Monday, February 25, 2008

Jacobs & Porter on Development

Back in the days when I had the occasion to interview job candidates often one of my questions was “name the two or three most important people in shaping your life so far, either personally or professionally (and it’s OK to say it’s your mother).” That was, I could get a sense of the person’s interests, passions and more importantly, how he looks at the world.

If asked the same question, I would say a couple of people who have influenced my thinking were Michael Porter and Jane Jacobs. My interest came from my stint as an emerging markets manager during the mid 1990s.

When I used to get assigned a country or region, I used to try to talk to the local investment managers, local brokers and then the companies, in that order of preference. Usually local investors drove the market and it was important to understand their analytical viewpoint. The local brokers also instinctively understand this and will tailor how they cover the local companies and industries accordingly. Until an investor understands how the local companies trade it will be impossible or risky to develop a quantitative framework for those companies.

After going through these exercises a few times, I came back to the same question over and over again.

Why are China and India booming and Kenya not? Typical academic development economic study programs focus on the China and India success stories but don’t focus on the failures. (Incidentally, one of the questions back in my youth was “why can’t India be like Japan?”)

I found the answer first in Michael Porter’s The Competitive Advantage of Nations. In the book Porter talks about how countries go through different stages of development as they migrate up the value chain and also of the importance of industry clusters. Later I also discovered Jane Jacobs’ work, see examples here and here. Her writing is more academic and less punchy but essentially say the same thing as Porter on the issue of moving through stages of development. The important difference is that Jacobs identified city and city-states as the units of growth, rather than nations. While Porter alluded to this point with his industry cluster comment, Jacobs was more explicit.

Could these lessons be generalized to other development economic problems, such as the issue of how to revive inner cities? This is a controversial topic and comments are not only welcome but invited.


legitimus said...

an effort was made in the uk to revive local stock markets on the basis that liquidity is local and the smaller the company the more local liquidity is.

much is made by governments of usa, canada, uk, europe of loan schemes for smaller companies. these always fail to funnel money to the areas that need it as the gatekeepers are reluctant to risk this "cheap" money on the risky businesses in failing areas. in most cases it has become a margin subsidy for banks.

several regional funds found themselves unable to allocate the funds available as their internal processes weeded out the very companies they were supposed to be targeting.

funds entering countries such as ghana from government sources are less than one third of what is sent back by expatriates who in many cases are funding small businesses run by relatives and friends. businesses that the government funds will never even consider investing in (if they make it through the administrators hands).

an interesting proposal to kick start your suggestion is to make repatriated funds to 3rd world economies tax deductible in the country of origin. this would ensure that the gatekeepers prejudices and sticky fingers are kept out of the process whilst ensuring funds reach the entrepreneurial.

this process could be used for failing districts within 1st world countries and be augmented with matching funds and participation of person to person loans via the various web sites offering the service.

have gone on too long. good luck with the discussion.

Cam Hui, CFA said...

Jane Jacobs works indicates that those kinds of synthetic boosts to local economies don't work: whether it's funding a factory in a far off place with high unemployment or locating a military base in a remote area to boost jobs. A city/town has to stand on its own economically.