Is this the most effective development program in history?

I will turn the mike over to Chris Blattman:

It’s a business plan competition for $50,000, and I think it’s a contender.

In 2011 the Nigerian government handed out 60 million dollars to about 1200 entrepreneurs, and three years later there are hundreds more new companies, generating tons of profit, and employing about 7000 new people.

David McKenzie did the incredible study.

24,000 Nigerians applied, the government selected about 6,000 to get some training and advice to develop their plan, the plans were scored, and about 1,200 were funded. They got an average of $50,000 each. Fifty thousand US dollars! Who the hell thought this was a good idea?

All the highest scoring plans got funded automatically, but McKenzie worked with the government to randomize among the runners up.

The results are amazing. Looking just at the people who had no firm to begin with, 54% of the control group have a firm after three years, compared to 93% of those who got the grant. And these firms are bigger. Just 11% of the control group have a firm with at least 10 employees, compared to 34% of those who got the grant. They’re more profitable too.

If you are the President of a developing country, one of the great problems that will occupy your thoughts is: how to get more people jobs? How to grow domestic businesses? Even I, Mr. Cash, did not think big grants would be the answer.

These entrepreneurs are not the deserving poor, to be sure, but the employees are more likely to be. They made $143 a month, so they probably weren’t the poorest of society. But 7000 people earning $7 a day they might not have earned otherwise—that is something. And this ignores the multiplier: the expansion of suppliers, the people employed by the 7000 employees spending that money, the taxes collected by the state, and so on.

Two other things occur to me:

  1. What if, in 10 years, we learn that after all the struggle to build infrastructure and services and other stuff was bullshit, and ALL ALONG we should have just been funneling more cash to the middle and bottom. I do not believe the cashonistas should go so far, but today I wonder.

  2. I should start responding to all the emails I get from Nigerians promising me $50,000 in cash.

Comments

Isn't this just transferring money and employees from one company to another, government-subsidized one?

I had the same thought.

Perhaps the best way to organize it is as a lottery. Everyone who wants to start a business needs to submit a plan and buy a ticket. The winners get the cash.

Then it becomes a type of savings plan. A lot of people defer consumption to buy a ticket. If they stay in the system long enough, they get most of the cash back.

Let me see:

for $60 Million I get

7,000 jobs which may or may not have otherwise existed paying approximately $1,700 per job per year which might be more than those folks would otherwise have earned:

7,000 jobs times $1,700 per job per year = approx. $12,000,000 per year in income. If we assume that half of that income would have been earned anyway then the benefit from the program is about $6 Million per year which may simply reflect the original subsidy and not any new value that has been created.

I think that the Nigerians would be better off spending some money tackling corruption and lawlessness rather than doling out grants.

If it were a issue of money...

Note this is tracking after 3 years. So after 3 years they have spent 60 millions and gotten 36M in salaries paid out. Sounds like a loss to me, but what do I know?

Wait a sec. Based on your reasoning alone: the 60 mm is sunk cost. One-time. The 36 is just the installment over 3 years. And it will continue to grow over time - and pay back.

10%/yr seems like a decent return for government investment in Nigeria

They are businesses, presumably buying equipment and goods, renting office space, purchasing delivery equipment, etc.
Just looking at salaries paid does not give a full reflection of the value to GDP or to society for the work. What if 5% of the now gainfully employed would have turned to crime? And so on.
Also, if the trends continue for 3 more years, that's 66 million paid out.

"Is this the most effective development program in history?"

I'd certainly hope not!

I think, even if your numbers are correct, that 10% a year return on capital is not too bad, considering the alternative is for the money to go into the pockets of corrupt businessmen doing 'infrastructure'. Here in the Philippines they resurface roads for no good reason and half or more of the money disappears.

My bigger concern is that in fact the grant recipients were not really randomly screened, or, after they got the grant money some government goon showed up and demanded a bribe, which is also very common in the Third World. I've heard countless stores here,where corruption is less than in Nigeria, of successful businesses being milked dry by bribe seekers, who are from the police or fire department or mayor's office or barangay district.

