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On how development is to occur.

On how development is to occur.

The idea of 'development' applies equally to all nations. The US or EU nations are developing just as much as are the very poor countries. What all nations are doing is solving the issues of organisation, and some are doing it well and others are not. The world has about 6.5 bn people alive, of which one billion live in extreme poverty and amongst who one billion live in those nations which generate about 80% of the world's added value. The US alone accounts for about a third of gross world product.

Catastrophes aside, we shall have around 8.5 bn people alive in 2030. Four fifths of these will have received primary schooling and around 2 bn of them will have tertiary qualifications. There will be more graduates alive than there were people in the world in 1900. A typical projection would suggest that there will be about 3 bn people living in modest economic independence by 2030, and therefore able to exercise choice, express opinions and resist change of which they do not approve. This will be a new fractious power in the world, altering politics, consumerism, fashion and ways of thinking about issues.

Around 3 bn people will remain poor, by no means all of them in 'poor' nations. China has around a third of the world's poorest people today, for example, but is far from being a poor country. Those who do live in the poorest nations will be doubly impoverished, however, because the will be confined to sprawling third world urbanisations, in which air and water quality, transport, housing and health care will all be under stress. There will be over 250 urbanisations of more than one million people by 2030, as compared to four in 1900.

As noted in the parallel paper on energy, the investment in infrastructure which is required even partly to meet these needs goes well beyond anything that can be achieved by these countries through domestic saving. Foreign investment will be needed, and this will flow only when the nations in question appear stable and capable of handling such flows, open to such projects and likely to honour the liabilities which they take on.

Development jargon has focused around the idea of 'capacity raising' over the past decade, chiefly as a result of World Bank analysis and the work of Douglass North. That is, the chief limit to economic and social development are the poor institutions in poor countries, and that development assistance should focus on raising 'capacity'. This is more easily said than done, and the next section looks at what these ideas imply.

One should think of development as having three high-level elements at play in it. First, there are the assets possessed by the society: its people, productive capital goods, natural resources, security situation, partnerships and so forth. Balancing these are a range of liabilities: debt, dependent people, resource limits. These comprised the main elements of how development was considered a generation ago.

Second, there are the goals that the society sets for itself - what it wants to become, more or less articulated, backed by more or less consensus, of greater or lesser realism, more or less actively pursued by its actions. If these goals are not clear, then it will achieve them only by accident and it will drift where, in particular, market forces press it to go. If they are unrealistic - or if they reflect an internal dynamic that leads to pathology, as discussed in the next section - then it may achieve an even less happy end. The third element consists of the rules by which the society operates internally, as defined by Professor North, above. These are discussed in the next section.

This introduction should have suggested a sense of rapid change. However, it also carries within it an implicit model, of positive and negative feedback. Forces are at work that will push poorly performing societies into ever-more difficult situations, and reward successful ones with all manner of prizes. The last section considers what this may mean.

On organising societies for change.

On organising societies for change.

We began this analysis by saying that every nation that is not sliding backward is in fact developing. It is learning to harness and manage increasing amounts of complexity - of connections, of information, of resources, of options. Nations may differ as to the balances that they choose to strike as a result of having done this, and unambiguous measures of 'success' are hard to fine tune. However, there is no such difficult in achieving a coarse ranking: it is plain that the US is more able to harness complexity, has more choices and more access to resources that its one-time rival, Russia. Proxy measures of success, from total economic added value to human resource measures such as health, literacy and subjective satisfaction all tend to agree with each other.

These are necessarily coarse measures. If France values its social model so as to deny itself the benefits of free trade, then that is a choice which reflects their rules of the game. It is impossible to truly discriminate between the "success" of France as a society and that of, for example, Britain without deploying loaded value judgements. It is, however, straightforward to compare the relative success of France and Turkey, or France and Argentina, both of which had broadly similar standards of living in 1905. France has clearly installed some better rules of conduct, better institutions.

The countries of Africa and South East Asia had broadly similar income levels in after World War II, and similar non-economic measures. By the early 1970s, Africa was enjoying higher standards than most Asian countries. The figure shows that this has now reversed: sub-Saharan Africa is now poorer on a per capita basis than it was in 1950, whilst Asia is far more wealthy, healthy and arguably wise.

The 40-50 countries in this sample can be subject to econometric modelling in order to pick out the main features that seem to influence this difference. It turns out that only 20% is inexplicable, for 65% is due to the differences in institutions - access to power, law, resources, transport, property rights, macroeconomic stability - and 20% due to differences in investment in education, itself arguably an institution. Natural resources, geography, colonialism and its absence and security threats had no systematic impact on this result. Nations which organise themselves for socio-economic and political growth achieve this, and those which are unable to do this do not.

