or the hereditary rich who employ few) nor very poor. They are defined by their capacity to consume. This is the crucial distinction: the middle classes are such because of their consumption (and their cultural and social norms), while capitalists are defined by their productive relationships. Both are important in the transformation to a dynamic economy, but it’s only the latter that truly catalyse the economic transformation and with it, the fortunes of the poor.

Continue reading

On Entrepreneurs, Capitalism and History

I wrote an article in the most recent issue of the UNIDO magazine, Making It, about the role of entrepreneurs in the development of low-income countries. Entrepreneurship is a difficult issue to approach from a head-on perspective, because it’s very difficult to put a finger on what one can actually do to help entrepreneurs – their raison d’etre is to respond to opportunities, rather than to function within a wider framework of a Government plan. This tends to lead a lot of writers to the standard liberal response of ‘provide an enabling environment’, and to avoid crowding them out, which is essentially the thrust of most of Bill Easterly’s work on his Planners vs. Searchers dichotomy, though I’m not much of a fan of this distinction.

My argument is that focusing on entrepreneurship is misguided, because there’s little shortage of it, and it’s been around for a very long time. Rather, we need to think much more carefully about the systems that allow entrepreneurs the ability to move from being small businessmen to the cornerstone of an economy. What distinguishes Richard Branson or Alan Sugar from the guy selling sea shells outside my local bar in Zanzibar isn’t their basic approach to opportunity, it’s the structures in place that amplify that approach. Referencing Bayly’s Birth of the Modern World (yet again) and De Soto’s Mystery of Capital (for the umpteenth time), I argue that there are specific economic, legal and political realms in which improvements must be made, and interventions undertaken if entrepreneurship is to achieve the same kind of effects in Africa, for example, as it has in America.

These are more than simply refining a market system, but move into the realms of redefining a legal system and property structure to change the incentives and capacities of different economic actors, and in effect, move an economy into modern capitalism, rather than the kind of market-based mixed economy that actually prevails in most of the third world.

I don’t see much evidence of this kind of approach in practical development work, unfortunately, though I’d be very happy to be alerted to examples of this.

Importing Capitalism

The uber-capitalist vs. The future development worker

Among my pretty strenuous criticisms of Paul Romer’s Charter Cities concept, I did point out that there were genuinely interesting insights and ideas underpinning the idea. One of them was the idea that a functioning capitalism does not need to be generated domestically, but can simply be imported in the form of international capital, multi-national companies and so on. I spent last weekend in Nairobi with a couple of friends, one of whom is an entrepreneur there. He told me about recent developments in the Kenyan economy, positive and negative, and this issue of the source of the capitalist impulse came up again and again.

Take telecommunications. Telecoms is big business in populous countries with high rates of mobile ownership like Kenya, and the services available there are both expanding and becoming cheaper rapidly. The biggest players in Kenya’s market are Safaricom, which holds something close to 80% of the market; and Zain, which appears to be their main threat in the short term. Zain is aggressively pursuing a strategy of cutting prices to increase market share by offering phone calls to any network (and even international calls) for just 3 Kenyan Shillings a minute. That’s roughly 4 cents in dollar terms, and it’s being marketed as a permanent price change, not a promotion. Meanwhile, Safaricom have one major trump card that they are using to hold on to their market share: M-Pesa, which they run. M-Pesa is the great Kenyan success story so beloved of development workers, which allows people to transfer money instantaneously and very cheaply using mobile phones. This is all great for consumers, who are using more and more varied services on their telephones.

How great this is for the economy, though, is not as clear-cut as it seems. Safaricom, while marketed as a Kenyan entity, is actually majority owned by the UK telecoms company Vodaphone (much in the same way that Malawi’s Kuche Kuche is marketed as ‘Mowa Wathu Wathu’ – ‘Our Beer!’ – despite being brewed by Carlsberg). And M-Pesa was actually developed by Vodaphone and is administered largely in the UK, where all of the servers that it depends on for functionality are based. M-Pesa actually only have a handful of employees actually working in Kenya. Zain, too, are no longer an African company. They were sold by Mo Ibrahim a few years back and are now Kuwait-based. The profits generated from their business in Kenya are repatriated to foreign owners, minus corporate tax.