You're only counting salaries, and not any capital accumulated into the enterprises.

Interesting if true, one implication is that valuable talent is highly unequally distributed, and that we're better off empowering the natural aristocracy. How do you say "Who is John Galt" in Nigerian?

You say " Who is John Galt?"

There is no langauge called Nigerian ; the three main tribes have different dialects and almost everyone (except may be in the Bush) speaks and understands English.

Somewhat north of 40% of the population speaks one of the four principal native languages. About 35% speak English.

About 70% of Nigerians speak Nigerian Pidgin English.

"Who be John Galt?"

When I was young you had to lead massive deregulation and liberalization campaigns like Hu Yangbao and Deng Xiaoping that let millions of SMEs flourish if you wanted to be in the conversation for being the best at development. Now 1/10000th the impact is good enough.

Evidently Robin Hanson is wrong. We should NOT save money and a cure interest since there won't be anything left to fix very soon if this keeps up.

Fully agree. Also it is amazing how this branch of economics (JPAL/BREAD) has so much faith in these types of quick fixes and so little faith in building sustainable systems. In particular, the stuff about infrastructure is particularly daft. Without good infrastructure the costs of moving goods (and services) is much higher. With high costs there can be no real development. These circle-jerk posts only serve to highlight how small their minds are and how limited they are by their own insularity.

https://en.wikipedia.org/wiki/China_National_Highways

Hold you horses. Blattman did not say infrastructure spending has no value. He merely raised the question of whether the marginal dollar spent today (or 10 years ago) on infrastructure does as much good as the marginal dollar spent on providing capital for start-ups or SMEs. If you think the answer to that is clear, please provide citations to the relevant empirical literature. If you don't have the citations, then I don't see what basis you have for attacking someone who simply admits there is a non-zero probability that start-up capital has the bigger impact and that future research may be able to demonstrate that.

Read comment one. Such statements are couched in such a reticent manner in public/academic fora and reach policy makers and international organizations with the full authority (in my opinion, completely undeserved) of an ivy professor. Yes, there is no way to know for sure whether a marginal dollar does better in the hands of an sme owner or on roads. But roads are a prerequisite for many other mechanisms through which a country will develop - including the growth of small businesses. There is no logical basis to make the kind of comparison that the poster has made.

And to the broader point - the answer to the blog post title is "Of course not". Grow up and read some history..

"Yes, there is no way to know for sure whether a marginal dollar does better in the hands of an sme owner or on roads."

Glad you agree, as that was precisely the point Blattman made. If you want to write anonymously about "circle-jerks," there are surely other corners of the internet that would be more appropriate for you.

I can't reply to your last post. So my replies are here.

i) You don't have evidence either and yet you suggest that the two (roads vs sme grants) are comparable. If there isn't evidence, common sense should prevail. I already addressed the issue of what was stated or suggested and how it is often presented differently in different fora.

ii) "Circle-Jerk" has evolved into having a broader meaning. In any event, the owners of MR can delete any of my posts. It is their right, not yours. And regardless, you have no authority to tell me where to post.

iii) You have the chutzpah to criticize me for being anonymous. You are anonymous as well and have responded to many of the posts here. You are clearly defending the blog post and have demonstrated a clear bias.

The early SMEs under Deng were effectively SOEs. They were village and township enterprise operated by local councils.

Could African townships replicate this? Or should they prefer Western orthodoxy about how to build from an SME to a larger business?

I would say both infrastructure and startup funding is necessary, that neither alone is sufficient. Each serves a function within the larger economic system. Building infrastructure in undeveloped countries w/o funding startups opens the door for large international companies to benefit at the expense of the population. These countries need to mature economically from within, at their own pace; to become self-sustainable.

The most effective development program ever invented was the establishment and defense of a harbor by an imperial power which then imposed law and order on the immediately surrounding land and sea areas:

Paris
London
Copenhagen (technically it was already part of Denmark when Absalon got there but it had descended into lawlessness)
Jakarta
New York
Hong Kong
Singapore
Karachi
Lagos
Mumbai
Kinshasa
Lima
Rio de Janeiro
etc.

