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.
>
>