Robert Putnam studied the Italian city states before their progressive unification over the 1860-70 period. The figure shows the striking relationship between the institutions possessed by individual states even before this period and their economic performance after 1990.

Long run studies on economic growth in the industrial countries show century-long consistent rates of growth: 2.25% for Britain, once the super-power, 3.5% for Canada and the USA. Strikingly, those nations which receive strong set-backs, such as Germany or Japan, France of Italy during European wars then undergo rapid compensatory growth to the point where their growth trend would have taken them, and then settle down on this rate.

After Hamburg was bombed flat (or London was incinerated in 1666) the task of rebuilding is relatively straightforward, for property rights and thoroughfares, drainage and water supply were issues which had been solved, both conceptually and in fact. By contrast, societies which are projected into domains which they do not understand tend to waver around until they develop the rules to handle this new situation, this new level of complexity. It is this gradual 'invention of the future' which sets the limits to long term social and economic expansion. The psychological and social collapse of the former German Democratic Republic, which occurred when it was unified with the FDR in 1991/2, was as much to do with failure of the old rules of conduct as it owed to useless factories.

Institutions can be explicit - in the sense of being embodied in laws, parliaments and the like - or implicit, being the rules of everyday conduct. Social scientists speak of the sum of these structures as being the 'social capital' of a society. Policy can alter formal institutions, but it is extremely hard to change tacit institutions in predictable ways: industry spends billion on advertising explicitly to achieve this, in very narrow spheres. Professor North defined these institutions as "the rules of the game in a society or, more formally, as the human-determined constraints that shape human interactions." Just as a game of football does not exist without the rules of the game - literally, the game comprises the rules which shape it and the motives of those who play it - so social interactions that are not completely random are shaped by the values of those who engage in them, and the rules which govern their conduct.

Change which places challenges which tacit structures cannot handle either requires formal rules - law - or results in the destruction of a level of ordering in society. Typically, the society reverts to simpler rules, such as force. Situations in which tacit structures are being eroded without corresponding protection - either from new tacit rules or form legislation - often see a much-strengthened policing of the rules that are under threat. This manifests itself as intolerance, punitive actions against disturbing people or groups, populism and fundamentalist ideologies. These ensure that adaptation does not occur, that the stresses become stronger and that the society as a whole is prevented from adapting itself to new situations.

Societies differ from savagery through their possession of more or less consistent rules. Successful rules are those which allow societies to expand the range of their choices, value added and the like. Societies which are relatively unsuccessful in these terms either lack rules, or lack good rules. It is easy to note those societies which lack the rule of law, but what - other than teleology and outcome - defines the characterises of good rules?

Prevailing wisdom holds that good rules create predictability whilst both reducing transactional costs and increasing the motivation of people who are using them to arrive at a positive sum outcome. Let us unwrap that complex statement.

Predictability: If a farmer is not sure that he owns his land, then he or she will not be inclined to invest in it. Thailand granted title to millions of peasant families and achieved a 60% growth in farm investment in the years that followed. If one is not confident that the currency is well-managed, then one does not save because inflation may eat up one's savings. If growth is erratic, then one is unsure of the pay-off of a project, and will tend reject any examples that do not meet high discount rates.

If the legal process is uncertain, then one is also less inclined to invest. Most developing nations reinvest 20-30% of gross national income. The World Bank found that nations with either a poor law of contract or else with poor judicial processes tended to invest about 10% less than this, and those with both flaws, 20% less.

Poor legislation is as much as a deterrent as corrupt or uncertain law. Romania rules itself by a mixture of Parliamentary law and Emergency Ordinances. Between 1997 and 2000, 47% of all laws were of the latter form, often reflecting special interest, often poorly drafted, often contradictory with other law. Commercial choices are stultified, or handled through special and often corrupt relationships with power.

Trust is fundamental to many transactions. If we do not trust, then we must monitor each step of a transaction as closely as two drug dealers in an alley. At the very least, we involve lawyers and - in some parts of the world, we are drawn into irrevocable fatwahs and related instruments. A rigidity is introduced by the absence of trust that hampers information interchanges, hampers innovation and to a large degree strangles hope.

Transactional costs: it is always easier to do something a second time. Indeed, the "experience curve" is a fundamental principle of productivity growth, showing that the cost of an activity is almost always inversely related to the logarithm of the number of times that it has been done. If tacit or formal rules are eroded, however, then each transaction has to be negotiated separately and costs remain high. Government can also be labyrinthine and inefficient. Examples of this abound. Brazil, for example, once required around 700 separate items of documentation in order to obtain an export licence. This may have simply grown without examination as life becoame more complex, or it may be conducted with predatory motives, or to provide employment in a bureaucracy in which patronage is important and where the number of employees in a department sets the prestige and salary of the presiding politician.