Instinctively, the mind recoils a little from this realization. Economic development is taken to mean the establishment of some kind of domestic capacity to produce goods and services and generate jobs. Often, the left assumes that multinational companies are damaging to domestic economic prospects, often painted as parasitic on the local economic resources or stifling the prospects of indigenous economic development. The knowledge that profits from business activities leave the country in which they are earned is also unsettling: it feels like the benefits of business are largely accruing to external players rather than the domestic economy, and hence reducing poverty within the country.

But while it’s true that economic development in almost every currently developed country involves and is ultimately powered by the emergence of a domestic capitalist class, looking at the issue from both the historical and the economic perspectives demonstrates that the dominance of international capital in emerging African economies is neither unusual nor necessarily a bad thing.

Continue reading

Examining Aid Success Using an Octopus, Classical Economics and a Blog

Aid, you say? Well, on the one hand...

"Aid, you say? Well, on the one hand..."

Owen Barder recently wrote an excellent, thought-provoking piece for Open Democracy about what aid does and how it should be judged. There seems to be an incipient groundswell around the idea that the ‘failing aid’ agenda is based on a misconception of what aid should be assessed against. Roger Ridell alluded to the same in his earlier piece that I wrote about here, and Chris Blattman floated the idea following conversations with Owen.

What Owen and Roger essentially argue is that the role of aid is more limited than that which it has been assessed on. Most critiques of aid are concerned with the stylized fact that aid is being poured into countries that remain resolutely poor. But what if aid isn’t meant to affect how rich or poor a country is? What if aid is just meant to make people healthier, give them a better education, and access to clean water? What if, in short, aid is simply about making conditions for individuals better without actually changing the economic structures within which they live? Owen doesn’t completely rule out the possibility that aid may make long term macroeconomic improvements, but he argues that if they do occur, there is little to suggest that they would become visible before many years pass.

The argument is enticing in that it allows a way out for those who argue that economic transformation is the standard against which development must be measured. Even if we believe this, it no longer follows that aid should be rejected, since its virtues are shorter term. This allows us to celebrate unreservedly the education that aid funds, the bednets it distributes, and the farmers it supports. None of us wants these things to be bad or useless: we all like to see individuals made better off. If we completely separate the arguments for economic growth and transformation from the arguments for education, health and farmer-support, we remove any need for us to choose what to support.

By my reading, there are three central components to this argument that we should examine a little further.

  1. Aid is aimed at improving lives of individuals and communities, without changing the structural aspects of the socio-economies in which they live. As such, aid can be successful without causing a transformation in the economy.
  2. Aid doesn’t harm the prospects of structural change in the economy. Owen argues that “aid can be used in ways that make such transformations more likely. It can pay for critical infrastructure – such as power, roads and ports – on which economic growth depends. It can finance new skills and capacity. It can provide access to financial services for entrepreneurs wanting to build their businesses.” He also cites South Korea and Taiwan as countries that grew with the support of aid.
  3. Though aid is working, according to the bounded criteria we should set for it, it could work better. Just because he thinks aid works doesn’t mean that there isn’t much we can do to make aid work even better; at the heart of this is a need for more transparency.

I believe in aid. This may come as a surprise to some of our readers, because I take a critical view of how it works and question much of our dominant thinking about development. At root, though, I believe that aid can contribute to deeper changes that are necessary, but to get there we need to change a great deal of our discourse about development. From this perspective, there are things I would challenge, and things I would wholeheartedly support from Owen’s argument.

Continue reading

Why is Dead Aid is more important than Dead Capital?

Who wants some? Ash prepares to take on the Evil Dead of Aid and Capital.

"Who wants some?" Ash prepares to take on the Evil Dead of Aid and Capital.

If you’re interested in development, you’re probably familiar with Dambisa Moyo. She’s the young Zambian economist who earlier this year published Dead Aid to enormous fanfare. She was on the news, in the debates and even had the privilege of being labelled ‘cruel’ by Jeffrey Sachs. Though fierce criticism of the quality of her arguments has dimmed her own personal star, there is no doubt that the intellectual thunderstorms that accompanied her book have persisted, and that aid has come to occupy the central position in the discourse on development in non-conflict Africa.

