Inclusive development needs an innovation and entrepreneurship policy 332.0

The Aquino Administration ought to add entrepreneurship and innovation policy to its flagship programs to achieve inclusive development.

To me, the two current flagship programs of public-private partnership focused on infrastructure and 4Ps through conditional cash transfers (CCT) as safety net for the poorest of the poor are necessary but not sufficient to achieve inclusive development.

Curator's Wand. Inclusive development. Entrepreneurship and innovation policy.From the macroeconomic equilibrium that was used in deriving these strategies – newer variations perhaps of the old Harrod-Domar model – they cover the top and the bottom and may lead to growth but not necessarily to development.

Asian Development Bank (ADB) definition of inclusive development

Inclusive development is a fairly recent concept. Previously, there was inclusive growth and prior to that such approaches as poverty alleviation.

The ADB actually went through the effort of defining inclusive development in a 58-page compendium authored by Ganesh Rauniyar and Ravi Kanbur of Cornell University which the January 2010 version can be read as linked.

Briefly, I quote:

According to ADB literature (Ali and Zhuang 2007, Ali and Son 2007), there is no agreed-upon and common definition of inclusive development. The concept, however, is understood to refer to “growth coupled with equal opportunities.

Inclusive development, Rauniyar. Kanbur

Click to ADB page with 2009 version of Rauniyar and Kanbur and other inclusive development papers.

They proceeded to define the words “inclusive” and “development” including the evolution and metrics of each word in the lengthy compendium.

Inclusiveness is an easier concept to appreciate. Development relates not just to economic GDP per capita but improvement in social and institutional context as well.

In the ADB definition, public-private partnership focused on infrastructure and government-sponsored charity through the 4Ps and CCT fall short of inclusive development.

In infrastructure, for example, the question on inclusiveness can be asked as to where the projects focused, say farm-to-market roads or expressways.

Adding entrepreneurship and innovation policy and the congruent changes in institutions to the two present flagships, I think, will be a pragmatic way towards inclusive development.

Innovation and entrepreneurship are externalities in modern-day macroeconomic planning

Neoclassical macroeconomics considers innovation and entrepreneurship as externalities because they were difficult to model. I noted this in the post Economics and Crises – an Epic History of Self-Healing.

In fact, classical economics assumed that technology is free and known by everybody or that entrepreneurs and managers do not exist and labor is interchangeable, among a few other simplifying assumptions.

Robert Solow in 1957 considered entrepreneurship and innovation as a black box – an un-analyzable residual that in his time accounted for up to 80% of growth already.

Even Paul Romer in Endogenous Technological Change (1990) assumed innovation as a steady-state and randomly directed change to ease the math.

Modern macro-economic planners can say with a straight face, indeed, that innovation and entrepreneurship do not manner in their models; more pragmatic people running actual businesses say they do matter.

Infrastructure-focused public-private partnership is a trickle-down strategy designed to bridge a financing gap between savings and investment – given that there is a relation between investment and growth. Still, the effectiveness of trickle down economics has long been suspect in delivering equitable and inclusive development.

Conditional cash transfers or CCT have substantial literature proving its net benefits say, in South America. Still, it can be considered a government’s version of charity; it distributes P1,400 worth of fish monthly but does not teach the poor to fish.

Both have the disadvantage of requiring substantial resources to sustain and, consequently, of having their economic benefits dry up when resource availability is not sustained.

Innovation and entrepreneurship are dynamic drivers of economic development

I first learned about inclusive development at 2010 GLOBELICS in Kuala Lumpur On November 2010 where it was the conference theme with Innovation for the Poor.

I blogged about it in Inclusive Development and Innovation for the Poor on November 9, 2010.

Interestingly, the approaches reported at GLOBELICS are not amenable to a cookie cutter approach in the cases presented and noted in the blog post.

For the Indian case study in Arunaschal Pradesh, that is a democracy moving to inclusiveness, the focus was on facilitating equality of opportunity for livelihood improvement.

For the China case study in Zhejiang, that is a communist party moving to inclusiveness, the focus was on increasing access to opportunity for SMEs for wealth creation.

My proposal for entrepreneurship and innovation policy in the Philippines seeks to accomplish both based on the Babson College framework for Global Entrepreneurship Monitor (GEM) survey.

Kauffman Foundation recommends growth of new business as the sustainable source of development

Carl Schramm, CEO of Ewing Marion Kauffman Foundation, shared the last insight above in a Charlie Rose discussion on the Obama Jobs Speech on September 8. 2011.

I have already blogged about the Kauffman Foundation on a post differentiating replicative from innovative entrepreneurship.

The Kauffman Foundation is a strong promoter of the latter because of its value-adding potential – without denigrating the first that is usually the result of necessity or livelihood – while working closely with such institutions as the Massachusetts Institute of Technology.

Under Carl Schramm, the Kauffman Foundation has done much research proving that the growth of innovative and entrepreneurial new business is the real metric for sustainable growth.

Further, from the Charlie Rose program, he claims that economic planners using macroeconomic models do not understand this process.

Reading further on Carl Schramm, I discovered his well-received Foreign Affairs article – Building Entrepreneurial Economies and the GEM survey of Babson College.

Babson. GEM conceptual model.

Conceptual model for economic growth (parallel to GDP model). Click image for link to the GEM website and later versions of this model.

GEM Survey of Babson College provides a framework for entrepreneurship and innovation policy

The Philippines participated once in a Global Entrepreneurship Monitor survey in 2006.

One of the Philippine authors was former NEDA Secretary Ciel Habito as facilitated by GoNegosyo. The survey details provide data suitable for policy making.

For one, the survey is done annually and breaks down GDP according to size and maturity of firms and establishment.

2007 GEM Report for the Philippines from year 2006

Click image to GoNegosyo page where a copy of the 2006 can be downloaded for free.

From this sole GEM report, Filipinos start many venture out of necessity and for livelihood purposes so that is not the key area of intervention.

Many of the ventures are classified as new businesses in a few months but remain small. Growing the small new businesses is one key area of entrepreneurship policy intervention.

From case studies elsewhere, new businesses (that are defined as those operating up to 3.5 years) are the major source of innovative entrepreneurship as they try to grow their businesses. Their innovation is different from that of big companies that are focused on their existing line of business. These new businesses are the ideal policy focus of innovation policy intervention.

I think it would be helpful to participate in the next annual Gem Survey and update the findings of the year 2006 base report.

Innovation and entrepreneurship as source of sustainable growth and inclusive development

Detailed entrepreneurship and innovation policy can be the subject of another blog post.

I firmly agree with Carl Schramm and the Kauffman Foundation that sustainable growth is best attained by supporting new businesses.

In the Philippine context, where enterprise by necessity is embedded in the social DNA, facilitating the process from entrepreneurship to innovation by policy, seems a good option to achieve real inclusive development.

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