Positive sum outcomes: tell us whether an activity between two parties will, in agregate, add value ot the community, destroy it or simply shuffle value around. Game theory, which discusses trades and other interactions in a semi-formal setting, offers three outcomes to any transaction - that net value will have been created, however partitioned, that the outcome is neutral or that the act creates a net negative. The first, positive sum game should, ideally, deliver a positive to both parties, but in fact need not do so: the point is that the result of many positive sum games implies positive value added to the society. Rome grew as a result of positive sum games, albeit with the slave population receiving some sharp negatives from this. Crime, by contrast, if a negative sum game in that whilst some criminals win some of the time, no wealth is created and the negatives far out-weight the positives.

The tacit and explicit rules of the game which were discussed above define the balance of positive and negative sum games that are played in the society. Further, the general rules of thumb that emerge from these ways of coping quickly become a rule in themselves. For example, in some states "everyone knows" that you ought to grab any opportunity at whatever cost to the society while you can, whether in politics or commerce; that it is normal to cheat your customers or to evade taxes. In others, "everyone knows" that politicians are in office in order to serve the population, that honest is the best policy in business and that reputation is to be prized above rubies. As social groups rise of fall in prominence, so their interpretation of how life is to be lived rises and falls in popular awareness, serving as a guide to people who would not otherwise have been touched by it. Consider the way hip hop and rap brought ghetto approaches to relationships and transactions to the attention of Western middle class youth. Which of these strategies is embedded in the social narrative - the way a society explains - and which of them gives the best pay off will define how large numbers of people behave, and thus have a major bearing on how the society itself performs.

These factors interact. For example, societies which are poorly organised and which have high levels of uncertainty tend to be encouraged to adopt negative sum outcomes: business seeks special guarantees from the state, officials steal and set out to make access to relative certainty both difficult and costly. Such situations create distrust at all levels and increase transaction costs, deter investment and lead to an approach to commerce and government which reinforce all of the trends. Distrust also tends to close access to policy making, or limit it to an elite. Legislation will not receive the thorough scrutiny and harmonisation that is its due, often as a result of the very limited access which elites have to real conditions. Even when the motive is worthy, poor decisions flow from poor information. However, special interest sets out to distort decisions for the benefits of the powerful. Corruption is innately damaging because resources are allocated badly under its influence: bridges are built where they are not needed, priorities are altered and the powerless are deprived of resources. A power elite may in fact take over the society for their own benefit, making the state into a predator which preys upon the people whom it rules.

Power systems can be mapped as hierarchies or loops; and the transition of the Western nations from monarchies or oligarchies to their modern state is a tale of how looped structures came to supplant pyramids. Pyramids are particularly vulnerable to perversion when there is a great source of power or wealth to hand. For example, if a state has oil, or gold or other resources, then a pyramid structure will quickly find ways of keeping this wealth in relatively few hands, accelerating many of the negative forces discussed above but mitigating these with hand outs. Valuable natural resources which are discovered in "pyramid" societies swifty make these less unified and less governable - as the wealth is arrogated by the top of the pyramid, and used by them to bribe the rest of society into temporary complacence - whilst those discovered in "loop" societies tend to be used more organically. The 'curse of oil' is an example of this, where a country like Norway is innately set up to avoid the difficulties which have entrapped the (extremely) pyramidal Arabian Gulf nations.

Mexico

An extremely formal system of patronage developed in Mexico, in which anyone of influence was both a don or a cliente. That is to say, they were under the sway of their don, had a network of people on their own level, and were in their own right dons to a layer of clients. And so, forth, down from President to dog-catcher. If the President changed, so did all the pramids lined up under him. This limited the period when one one group could improve their lot, which naturally made them both eager to do so quickly and ready to tolerate others who happened to be in power at that time. As the same political party had held power for over five decades, this had little to do with democracy.

People at a given level went through the Catholic right of compadrazco, becoming a 'brother' of their peer clients. They were expected to help those of their compadres who fell behind, often involving substantial cash transfers. Dons were expected to advance and protect their clients, and rain gifts on their heads, often to be broken up and cascaded further down the pyramid. If a don was seen to be weak, his entire support structure would desert him for another, stronger figure. (Hence machismo, not being seen to lose face in public.) This system virtually formalised corruption. In Mexican company, for example, each member of the management team had dual loyalties: to the company and to their "string" outside of it and, where they had been placed nepotistically, within it. Rival groups within a company would struggle for influence - for control over labour dispute resolution, for example - and exert more effort in winning this battle than working for the organisation.

Development is something that all nations undertake, not just the poor countries. There is no plateau. The poor nations have the opportunity to recapitulate the development of the current industrial powers, modified as they see fit. However, in order to do this, they need to organise the rules by which they operate in ways which avoid the traps that have been discussed.

Winners and losers: possible outcomes.

Winners and losers: possible outcomes.