Rewind one decade. At the turn of the century, a Peruvian named Hernando de Soto published his own treatise on the failure of development. A brilliant thinker and polymath who took ideas from the philosophy of mind, legal theory, the histories of culture, economy and law as well as modern and classical economics, de Soto’s work was called The Mystery of Capital. In it he mentions aid three times. His focus was on the central importance and current absence of socially acceptable, easily accessed forms of legal property. He argued that legitimate, functioning national systems of property rights are the crucial innovation that every single prosperous capitalist nation had to make to achieve economic development. Such a system transforms mere physical property into capital – a fungible, divisible, and secure economic asset that powers the capitalist system which exists only in pockets outside of the West.

De Soto’s work and his prescription that legitimate property systems must be created was widely hailed as a watershed in thinking about development. The New Statesman put him ‘in the pantheon of great progressive intellectuals’. He remains one of the most highly thought of thinkers in world development.

Despite the continuing high regard de Soto’s work commands, I cannot think of any serious attempts to put his ideas about property systems into practice in Africa. Meanwhile, the reform of aid and its efficacy has never had a higher profile. We in the development community have chosen to focus extraordinary energies on an agenda based on aid that does not appear to have the anything like the untapped potential that property does. We have silently but decisively decided that dead aid is a greater problem than dead capital. The evidence does not seem to support this. Consider the following:

  • De Soto’s team measured at least $9.3 trillion dollars dead capital in the third world, certainly an underestimate given that he counted only real estate. The potential value of this dead capital, when unlocked by a national, legitimate formal property system, would be multiplied several times over.
  • By contrast Moyo (and other aid critics) focus centrally on the failure of aid to achieve a result. By various reckonings this is anything between $300 billion and $2 trillion of dead aid – and after a decade of aid-growth regressions it’s clear we have little idea what, if any, multiplicative effect it has.
  • Probably the most robust critique of the aid system comes from Bill Easterly, who argues that the central planned approach to aid is too risky because we don’t know what works, favouring instead a bottom up approach through entrepreneurs.
  • De Soto takes as his starting position that the capacity of entrepreneurs is fundamentally restrained by their participation in a pre-capitalist system; the absence of any property system linking all such entrepreneurs and their assets into a single system is what prevents them from fulfilling their potential to lead bottom-up development.
  • In contrast to the more recent data set of recently developed and currently developing countries that aid critics tend to focus on, de Soto’s arguments about property systems tally remarkably well with the latest thinking among historians concerned with the process by which Europe and America pulled away from the rest of the world in its developing process. The European conception of alienable property was of central import. It also tallies with what we know about Japan, Korea and Taiwain since the 1920s.

Unfortunately, I believe those aspects that make de Soto’s work so important are the same ones that hamper efforts to translate them into to real development programmes.

Continue reading

Apparently, Not Everybody Gets This…

In addition to having an *awesome* beard, Marx also understood what makes capitalism so dynamic.

In addition to having an *awesome* beard, Marx also understood what makes capitalism so dynamic.

Markets (even free markets) are not the same thing as capitalism.

Yet constantly people, even economists (who should really know better), conflate the terms. They’ll start a sentence by saying ‘capitalism has been promoted throughout Africa…’ and end it talking about ‘… despite extensive market liberalization, poverty reduction remains slow’ as if they are still talking about the same thing.

Entrepreneurship is not the same thing as capitalism.

I’ve often heard people say ‘Africa is one of the most capitalist places I’ve been to – everywhere I went someone was trying to sell me something!’ More news – that’s commerce and entrepreneurship. Neither of those things are the same as capitalism.

The existence of private property is also not sufficient to indicate capitalism.

Private property exists in almost every form of economic organization beyond the most primitive economies. Capitalism isn’t defined by private property either.

Most people understand there is an economic form called ‘capitalism’ which is distinct from and more dynamic than other economic forms. However, they define capitalism against a limited sample of comparators. Most people conceive of only two types of economic organization in any detail: capitalism and socialism (in its extreme form, communism). This is partly a product of the era in which we have grown up. The Cold War and the conflict between Capitalism and Communism so defined modern international relations until recently that the end of this conflict prompted Francis Fukuyama to declare ‘The End of History’, with the triumph of Capitalism (and liberal democracy) representing the end of modern development.

Thus, most observers define capitalism not by its most individual characteristics, but by those that best set it apart from communism: free markets, unfettered entrepreneurship (in the sense of freedom to pursue economic self-realisation) and the existence of private property. This has had serious effects on our ability to diagnose and define policy in less-developed countries. Economic policies attempt to manipulate or take advantage the underlying laws of motion of an economic system; if we have misunderstood that system, our policies may not have their intended effects.

Continue reading