Most likely, it was the market access that comes with being a port controlled by an empire, and hence linked to the markets of the empire. A simple SEZ in a port area should do.

Good point but remember that it has to be a deep water harbor. New York City became the metropolis that it did precisely because it wa sa natural deep water harbor.

Add Chicago, Moscow, Sao Paulo and Mexico City to the list.

An SEZ would do it - if there was someone to impose law and order. That is part of what the empires brought to the table.

Landlocked countries (of which there are many in sub-Saharan Africa) are kind of screwed I guess.

When I last checked Angus Maddison's numbers, India barely grew at all when it was ruled by the British. Per capita GDP only started growing at a slow but respectable rate after independence. Whatever the British were doing in India, there is no evidence they were stimulating economic growth.

I'm not talking about India as a whole - just the major port Cities established by European empires.

Per capita GDP growth. What you mean is that the British enabled a great deal of economic growth in India but that the Indians preferred to put all their gains into more children.

The economy of India grew a great deal under the British.

Lagos, Nigeria.
Attention: The President/CEO of Marginal revolution

Dear Sir,

Confidential Business Proposal

Having consulted with my colleagues and based on the information gathered from the Nigerian Chambers Of Commerce And Industry, I have the privilege to request your assistance to transfer the sum of $47,500,000.00 (forty seven million, five hundred thousand United States dollars) into your accounts. The above sum resulted from an over-invoiced contract, executed, commissioned and paid for about five years (5) ago by a foreign contractor. This action was however intentional and since then the fund has been in a suspense account at The Central Bank Of Nigeria Apex Bank.

We are now ready to transfer the fund overseas and that is where you come in. It is important to inform you that as civil servants, we are forbidden to operate a foreign account; that is why we require your assistance. The total sum will be shared as follows: 70% for us, 25% for you and 5% for local and international expenses incidental to the transfer.

The transfer is risk free on both sides. I am an accountant with the Nigerian National Petroleum Corporation (NNPC). If you find this proposal acceptable, we shall require the following documents:

(a) your banker's name, telephone, account and fax numbers.

(b) your private telephone and fax numbers —for confidentiality and easy communication.

(c) your letter-headed paper stamped and signed.

Alternatively we will furnish you with the text of what to type into your letter-headed paper, along with a breakdown explaining, comprehensively what we require of you. The business will take us thirty (30) working days to accomplish.

Please reply urgently.

Best regards

Howgul Abul Arhu

As a Nigerian, I have always felt that most "Nigerian Scam Letters" do not come from Nigeria or Nigerians at all. Thanks to your convincing letter, here perhaps, is proof.

The most successful development program in history is natural selection. Thats how we did it.

Of course! In an article by (Christ J., Buddha G, Mohamed et al (0)) it was agreed that rich people go to heaven and poor people go to hell.

Would have been funny if it weren't retarded, and not funny

Well thats natural selection for you :)

Wait a minute. 6,000 * $50,000 = $300 million not $60 million. WTF?

Oh I see, only 1200 got funded. Nevermind.

smells like vagina

Smells like douchebag

Given Tyler's sometimes circuitous approach to things, I'll assume that this post intends to incite commentors to pooh-pooh these programs. While these programs are effective on the, ahem, margin, like the other commenters, I doubt that they can do anything to address general infrastructure and governance issues that constrain the overall growth of the economy.

I especially appreciate Jorgensen doing the arithmetic that the original writers appear to have neglected. A ~10% ROI in a developing country isn't all that world-beating. Wasn't there a recent post about how you can save a life from malaria for $3,400? I'll take the latter, please.

Related: read a bit of the top to get the technical sense, and the skip to the appeal at the bottom:

https://github.com/gernest/utron/blob/master/README.md

Before I posted that I was thinking a bit about how a great reduction in information asymmetry has opened new investment opportunities in Africa. That would seem a case in point. This isn't just a farmer who knows the market price for coffee, this is a guy with competitive skills.

