more thoughts on social enterprises

There are four things that at root explain the persistent poverty that social enterprises seek to address: (1) loss aversion (2) credit constraints (3) what I refer to as contigent profitability and (4) high transactions costs. Poverty is both the cause and a consquences of each one of these. Consider first loss aversion. However much a gain in earnings might mean to a poor family, the fact of the matter is that if potential losses are substantial this family, because of its poverty, cannot afford to gamble. Loss aversion means that even if such a family were able to experiment (or even if the family concerned were otherwise quite comfortable with the notion of gambling) they would still sit back and wait, “leaving well enough alone”. Of course, the poverty of poor families also sharply limits their ability to act. By definition, one’s own resources are limited if one is poor and credit is not easily had as the fears of the poor are compounded by creditor's lack of faith in their ability to honor obligations. Contigent profitability is simply a term I have created that is meant to capture the fact that the expected payoffs of any undertaking are often dependent on a number of significant factors outside the invididual family’s control. For example, the less faith poor families have in job opportunities appearing after investing in education or the less confident they might be that a reliable supply of inputs would be available to continue to operate one's own business the less beneficial activity will take place. Even if the poor had no real reason to be particularly loss averse and even if credit were readily available on reasonable terms this would be true. Paul Polak in his book Out of Poverty discusses his organization IDE's (International Development Enterprises) first project. This project involved helping refugee blacksmiths in Somalia build and sell donkey carts to other Somali refugees. Absent Polak’s realizing that tires would frequently be in need of repair and his efforts to bring tire patch kits and lug wrenches (inexpensive lower quality ones) all the way from Nairobi back to Somalia , the initial efforts of blacksmiths would have been far less successful. (Polak, p. 65) In essence the complementary investment and activity of others, as it limits the size of potential losses and raises the potential payoff of any investment, tips the scales in favor of action rather than inaction. There is finally a myriad of things that together combine to create the fourth factor contributing to persistent poverty: high transaction costs. To begin with, individual transactions the poor carry out are small . This means that if, for some reason, a given trade is unsatisfactory there is a high chance that the costs to an injured party of making a legal case against the offender will often far outweigh the benefits. Also the very contingent nature of economic activity just discussed and the large number of individuals involved means that not only is the enforcment of contracts costly but so too would be writing-up such contracts . Add to all of this low levels of education and poor infrastructure and it should be easy to understand that high trasanction costs serve as barriers to the identification as well as the pursuit of opportunities. In essence social entrepreneurs are involved in trying to break the vicious circle that the preceding four factors create. This of course begs the question as to how social entrepreneurs addressing such questions differ from other non-profits or government agencies devoted to attacking the same problems. Some see the key difference as being due to better organization and the sharper focus on results that social entrepreneurs have. Some equate social entrepreneurship with being for-benefit organizations that are completely self-sufficient. What is curious about the field of social entrepreneurship is how wide the range of definitions in use is. This then means that what might pass muster as a social enterprise to some may not at all qualify if an alternative definition were to be employed. What one might consider social enterprise is to another a nonprofit or what is labelled by one person a for-profit with a charitable bent becomes in the eyes of another a social entrepreneur. An attempt at a definition: The word entrepreneur comes from the French entrependre meaning to undertake (as in to undertake a challenging task). A social entrepreneur then is an individual willing and able to undertake challenges (either the challenge of pursuing advantages of opportunities as they appear or warding off threats such as finding and continuing to attract resources and funding) with her principal goal being not her own gain but rather the benefits her efforts generate for others. In turn, broadly what seems to distinguish social enterprises from other non-profits are two things: While many other non-profits are focused on helping others they rely heavily on charitable donations and grants and operate in a very nonbusiness-like manner social enterprises are run more professionally and to some degree have the ability to generate earnings that defray operating expenses, help pay suppliers and help attract and retain qualified staff. Discussing an obviously important part of the social enterprise movement, microfinance institutions (MFIs), Jonathan Murdoch notes that while a substantial proportion of MFIs are self-sufficient in this sense (what he refers to as operationally sustainable) far fewer are financially sustainable. While operationally sustainable MFIs generate enough to revenues to cover their operating expenses they fail to generate enough revenue to act entirely independently. It is only the much rarer financially sustainable MFIs that could survive if they had to "...obtain all inputs (especially capital) at market, rather than concessional, rates (Murdoch, 1999, p. 1588) While the goal of financial sustainability is laudible as Wei-Skillern et al point out while in commerical capital markets "...the key motivation for all players involved is most often to build a profitable company and to earn an attractive return on investment" the motivation is varied in the case of those funding social enterprises (Wei-Skillern et al, p. 13) They go on to note social enterprises "...rarely, if ever, atain breakeven without some form of donor support" (p. 13) It is enough to be business-like in managing operations and to be, if possible, concerned with operational sustainablity. It is often nothing short of impossible to pay staff competitive salaries and benefits and at the same time pay investors an adequate return on their investment and remain at the same time true to the social enterprise's orginal mission.

Nonetheless, Boschee and McClurg define social enterprises and social entrepreneurship in terms of self-sufficiency. As they put it self-sufficiency "...can be achieved only by relying completely on earned income, and is the ultimate goal of the most ambitious social entrepreneurs" (Boschee and McClurg, 2003, p. 3, emphasis added) As Murdoch suggests however by such a definition it is well nigh impossible to find real world examples of social enterprises. It sets a standard that few social enterprises will ever be able to attain.

On its website the Social Enterprise Alliance notes that in 2002 commercial revenue ("service fees, registratrions, dues and subscriptions, and other program fees, as well as income from special events and sales of products") has risen from 48.1% of nonprofit revenue overall in 1982 to 57.6% in 2002. These figures are not adjusted for inflation where inflation eats away over half of the seemingly impressive 219% growth in nonprofit revenues. And when adjusted for inflation the figures represent at most decent growth in earned income. This growth has taken place alongside relatively weak growth in the total earnings of nonprofits. While the U.S. economy grew at an average annual rate of 3.36% in real terms between 1982 and 2002 the total revenue of nonprofits grew only 2.75% a year in real terms while earned income (if commercial revenue and earned income are synonmous which is not entirely clear from the SEA's website) grew at an average annual rate of 3.68%. In short, as overall funding for nonprofits lagged behind the general growth of the U.S. economy a few additional scraps were thrown in the direction of nonprofits in general to make up for the significantly lower growth in government support for nonprofits (1.72% a year in real terms or put another way a little over half the growth in real incomes overall between 1982 and 2002).

A key catalyst to growth of social enterprises and the increased focus on earned income has therefore been the fact that tighter government budgets have forced many social organizations to become far more self-sufficient than they might otherwise be. It also reflects the sad fact is that more than being a desirable goal for social enterprises the complete self-sufficiency that McClurg and Boschee call for reflects the outsourcing of public service to private sector. Part of the rise of social enterprise is then borne of necessity converting some non-profits into social enterprises simply because of a lack of funding.

All the while the mountain of poverty grows in absolute terms. The many social enterprises that have sprung up are to be admired and applauded for their accomplishments. However what many of these enterprises have been able to accomplish is tantomount to moving small sections of earth from this ever growing mountain of poverty. Looked at from the ground level those who have given so much of their time and effort are justifiably proud. This in no way however means that such undertakings represent a key solution to the dilemma of world poverty. As Jonathan Murdoch in his work on MFIs has suggested in fact the more operationally sustainable MFIs -taken here as a subspecies of social enterprises- have succeeded by addressing not the needs of the poorest of the poor but small merchants and shop keepers who are relatively speaking better off. It is indeed striking to see the Mexican MFI Compartamos frankly admit this and to draw the connection between its move from nonprofit to profit status as in no small degree due to this and that it's mission does not nor can it include addressing the needs of the poorest of Mexico's poor (see the following).

