Blockchain, l’économie numérique à l’aube d’une seconde révolution numérique
novembre 25, 2016

A world apart: stimulating economic growth in emerging countries

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As any policy maker will tell you, the crafting of successful economic development policies at a national scale is an art. While this is the case everywhere, emerging countries are faced with several peculiar challenges that set them apart.

First is an enduring myth: many would have us believe that national economies operating at a lower level of GDP per capita should be easier to grow through policy stimulus: all they have to do is imitate the successful ones.

Yet for many reasons, that has largely been proven untrue.

Strong interdependencies between a vast array of economic actors — in many cases even more diversified than that of developed countries — warn us against simplistic approaches. Some systematic design flaws and path dependencies create a number of traps that are out to get out of.

Here are a few ideas drawn from observations and conversations I had during my last trip in Bangkok.

1. Economies of scale

Roaming the street of metropolises like Bangkok, Mumbai or Manilla, the traveler reckons that these capital cities are characterized by strong entrepreneurial forces. At every street corner, at the back of every alley, an old man on his food cart, a young girl and her father assembling flower arrangements, a retail shop of Chinese-made oddities, a tuktuk or a moto-taxi ready to take you on for a small fee. In each of these occurrences, an opportunity to negotiate.

As we sit in a comfortable, leather-bound, air-conditioned Toyota Camry booked thanks to Uber, an old lady walks between lanes selling French fries and fried bananas. These cities, so vast, and so recently, rapidly and anarchically urbanized, leave no rock unturned. Like Michael Porter would have it, someone’s waste rapidly becomes the next man’s opportunity.

Yet many of these endeavours are individually-operated endeavours, or at best, rely on the joint efforts of a single family unit. The challenge is to move from this enviable entrepreneurial culture to a similarly dynamic set of operations at scale. While economic development undoubtedly requires the incessant labour of the individual entrepreneurs, it also relies on these entrepreneurs’ ability to grow, not only as individuals, but in the complex networks that make up today’s larger firms.

Yet in the vast majority of cases, what we observe is stagnation. Year over year, and in many cases, generation after generation, the same operations, the same volume. Price takers, all of them. The market is so abundant, there is so much competition and so little effort to capture economies of scale that no effective growth occurs.

While we can help large companies that are reluctant to change to move past their spontaneous inertia, it is much easier to do so in the presence of a unity of command — from top to bottom and from bottom to top — than it is to change the culture of several million individuals whose decisions are uncoordinated.

2. Entering the formal economy

The second major systemic issue in emerging economies is that a significant proportion of these micro-enterprises earnings are done in cash. Flowers, hand-made knives, shirts, are negotiated and sold based on both parties’ eagerness or availability of immediate funds. Taxis run “non-metered” runs. Most of them don’t accept credit cards. While this is still the case in many developed countries, the black market is known and the inactivity of our elected leaders has more to do with complacency with taxi cartels than with the difficulty of controlling such fiscal abuse.

In developing countries, this is a problem at many levels.

As most westerners know, entering the formal economy means paying sales and income tax. Yet in real terms, the passage from informal to formal may represent a decrease of 20 to 30% in an individual’s net earnings. For a self-owned micro-business earning 10–15$ a day, this is simply not possible.

The consequence is that a significant proportion of these companies and the individuals behind them are unbanked. They have access to no capital, no credit, and no safety net. The little they own is owned in cash or in highly liquid assets, stashed somewhere physically close to themselves. They are prone to theft and robbery. But this also means that investments are delayed until sufficient funds are gathered — limiting the ability of these companies to adapt to changing market conditions through risk-taking activities. Cashflow is an issue for all growing companies. Yet in circumstances where no banks will have you, it becomes an impediment to growth.

Having such a significant part of the economy operating on black market wages also has its tolls on policy makers and governments’ ability to intervene. Wages paid in cash are ineligible to all sort of insurance programs — from unemployment to professional health, to retirement funds, etc.

This means that any unexpected event becomes a strong destabilizing force for the individual and his / her family. Growth is favored by market conditions that are stable and predictable, whether at the microeconomic or the macroeconomic level.

In cash economies, this becomes very difficult to do.