In a greatly changed world of course there are opportunities for business grants.

One of the most effective development programs is also one that is very cheap to create: the tariff.

The infant industry has been thoroughly debunked so many times its impossible to count.

But, I DO believe that there is a time and place for it. Eventually though, the logic that competition forces productivity gains is too strong.

Probably the best development program would be to make Africa a tariff-free trading zone. This would strip powers from capricious and greedy inspectors which line national highways throughout Africa.

The infant industry argument has not been debunked and your second and third sentences demonstrate as much. In a world of imperfect capital markets and economies of scale, temporary protection of infant industries can increase rather than decrease the level of competition in the long-run once the companies cease being infants and tariffs are lowered. Boeing, Airbus and Embraer are all clearly the result of industrial policy and implicit or explicit protectionism and subsidies from their respective host governments. Yet the existence of three players in the civilian aircraft business almost certainly is a plus for the world and it is quite possible that there would be a monopoly or duopoly on big passenger aircraft if Brazil or France hadn't made it a priority to develop these companies. Japan tried and failed to have a successful airplane manufacturing industry so fostering such a company is non-trivial.

I'm a bit perplexed as to why this is supposed to work better in a systematic way than would conventional banking, re-investment of earnings, or micro-credit agencies. I would not want this done in my own country. In a Nigerian context, we'd be sage to assume one of two or three things would happen: (1) the funds would be used to maintain patron-client networks gathered around party bosses, or (2) the funds would be used to maintain patron-client networks gathered around lineage patriarchs or (3) the cousins of those making the discretionary decisions would be badgering the Big Man for some candy. (To a great extent, I'm being repetitive).

Theodore Dalrymple has offered that you have a systematic problem: a prominent official in the modern economic sector in Africa is enmeshed in a web of family obligation of which Europeans and their posterity know nothing. The temptation toward malfeasance, misfeasance, and nonfeasance on the part of public officials is thus something of which a westerner knows nothing.

Shorter: it may work in practice, but I can think of too many ways for it to fail in theory.

Work in practice? I think I'd be inclined to audit their results.

Art Deco September 26, 2015 at 5:28 pm

The temptation toward malfeasance, misfeasance, and nonfeasance on the part of public officials is thus something of which a westerner knows nothing.

So perhaps the solution is to legalize corruption? Or at least stop enforcement and recovery. After all at the moment the officials steal all that money and put it in Swiss bank accounts. Well, Hong Kong ones these days. What good does it do Africa there?

We want them to keep it in Nigeria and hand out to their clients. Who may or may not start businesses. We need to encourage officials to acquire large amounts of money so they can kick start the whole economy. It worked in China!

There is no solution. Nigeria has made adjustments over the years, such as setting up an audit and control apparat. You're not going to improve matters by legalizing bribery and embezzlement. You just hope the problem gradually abates as the society grows more affluent and formal means for indemnifying oneself against the vicissitudes of life are developed and replace ad hoc favor seeking from relatives. Some societies can develop even with a great deal of leakage (see South Korea). Africa's had some modest successes in recent decades (outside of the equatorial states and the Horn, which are a mess), but these have not been in the economic realm.

"We need to encourage officials to acquire large amounts of money so they can kick start the whole economy. It worked in China!"

Right.

If this were true, Indonesia under Sukarno would have boomed.

China boomed because a bunch of people started up little factories in Shenzhen to sell things to foreigners.

"If this were true, Indonesia under Sukarno would have boomed."

-It boomed under his successor, Suharto! Very strongly in economic complexity, in GDP per capita it boomed a little stronger than Malaysia (which was at a much higher level), but not as hard as China, which has surpassed it.

Fairly nepotistic systems also worked in Japan and Korea, in that significant public expertise was directed towards improving technological abilities of chosen winners.

The reason it doesn't work in Africa is that locals wouldn't stand for it if they saw a capitalist elite take hold in such nepotistic circumstances, so corrupt leaders hide their money outside of the economy (e.g. Switzerland). If there were a way to force corrupt leaders to keep their money in the country, then perhaps there would be a chance that this would work.

