Entrepreneurial approaches to Wicked problems.
Wicked problems; poverty in the Global South is a wicked problems, the geography trap and the Dutch disease trap
1. Revisiting Wicked problems
"Wicked problem" is a problem that is difficult or impossible to solve and can only be re-solved over and over again. Because of its nature, specifically the complex interdependencies that create and sustain these problems, any effort to solve on aspect of a wicked problem is likely to reveal and/or create other problems.
The concept was introduced by Horst Rittel and Melvin M. Webber in a 1973 treatise contrasting "wicked" problems with relatively "tame," soluble problems in mathematics, chess, and puzzle solving (check out the paper in this link).
2. Poverty (lack of economic development) in the Global South is definitively a wicked problem.
Paul Collier tells us in Chapter 1 of his book that the real challenge of development is that there is a group of countries at the bottom that are falling behind, and often falling apart. These countries are concentrated in Africa and Central Asia, with scattering elsewhere. He further argues that all societies used to be poor. Most are now lifting out of it, why are others stuck? The answer is traps.
3. Last class you guys discussed two of these traps: The conflict trap and the Natural Resources Trap. This class we will discuss the Landlocked with bad neighbors trap, and the Bad Governance trap.
3.1. First let’s review the conflict trap and the natural resources trap.
· The conflict trap: For Collier you cannot trust the rebel discourse of concern for social justice: what else do you expect them to say? He argues that the sources of war are less romantic and political and more economic and natural:
o Low initial sources of income (poverty)
o Slow growth and, of course, decline (hopelessness)
o Ease of rebellion because the state is weak. “Rebel leader Laurent Kabila, marching across Zaire with his troops to seize the state, told a journalist that in Zaire rebellion is easy: all you needed was $10,000 and a satellite phone.” (p. 21).
o Dependence upon primary commodity exports
o Geography matters: more civil war in mountainous countries.
o Ethnic dominance
o The experience of having been through a civil war roughly doubles the risk of another conflict.
· The natural resources trap. “A low-income, resource-rich society that either is an ethnically diverse autocracy or acquires the instant lopsided democracy of electoral competition without checks and balances is likely to misuse its opportunities in ways that make it fail to grow.” (p. 51).
o The Dutch disease: The resource exports cause the country’s currency to rise in value against other currencies. This makes the country’s other export activities uncompetitive.
o The boom-and-bust phenomenon also makes it very hard for electorates to sort out when a government is making mistakes.
o Resource rents make democracy malfunction (problems with checks and balances). But autocracy is also bad because of ethnic diversity.
3.2. The landlocked with bad neighbors trap.
· Let’s make a list of landlocked countries (visit list of countries)
· Let’s compared with a list of per capita income (visit list in wikipedia)
· What about the neighbors….
3.3. Bad Governance -- Country Policy and Institutional Assessment
· Review of basic concepts:
o What are the functions of government? What is a minimalist government?
o What are checks and balances?
o What are the tools available to government to intervene in the economy?
Two other traps: landlocked with bad neighbors and governance
1. The landlocked with bad neighbors trap.
· Among economists there has been a realization over the past decade that geography matters. To be noted in this area is the work of Jeffrey Sacks and that of Paul Krugman and Tony Venables.
· The general idea has been that it matters whether you are (or not) landlocked. The fundamental reason is the cost of connecting with the rest of the world.
· Paul Collier furthers the regular argument of geographic matters arguing that what matters is not only whether you are landlocked or not but also who your neighbors are. In this way Switzerland has done fine while the Central African Republic has done poorly. Why? What is it that neighboring countries provide?
o They provide infrastructure with which to access international markets
o They are themselves a market which can purchase goods.
· So what can landlocked countries do?
o Increase neighborhood growth spillover by improving transportation infrastructure and improving policies.
o Improve neighborhood economic policies
o Improve coastal access
o Don’t be air-locked or E-locked
o Encourage remittances
o Create a transparent and investor-friend environment for resource prospecting.
o Pay more attention to rural development
o Attract aid.
2. Bad Governance -- Country Policy and Institutional Assessment
Crucial concept to derive from this chapter: “governance and economic policies help to shape economic performance, but there is an asymmetry in the consequences of getting them right and getting them wrong. Excellent governance and economic policies can help the growth process, but there is a ceiling to feasible growth rates at around 10 percent: economies just cannot grow much faster than this no matter what governments do. By contrast, terrible governance and policies can destroy an economy with alarming speed. Why?
· The economy needs a peaceful and predictable environment
· People need to trust one another and the system to engage and profit from economic transactions. Protecting ourselves from abuse is expensive and a discouragement for trade.
The market and the state (private good vs. public good)
GH104H Dorado (Fall 2010) Source:Goldsmith, Arthur. Business, Government, Society: The Global Political economy. Thompson Custom Publishing, 2003.
The market
The market is a system of social coordination. It is a network of institutions within which people buy, sell, or rent.
How the market is supposed to work
The critical feature that allows markets to meet people’s needs is that, when they are working right, markets are voluntary.
Adam Smith (1776) was among the first to point out how the market channels human energy toward socially useful ends. In a celebrated passage at the beginning of The Wealth of Nations, he asserts that: “It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest.” (Smith 1965[1776]:14)[1] Smith develops the argument more fully later:
He generally, indeed, neither intends to promote the public interest . . . he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which has not part of his intention . . . By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it [stress added]. (Smith 1965[1776]:423)[2]
The Invisible hand was a powerful metaphor for a striking observation: the market can spontaneously serve society’s interests. .. This insight has led many people to advocate laissez-faire government policies toward business. Smith, however, never pushed this doctrine to its logical extreme to make a blanket rejection of government.
