Re: 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.
>
> -----------------
>
> 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.
>
>
>
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