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Wednesday, March 11, 2009

Guest Post: Why Policy Coherence Matters to the Next Billion

By David Peyton

"Capitol at Sunset".

Editor's note: The American Enterprise Institute recently convened a two-day symposium on the future of U.S. development policy and foreign assistance. The nexus between development and enterprise was a recurring theme at the event, and participants discussed how entrepreneurial philanthropy, social entrepreneurship, and base-of-the-pyramid approaches to development will influence U.S. engagement in the developing world. We invite NextBillion.net readers to join the dialogue about foreign assistance under a new presidential administration and also read Apoorva Shah's recent Guest Post on the same topic.

The development discussion in Washington has noticeably shifted. Over the past decade, the conversation has moved beyond large-scale government initiatives to homegrown, entrepreneurial approaches to ending poverty. To be fair, the IFIs, USAID, and other traditional foreign assistance programs are still around, but their centrality is fading. The darling of Washington’s development thinkers is now the private sector, not the public sector. This is a step in the right direction and can be attributed in part to forums like NextBillion.net.  

However, the rush to embrace private-sector solutions to development challenges can lead us to ignore the importance of sound public policy. Innovative development techniques like microfinance and social entrepreneurship have demonstrated their worth but are no substitute for government policies that unleash on a national level the productive power of entrepreneurs.

At a recent AEI conference, the former prime minister of Georgia, Lado Gurgenidze, argued that coherent national policies are a prerequisite for entrepreneurship. “For instance, if you do not have a reasonable climate for starting up a business, if you do not have a flexible labor code, and if you do not have credit availability in the country, you simply will not have much of the entrepreneurial momentum,” said Gurgenidze. Far-reaching national policies are needed to address the whole development equation, not merely isolated items.

Georgia’s story is a case in point. The country launched an aggressive and far-reaching reform agenda in 2004 to improve its business climate. According to the World Bank’s Ease of Doing Business Index, the country jumped from 137th place in 2004 to 15th in 2009. This progress was the result of state efforts to streamline business registration, bankruptcy codes, financial regulations, and trade policies. These interventions were enacted as part of a comprehensive and coherent reform agenda. If taken in isolation, the interventions’ collective impact would have been incomplete and possibly counterproductive. According to Gurgenidze, these reforms are “so basic that they are equally applicable and appropriate in G7 countries as they are in small African nations.”

And African countries have taken up the mantle of broad-based reform. Rwanda’s Vision 2020 plan is an exemplar. It says that “productive entrepreneurship must be fostered to perform its traditional role of creating wealth, employment, and vital innovations through opportunities for profit.” Thanks to Vision 2020, Rwanda has reformed property rights, its justice sector, and banking and finance, making the country a more attractive and enabling environment for entrepreneurship. These kinds of broad-based and coherent national plans not only catalyze domestic entrepreneurship, but also give external investors confidence that the country is serious about doing business. Rwanda’s Vision 2020 has caught the attention of large U.S. companies like Costco and Starbucks. 

The Georgian and Rwandan examples of broad-based national plans should encourage other developing countries to take up similar reforms. AEI conference participants agreed that tapping into entrepreneurship requires these kinds of strategies. According to Mary Ryckman, assistant U.S. Trade Representative for trade and development, “it is a coherent approach on policy that that we are seeking to obtain.” 

The microfinance revolution, SME development, and social entrepreneurship are organic, private-sector-based solutions to development that have changed our discussion of the topic in positive ways, especially among Washington’s cadre of development scholars. According to the Whitaker Group’s Aubrey Hruby, “the debate of whether the market or entrepreneurial spirit exists [in developing countries] is just completely ridiculous. It is there.” The challenge is to match entrepreneurial drive with policy coherence at the level of national governments. Locally conceived, private-sector success stories have not erased the need for a serious discussion of public policy.

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