March 25,2014
A Harvard professor said developing countries were forced down an economic path in the 20th Century that lacked innovation, entrepreneurship and technology. As a result, he said, they had stunted development, while many other nations prospered.
Professor Calestous Juma tells the story of dueling economic theories. One based on new ideas and risk taking, and the other on pessimism and ignorance.
Jobless Africa
“In 1911, an Austrian economist by the name of Joseph Schumpeter published a book called The Theory of Economic Development, which proposed that economies grow over time through innovation. Through new combinations that involved the application of new technologies. And this book became really a standard on how to think about economic transformation through the use of technology and entrepreneurship,” he said.
Juma said Schumpeter took a different view on what was needed for robust economic growth.
“It was new because up to that point people believed that economies grew because of extraction of natural resources – not because of application of technologies. It was also new because he proposed that the use of new technologies resulted in revolutionary changes in economic systems.”
Schumpeter, he said, based his theory on what he saw happening in developed nations.
“He made the observation by looking at the impact of railroads in Europe and America. So, rich nations were already doing it, but it had not been explained in a clear and explicit way, which had to do with this idea of introducing new combinations in the economy, which [are] technological combinations -- but also the recognition that these new technological transformations were being driven by entrepreneurs. So entrepreneurship became a very central part of his thinking.”
Professor Juma said new industries develop through – what’s called – creative destruction.
“His idea was that when you introduce, say, railroads in a community, which didn’t have railroads before, so they’re using stage coaches, railroads will destroy stage coaches. That industry will disappear, but it will create a new industry, which is a faster industry with a greater opportunity for economic expansion. If you think of it in modern times, if we introduce downloading of music, it destroys CDs. So, it’s destructive to the CDs, but it creates new industries, which is downloading of music,” he said.
Such developments are common today. But many economists in the 20th Century thought the developing world was not ready for Schumpeter’s ideas.
Juma said, “So the critics said emerging economies don’t have new technologies. Secondly, he said, the agent of change is [the] entrepreneur. Then they argued that the entrepreneur is not the biggest player in poor economies you need big government. You need bureaucracies. And thirdly, he put a lot of emphasis on industrial production. His critics said what the poor want is not production. They want consumption. So we give them some products that have been developed elsewhere. But it doesn’t make sense to enable them to produce themselves.”
Juma does not think racism was behind their beliefs, but rather pessimism about developing countries.
“Because they looked at them and said – they’re so poor, we cannot possibly give them the latest technologies because they are not even able to absorb them. So let’s find them older technologies. So, I don’t think it was racism. I think it was a mindset that was more colored by pessimism and less by an appreciation that even poor countries are able to solve their own problems when given a chance,” he said.
Instead, they were given – so-called -- appropriate technologies. Juma said instead of a modern water supply with sewers, they were told to dig wells. Instead of building modern electric grids, they were given fuel efficient stoves.
During the HIV/AIDS epidemic, many doubted African nations had the capability to distribute and administer antiretroviral drugs. And as a result, they said the drugs could not be effective. African nations proved them wrong.
“Again that was another example of pessimism. Of saying there’s really very little you can do for these countries because they don’t have the infrastructure. The same infrastructure they had been denied from building in the first place,” said Juma.
In the 20th Century, many had thought Ghana had the potential to become an economic powerhouse – that it would become what South Korea is today.
Juma said, “It’s very interesting you bring up the case of Ghana because Ghana at independence got a foreign economic advisor – a Nobel Laureate in economics – Arthur Lewis. He was one of the critics of Schumpeter, who did not believe that a country like Ghana was capable of transforming itself technologically, whereas South Korea was able to do that. At that time, there wasn’t a big difference between South Korea and Ghana.”
Juma recommends giving priority to innovation, technical and engineering fields, transformative infrastructure and entrepreneurship.
The Harvard professor is working on a new book containing his ideas. It has the tentative title of How Economies Succeed: Innovation and the Wealth of Nations. It’s due out in 2015.