There are, of course, social enterprises that as Alan Folwer notes he would prefer to refer to as integrated complementary organizations. In these the business generates a suplus that then is not plowed back into the original venture nor turned over to shareholders but rather it directed toward a social program of some sort. Staff is hired, funding is raised through bank loans and bonds, advertising is carried out and after all the bills are paid the net revenue goes toward supporting some social program or perhaps a variety of social programs. BRAC through a variety of enterprises such as its retail outlet Aarong provides employment opportunities to the poor, an outlet for their products, and provides revenue that helps fund BRAC's other activities. Newman's Own "shameless exploitation in pursuit of the common good" would be another example of a business that operates at least in a sense at a financially sustainable level and uses the profits earned for social programs rather than to provide a return to shareholders. To their credit the fact that this presents practical difficulties in equity markets is something the Grameen Foundation recognizes.

Thoughts on social entrepreneurship

At the end of this month, the University of Baltimore will be holding a day long symposium 'Love and Money' in which participants consider the growing power and influence of social entrepreneurship. Referring to social entrepreneurship as the fourth sector (the other three being for-profits, not- for-profits, and government) the announcement for this symposium describes social entrepreneurs as : "leveraging the potential to realize lasting change on a worldwide scale, addressing millennia-old issues like hunger, poverty and social inequality in ways never before seen in history. Their "for benefit" model—prompted by a social purpose, self-sustaining, and creating and distributing products and services that improve quality of life, add jobs and stimulate the economy—calls for market generated profits that are then turned back to be invested to advance a social mission. These entrepreneurs are determined to put all of their energies into resolving entrenched social issues while reducing dependence on traditional grant and gift funding methods". What I would like to consider in what follows is the question of how profitable "for benefit" entrepreneurship can be as well as the question of how effective the untold number of small organizations (working more or less independently ) can be in protecting the environment, reducing poverty, and promoting the general welfare . Furthermore -assuming that the popular press is correct and that social entrepreneurship is is growing- a third question is what are the forces that are at play in promoting this growth. Finally, returning to the question of effectiveness, the issue of how much of what social entrepreneurs are trying to accomplish ideally should be done by the state? In a democracy is it not true that the state's main goal to promote the public's interest? Is it not equally true that , by virtue of its size, the state has far more power to organize resources on a large scale to promote general welfare than individual businesses ever will? Does the rise of social entrepreneurship reflect acceptance of the fact that real world governments are unwieldy and often unable or unwilling to address pressing social issues effectively?

How profitable can for-benefit companies be? It is a matter of basic microeconomic theory that any organization that on the one hand seeks to earn profits but on the other is focused on not only its own profits but is also concerned with the impact of its actions on other people and the planet will tend to either earn less profit than it would otherwise enjoy or it has to pay its staff less than they could make elsewhere. Why? Concerned with a "triple bottom line" such a company is trying to internalize benefits that it will not be compensated for or is trying to internalize costs that it would not otherwise have to bear. It can be shown that either way profits earned will be less than what they would be if the company were instead concerned only with its own profits.

In a market in which funding will only flow to such a company if it pays a competitive rate of return this means that it will have to rely on its staff willingly taking a cut in pay or relying on volunteers to help. Barring this the fact is that investors in a social enterprise will have to be willing to accept less return with greater risk than they would have to elsewhere. In reality of course what we increasingly see is a combination of all three of these things, also included in this mix are grants and subsidized credit that brings the average cost of capital down while appearing to pay private investors a favorable return. By bringing together dedicated staff ,volunteers, and investors social enterprises can reduce their dependence on grants, gifts, and subsidized credit from chariable organizations and governments but in reality dedication and commitment are both necessary ingredients in the process.

For example consider the following scenario. Management realizes that the more labor it employs and the higher its scale of operations the better it will be for other businesses in its area. This could be because of the knowledge that spillovers from its workers to employees of other companies operating in the area. This could be because this company supplies an input that will then be regularly supplied in the local market. The point is that with a view toward the social benefits of its actions this firm will push its level of operations well beyond the level it would if only concerned with short-run maximization of its own profits. Arguably, the long-run profitability of this firm may be increased if the productivity of labor employed by other firms is increased significantly but the fact remains that this social enterprise's short-term profits will suffer.

Assuming that it would have only earned normal profits as a for-profit then by producing more than the profit maximizing level of output it generates negative economic profits. In an accounting sense the books may more than balance, the firm may appear to be profitable but this is only because either stakeholders or staff are willing to accept a lower return (in exchange for knowing that what they have done is of benefit to others) or because grants, subsidized credit, gifts, or volunteers are able to make-up the difference between the accounting profits realized and the economic profits required of a for-profit enterprise.

The Grameen Bank is an example of such an organization. Working with a dedicated staff that could be earning far more elsewhere 22% of every dollar lent comes from donations or the Central Bank of Bangladesh. This is not to be viewed as a failing of the Grameen Bank but rather simple comfirmation of the fact that it is impossible for a firm to either consider costs that it would not otherwise have to bear or consider benefits in making its decisions that it will not receive any direct or immediate compensation for without seeing its short-run profits fall*.

*In the late 1990s Richard Sandor helped to establish the Chicago Climate Exchange (the CCX) in which CO2 emission rights are traded on the private market. The CCX also manages the much more important ECX (the European Climate Exchange). Although enormously profitable at this point the CCX was formed in the late 1990s with the help of a $1.1 million grant from the Joyce Foundation. Sandor is also the father of the interest rate futures market. A question naturally arises as to how much grant money had to be provided to form interest rate futures trading in the 1970s compared to the $1.1 million used to organize the CCX.

The catalysts to growth in social enterprises.

Imagine a Venn diagram with three circles drawn on it. The first is labeled need, the second staffing, and the third, financing. Given growing population and the push worldwide toward industrialization the need circle is growing ever larger each year. The growth in population corresponds to a rising number of people living in absolute poverty while rising population and industrialization together mean growing pressure on the environment. Growth in accumulated wealth, in the stock of human capital, and in the supply of labor mean that the staffing and funding circles are growing as well. This growth in all three circles means that inevitably the degree of overlap should grow over time but there is also at play a shifting of the staffing and funding circles toward the much larger and faster growing need circle as attitudes change and more people become aware of the extent and severity of problems the world's poor and, via the environment, future generations face.

There was serious flooding toward the end of summer of 2007 in Bangladesh, India and Nepal. Former President Bill Clinton appeared on the Oprah Winfrey show early last fall to promote his book Giving and featured the microfinance institution Kiva. In response to the crisis in South Asia one could easily go online and donate money to aid flood victims in South Asia. After hearing of Kiva on the Oprah Winfrey show anyone interested in becoming a lender to someone in any number of developing countries could do so with only a bit of time, a bit of money, an internet connection, and a valid credit card. Computer technology has made it easier to not only learn of problems around the world but also to act on such problems. One hears of the Skoll Foundation on social enterpreneurship, One World Health, Living Goods, Better World Books, Vikram Akula's microfinance organization SKS and within minutes finds the home pages for these organizations, praise and criticism, and discussion of related organization. There is no question that a large part of the growth in activity, refered to above the shifting of staffing and funding circles toward the needs circle as all three grow ever larger, is in part due to the ease with which information can be obtained and action taken. In particular, the flow of funding that as Wei-Skillern et al in their book Entrepreneurship in the Social Sector characterize as highly fragmented (p. 13) has become far less so thanks to the internet.

Arguably another factor in addition to the ease of funding is that both in terms of funding and staffing there are a growing number of upper-middle class and wealthy people whose knowledge of the world is quite a bit broader than their parents and grandparents. They also increasingly are searching for some meaning in their own lives, are conscious at some level of their good fortune and wish to share it rather than hoard it. The growth of modern cities allowed a shift from the street-alley segregation (where although separate the wealthy and the poor lived in proximity to each other) that Stuart M Blumen refers to in his book the Emergence of the Middle Class to areal segregation (where the middle class and wealthier segments of society could and do live largely separate lives). In a very interesting way perhaps modern media has created a virtual world where it is far more difficult to grow up shielded and largely unaware of the problems of others and the environment and has helped move us back toward a time where it was harder to ignore the plight and misfortune of others.

