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.

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.

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