Tuesday, November 12, 2013

Focusing on economic growth and talent development solve the problems of disadvantage and inequality faster than focusing directly on disadvantage and inequality

A couple of weeks ago, I posted about Ricardo Hausmann, a Venezuelan developmental economist and Harvard professor, and a provocative post, The Tacit-Knowledge Economy.

Hausmann's conclusion.
The bottom line is that urbanization, schooling, and Internet access are woefully insufficient to transmit effectively the tacit knowledge required to be productive. That is why today’s emerging markets are so much less productive than rich countries were in 1960, even though the latter were less urban, had higher birth rates and less formal schooling, and used much older technologies.
Hausmann is a member of the Harvard Center for International Development and they have the South Africa Growth Initiative along with a number of associated research papers. I browsed through a few of them and came across, Is Black Economic Empowerment a South African Growth Catalyst? (Or Could it Be…)
Racial segregation has been South Africa’s primary and defining characteristic. Non-whites were seriously disadvantaged because of structures that limited their economic and social opportunities, leaving few from this vast group in the formal economy. Black Economic Empowerment (BEE and its more recent Broad Based version) is a policy intervention driven from the economic and industrial complex in government. Aimed directly at addressing the economy’s skewed racial profile, BEE calls the private sector to restructure itself and create opportunities for previously disadvantaged individuals (PDIs). The policy requires change to intra and inter-firm relational patterns of capital and control, personnel selection, promotion and development, supplier selection, enterprise development and social engagement.

Organizational theory argues that these kinds of intra and inter-firm relational structures and the networks they establish influence who participates in economies and how these people benefit. This argument supports the contention that BEE’s focal changes are necessary to open the economy and adjust its racial composition. If the structures that have entrenched patterns of access to economic opportunities remain static they will not allow inclusion of previously excluded groups. The argument could also be used to view BEE as a potential South African growth catalyst.

Research suggests that the same structural variables that influence who participate in and benefit from an economy also impact what new ideas enter, what products are produced and what growth opportunities exist. Organizational arrangements
prompt and constrain economic actors all the time, shaping what and how they produce. When favoring large firms and vertical relationships, for example, organizing structures offer opportunities for large scale undertakings that emphasize heavy capital investment. Such structures are less conducive to nimble adjustment in the face of changing global economics, however.

Many observers have noted links between the South African economy’s organizing structures and its economic weaknesses. Limited new entry into markets is often explained, for example, as a result of high levels of capital concentration and vertical integration in key industries. Critics contend that these and other structural factors restrict the entry of new ideas, inclusion of outsiders (including budding entrepreneurs and low skilled workers) and development of a
Interesting research. I thought this observation particularly telling.
One is reminded of Fafchamps’ comment that business networks are about much more than ethnicity: If the ethnic barrier to entry in the inner circle falls but the other barriers are left up, does the network really expand? Racial barriers are falling, as are gender and political barriers (with new political voices entering this circle) but in other respects most companies in the sample cannot claim to have enhanced the cosmopolitanism of their boards.40 This suggests that the highest rungs of big business will remain closed to most, as defined by pre-existing network configurations. One has to wonder if these big business decision-making rungs will also be closed to new ideas and thus limit economic growth as well. Chabane, Goldstein and Roberts (2006, 567) certainly suggest it might in commenting, “There is no discernible evidence that changing the composition of South African boards influences corporate strategies.”
A second type of proposition arises from observing Malaysia’s affirmative action policies. These policies took two different shapes in different time periods—the New Economic Policy (NEP) between 1970 and 1985 and the National Development Policy (NDP) after 1985 (Athukorala and Menon 1999; Haque 2003). The NEP actually looked a lot like BEE, but with an explicit growth policy tagged to it focused on promoting heavy industry. The BEE-type components include “long-term targets” for “Malay ownership of share capital in limited companies, and the proportion of Malays employed in manufacturing and occupying managerial positions” (Athukorala and Menon 1999, 1122-23). The program had many problems and contributed to budget and current account deficits. A faltering economy—unassisted by the deficits—frustrated NEP progress. The NDP replaced it in 1986, “with a view to putting creating wealth ahead of redistributing it” (Athukorala and Menon 1999, 1123). Some of the ethnic requirements of the NEP were relaxed, work permit requirements for foreigners were eased, and authorities adopted a more overt approach to address racial imbalance, consisting of “various initiatives geared to entrepreneurship, managerial expertise and skills development in the Malay community” (Ibid). The NDP was more successful than the NEP, facilitating growth and structural change: Inequality dropped, Malay engagement in the economy increased, the manufacturing sector grew, and the economy flourished.
Interesting throughout. The final conclusions are that the existing policies intended to broaden and integrate the economy are certainly benefitting substantially only a small privileged elite, and likely, but not conclusively, hindering the transmission of knowledge and talent, constraining the openness of firms to new ideas, and handicapping the companies when they face competition.

There are echoes of the experience of Philadelphia, Detroit, Jersey City, Baltimore and Atlanta throughout.

The final conclusions, though not stated plainly, seem to be that focusing on economic competitive growth and talent development solve the problems of disadvantage and inequality faster than focusing directly on disadvantage and inequality.

The challenge is that from a policy perspective, ensuring economic competition, fostering economic growth and developing talent offer far less scope for rent seeking and regulatory capture to the established elites than do coercive goals and redistributionist policies. It is like asking the turkeys to vote for Thanksgiving. That is likely why we see so much more "guided" economic development despite its extensively documented failures rather than competitive market development where the successes are so much better documented.

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