Patronage is well known to be a major problem in Nigeria.

A fairly unrealistic (for Nigeria ... I hope they prove me wrong) degree of transparency would be required.

A partial solution would be that applicants must not include any markings of ethnicity/family, etc until decisions are final.

Bankers are scared of making loans without collateral and are also scared of lending to start-ups. Put both together -- an entrepreneur with almost no personal assets who wants to borrow $50,000 to start a brand new business -- and few if any bankers in the real world are going to seriously consider lending to him or her. The purpose of microfinance loans of, at most, a few thousand dollars to people who don't have collateral. The loans are necessarily small because microfinance lenders are only slightly less scared than big banks of making big loans with no collateral.

didn't matt yglesias throw around the idea of issuing $100k loan guarantees to any american who wanted to start a business a few years ago?

And what crop did the white farmers grow in Africa in response to the market before their farms were expropriated? Of course, Cowen doesn't ask what goods and services these new African entrepreneurs were providing.

Livestock, tobacco, and corn.

What about pussy?

you are a truly loathsome individual

There were never really any White farmers in any numbers in Nigeria. It was the model of the Indirect Rule concept. So the British ruled through the descendents of the last Islamic fundamentalist movement in Nigeria - the ideological ancestors of Boko Harem.

Which meant they were very slow to end what was probably the largest single slave society on the planet. Maybe half the population were slaves at one point. Only the US had more in absolute numbers and that is disputable.

However Nigeria was famous for its peanuts. When the British built a railway into the north, it had a massive impact on the economy as everyone turned to producing peanuts for export.

Good point. White settlement was in the temperate zones in southern Africa, as well as the highlands in east Africa. In west Africa, you had a five digit population of civil servants and soldiers in the French territories and not much else.

I expect that West Africa could not grow any crops that Europe wanted (or least any crops that could not be better grown in India, Brazil or Malaysia).

Ghana and the Ivory Coast grew cacao.

Liberia was a big producer of rubber. Firestone operated the world's largest rubber plantation in Liberia, starting in the 1920s. I don't know if they still run it. Probably not.

Nigeria and France's Ivory Coast were also big producers.

It's true to some extent that the British perceived Nigeria as a poor investment opportunity and thus indirect rule, but there were mining and agriculture opportunities. But British business was largely prevented from participating in either directly for fear of getting involved in fractious local land and labor issues. For example, the influential William Hesketh Lever, sort of the John D. Rockefeller of the soap industry, wanted to operate palm oil plantations in Nigeria, but was repeatedly refused so he went to Belgian Congo. What the British were mainly involved in was infrastructure investments, railroads, roads, dredging, banking, shipping, etc.

Could not? During their salad days in the 1970s, Ivory Coast experienced tremendous agricultural diversification and massive immigration from farther north as production boomed.

I assume you refer to the case of Zimbabwe.

For economic purposes, it's not about white and black. Educated people with experience in management (who, as a matter of history and fact were white) were forced out of the country, and uneducated people whose only experience in farming was in "traditional" methods (who, as a matter of history and fact were black) predictably fail to use modern management techniques that they are not experienced in using.

If Zimbabwe had looked to the case of Uganda in the 1970s, they could easily have seen that removing the management class from society does not produce good results.

To be fair, if white Zimbabweans had been more forthright in acknowledging historical wrongs and a need for SOME land redistribution, expulsion of white farmers probably would have been less severe or un-"needed".

How exactly would redistribution - taking land from economically productive commercial farmers and giving it to inexperienced subsistence farmers - have improved the economy of Zimbabwe?

It wouldn't have. It was a political demand. White farmers owned all the good land. Now they own none of the good land because they wouldn't negotiate. Everyone loses, and everyone loses more than if a middle ground solution had been accepted.

I know someone who wants to have a $15 minimum wage so Taiwan and China can export more to America. (He's very Taiwan centric)

I asked him why not just have a $15 minimum wage in Taiwan if its so awesome.

Who did the scoring?

How fast would this system be gamed?