The need for social enterprises.

As laudible as social enterprises are it is an important question whether or not these needs couldn't be far better served by government. Herman Daly has long advocated that government set the stage for the private sector by insuring, prior to market activity, that what he refers to as intragenerational equity and intergenerational equity are taken into account. In a world in which historical accident is relevant (such as England's endowments of coal, iron ore, and water transport in the age of coal and steam or our own endowments in the U.S. of coal, iron-ore, oil, and water transport in the age of steel) and in which the scale of activity has risen so much relative to its resource base (as in populous areas throughout the premodern period or the industrialized world now) attention must be paid not only to efficiency but to justice as well. The faster a society pushes use of renewable resources beyond their sustainable limits and the faster it depletes its stock of nonrenewable resources the more future generations are liable to suffer and the less equitable the allocation of natural resources will be over time. The more economies allocate resources of all sorts to the satisfaction of the relatively trivial needs of economically better off consumers and businesses rather than the abolutely basic needs of the poor the less equitable the allocation of resources will be at the present time. Social entrepreneurs, by definition, seek to promote a more equitable allocation of effort both now and in the future or in short, doing what Daly has long advocated sovereign governments should be doing. The question therefore arises whether or not social enterprises are not only growing because it has become easier to become informed of where needs are and to organize the resources needed to affect change but also because of an increasing awareness of how far short of the mark governments have been in taking the initiative and following through. Indeed Kaushik Basu in his Prelude to Political Economy identifies clearly how easily recommendations given to politicians by experts can be expected to be completely ignored (see chapter 7 of Basu's Prelude pp. 169-173).

Because of their ability to act without having to navigate choppy political waters, to act without having to divine the preferences of politicians, to act without having to try to persuade them of the value of a given program, or to act without having to enlist the support of others to persuade policy makers, social enterprises are far better at initiating change than governments can be. Ironically they are inherently inferior to government in being able to sustain a certain level of activity or to achieve a sufficiently high enough scale. No small part of the limited ability to sustain effort over time is because it is difficult for social enterprises to capture the benefits generated by programs they've initiated as easily as governments can. For example, one might envision a social enterprise in which schooling is provided to elementary age students along with a stipend to cover the loss of income the family suffers as their children attend school rather than work. If this important work was carried out on a wide enough scale by the state the stock of human capital might grow. In turn, the level of output per worker would grow, and given current capital labor ratios, the expanded real per capita income would generate increased tax revenues and therefore be a self-liquidating investment. In contrast it is hard to imagine a patch work of social enterprises working independently that could offer similar opportunities on a wide enough scale to make much of a dent in the problem in a short enough period of time. It is equally hard to imagine their capturing the benefits that accrue only with a lag to other businesses in terms of more easily trained, more flexible, and therefore more productive workers. In short, there are places where social enterpreneurs will be able to step in but many others where benefits are either delayed or shared by the community at large in which they will not be able to step in as easily.

The other major drawback to social entrepreneurship is that it is difficult for social enterprises to achieve the sort of scale needed to really bring about change. Primarily this is due to the continual need to find staff and those willing to provide financial support who will readily take on added risk or responsibility for lower returns in the numbers required to keep up with the growing needs of the world economy for help.

All true but largely beside the point.

Thanks to the weather (an ice storm), I woke today to find that that I had a bit of extra time. So I sat with a cup of coffee and yesterday's NYT (December 10th 2007) and saw on the front page Lydia Polgreen's "Congo Republic Awash in Oil and Poverty". I readily admit that I expect to see certain things in any article on Africa. Ms. Polgreen's article did not in any way, shape, or form surprise me. In it (1) I found a naive notion that mineral wealth, overall wealth, and income are synonymous and found no mention of environmental issues, (2) I found too much focus on corruption, and (3) I found a careless use of numbers. One walks away from a piece such as Polgreen's confident that if they were given a month or two to run the show all would be well. Implicit in this is the ugly attitude that the people actually involved are so inherently bad, stupid or both that they cannot manage their own affairs. (1) RESOURCES: After having described the deplorable conditions at Brazzaville's main teaching hospital, Polgreen poses the following question "... why is the hospital, like so much of the Congo Republic, so tattered when the country sells billions of dollars of oil each year?" The answer is actually simple. Oil and willing workers it may have but the Congo Republic lacks human capital, tools and machinery and natural resources. The skilled labor to fix plumbing, repair light fixtures and electrical connections is in short supply. Also the capital it needs, real capital, both public (roads, well developed harbors, airports) and private (tools and machinery) is scarce in the Congo Republic. Finally, as green and lush as it may appear the Congo Republic's environment is very fragile indeed. As population has increased and farmers have been forced to change from traditional slash and burn techniques to more settled agricultural techniques, nutrient mining (the depletion of minerals in the soil and hence fertility) has been very high (1). This coupled with the Congo river (an annual river which goes from a trickle to rapids and back again) means that overall the country's natural resource base is quite poor. Nobody who takes a moment to consider how important natural resources, physical capital, and skilled labor to economic development will be at all surprised that the Congo Republic is so poor. Perhaps a better question would be how well those of us from economically richer areas -used to the advantages we enjoy-would cope with the obstacles found in the Congo Republic. _________________________________________________________ Of course, the preceding raises the question as to why the stock of skilled labor, tools and machinery and infrastructure is so poorly developed. Consider investment in public capital or infrastructural investment first. The Congo like most of SubSaharan Africa is sparsely settled. Therefore the cost of building and maintaining infrastructure is spread over relatively fewer people and people who are poor. As a result, the cost per person is by definition far higher than it would be in a more densely settled area. There is therefore in turn a lower chance that individual benefits will outweigh the costs. Because of this, as Ester Boserup argued a long time ago, poor and sparsely settled areas are caught in a trap that is difficult to escape. The publicly provided capital, the infrastructure, that the country needs to carry out economic activity such a producing and then transporting new light fixtures, paint, and plumbing fixtures to fix hospitals is far from developed to the degree that it should be. Without a great deal of extra effort this is unlikely to change. And low levels of investment in education, training, or in business is a chicken and egg problem. Take for example education. The benefits from the investment in education are contingent on what we expect others to do. If somehow a poor family could afford to give up the income that their children help to provide them*(see * below), it would all be worth it if that child in turn could find work that would make use of this education. However, this will only be true if the structure of the economy changes and this the family has no direct control over. Stuck at the bottom of a very deep hole individuals trying to climb up to the top on their own are unlikely to make it. Only if they were to cooperate, standing on one another's shoulders, might it be possible to escape. And this is not possible without a great deal of trust. While life at the bottom of the deep hole may not be too pleasant you know what you must face and know you can cope. What if a family helps others climb out only to find that when they have reached the top they have forgotten their obligation to help the rest escape? What of the risks of injury if this human ladder collapses means? It perhaps is better to leave well enough alone. Poor laborers, farmers, and business people are -because of their poverty-risk averse. (2) CORRUPTION: Even if one had the most dedicated and well-financed government in the world it is difficult to overcome these obstacles, especially when the environment is such that it lacks skilled labor and capital and the country's coastline has few natural harbors, its rivers are not navigable, rainfall is highly variable, and soil is poor. In short, when the hole is especially deep and the edges particularly slippery it will require far more effort and far more help than the help those in shallower holes required. Corruption does not help make it any easier for a poor country to climb out of the hole it is in. However, for every twenty pieces written on the political and economic obstacles African countries face that focus on corruption there may be one that mentions the problems of poor natural resources, low private investment and poorly developed infrastructure. A change in political culture will not make the Congo River more navigable. It will not change the speed with which the costs of increased population and density emerge (urban overcrowding, nutrient mining, and so on) versus the speed at which the benefits appear (a wider base to spread infrastructural investment over only works if the level of real per capita income remains constant or increases.) It can of course alter the payoffs from private investment in such a way that it lessens the risks to any one family or business taking the first steps to educate, train, or invest in their own business or farm. However, a less corrupt government does not alter the contingent nature of these investments. What I referred to as the chicken and egg problem remains. Blessed with natural harbors, timber, coal, iron ore, fertile land, labor (first brought in chains and the driven here by poverty) the U.S. has prospered despite Tammany Hall, McCarthyism, Watergate, or Enron. Although India's shining is more an example of how all that glitters is not gold (see Mira Nair's Planet India for example) its growth is high despite widespread corruption. To blame poor performance on corruption is cruel when no matter how well run things might be or how selfless public servants could be, the hole is so deep and so hard as to be almost impossible to climb out of. (3) PROPORTION: My last criticism of Polgreen's piece involves simply taking the numbers she had reported and asking a few relatively straightforward questions. For example, Polgreen states that the Congo Republic churns out 250,000 barrels of oil a day. At $90 a barrel this means that that the Congo would earn $22,500,000 a day or $8,212,500,000 a year. This sounds like an awful lot of money. However even with a population of only 3.8 million people this then represents only $2,161.18 a year available per person. Say that actually only half of this (about $1100 per person) could be turned back over to development because the rest is needed to cover costs of production and that none of this money was wasted. It is without a doubt true that a great deal could be done with this in such a poor country as the Congo. It is equally true that the average American would need to pay only about $14 a year and that the burden would be even less (far far less than what the average American family spends eating out or on entertainment each year, about $5,000 per family) if all the economically more developed parts of the world were to ask its citizens to put money into what might be called something like a Help Africa Compensate for Corruption Fund. In sum, we could help those most in need if we were to actually go out and buy a ladder rather than standing at the edge of this deep hole criticizing the behavior of the leaders on the bottom. The money wasted by government officials on travel, lobbying, and such is not confined to just countries like the Congo Republic. *(See above) Stephan Thernstrom in _Poverty and Progress_ wrote eloquently of the problem that the families of unskilled workers in Newburyport, Massachusetts faced. "The relentless pressure of poverty -stemming from the depressed wage level for common labor and from sharp seasonal fluctuations in employment opportunities -forced the children of Newburyport's laborers into the job market at an early age. Sometimes a laborer went several weeks without earning a cent; then the four dollars a week that his twelve year-old son earned as a bobbin boy was the family's sole source of support. Opportunities for formal education past the age of eleven or twelve were effectively nil for working class children" (Thernstrom, 1971, pp. 22-23) For more on geography as a barrier to trade see Hummels "Time to Trade"

