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Wednesday, March 29

Dean Kamen vs World Bank: "Render unto Caesar the things that are Caesar's..."

February 18
Subject: Ephemeralization against the bureaucracy
Dear Pundita,
Welcome back! We've missed you. I just saw this euphoric post by open source advocate Eric Raymond about Dean Kamen's attempt to transform the economics of water and power distribution.

I'm sure much of this is hype (considering the Segway :-), but it is interesting how Eric (libertarian that he is) sees this as part of a larger quest to "dis-empower" government:

> Kamen's (rightly) contemptuous dismissal of conventional development economics, and his plan to end-run governments.
> Kamen is taking the next logical step: downsizing and decentralizing the power and water infrastructure. And look at the way he plans to do it; not by enlisting governments, but by tapping local entrepreneurialism.

To be sure, I think it is silly to imagine we can over do away with government, the way some Libertarians dream. On the other hand, it does seem plausible that technical achievements (or even failures) could dramatically impact some large-scale geopolitical issues you talk about, especially the development community.

Which brings me to my question: do you think it is possible for technology + entrepreneurship to (eventually) do an "end-run" around traditional development organizations (e.g., the World Bank), and demonstrate the viability of a truly grass-roots approach to social uplift?
Dr. Ernie Prabhakar in California"

Dear Dr. Ernie:
Thank you for alerting Pundita to the investment model developed by Dean Kamen and Iqbal Quadir; it's very exciting news so I can see why Eric Raymond is euphoric. Now to play wet blanket:

As the Kamen article notes, those nifty energy generator/water purifier machines have to be mass produced in order to bring their price within the reach of village entrepreneurs. As soon as you talk about mass production, you're talking about factories and distribution, and labor unions, and financing. When talking about financing you're talking about banks, which leads to banking regulations, and -- pretty soon you are entangled in the very red tape that Kamen wants to circumvent.

In 2003, Segway's marketing chief told CBS 60 Minutes that he was targeting military and industrial markets in Europe and Asia, "where there are fewer regulatory hurdles than in the U.S."

There are hurdles of a certain kind in the USA, but just try doing the most routine business in a developing country; the hurdles can be mind boggling. Two illustrations:

> Many illegal Mexicans in the US are here simply because they don't want to wait a decade to get a small business loan approved by a Mexican bank. So they work illegally in the USA just to establish credit so they can borrow from an American bank.

> In the 1990s Ukraine's government appealed to the World Bank for help in handling the massive task of establishing individual ownership of property, which of course was held collectively under the Soviet regime.

The examples are a helpful introduction to David Puglielli's paper The World Bank and Microfinance: An Elephant Trying to Build a Bird Nest, which is the shortest answer to your question. Puglielli observes:
...the World Bank has already found its place in the world of microfinance; structural adjustment programs designed to liberalize the over-regulated and suffocating less-developed economies.
The catch is that unless readers are already steeped in Bankese they will have to plow through the entire paper to fully grasp Puglielli's observation. The effort is worth the trouble; Puglielli's writing seems to be poorly transcribed in parts but the points are well reasoned and clear enough.

The points are also timely -- although for all Pundita knows the paper was published a decade ago. That is another reason to give the paper a read: the general public and businesspeople such as Kamen are at least a decade behind the thinking at the IMF-World Bank (and multilateral development institutions in general).

By the late 1990s the big institutions had come round to the idea that developing the physical infrastructures to support industry in the LDCs isn't much help, if the institutions and methods that support business in an advanced industrial nation are not in place.

In other words, if it takes years for entrepreneurs to get a simple business loan; if owners can't write business contracts because the legal infrastructure isn't in place to enforce the contracts; if the notion of private property has not been legally established, much less codified -- then the country is not exactly developing. It remains dependent on the advanced nations, no matter how many factories are built by multilateral institution development loans.

However, the World Bank and IMF must deal with governments that have any number of excuses for not modernizing their 'soft' infrastructures, shall we call them. Then along came the War on Terror and the Bush Democracy Doctrine; taken together, they provide the practical and theoretical rationale for shifting more emphasis to modernizing business infrastructures in the LDCs.

So that's where we are now. Microenterprise is coming into its own in development circles. The catch is that microenterprise, with its emphasis on small-scale entrepreneurs, requires microfinancing and thus, laws that don't mire small business and creative microfinancing in red tape.

The task for the American public in this regard is to lean hard on USAID; Treasury; Congress, the White House and, above all, the US Department of State, so that the multilateral development banks stay the course that the brightest development economists have laid down. (I urge Europeans in the advanced industrial nations to lean on their counterpart organizations as well.) As to why State is key in this regard:

In the manner of the White Rabbit Pundita cautions that you will lose your bearings if you assume that the World Bank's mission is development and reconstruction. The IBRD (now World Bank Group) and its sister organization, the IMF, were conceived as a means to avert another world war; that's their mission, which applies macroeconomic theories to the role of lending to governments that seek development and/or reconstruction assistance from wealthier governments.

The loan mechanism used by the Bank is a carrot and stick; it steers governments toward development/ reconstruction projects that follow economic principles which, in theory, help a poorer government avoid the kind of drastic conditions that traditionally lead to war.

But the development loan is also a powerful tool of foreign policy for the lending governments. So, historically, State (as with all foreign offices in the advanced industrial nations) tends to think in terms of advantage rather than development. Which means State has to be prodded to plug their ears when a government whines that they really can't modernize their business infrastructures if it means riling the party that put them in power. State understands all this; the public just needs to make sure that State's actions support their understanding.

Okay; that is the short answer to your question: In this era the inventor and the entrepeneur still need the World Bank. To be more precise, they need the governments in the advanced industrial nations to lean hard on the IMF and big development banks to keep pushing LDC governments toward modernizing their soft infrastructures.

(The response from many LDC governments will be -- and already is, in some cases -- "We don't need the IMF and World Bank and their stupid rules. We'll just go borrow from commercial banks." Persistence is the best retort.)

In the next post Pundita will tackle the kind of thinking that informs Kamen's push to save the world via cheap energy and clean drinking water. Puglielli's paper is enough homework for now.

Readers who are new to the concept of microfinancing, as applied to small scale development projects in LDCs, might want to visit the Grameen Bank, Grameen Foundation and Aga Khan Network websites before tackling David Puglielli's paper.(1)

Study the history of the Aga Khan's development network if you want to see how relatively small sums of money and lots of ingenuity and good planning can crank out "grassroots" development projects that work well. Also study the history of the Grameen Bank, which led the microinvesting revolution.

Next, I suggest visiting the Microvest Fund website to learn about microinvesting as it's used to help the world's poorest start small businessess.(2) And now that really is enough homework!

Finally, as I noted in the private reply to your February email, Pundita is not exactly back but we'll be posting a little more regularly -- at least once a week -- in April.

Grameen Bank

Aga Khan Development Network

(Pundita has no connection with Microvest Fund and this mention given to the company should not be considered an endorsement.)
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