Color me skeptical.

Don't we already have this in the form of the federally funded SBIR program, except for science and technology related businesses? Not sure if there are published statistics on what the ROI is on those programs.

So suddenly the government "picking winners" is a great idea.

Like DARPA?

In both cases it is a question of minority efforts which might yield return, without changing the broader nature of the economy.

Anything less than 1% of GDP is a hobby project.

Picking winners of 1200 entrepreneurship grant awards is very different from the typical case against it, which involves picking one or two winners to represent entire industries. Picking one or two winners in an industry easily invokes nepotism, and often involves pushing lots of money into the "winners" regardless of their ROI, productivity, etc.

I think it's quite fair to question the ability of the judges to evaluate applications though. What if it's stacked with environmentalists, farmers, oil industry, food industry people, social scientists, pharmacists, etc. They will have biases in judging applications that may not be related to underlying economic merit. I didn't see anything in the methods to ensure against this kind of problem.

Any US taxpayer who has paid more than $10k in life total taxes should be able to get a "tax-loan" of the amount paid, up to $100k (US is more expensive than Nigeria). The tax loan would need to be repaid, with the interest rate being variable, set equal to the Fed funds rate.

When it costs you more to get a container a few hundred km from Lagos as it costs you to get it from Chicago to Lagos, there is a real infrastructure problem.

This is a very interesting idea. I really like the ability of award-based program to bring out ingenuity and give opportunity to people who otherwise don't have access to funds. But seeing it as a replacement for much needed investment in infrastructure is a really bad way to think about it.

What about coastal SEZs being built with the Chinese? Oh, China = bad.

Also, as mentioned by John, better information systems which enable markets to properly function (respond to price signals) are another area of innovation that should be heavily rewarded.

Sort of surprised that only 1/3rd had 10+ employees. I think the real future needs to be to invest in medium to large enterprises or the kind of things that attract those businesses. All these micro/family businesses just don't seem like the right thing to focus on. The vast majority of those people won't be successful entreupeneurs, even with a cash influx, and even the sustainable ones won't employee enough people to matter.

In the last few years, I've seen more interest in "backing successful companies" instead of trying to create businesses from the ground up.

I'm inclined to think that a bit of both is good.

In the case of the developing world, consider that a lot of "small business" is basically street vendors. This might help them get out of poverty and therefore improve prospects for their children. I.e., microcredit might be very useful in tackling poverty, but I am quite skeptical that it will create a large volume of employment, which is what these economies really need.

"Is this the most effective development program in history? " is such a pompous title.

If only a small fraction of these recipients begin to compound the grant, the magic of compound interest will take over in the long run. Remember what the venture capitalists say, it only takes one or two big winners to make up for all the losers. What Africa lacks are families builiding and compounding wealth generation after generation. This accelerates the process of identifying those families.

What is the right mix between straight up grants and subsidized loans? That is, is it better to give $50k each to 1,200 entrepreneurs, with no strings attached, or to give $50k loans to 2,400 entrepreneurs with the requirement that they pay back 50% of the loan over the next 5 years? (Or however you want to tune the numbers)?

While the Nigerian government program might have ended (elections have consequences), a Nigerian banker and entrepreneur - Tony Elumelu has launched his own intervention.

Tony Elumelu Entrepreneurship Programme (TEEP) is giving out seed funding of $10,000 to 1000 new startups across Africa for the next ten years. The first batch just got funded.

Link : http://tonyelumelufoundation.org

How did we get through several days of this thread without mentioning Ray?

I think that the good Doctor Lopez should write up his empirical work on the effects of transferring large sums of money to the relatives of young Filippinas. It would be a fascinating case study.

How difficult it is to measure ROI of a program? Howsoever we might want to believe that evidence-based theories should only be encouraged, when one is trying to change a social system, one cannot use these kind of measures. We are using metrics that we use in Closed boundary system of companies to measure the impact in Open boundary system like society. We need to design different measures.

Maybe the Nigerian government should sell their business plan scoring algorithm to investment bankers to raise more money.

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