sanitation in india

For anyone travelling to India the question of public sanitation naturally arises. Garbage collects on the streets alongside animal waste. Men stop on the side of the road to relieve themselves. Toddlers squat right out in the open to defecate. The extremely naive notion is that it is culture that explains why Indians of all walks of life accept this . (India of course is far from alone in the developing world in struggling with these issues. Click here for more.) A historical perspective. In _Conditions of the Working Class in England_ Engels describes 19th century urban England. It matches what one sees in urban India today: Every great city has one or more slums, where the working-class is crowded together. True, poverty often dwells in hidden alleys close to the palaces of the rich; but, in general, a separate territory has been assigned to it, where, removed from the sight of the happier classes, it may struggle along as it can. These slums are pretty equally arranged in all the great towns of England, the worst houses in the worst quarters of the towns; usually one- or two-storied cottages in long rows, perhaps with cellars used as dwellings, almost always irregularly built. These houses of three or four rooms and a kitchens form, throughout England, some parts of London excepted, the general dwellings of the working-class. The streets are generally unpaved, rough, dirty, filled with vegetable and animal refuse, without sewers or gutters, but supplied with foul, stagnant pools instead. Moreover, ventilation is impeded by the bad, confused method of building of the whole quarter, and since many human beings here live crowded into a small space, the atmosphere that prevails in these working-men's quarters may readily be imagined. Further, the streets serve as drying grounds in fine weather; lines are stretched across from house to house, and hung with wet clothing. (For reference click here.) Stuart Blumin in his book _The Emergence of the American Middle Class_ describes the same transition taking place between late 18th century urban America and the post-bellum period. Urban America moved from "street-alley segregation" of classes to "areal" segregation. Street-alley segregation meant wealthier families lived on the broader, better maintained streets while poorer families lived nearby, down narrower and more crowded alleys. Areal segregation means different social classes living in distinct neighborhoods. Advances in transportation made it possible for more affluent city dwellers to in one way or another to remove themselves from direct contact with what Engels describes above. And something similar is happening today in modern India. Slums are being cleared and slum families relocated. In the place of slums multi-storied apartments are built for the middle class and wealthier families. Those able to separate themselves from the less fortunate do so. It means that the illnesses and the other problems of the poor become less and less of an immediate threat to their own family's well-being. With this, the more affluent need worry far less about the poor's welfare. The poor continue to live their lives, removed from the sight of the "happier" classes . No Other Choice: Enduring open sewers and refuse of all kinds is not a cultural choice. Access to running water and toilets is obscenely small in India. With considerable variation state by state, according to the 2001 census fewer than 30% of homes in India have toilets (with a sizeable percentage of these being pit latrines or pit toilets. For a break down I've compiled state by state click here). This begs the question as to why investment in water and sewer systems are not given priority, especially given the seriousness of the diseases caued by improper sanitation.

Two important differences between modern India and urban 19th century America and western Europe:

The provision of clean water and sewer connections was not remarkably fast in the now indistrialized world (see for example, Martin Melosi's _The Sanitary City_) There are two things that make India's current situation different from western Europe or America's in the 19th century however that have made progress even slower in India and in other economically developing countries. The first has to do with the medical advances that have taken place between the 19th century and now. The second is the sheer size of the problem India faces now now versus what America and western Europe had to deal with a century and a half ago.