3. Improving basic levels of education

Education can contribute generally to a better understanding of the underlying forces that produce wealth and economic growth. As it stands, while many micro-businesses and the entrepreneurs behind them are able to add and subtract in order to manage their daily operations, they mostly do not comprehend the additive properties of capitalization, the requirements of cashflow, the cost of stock, the nuance between OpEx and CapEx, or the virtues of quarterly balance sheets and statement of earnings.

I do not wish to take a stance on religious matters per se, but studies have also shown that higher levels of education tend to decrease individuals’ beliefs in irrational causes to rational outcomes. “Just one extra year of schooling makes someone 10% less likely to attend a church, mosque or temple, pray alone or describe himself as religious” writes the Economist.

Education can thus contribute to the reorientation of certain “investments” made in order to achieve outcomes. The point here is not that all expenses made by an individual should be rational, or useful, but rather that if someone wishes to achieve something, the odds are better when investing in something that has a 90% success rate than a 0% success rate (such as an amulet or a donation to the Gods).

Religion and superstition tend to grab their fair share of expenses in emerging economies, and while we can recognize that having a deep and profound spiritual life can be fulfilling, organized religion tends to be filled with scammers and other dubious characters. The market for amulets, candles, and incense, or the investment of one’s entire life savings in supporting organized religion as means to achieve economic ends is simply not the best way to stimulate economic growth at a national scale.

Basic notions in economics and accounting can increase the correlations between expenses and outcomes, leading to more appropriate investment decisions according to individual’s actual preferences, rather than on unreasonable beliefs.

4. Taking better care of the business (and natural) environment

We could’ve hoped that development in emerging countries would’ve benefited from the advanced technology of the developed countries in terms of pollution reduction and energy efficiency. The fact of the matter is that is has, but only to a point.

The fast rhythm of real estate development, combined with a strong willingness to acquire “Western” external symbols of social status such as the ownership of private vehicles, has lead to an explosion in the presence of ozone and suspended particles in the atmosphere of all major cities. Developed countries aren’t immune from this, as recent data shows Paris, France, as one of the most polluted cities in the world.

Yet in developing countries, this strategy (or absence thereof) has significant consequences for the ability of these cities to serve further as engines of economic growth.

First, the lack of interest towards regulation has made it so that it has become nearly impossible to move around in these cities. The problem is not direct cost: but a lack of interest that leads to a lack of supply. Public transit is developing at a very slow pace and covering only the most crowded axes of these cities, leaving many without any other possibility than to own individual cars or to ride the bus for hours morning and night.

Most surprising is the fact that even public transit, such as public buses, is not well maintained. In Bangkok, buses are many decades old, and emit either white or black smoke — or a mixture of both — each time they stop and go.

Over time, these cities will undoubtedly be plagued with rising health costs due to the poor air quality of their urban environments. While healthcare can be seen as an investment in the productivity of a country’s inhabitants, remedial healthcare is an unnecessary burden for governments and citizens: expenses that could be avoided or divested toward other health issues are consumed by these man-made illnesses.

The absence or limited strategy in terms of public transit infrastructure also reveals something about the lack of vision in terms of urban development. While we recognize that this level of development activity is largely incompatible with a command-and-control top down approach, transferring the planning responsibility for city planning from government to private promoters isn’t a particularly far-sighted idea, to say the least.

This absence of an organized view of the city leads to the incessant emergence of neighborhoods removed from public infrastructure, creating additional cost on the already limited means at the disposal of public officials. Taking care of developing a proper strategy would lead to the emergence of a favourable business environment, and would pay off in terms of efficiency and quality of life for all.

While the U.N. expects that more than two-thirds of the world’s population will live in cities by 2050, we absolutely need to take these factors into account. As we move towards these ever-growing urban entities, the number and variety to consideration that feed into policy making will form a more and more complex ecosystem, and policymakers will need to develop skills and mindsets accordingly.

To be sure, many more elements can serve as food for thought in the realm of economic development, and inform all countries — developed and emerging — as they strive to create genuinely stimulating urban environments.

Women’s participation is one. Promoting and facilitation “frugal innovation” is another.

In due time, I will write about those, too.