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It hurts to fund governments

It hurts to fund governments
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First Published: Tue, Oct 21 2008. 10 04 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Tue, Oct 21 2008. 10 04 PM IST
Eight years ago, with great fanfare, the United Nations (UN) developed eight goals for improving the life chances of the world’s poorest. From reducing child mortality to eradicating hunger and increasing access to education, these so-called Millennium Development Goals (MDGs) were ultimately endorsed by the UN, and achieving these targets has become the battle cry of development experts around the world.
UN dignitaries met recently to discuss and likely recommit to the MDGs. The reality, surprising only to some, is that most of the goals are nowhere close to being met. This failure is due to holes in the logic, the most striking being that it flies in the face of economic development in the last millennium. That period’s successful developments were fuelled by innovations and entrepreneurship, giving rise to the economic advancement of many, often in opposition to the state, controlled by a few. This eventually led to arrangements known as democracies, with people managing their governments. In contrast, MDGs see governments managing their people.
Illustration: Jayachandran / Mint
Entrepreneurs drive economic growth and push their governments to accountability. They need support for inducing organic transformation. In contrast, supporting government bureaucracies stagnates poor countries. How? Economic assets are often kept in the hands of the state, leading to monopolies and extortion. As red tape increases, entrepreneurs are discouraged and a vicious cycle ensues.
Over the last several decades, millions have been lifted out of poverty, particularly in Asia. This, however, has happened through trade and commerce. In contrast, the results from state-led efforts have been abysmal (for example, Africa). At the same time, there are instances whereby entrepreneurs have created successful businesses even in the most difficult environments. Proponents of aid often claim that aid in general helps poor countries, even justifying aid to governments. But clearly, funding entrepreneurs helps; funding governments hurts.
A look at the history of England explains why outside aid to governments is damaging. In the 13th century, after the advent of property rights, the monarch was forced to convene a group of citizens as a tax legitimizing device. That group’s name? Parliament. Over several centuries, Parliament capitalized on the monarch’s chronic need for money and, indeed, made sure the crown did not gain financial independence. Every time a monarch came to pass a new tax Bill, Parliament obliged, but only after exacting more liberty from the crown. Over time, Parliament emerged as the more powerful branch of government. In hindsight, the two keys to the successful economic and democratic growth of England were (a) the monarch’s shortage of money, not its adequacy; and (b) the lack of external aid.
Private investments would necessarily employ poor countries’ low-cost labour, thus creating jobs.
Second, provide seed money to small entrepreneurs in the range of $10,000-20,000 (Rs5-10 lakh). These entrepreneurs would create jobs, products, services and choices. It is precisely such jobs, entrepreneurs and choices that form the bedrock of flourishing democracies. The World Bank needs to be reformed to back these small entrepreneurs and not the governments.
Third, introduce technologies that cost-effectively empower individuals. Such technologies multiply people’s abilities and deliver genuine aid to citizens directly. A pair of wheels, for example, provides invaluable assistance in moving a heavy load of bricks.
The consequently heightened productivity has four benefits. First, as individuals control what they produce and consume, their lives improve. Second, when citizens’ economic clout increases, institutions are forced to respond to their needs. Third, by becoming more productive, users can pay for productivity tools, creating opportunities for entrepreneurs to launch profit seeking enterprises to provide such tools. This is why businesses selling computers and cellphones sprang up naturally in Africa.
Finally, profitable businesses attract imitators, unleashing competition. That means innovation, specialization, scalability, lower prices, higher wages and a host of other good things including curtailing potential abuses by businesses. It’s a virtuous cycle of organic economic growth that, like a mighty wheel, can bring poor countries to the world’s economic orbit.
To achieve real progress, we must activate the hands and brains of ordinary people in poor countries, who can then make their economies blossom and tame their bureaucracies. Instead of building the proverbial “hospitals” treating people as patients to be taken care of, we need to support entrepreneurs to build “gyms” of their economies for healthy progress.
Iqbal Z. Quadir is founder and director of Massachusetts Institute of Technology’s Legatum Centre for Development and Entrepreneurship, and founder of GrameenPhone in Bangladesh. Comment at theirview@livemint.com
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First Published: Tue, Oct 21 2008. 10 04 PM IST