Modern medicine has made it possible for economically privileged families to protect themselves without having to worry as much about the poor and their situation. In contrast to 19th century America and western Europe, middle class and wealthier families can insulate themselves fairly effectively against diseases such as cholera and dysentary. Abram De Swaan in his book _In the Care of the State_ details how even as more properous families located in suburban areas with new construction and water and sewer lines they could not completely protect themselves from diseases spread from the poorer sections of 19th century America and Europe. Also with greater numbers of poor people crowded into urban areas it was more and more likely that dieseases such as cholera would break out and spread from poorer areas to wealthier ones. Before antibiotics, other advances in medical care, and insecticides weighing the threat of diseases spreading to wealthier neighborhoods against the added costs of extending water and sewer lines to poor neighborhoods, the calculus of enlightened self-interest tipped the scales in favor of the poor (see Abram De Swaan, pp. 137-142). In modern India the costs and the benefits have changed radically. Poor areas are incredibly congested and therefore very difficult (i.e. costly) to connect to existing water and sewer lines. At the same time and more importantly, the direct benefits to wealthier families of such measures are far less thanks to modern medicine which better protects them against the threat of diseases originating in poorer areas.* *Susan Chaplin in her article "Cities, Sewers and Poverty: India's Politics of Sanitation" (environment and Urbanization, 1999, pp. 145-158) clearly notes this "...the very developlements in modern medicine and civil engineering that contributed to the success of sanitation/ public health in nineteenth century Britain have enabled the middle class to largely ignore environmental problems and the resulting diseases. The use of antibiotics and insecticides have generally contained potential epidemics in slum areas, and hence have not generated a mutual awareness amoung the middle-class that it would be in the interests of society as a whole if the poor were provided with decent living conditions" (Chaplin, p. 151) The congestion and the resultant costs of dealing with sanitation issues are in part a function of much higher rates of increase in numbers and therefore a much larger scale problem to be dealt with. Mira Kamdar in _Planet India_ notes that urban India grows by 10 million people a year. and in Calcutta, The Living City, volume 2 it is noted that Mumbai saw its population increase by 1000 people per day through migration. (Although these numbers are out of date one can imagine the problem is even worse today). America and western Europe had much smaller numbers to deal with during their periods of substantial urban growth. Other factors: A great degree of India's failure to conquer the problems of sanitation and clean water are therefore arguably due to the these two factors. Other factors of course are at play as well. There is the fear on the part of municipal authorities that if in they take measures to improve the living conditions of the poor that this will simply attract more poor migrants to them. There is a Harris-Todaro like argument implicit in this that therefore improvements will be short-lived. As conditions in city A improve a larger fraction of those migrants who might have moved to city B will move instead to A, overtaxing its capacity to serve them and pushing living conditions back to where they were before. The initially cleaner city is ultimately no better off than it was before. One conclusion to be drawn from this is that piecemeal efforts to effect change are far less likely to achieve success than coordinated concerted effort on at least a regional if not national front. There is also the fact that many slum areas are occupied by squatters. The fear is that extending proper water and sanitation will legitimize squatters' claims to these lands. Often large slums are located in what are considered areas of prime real estate (currently Dharavi in Mumbai and the Salt Lake area in Kolkata years ago as well.). As an area becomes more and more settled real estate developers must realize that it will be far more difficult for the state to remove and relocate slum dwellers from these areas on their behalf. (see pages 14-15 of Burra, Patel and Kerr, "Community Designed, built and Managed Toilet Blocks in Indian Cities" Environment and Urbanization, 2003, pp. 11-32) The great predicament is that if the Alliance (SPARC, the National Slum Dwellers Federation, and Mahila Milan) estimates are correct and a 10 seat toilet block will serve 500 people in an area are realtively low cost ($800 U.S. to build a well-designed 10 seat toilet block with pour-flush systems) the fact remains that to tackle this problem requires massive expenditures. For example, in Mumbai almost 2000 such blocks would need to be built to cover slum dwellers who, as of now, haven't access to proper facilities at all. Using the official exchange rate, the total costs would therefore be over one and a half million dollars U.S. (and in terms of purchasing power parity almost $8 million U.S.). Regardless of the cost, management of various charities and NGOs of 2000 such projects along with the competition for money as these organizations work independently of one another implies a high degree of inefficiency. Yet along with the decided apathy that exists due to government focusing mostly on the interests of the well-to-do and the powerful there is the issue of government inefficiency. Burra, Patel, and Kerr make a strong case for being more than a bit skeptical about the ability of municipal governments being at all efficient. One Alliance study cited in their article shows that contractors have routinely built substandard toilet blocks.** Inadequate water supplies in particular mean that often in as little as three months latrines become so blocked and dirty that they become unusable. This couple with builders asking community members for more money as toilet blocks are being built in their neighborhoods and the city charging unrealistically high fees for access (Rs150 for a family of five would allow each family member to use the facilities once a day) suggests that perhaps community based initiatives, given political realities, are on balance a better alternative. ** See Robert Wade_Governing the Market_ pages 288-289. Contrasting corruption in Taiwan to corruption in India he notes that in East Asia: "Most rumored or reported corruption takes place at the local and provincial government levels where nothing major for the national development effort is at stake ... In all these ways corruption contrasts with corruption in many other countries in South and Southeast Asia. Corruption on public works projects, for example, occurs mainly through overcharging for correctly built structures. In India it occurs mainly by substandard construction of correctly priced structures, which are much more likely to wash out in the next monsoon. Taiwan's mode is probably less damaging to economic development than India's".