Historically, Laissez-faire was a reaction against mercantilism, a system where states tried to control industry and foreign trade to make their countries rich. These well-intended actions could backfire and hold down living standards. Laissez-faire became the dominant theory of public policy in the United States after the Civil War (1861-65). It fell out of favor later. By the 1930s and into the post-World War II period, government activism and interventionism became the conventional wisdom in most of the developed world. Since the 1980s, laissez-fair has reappeared as a serious guide to public policy, particularly in Anglo-Saxon countries.
Arguments for laissez-faire
1. Efficiency (allocative efficiency): markets allow mutually satisfactory exchanges among consenting individuals, and thus promote social welfare.
But … efficiency requires perfect competition which means all the following assumption are true:
§ All firms are small and there are lots of them, so no buyer or seller can influence prices though independent action.
§ Entering or leaving the market is easy.
§ Consumers act to maximized utility, and firms act to maximize profits.
§ Production technology has constant or decreasing returns to scale (The rate of output stays the same or falls as inputs are added)
§ Buyers and sellers have full knowledge, available at no cost, about the performance and quality of items being traded.
§ The offerings of sellers are identical in all respects.
§ Prices of goods and services are not sticky and move up and down quickly, and they reflect full costs.
§ Finally, the cost to penalize cheating by either party, and to protect their property, is zero.
Market competition, it must be stressed, never produces the best possible distribution of resources—just the best distribution given the pattern of wealth and income.
2. Innovation: Markets force companies to innovate.
3. Liberty: Markets are desirable because they permit voluntary cooperation and are not binding.
But . . . it depends on departing equality. . . The biggest inequality is often the gap between owners of capital and wage-earners. From this viewpoint, capitalism and democracy are contradictory.
More over voluntary exchanges will not do for every social task. The United States is better off today for having forcibly freed slaves, whose owners were not paid for the property they lost.
Market failure (table 2.2 of textbook)
§ Public goods: Markets do not provide education, public health services, infrastructure, and other public goods in ample quantity due to the problem of free riding. Example: Private companies may choose not to train their workers for fear they will lose any trained workers to competitors
§ Externalities: Markets do not protect people from the actions of others. Example: second-hand smoke inflicts cost on non-smokers who had nothing to do with the purchase or sale of cigarettes.
§ Monopoly: Due to obstacles to free entry, economies of scale, and other factors, markets may be dominated by one or a few companies that may try to take advantage of consumers. Example: Airlines charge very high fares in out-of-the-way communities where they face little competition.
§ Information asymmetry: Markets cannot work well when consumers are ignorant. Example: lacking scientific knowledge, consumer can be enticed to buy dangerous patent medicines.
§ Agent misdirection: Agents need not act in their principals’ best interest in a market. Example: brokers sometimes mislead elderly clients into making high-risk investments that are not appropriate for their investment goals.
§ Social goals: Markets may not promote social goals, like providing merit goods. Example: Real estate developers do not build homes for the indigent.
§ Inequality: Markets may be inequitable. Example: people with inherited wealth get to live extravagantly without working, while many hardworking people live in poverty.
§ Economic instability: Markets may not provide full employment, stable prices, or economic growth. Example: The transition to a market economy in Russia is accompanied by a loss of jobs and a collapsing currency.
Roles of the state
States are organizations that embody legal order within geographic territories. They are different from nations. A nation is a people who share a common language and culture.
States defining characteristics is having sovereign control of territory.. As Max Weber (an eminent sociologist) has argued states possess a monopoly of legitimate force, business has no choice but to work with them.
Roles taken by the state to correct market failure
Rule-maker: it makes the rules of the game of economic competition.
Umpire: it resolves disputes over those rules.
Buyer: it is a major market for private companies
Producer: it produces public goods that help business, such as infrastructure and human capital, and also many privately-sold, individually-consumed goods and services, sometimes in competition with the private sector.
Promoter: It promotes business through direct and indirect subsidies, on either a planned or ad hoc basis.
Guarantor: It insures business and individuals against many types of risks.
Broker: It is a middleman that brings companies and communities (including foreign countries) together.
Regulator: It regulates many facets of business, such as safety standards, pollution standards, and employment practices.
Economic manager: It uses macroeconomic policy to try to maintain full employment and stable prices.
“Market failures are pervasive; it is only under exceptional circumstances that markets are efficient. The issue for the appropriate role of government is to identify the large market failures where there is scope for beneficial government intervention.” (Stiglitz, 1989:38).[3]
How states fail?
A government failure is a miscarriage of public policy that has a net social cost. The failure is either one of commission or of omission.
Rent-seeking behavior or attempts to exploit the state for private gain. How big is the cost to society? The estimates range from 3 to 25 percent of GNP.
Special interest groups: Organized pressure groups work to take advantage of the unorganized.
Inadequate feedback: Public employees are not given clear signals from their clients about how they are doing, and have little incentive to satisfy clients’ needs.
Office seeking: Professional politicians are tempted to mislead of buy off constituents to win elections.
Voting: Voters are poorly informed and apathetic.
Unintended consequences: No one can accurately foresee the outcome of public policy
Entrepreneurial approaches to Wicked problems.
Collier’s chapter 1 -- The professionals?, the MDG and growth
· The countries at the bottom coexist with the twenty-first century, but their reality is the fourteenth century: civil war, plague, ignorance. They are concentrated in Africa and Central Asia, with scattering elsewhere.
· Development biz -- Not focused on the bottom billion. the World Bank has large offices in every major middle-income country but not a single person resident in the Central African Republic.
· Development buzz is generated by rock stars, celebrities and NGOs. It is focused on the bottom billion. But inevitably, development buzz has to keep its messages simple, driven by the need for slogans, images, and anger. Unfortunately, although the plight of the bottom billion lends itself to simple moralizing, the answers to do not.