The situation which is facing the world is unprecedented. Every indicator we examine show exponential growth: information, population, economy, technology, resource use, pollution, complexity and connectivity. The striking exception is progress towards development amongst the world's poor people. This is far from exponential, and in some instance is in retreat.

To cope with these exponentials - plus the many issues of security - we need to have much more collaboration - agreed rues, institutions - around these issues. Current international agencies and law are a start, but all have their weaknesses and progress has been very slow. No nation will cede power to a trans-national agency without gaining more than is lost - a positive sum game - and without complete trust that the institution will in fact work as planned.

We began, however, with a snapshot of the world's population in 2030: a billion living in the currently wealthy world, three billion making up the new middle classes and something over four billion poor, roughly half living in poor countries an half in middle income ones. The world will probably be coping with China's emergence as a power, and adhesion to ideologies and the rejection of change by some nations will be a prevalent then as now. Environmental issues will be everywhere acute, and demanding of trans-national custodianship.

This is not an encouraging set of balances for the world to have to manage. Many commentators feel that we have 20-30 years to get things "right", after which the negative forces would become so strong as to lead to a brittle situation, all the more dangerous because the ways out would all appear blocked. These thoughts, allied to the less justified belief that a liberal democracy is the sole and immediate goal of every development process, underpins the neo-conservative agenda for US foreign policy. Even with its weaknesses - such as the utter lack of a "technology" by which to increase institutional strength very rapidly - this analysis has much to commend it. However, for it to be able to inform practical policy, we need to know two things.

First, in respect of getting from "here" to "there", not a few things have to change in the market economies as well as the developing nations. There must be a trade system that does not systematically block the exports of poor countries. This means accepting painful changes in the agricultural, manufacturing sectors and to the low-skill labour force. It means vastly boosting investment in education and training. In addition, attitudes to international institutions have to change. This means creating international institutions which work, both in the sense of having legitimacy and that of having real power, binding on the market economies as well as others. However, real legitimate institutions must reflect the realities of power, not pseudo-democratic head counting or, worse, flag-counting. Staffing must be intensely professional and recruitment aimed at getting the best, not the best connected.

Second, we need the capacity building "technology" that was referred to above. That is, we need techniques by which to analyse societies for their deficiencies, and to make prescriptions for positive sum-generating change. A part of this prescription should be the political machinery through which to affect change. If this machinery is good enough, the "we" who is to use it are the people of the nations in question, assessing their own society and discussing options as to how they would like to shape themselves. In a sense that is exactly what the much-maligned "IMF formula" delivers, and it is striking that Latinobarometer reports (2005) that 70-80% of the populations of each Latin country believe that the free market is the way to go. By contrast, around 50% in the same poll believe that democracy is the best form of government, and 10-20% say that they trust their national political parties. If a socio-political formula or diagnostic for development were to exist, it would find a ready audience.

This said, there will always be a problem of agency in autocracies. Like the joke about how many psychologists it takes to change a light bulb - "One, but the bulb really needs to want to change" - many oligarchic regimes are aware of their deficiencies, are advised by many outsiders of how helpful change would be; but the elites like their power and so the bulb will not change itself. So should there be intervention? Of what sort and by whom? Should the wealthy powers take in huge numbers of students and inculcate them with the possibility of change; or should they park metaphorical or literal tanks on presidential lawns? Which of these options is in fact most likely to precipitate violence? Which political units - chiefly nations, but also religious blocks - matter sufficiently to motivate any kind of intervention? Which of them are in fact practically are amenable ot intervention, at present capabilities for undertaking this?

The answer to all of these questions, underscored by the Iraq adventure and experiences in Africa and the Balkans, is that intervention is extremely arduous, with the aftermath consuming far, far much more resource, time and political capital than does any initial conflict. Intervention through force is likely to be a minimal contributor to a practical solution, whatever then policy of the major states.

This leaves us with a world in which unimproved poor nations are going to find it extremely hard to cope; in which those resenting change or their relative poverty - or seeking self-dramatisation, or for whatever motive - have a springboard for power grabs, direct action and crime. By contrast, nations which have found ways to manage themselves will grow much faster than has happened in history: Britain took something like 60 years to double its output during the industrial revolution, Germany around thirty in the 1880 period, Japan 15 years after World War II, and now China takes only eight years to achieve the same thing with 9% annual growth.

The lessons on impersonal organisation are there for the taking: how to organise an industry, how to teach and train, how to raise capital, tax a population, manage infrastructure. There is no communist or Islamic way of digging a sewer or installing a cell phone antenna. There is no 'African' approach to traffic management. What is specifically Islamic, Chinese of African are the accommodations that are reached about how things are organised, about "how we do things around here", about who we want to be. Perceiving what already exists in these categories, its deficiencies and potential, must be a missing tool in the development tool kit.

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