Microfinance

An example of a microloan (a little does quite a lot): A young man named Abhijit lives in Kolkata. He has saved up Rs 400 to buy small area rugs to sell on the streets. The wholesaler's warehouse is one hour by bus from the place this young man has found to sell these rugs. The cost of the trip one way is Rs10. He figures, correctly as it turns out, that he can sell an average of 10 such rugs an hour. He sells them from about 12 noon until about 8 in the evening. Each day but Sunday Abhijit leaves home at 10:00, reaches the supplier's warehouse at about 11:00. He then quickly buys his day's supply of rugs and hurries back to start selling by noon. The rugs cost him Rs5 apiece and he is able to sell his rugs for an average of Rs5.5. At the end of the day he has sold 80 rugs at Rs5.5 a rug and so has earned Rs440 total or about$55 U.S. This leaves him with Rs400 to buy a fresh supply of rugs tomorrow and Rs20 to cover his bus fare round trip. In the end , he makes about Rs20 a day or about the equivalent of $2.50 U.S. The week's net income, if all goes well, is therefore Rs20*6 or RS120 (about $15). If Abhijit could stock up and buy three days' worth of inventory at one go he could manage to save 8 hours of the time lost to travel each week. This would require however a total of Rs1400 that he does not have. Although the equivalent of about $175 U.S. with an uncertain weekly income of $15 (Rs120) this is far beyond Abhijit's resources. The supplier, better off than Abhijit, is far from wealthy enough to risk three days worth of inventory and hesitates extending this sort of trade credit to Abhijit out of fear that others will ask for the same. Abhijit is trapped in this situation, limited by his own meagre financial resources . He learns of a MFI (microfinance institution) and is contacted by one of their representatives. He discusses with this representative his idea of buying a three day supply of rugs. He thinks that he has the capacity to twice a week carry the 280 rugs on the bus that 3 day's inventory represents and to safely store the ones he hasn't sold . The total cost of Rs1400 is lent to him at a rate of 100% interest. No longer having to travel each day to pick up his inventory, over the course of 30 days or so (from Monday July 30th to Saturday September 1st) he saves a tremendous amount of time and money; 40 hours of travel time or Rs400. The average saving of Rs80 a week means Rs4160 saved over the course of the entire year. The total payments made on this one year loan, even at 100%, are "only" Rs2268. Abhijit's annual net income as a result is Rs1892 higher than the RS6240 it otherwise would have been (i.e. 30% higher). (For a similar real world versions of this story click here and here.) The beauty of microfinance is found in examples like this one. Several questions naturally arise: (1) Although the present example illustrates that even at exceedingly high rates of interest microfinance loans are profitable, why do the rates charged on micro loans tend to be so high? (2) where do the funds to finance such loans come from? (3) would financial resources channelled into microloans be better used improving woefully substandard infrastructure and funding education? High rates of interest. Microloans typically are short term and the track record of the majority of borrowers is very good. Therefore microloans carry little interest rate risk or default risk. The principle reason rates are so high is that the adminstrative expenses are enormous. These expenses include first the costs of identifying and assessing the creditworthiness of clients. With little or no collateral and little or no established credit history this is a very time consuming -and therefore expensive- part of microfinance. This is followed by the costs of processing a loan. These costs will tend to be the same regardless of the size of the loan. That is to say, whether it is a $100 loan or a $1 million loan the amount paperwork involved will be very much the same. After these two already substantial expenses comes the process of first turning over the funds being lent to the borrower and then collecting payment. One study estimated that in India each personal contact with a borrower, such as meeting them to collect payment, costs $0.25. This may not seem like much but consider $1 million lent $100 at a time. This means loans to 10,000 borrowers who must be contacted monthly to collect payment. Over the year, at $0.25 a visit, this adds up to $30,000. (For more details on the pricing in microloans click here, here , or here.) The last component of adminstrative expenses may be considerable even if ultimately the default rate is low. This cost is the added cost of following up with those borrowers who are late making payments on their loans. Disappointing sales, illness, or interuption of supply all may hamper a particular borrower's ability to pay on time in a give month. The MFI's representative may have to return a few more times to collect payment and to offer advice. Anyone with firsthand experience of the difficulties that often are encountered when trying to contact someone or trying to travel in an economically poorer country will understand another very concrete reason why payments may be delayed. If the borrower is not facing difficulty but simply isn't there when the first visit is made means that follow-up visits will be necessary. Say that these five elements represents $3 each in administrative expenses on a $100 loan. The borrower must then pay $15 just to cover these costs. Now add on to this a nominal rate of 10% for the funds raised and a 1% premium to cover the risk of default and the rate to be charged is already at 26%. How successful a microloan is depends on a variety of factors including how small the amount to be borrowed is. A corrolary of the idea that borrowers are not especially senstive to the interest rate charged on microloans is that beyond the initial loans made it is hard to identify further investments unless the interest rates charged are significantly lower. For example, while it might be more efficient for Abhijit to buy and cary home the entire week's inventory even at 26% this would not be feasible. He would sell Rs440 worth of rugs the first day followed by Rs3,300 over the following five days. This would require a loan of of Rs3400 (the cost of goods sold= 8 hours day 1 times sales of ten an hour times the cost per rug of Rs5 plus 10 hours days 2 to 6 times sales of ten rugs an hour times costs per rug of Rs5) . With cost savings of only Rs100 a month and a loan of Rs3400 at 26% annual interest, Abhijit faces monthly payments of Rs324.80 (or about Rs135 more in added debt payments each month). The added costs per month of servicing his debt clearly would wipe out the benefits of this added debt (the reduction in travel expenses). In short, while initially the gross marginal returns on small investments might be high enough that the loans to fund them might be profitable for both borrowers and lenders alike, the marginal returns fall off quite quickly for many borrowers. Abhijit's investment demand schedule, while initially quite interest inelastic, very quickly becomes interest elastic. However it is safe to assume that there are many more potential borrowers like Abhijit who if offered credit, even at fairly high rates of interest, will be more than ready to borrow. Therefore the sharp kink in individual investment demand curves emerges much more slowly in the aggregate. To the degree that MFIs have an increasingly easier time identifying and orginating microcredit and the pool of potential borrowers remains large the overall costs of providing microcredit should be kept in check. In the case of a nonrenewable resource overall costs are made up of exploration costs and extraction costs. The former with experience have declined over time while the latter, extraction costs, as more and more coal or oil is pulled out of the ground, have risen over time. What has kept costs of coal and oil from rising has been the fact that when certain areas have been completed mined or pumped dry it has been relatively easy to open up new areas. With MFIs even if the additional benefits to an individual borrower are quickly reached there are many more borrowers to move on to who have as yet not been touched. Alternatives to microloans: This leads to the question of priorities and the relative benefits of microloans for poor merchants such as Abhijit compared to the same financial resources being used elsewhere. For example, the funds could have been channeled into Kolkata's transportation system, into its utilities or into its public schools. Improvements in Kolkata's transportation infrasctructure might cut the travel time from Abhijit's market to his supplier and back again by half an hour and reduced fares by Rs2 for each trip. This would result in a cost savings each week of Rs48 or over the five weeks from July 30th to September 1st a reduction in Rs240. All this without Abhijit's degree of combined leverage (the sensitivity of his net profits to changes in sales) worsening as it would with a fixed commitment to pay Rs189 a month servicing debt. Of course, the two in combination or, better still, microfinance loans and infrastructural investment combined with more resources invested in education would be even more desirable. The latter would mean that while Abhijit toils away in the market each day his children are acquiring the skills that would increase their options once they enter the labor force. Whatever the details, the point is that the small investments made possible through microloans should not be considered a substitute for other, more major investments. Microloans should be considered as highly complementary to these other investments. And if financial resources are scarce, there is a very real question of whether the highest returns, long-term, come from micro loans. Financial resources are far from scarce: Potential funding is available to do much more than currently is being done. Unitus estimates that 80% of the world's most desperately poor families living on $2 or less a day (2.4 billion souls and, assuming an average family size of six people, 400 milion families) have limited or no access to microcredit. Without access to microcredit, the vast majority of the world's poor families are therefore forced to rely on their own resources, if they have any to speak of, or what can be borrowed from moneylenders. Unitus and other organizations promote the idea that private capital markets need to be tapped to rapidly expand the funds available. This is one avenue of funding certainly worth pursuing. However, one could also note that if the U.S. federal government were to divert only .5% of our nation's total earnings to funding MFIs this would provide about $55 billion or about $137.5 per family in this cohort of 400 million that Unitus estimates do not have access to microcredit at present These families could then make the sorts of relatively small and simple changes that Abhijit did in our earlier example. (for Unitus's webpage click here .) (see also the Basic Facts About Microfinance.) Could such a sacrifice be made? When the economic standard of living was considerably lower than it is now the U.S. lent the U.K. a similar amount (when adjusted for inflation) for an entire 60 year period at 2% interest. (click here and here). Not that I advocate this particular method of raising the $55 billion but it could be raised by increasing federal corporate income taxes by 16% over what they were last year or increasing federal individual income taxes by a little over 5%. Although it is politically naive to consider either one as likely, my point is that the sacrifice is not so great that it couldn't be done. And indeed, through growth in the U.S. economy federal tax revenues grew by $353 billion between 2003 and 2006 . Simply skimming off 16% or so of the increase in payments (or well under the increase in revenues for just one of these years) would accomplish the goal of making over $100 a year available to families throughout the world currently without access to microcredit. (click here for more details on recent federal income tax revenue collection.) Private capital markets are there as an alternative to bridge the gap between what we are truly capable of doing and what we are willing to do. However, even if half of the 57 million households who in 2006 earned above median family income were to invest $1,500 a year in MFIs the total amount of funding available for microloans would fall far short of the $55 billion needed to provide the $100 + per family that currently does not have access to microcredit. If one quarter of wealthier American households were to invest $800 a year then each of these 14.25 million households could provide some funding to 82.94 million more families than are being served right now The binding constraints are economic as opposed to financial resources:Even this more modest goal may not be too practical in that there are 10,000 MFIs with an average of $700,000 per MFI in loans outstanding. For the average MFI to take in and effectively lend $1.14 million more over and above the current $700,000 in loans they are originating now may be asking for far too much in the short run. Even Kiva, a remarkable organization that has helped to originate $9-10 million in loans with what appears to be a fulltime staff of 20 is -because of the way that it is structured- uniquely positioned to directly absorb such funds. But it would face difficulties. For example, if one-tenth of the money we are thinking about here were to go to Kiva and even if Kiva lent unusually large sums of money to individual borrowers of $1,000 each this would still mean originating over 150 loans a day each day per staff member! In short, the current size of the pipe appears to be too small to absorb significant increases in a short amount of time. Much more would need to be done if we were to accomplish a net decrease of even about 25% in the number of families currently without access to microcredit. In the preceding, I have not considered what governments, business, and individuals in Japan, the newly industrialized countries, the European Union, Canada, New Zealand, and Australia could contribute which would make some of this seem less daunting. At the same time, I have assumed quite unrealistically that the number of families living in dire economic poverty does not grow. Just because the job is enormous and microcredit is not "THE" answer to ending much poverty as quickly as we can (of course, unfortunately nothing is "THE" answer to this) I hasten to note that not only have MFIs done a great deal to help millions of economically poorer families the potential is great to still more, especially if we are aware of the obstacles in the way. Other references: Blondeau, Nicholas "Microfinance An Instrument of Sustainable Development"? "Microfinance Interest Rates as a Function of Transaction Costs" Guinnane, Timothy "A Failed Institutional Transplant: Raiffeisens' Credit Cooperative in Ireland, 1894-1914" Hollis, Aidin "Microcredit in Prefamine Ireland" World Development, forthcoming Aidin Hollis and Arthur Sweetman, "Microfinance and Famine: The Irish Loan Funds during the Great Famine", World Development, forthcoming. Morduch,Jonathan, "The Microfinance Promise", Journal of Economic Literature, 1999, 37, 4, 1569-1614. Wikipedia on microfinance, microcredit and the early history of microcredit in what is now Bangladesh

