Local economic development and enterprise financing models: the good, the bad and the ideological

1. Local economic development and enterprise financing models: the good, the bad and the ideological Milford Bateman Freelance Consultant on local economic development and Visiting Professor of Economics Juraj Dobrila University of Pula, Croatia Presentation at the SEMINARIO INTERNACIONAL LECCIONES DE DESARROLLO SOCIO-ECONÓMICO PARA AMÉRICA LATINA, Medellin, Colombia, March 13-16, 2012

2. Background • Local Economic Development (LED) often forgotten part of sustainable development policy… • Yet it might have even greater role to play than macro-policy • 1980s turn to neoliberalism delegitimized pro-active local governments, leading to NGO-ization of many developing countries • Local financial sector restructured on business lines, allowed business elites to ‘loot’ local population under cover of ‘providing services’

3. Background • The Great Recession begins in 2008, not predicted by ANY neoliberal economist! • It is having a major impact on policy: • New non-market policy alternatives now possible, such as CCTs • East Asian-style ‘developmental state’ structures are now possible outside of Asia, including local versions • It is now more widely accepted that the local financial system should exist to promote sustainable local economic development, NOT to enrich a small financial elite as at present • Building ‘collective (local) capabilities’ (Amartya Sen) is now permitted – key issue now is HOW CAN WE TO DO THIS?

4. Good examples (1) • Europe’s post-war recovery under broadly Keynesian macro-principles and tolerance for planning saw many good examples emerge: • Northern Italy, where local and regional governments have excellent capacity to act and to plan • Basque country of Spain, where local quasi-state capacities promote LED through a range of institutions and turn poorest region of Spain into one of richest in 40 years • Scandinavia, where active local governments behind major expansion of, and improvements to, the local SME population. Affordable finance is a priority to allow upgrading of technological capacities (product and process) • Former West Germany, where regional and local governments very active after 1945 (though kept a low profile) in promoting major LED outcomes, notably famous ‘Mittelstand’ (medium businesses) which arose in such a supportive environment to dominate German economy

5. Good Examples (2) • East Asian ‘Miracle’ economies known for their national policy success, but LED by local state was also crucial • Japan’s local governments provided comprehensive support to MSMEs to integrate into supply chains • South Korea and Taiwan learn much from Japanese and establish very active T&V administrations providing support for local agriculture and then off-farm businesses • China’s ‘economic miracle’ is NOT because of FDI which came in late 1990s, but because of 1980s success with TVEs supported by pro-active T&V administrations • Vietnam – latest ‘poster child’ for sustainable development – T&V administrations go to China to learn, come back and provide carefully planned support for minimum efficient scale family farms and family businesses – now dominate several global sectors and world’s 3rd exporter of rice (after USA and Thailand)

6. Bad Examples (1) • Bangladesh – focus remains on expanding the NGO sector, no state capacity encouraged – becomes self-fulfilling prophesy….. • BRAC, Grameen Bank family of social enterprises and other similar NGOs are quasi-state actors ‘doing things’ in the community…. so long as financed by the international donors • Also complete lack of democracy in these NGOs – often run by one family (Grameen is run by Muhammad Yunus and some family, BRAC is run by the Abed family, etc) • No real capacity building in last thirty years in Bangladesh, perhaps alone among Asian countries – is this a coincidence or not? • Finance (savings, remittances) is largely circulated through the big 4 microfinance institutions and into informal microenterprises with no-growth potential and into consumption spending (sub-prime risk of collapse is real) • SME sector is almost non-existent at least partly because it has NO financial support at all.

7. Bad Examples (2) • Bolivia since 1980s under imposed Washington Consensus/Jeffrey Sachs neoliberal policy framework • Cut role of the state – poor (and women in poverty) suffer the most • Allow NGOs to flourish and replace state capacity, funding provided by USAID and others in initial period the fees come into effect • Just like in Bangladesh, finance (savings, remittances) circulates through for-profit microfinance institutions (BancoSol) and then into ‘postage stamp’ farms and informal microenterprises with no-growth potential and consumption spending – family farms and growth-oriented small enterprises have NO support at all • Poverty rises dramatically as a result from 1980- 2006, only coming down since 2006 as a result of policy changes

8. Ideological examples • ‘Doing Business’ project of World Bank – driven forward by business elites • Focuses upon ideological markers – ‘freedom’ and ‘opportunity’ to do business, not real outcomes of enterprise development on the poor • Developed a stable of ‘false policies’, such as ‘streamlined registration procedures’ as if this was primary barrier to enterprise development – mostly nonsense!! • Avoids addressing substantive and systematic issues at local level that might require coordinated state/collective response – demand constraints, affordable finance, lack of technical back-up, weak/non-existent agricultural extension services, etc • Refuses to deal with – if not blocks - crucial ‘collective capabilities’ potential to help the poor – trade unions, ‘local developmental state’, social movements, public sector ownership, cooperatives, etc

9. Change is coming? • Collapse of neoliberal policy model in 2008 • But most ideological and powerful trying desperately to maintain its legitimacy • Nonetheless, policy space is now much more open • Even the neoliberal fundamentalist Economist magazine admits growing role of ‘state capitalist’ economies shows the state can get it right for its people! • Local state and local activities now legitimised as never before • But is there any additional funding to develop new local capacities, institutions and linkages !!

10. Specific role of local finance in LED • Donors promoted the microfinance model • In some countries, the commercialised model became dominant (Bolivia) but impoverished the country through the proliferation of informal microenterprises • Even IDB now sees the support for informal sector to be the major cause of Latin America’s poverty this last thirty years (see ‘The Age of Productivity’ 2010) • Microfinance now seen as an anti-developmental fad if not a major poverty trap • Only people who became rich were those providing microfinance (managers of Compartamos, BancoSol, etc), not those receiving it – the poor!

11. Specific role of local finance in LED • Need now is for community-based financial institutions that prioritise sustainable local development • Need to explore such as: • Credit unions • Financial cooperatives • Community development banks • Local state development banks • Social venture capitalist funds • Important governance issues will need to be overcome (democratic management, corruption, ‘elite capture’, etc) • And weak bureaucratic capacity at the local level will be a problem (regulation, technical support, etc) • But many countries/regions have solved these issues, so there ARE ways around these problems…..

12. The need to learn • Collapse of neoliberal model told us that learning from success and failure is now a better bet than ‘learning’ from theory and mathematical models! • Yes, local models are always context dependent (geography, politics, culture, macro-conditions, etc) • But massive success of East Asian ‘miracle’ economies shows that learning from others is not just perfectly possible… • But that earlier faults and problems can be corrected in your own model – suggesting the benefit of an evolutionary model of institutional and organizational change has major benefits.

13. Conclusion • Neoliberalism is dead and alternatives now have space to flourish • Local level now becoming the seat of much economic development activity • No shortage of good, bad and ideologically-driven local models to learn from • Exploring what worked and didn’t work elsewhere is now crucial • A new LED model for the post-neoliberal era is now urgently needed, based upon - • ‘Decent jobs’ (ILO) - secure, dignified, meaningful, formal, well-paid • Democratic – participatory and bottom-up, not business elite driven (e.g., World Bank’s ‘Doing Business’) • Equality and social justice • Resource limits and need to be environmentally friendly

14. Thank you for listening Further queries to me at: milfordbateman@yahoo.com