07.01.29 - Editorial: WSJ - Phelp's Prize (Impact of Microfinance?)

"The not-quite-miraculous growth in Bangladesh has followed rather
modest reforms. What might have been achieved with more vigorous
modernization?"

I'm not sure I agree with the prescription but my own humble view is
that microfinance is merely an accelerator - not the spark for poverty
eradication.  Government and legal reform must first provide the
framework for development.  I don't think this detracts from the
incremental impacts millions of times over on the poor because of
microfinance.  

Clement Wan
Riverstone Manufacturing.  

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Phelps's Prize
By AMAR BHIDE and CARL SCHRAMM
The Wall Street Journal
January 29, 2007; Page A16

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

Mr. Phelps's celebration of modern capitalistic entrepreneurship is,
to say the least, unusual. Of the 35 winners of the Nobel in
economics, 28 did not utter the word "entrepreneur" or
"entrepreneurship" in their lectures. Mr. Phelps's lecture has 17
mentions -- more than the total over the previous 19 years.

Moreover when the typical economic theorist uses the word
entrepreneur, it is often a short-hand for a Big Blue-like computer
that unfailingly makes the right choices. In contrast, Mr. Phelps's
entrepreneurs, like those of Friedrich Hayek and Frank Knight,
undertake innovations in a dynamic and highly uncertain world. They
play a "human role over a vast range of activities, involving
management, judgment, insight, intuition and creativity." This
entrepreneurial activity, says Mr. Phelps, has not only produced great
material prosperity in the economies where it has flourished, but also
represents the essence of a "good life," full of "stimulation,
challenge, engagement, discovery and personal development." None of
this is possible in a stagnant society where individuals are assigned
fixed tasks.

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

Mr. Yunus's ameliorative entrepreneurship however is very different
from the transformative entrepreneurship that Mr. Phelps argues has
been central to modern capitalism. Indeed, most of the ventures funded
by microloans in Bangladesh are activities that were marginalized by
modern entrepreneurs: They don't involve any economies of scale or
scope or the use of new technologies capable of producing significant
advances in overall productivity and incomes.

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

In principle, microfinance does not preclude modern entrepreneurship.
But in practice, we wonder if the romantic charm of the former might
distract governments in impoverished countries from undertaking
reforms needed to foster the latter. The poverty of countries like
Bangladesh derives from their comprehensive backwardness -- bad roads,
illiteracy, inadequate health care, unsound banks, porous tax
collection systems, disorganized land records, corrupt policemen and
so on. Simple policy changes (such as lowering import tariffs) are a
good start; still, the problems won't disappear with a stroke of a
pen. They require a change in deeply embedded attitudes. But
governments in fragile states have only so much political capital and
capacity. So it is crucial to proceed in a disciplined sequence:
Identify the worst impediments, overcome them and move on to the next lot.

Micro-enterprise may well help those left behind in economies that are
already advanced help themselves: The inner cities in the U.S. may
derive great benefit from Mr. Yunus's innovations. But chasing will o'
the wisps instead of tackling the first-order causes of backwardness
is probably not a winning strategy for countries like Bangladesh. That
country has, in fact, made some economic progress in recent years,
most notably through the growth of an export-oriented garment
industry. Although the few thousand firms in the industry are smaller
and less efficient than their Chinese counterparts, they are larger
and more productive than individual craftsmen, microfinanced or not.

The not-quite-miraculous growth in Bangladesh has followed rather
modest reforms. What might have been achieved with more vigorous
modernization? Consider the case of Vietnam, now one of the fastest
growing economies in Asia. In 1987 the country started a transition to
an open economy. Ongoing reforms that fostered a new class of modern
entrepreneurs, not microlending to marginal businesses, helped cut
poverty in Vietnam by half in the 1990s. Surely the country's unsung
and possibly uncharismatic policy makers also deserve a Prize?

Mr. Bhide is a professor at Columbia Business School. Mr. Schramm is
president of the Kauffman Foundation.