Ester Boserup (Density neutrality and the ahistorical nature of textbook growth theory)

The dominant model (i.e. explanation) of economic growth is the Solow model. To many it represents a powerful and flexible tool. Whatever its merits as a basic framework for analysis, many have sought to introduce modifications necessary to bring Solow closer to reality. My own view is that among the least acceptable assumptions in Solow is that there are neither costs nor benefits to be associated with increased population density. This assumption – as I shall argue implicit in the model and which I will refer to as the assumption of density neutrality – stands in the way of its being of much use in either historical analysis (the model, because of density neutrality, is ahistorical) or in an ecologically informed discussion of modern economic development and growth. In what follows I will compare Solow to the much richer and nuanced model of economic growth developed by Ester Boserup in her 1981 book Population and Technological Change. Boserup argues that density plays a central role in economic growth and development. Its role being a positive or a negative one depending on the relative size of costs and benefits of increased density. A brief proof of the density neutrality of Solow The following presumes a certain degree of familiarity with the Solow model. In Solow, once an economy’s “steady state” level of real per capita income is reached, given its state of technology, the depreciation rate, the investment ratio and the rate of population growth, this level of real per income and the capita-labor ratio implied by the production function will remain in equilibrium at these levels. Of course, continuous population growth within a given area means increasing levels of population density yet, by assumption, this does not impact steady state equilibrium. For this to be true one of the following must also be true: (1) that there are neither costs nor benefits to be associated with increasing population within an area. (2) that, following a neoclassical environmental view, the rate of technological progress is positive and just happens to be sufficient to offset the costs of increased density (3) that the benefits of increased density are just enough to offset its increased costs (4) that as population grows, new territory is opened up The fourth assumption listed has merit if one is thinking of hunter-gatherers or long-fallow agriculturalists. With relatively little capital per worker needed to sustain a tolerable standard of living, with scarce labor, and with leisure highly valued if land is relatively abundant some will strike off into new territory once the costs of increased density, here increased pressure on the natural resource base, begin to be felt. The term noncircumscribed has been applied to describe the tendency of hunter-gatherers and slash and burn agriculturalists to open new territories rather than adapt more labor or capital intension technologies. I will reject the first assumption listed out of hand. There are obviously, given the stock of natural resources, very real costs to increased density as the exploited stock of renewable resources are used at levels that are not sustainable and as the stock of exhaustible resources are depleted. This leaves the second,third, and fourth assumptions still to be considered. Because Boserup has much to say about these matters, especially about the benefits of increased density, I would like to first discuss her model. A brief summary of Boserup: "to starve or not to starve: that is the question". Boserup begins by flatly rejecting the Malthusian notion that growing numbers press against an economy’s natural resources without society fighting against this. In the struggle for survival, we have repeatedly risen to the challenge by inventively squeezing more from the resources we have. Plows replace hoes, seed-drills replace broadcast seeding, land is worked annually or even more often, it is weeded and fertilized, meat dairy and wool are replaced by cotton and fish. In general more capital and labor intensive techniques are employed to recover the ground lost as numbers increase. (See p.181 of Boserup. These themes are also the focus of her book The Conditions of Agricultural Growth and Change.) Whether it is more correct to refer to the changes brought about by the pressure created by increased density as induced changes in technique rather than induced technological change per se, the Malthusian model of population encourages us to gloss over all that preindustrial societies were able to accomplish in the face of the pressure population growth and increased density created. Despite diminishing marginal returns to labor, the Malthusian demon of diminishing marginal returns to land, rising rents, and the positive checks a population of famine and starvation are held at bay. The preceding, of course, describes not the benefits that flow from increased density but rather points to what must be done if higher levels of population density are to be sustainable. What possible benefits could large numbers of people crowded into a given area provide? The benefits of higher density: infrastructural investment, division of labor and urbanization. In an era of high rates of population growth in already densely settled areas (most notably India and China) and urban overcrowding throughout the developing world one tends to think of population density only in terms of costs. It is a challenge to think in terms of benefits. This is why it is important to make a clear distinction between the rate of approach to a certain population size (the rate of population growth) and population density itself. The more densely settled an area already is, the more fragile its environment, and less likely it is that the benefits of increased population and therefore increased density will be felt. Before the twentieth century we see a positive correlation between economic power and population. Although by modern standards, real per capita income was quite low throughout the world, what set what can be thought of as economically more powerful areas were (1) a much sharper division of labor than found elsewhere, (2) a better developed infrastructure and (3) a higher degree of urbanization. Following Boserup I will argue that these hallmarks of economic “power” are more the consequences than the causes of increased density. Social overhead capital: infrastructural investment The importance of infrastructural investment, especially transportation facilities, is emphasized by all economic historians but it is often overlooked that such facilities require a certain density of population. (Boserup, 1981, p.68) Assume that there are a series of projects that could be carried out to significantly increase an economy’s stock of social overhead capital, its infrastructure. Further assume that through the sort of induced technological changes already discussed that real per capita income is constant and that as density and aggregate output grow the costs of completing these projects, both in terms of resources required and in monetary costs are constant as well. In short, assume an economy with a series of infrastructural projects that will cost less and less in per capita terms. As the per person costs go down, the likelihood of individual benefits exceeding costs one is being asked to bear rises. Even if the benefits to the average person are quite small, the more widely construction and maintenance costs are shared the less likely any one individual or group of individuals might be to oppose these projects. This does not mean that there will not be resistance to infrastructural investment. However, the way will be far easier the larger the numbers are because the burden per person becomes lighter as numbers grow. The Division of Labor Smith emphasized the role an economy’s geography plays in determining the extent of the market and therefore the scope for specialization, i.e. a greater division of labor. However, the rise in numbers and aggregate output in a given area that can follow higher population density (assuming that real per capita income does not fall) make further specialization or division of labor possible. In part, this is due to the build-up of infrastructure I have just discussed. As roads and canals are built, harbors made deeper, docks and public squares finished the costs of transport and exchange will be lowered. Assuming that food supply systems have successfully adjusted to increased density, the first force leading to an increased division of labor will be played out on the stage set via increased infrastructural investment. Although aided immensely by the build-up of infrastructure, increased density increases the likelihood of someone being able to find full-time employment if they are to specialize. In his book the Great Divergence Ken Pomeranz notes “…one cannot generally support oneself doing certain tasks that each person needs done only occasionally unless there are many people in one’s market area”. (Pomeranz, p. 27) In other words, it is only as numbers grow that the general homebuilder is able to shift from being a part-time carpenter, mason, painter, plumber, and electrician – jack of all trades, master of none – to being able to focus her talents on one of these areas or focus on coordinating and supervising these activities. Boserup points out that “…the areas in Europe which first developed manufacturing were the ones with the highest population density”. (Boserup, 1981, p. 102) Echoing this, E. A. Wrigley emphasizes that premodern growth was “specialization growth” and that this was – to a point - intimately connected to population density. (see his Continuity, Chance, and Change) Urbanization The third and final benefit of increased density Boserup highlights is increased urbanization. Her point is that in pre-industrial societies, agricultural households are at best capable of giving up only a small fraction of their output to feed, clothe, and shelter an urban population. As a result, all else being equal, growing numbers in the surrounding countryside, higher rural densities, make large urban centers possible. Lack of coastline, an unreliable and a relatively poor system of navigable rivers or a mountainous terrain all raise the costs of transporting goods to market. In such a situation, to support a city of a given size, agricultural density must be even higher in the area immediately outside it. If the surrounding countryside is successful in supporting an urban area long enough, economies of agglomeration for both physical and human capital are at the very least possible. Costs of higher density The costs of higher density – as suggested earlier – are far easier to enumerate than its benefits. Stress on natural resources, congestion and pollution are all easily understood costs of crowding more and more people into a given area. With these costs in mind, the process of premodern economic growth – here defined as growth in aggregate output and population but without significant growth in real per capita income – can be viewed as a rough balance being struck between the costs and benefits of increased density. Despite stagnant and relatively low levels of real per capita income, in the premodern world what were considered prosperous economies (what I earlier referred to as economic powers) all exhibited extensive division of labor, well-developed infrastructure, and relatively high rates of urbanization. More sparsely settled areas are the ones that failed to achieve high level of urbanization, division of labor, and infrastructural development. And in turn, sparse settlement was largely a function of geography, geography having stacked the deck against these areas. Their climate and terrain simply could not produce the food, fiber, fodder, fuel, and building materials needed to sustain larger numbers. What emerges from Boserup is then a much richer explanation of the steady state than that found in Solow. Before the advent of the modern era, numbers and aggregate output grew with painfully little advance in the standard of living. This was because it was difficult in the extreme to do much more than offset the costs of increased density with specialization, infrastructure, and urbanization. In areas where a population’s ‘back was to the wall’, where new lands were not open, where mountains, deserts, oceans and other boundaries stood in the way of movement more and more people had to be supported in a given area and the sort of development we have described here, based on what Arnold Pacey has referred to as survival technology, came into play if possible. Only where the development of such technologies was not possible and population was hemmed in was the Matthusian model relevant. Much of Sub-Saharan Africa stands as an example of this case. “This region had a small and scattered population whose main centers were cut off from one another by vast areas of desert and impenetrable forest, so the diffusion of technology was so slim…the density areas near the West African coast were sparsely inhabited and there were few crops which could be grown in the very humid climate until bananas and Asian yams were introduced after A.D. 500. (Pacey, p. 38)) Europe was far from hemmed in until relatively recently. As Boserup described Europe’s geography: “The European continent is a large open area with good conditions for agriculture nearly everywhere. The temperate, humid climate permits the growth of one crop per year without irrigation; most of the territory consists of large plains or gently sloping hillsides; and surface water for drinking and other purposes is available nearly everywhere. So when population increased, it was easy for the population to disperse without any need to adopt other types of food or change the way of life. (Boserup, 1981, p. 57) Looked at in this way, Europe’s dark ages may at least in part be due to its ability to avoid the sting of higher numbers by replicating itself in new areas rather than taking the higher cost route of adaptation and change. In contrast to Europe, Asia – particularly China but India, Japan, and parts of western and southeastern Asia as well - bumped up against progressively more and more constraints that it could, with added effort, overcome. Areas such as southern China, Japan, and the eastern region of India had relatively high density thanks to wet sub-tropical and tropical climates that permitted the harvesting of rice and cotton for calories and cloth and fish for protein. Squeezing more from the land and water by more labor-intensive techniques was far easier than in the wool-wheat-dairy-linen and leather economies of the west. Although cotton is quite hard on the soil, drains the water table, and requires much moisture when planting and growing but a hot dry climate when maturing, rice can be sown more than once a year, does not deplete the soil, and requires about a third of the land that wheat does to support someone on a 2400 calorie diet. Up to a point at least, the superior capacity of rice and cotton economies to support a dense population meant that more of the benefits outlined above could be enjoyed. The dominant position of Asia historicall was due to its ability to more readily absorb ever increasing numbers. Highly urbanized and technologically-developed economies rich in infrastructure, with a considerable division of labor were the consequence not the cause of higher density. As important as all of this is historically and although it is compatible with Solow it is completely neglected in standard textbook treatments of Solow. In addition to this it diverts attention from the fundamental forces driving modern economic growth and the industrial revolution where, as I argue elsewhere, for the first time the benefits of increased density were more than able to offset the costs of increased density thanks to coal. The difficulty of maintaining balance over time The marginal benefits of increased density could be measured by upward shifts in the production function in y(t) (real output per hour’s worth of labor), k(t) space while marginal costs could be measured by shifts down. I draw the marginal benefits of density curve (MBD) as downward-sloping because the benefits of increased density (increased division of labor, infrastructural investment and economies of agglomeration associated with urbanization, etc.) can be expected to decline as density grows. All else equal, the costs of density will continue to rise so I have drawn the marginal cost of density curve (MCD) as upward sloping. Growth in real per capita income will be maximized when all else equal, D is such that the marginal benefits of density equal the added or marginal costs. Of course density will approach this point and eventually reach D* the optimal level. However, given n, the rate of population growth, D will continue to grow beyond this point. Therefore the speed that density approaches D* and, having crossed it, moves on is significant. The slower the better. The marginal benefits of density take time to emerge. Therefore the faster the approach to D* (the higher n is) the lower overall and the steeper MBD will be. On the other side of D*, once optimal D, has been passed, the likelihood of an economy being able to adapt or innovate rapidly enough falls. The situation far too easily gets out of hand and it becomes quite difficult to bring the costs of density down soon enough, to prevent the marginal costs of density from rising. Geography helps to determine how rapidly the cost of increased density rises. Areas of poor forest reserves, areas with relatively infertile soil, areas with low water tables, and those with limited access to alternate sources of energy for heating, cooking, and for fuel will feel the pressures of higher numbers far more than economies more favorably placed. And it is not too radical a proposition that the less time a system has to adjust to an increasingly difficult situation the more painful adjustment must be. Regions with poor geographic conditions and rapid rates of population growth therefore are doubly cursed. The length of time that benefits if higher density outweighs the costs is extremely short. And the economy continues on, moving away so quickly from D*, that the odds are very small that enough innovation, invention, and adaptation takes place to do much more than gently nudge MCD to the right. Once D* has been passed, a drop in n does no more than give the system breathing room. At least for a short while, a drop in n increases the chances that a gentle nudge to MCD will be sufficient to keep real per capita income stable or slow the rate at which it’s falling. The plight of sub-Saharan Africa and the British industrial revolution: A connection? For every twenty news reports that focus on corruption and other forms of bad governance in various counties in sub-Saharan Africa there may be perhaps one that mentions in passing the region’s very fragile environment: its lack of arable land, poor coastlines, lack of perennial rivers, and tremendously high rates of population growth. In terms of the model I have just presented, the plight of subSaharan Africa arguably has more to do with the impact a fragile environment has on the rate at which the costs of density increase than its does corruption. In terms of the model I have just presented, the plight of sub-Saharan Africa arguably has as much to do with the impact other environmental factors such as a lack of good coastlines, annual rain-fed rivers (dependent on low and highly variable rainfall) have on the total benefits at any level of density and the rate at which these benefits increase. In terms of the model I have just presented, the plight of sub-Saharan Africa arguably has as much to do with the high rate of population growth that push such economies away from D* and therefore push them toward the point where neither new technologies can be created fast enough nor existing areas adapted to local conditions readily enough to do much good. Whatever the steady state level of real per capita income might be, whatever investment ratios or depreciation rates might be, powerful and more fundamental forces are holding this part of the world down. In contrast, England, the home of the industrial revolution, was environmentally in a much more favorable position with more slowly rising costs, much higher and much more gradually falling marginal benefits, and although by historical standards a phenomenal rate of population growth, a far gentler (i.e., more manageable) rate of increase in population than developing countries in the 20th century experienced. Sometimes only implied, at other times very explicitly stated, one encounters the argument that you have to look no further than culture if you wish to understand the differences in economic fortunes both now and in the past. This view resonates well with anyone currently on the top of the economic heap. After all, what it suggests is that economic prosperity is due to a lack of freedom, a lack of respect for the law, a lack of strong work ethic or an inquisitive nature. As a result, the conclusion that the rewards of wealth and freedom are there for any society willing to change its outlook. As proof of this incredibly naive outlook you need look no further than calls for government reform and an opening of trade as an answer to sub-Saharan Africa’s very real and profound problems.