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Private-Led Developmentalism: Jobs for What?

November 21, 2012

Last post exposed how the private-led developmentalism in vogue today is not after all such a new idea. It was tried before and it was dropped because it did not square well with other priorities of rich countries: political discipline and security. The business-led mantra however has still two strong points to argue that foreign private firms stand to benefit poor: they create jobs thus prompting an improvement in living of standard and they transfer technical know-how to poor countries. The rest of the post will look into these two postulates and highlight the contradictions.

Look Beyond Efficiency. The example of Wal-Mart highlighted by USAID administrator shows how farmers can be integrated in the market by sub-contracting them with a big private company. The knowledge and inputs received will in most of the cases lead to increased output per hectare (or any other measures of yields improvements). Integration into market through contracting with big corporations is welded with improvements in efficiency: poor farmers stand to benefit, one is said. This is true, however it is only part of the story. By integrating farmers into the market (which in most of the cases means converting them to mono cropping) one is also closing the exit option: mono cropping can compromise their ability to adapt to extreme weather conditions by switching crops and reduce their autonomy to negotiate terms and conditions of the insertion into the market. Big private corporations tend to monopolize the market: this example in Indiana shows how farmers who want to buy seeds have no other choice than buying them from Monsanto. Linking up poor farmers to them can therefore, in some cases, reduce their freedom to chose. Increasing their outputs thus improving their well-being and increasing their vulnerability to big corporations are not mutually exclusive and can happen at different times, as professor Edward Carr puts it here. Business-led development cheerleaders focus on the pros and miss the cons: by so doing they miss part of the picture.

Corrupting Your Way Up. The case of Wal-Mart in Mexico shows also why taking a look at the big picture matters a great deal. Wal-Mart is today the largest private employers in the country with 209,000 employees. The success in terms of job creation is staggering. But how did it get there? It bribed its way up. NYT revealed how the dramatic business expansion in the country was the result of a systematic system of bribes which

targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits — anyone with the power to thwart Wal-Mart’s growth.  The bribes (…) bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.

Through bribery Wal-Mart was bypassing all the legislation so to accelerate its growth. By buying time it was crushing its competitors: it forced other private actors to do so if they were to keep up with it.  Private sectors cheerleaders could argue that for any case of company bribing government there are 1000 companies not paying anything to government officials. This might be true as much as it could be false. The truth is that nobody knows. But if private companies (even a small percentage of them) are  engaged in governments corruption who is to decide if this is a fair trade off, a so to say pact with the devil to get more jobs or a cost a country cannot afford to pay?

Transferring Knowledge? It depends on many factors. The case of Lesotho and its apparel industry is a paradigmatic case and shows that the transfer of knowledge does not always come with foreign private firms investments. Beneficiary of the AGOA (Africa Growth and Opportunity Act), Lesotho attracted private enterprises to invest in the country clothing manufacturing. The benefits were clear and very tangible: a lot of jobs were created and apparel exports spiked. The transfer of the technical know-how  about how one manufactures apparel however never took place and several factors can account for this miss. Firstly, foreign firms were relying on expatriates to fill managerial and supervisory positions and to oversee production operations, which are keys for capability building. To put it simply, Chinese and Taiwanese managers did not speak English and communicated little with Basotho staff: knowledge transfer was very limited. Where training was taking place, it was about the simple procedure: how to operate one type of machine (instead of multiple). More complex operations such as machine maintenance, layout, and patterns making were not part of the training because they were not competence of Basotho staff. These skills however are fundamental if an industry is to take roots in a country. Foreign investors sometimes keep a footlose attitude in the sense that they will stay in the country as long as it is convenient for them i.e. as long as the trade preference last. They do not care about knowledge transfer because it is just not their business.  If knowledge was not transferred within the enterprise it seems that in Lesotho it did not spill over either: in the 15 years of foreign apparel manufacturing in Lesotho, no local firms emerged to compete with or to subcontract from foreign enterprises. Lesotho is just one example and other countries (e.g. Bangladesh) show that the investment of foreign enterprise can result in the knowledge spilling over to the host countries nationals who are able to set up their own firms.  Private sector cheerleaders limit their view to the short term (farmers were trained by Wal-Mart) and fail to see the nuances (training about how to operate one machine is different from training on how to maintain them): by ignoring these aspects one is not able to fully gauge the odds of the knowledge getting transferred and to stick in the long term.

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