Part I and II look at the challenging question of prosperity and poverty. The risk imbalance between wealthy and poor countires is a likely culprit that acts like a Damocles sword on poor countries. So, the key question is to reduce this imbalance, how to make sure that poor countries do not always end up managing by.
Creativity can defeat the risk-sharing divide. As Michael Mandel, Business Week's chief economist, puts it “ the invention of new markets – whether physical or financial – is one of the highest forms of economic creativity.” Here one can talk about Financial Entrepreneurship. Why such entrepreneurship is somehow neglected by academics and why the public accept Gates getting billions, but is offended when financial entrepreneurs such as Milken, get 1 billion is still an obstacle to overcome.
Making an innovation successful is not an easy task. There is some kind of alignment of planets going on there. Hence the potential for failure is not nil even for a bright idea whose time has come. The late Mancur Olson (1982, 2000), Distinguished Professor of Economics at the University of Maryland, reminds us that our democratic societies suffer from the growing proliferation of interest groups whose sole agenda is to defend their own “pré carré”. The reduction of the risk-sharing divide carries a lot of benefits. However, people won’t buy it even if its intellectual foundations are elegant and convincing. It takes charismatic leaders of opinion to create the public debate, to foster the public interest. It took Hernando De Soto and his stubborn crusade to make the “dead capital” message listened to. It took Muhammad Yunus to make the Grameen Bank and its followers what they are. There is no reason why the same path should not apply to the reduction of the risk-sharing divide. But there is more than charisma to the equation.
Charisma is the form. What about content? Poor and less developed countries are plagued by closeness. As a result, most of the issues are discussed or thought of along ideological lines (Brenner (2002)). These ideologies are often the antechamber to wars and riots. And, unfortunately, when academics, commentators do not know any facts – often the case – they substitute with jargon and ideology. In such circumstances, people are steered towards more government support or even towards criminal activities.
Government support usually comes from outside (Yali’s cargo), directly from government of wealthy countries or indirectly through NGOs. But, this simply does not work: People are still denied to decide upon the challenges they want to embrace. This is why the western countries should condition the access to their capital to the opening up of financial markets. This is where Brenner advocates a bottom-up approach. But again, the devil lies in the details. First, the opening up of a financial market is no warranty of its future
success. Not all “buttonwood tree markets” turn one day into New York Stock Exchange! (Blume, Siegel and Rottenberg (1993)).
As a matter of fact, a lot of small financial markets have a hard time breaking the initial “chicken and
the egg” dilemma: Financial markets attract investors if they offer depth; but to have depth they need investors. That is where again financial engineering may help a lot. For Western investors emerging financial markets offer new diversification opportunities. Indeed, they span risks that the current financial markets in which these investors are invested do not span. For local investors, they bring ready-made depth and diversification. They get access to claims that would otherwise be inaccessible. This should induce them to invest in their newly established local financial markets with more confidence.
Second, there is the more subjective issue of the political willingness of getting things done. Things can be done, but they rarely fit local political agendas. This is precisely why a bottom-up approach is far better than a top-down approach. In the latter (the usual (IMF-World Bank) way) local elites still have the upper hand on things. And, it is quite obvious that they won’t happily create a new context that is deemed to boomerang on them. French philosopher Pascal Bruckner has a nice way of summarising the issue:
“ Cosmopolitans bring out something essential, upset opinions, bare the lie of closed societies”.
Financial markets are part of the cosmopolitan tribe. They make local governments accountable. If they fool around for too long, they will be punished. This is the litmus test of the willingness to promote openness
versus closeness. David Brin, a famous science fiction author, has his own very personal way to describe openness:
“Because I'm a brash eccentric, I need a society that is open, tolerant and welcoming of eccentricity! One whose institutions are accountable enough to minimize the inevitable capricious power abuses that fester in every human culture. One where competition takes place under conditions that maximize fair comparison of quality (in goods, services, and ideas) while minimizing the destructive effects of our most loathsome human trait -- an ingenious talent for rationalizing, predation, cheating and oppression.”
He goes on and advocate “a world where coercion is minimized and individuals are free to achieve the maximum they can by making fair and open deals with each other, leveraging off others' talents, and benefiting from the mutual criticism that only true freedom engenders.” This is not science fiction indeed. And, we better listen to him. Openness is what financial markets are made of. Openness is what people need. But we need more. We need accountable eccentricity in all senses of the expression.
Financial markets embedded in a proper maze of checks and balances yield this essential accountable eccentricity. We have to take the risk-sharing divide seriously. The divide is a biting reflection of our inconsistencies, of our procrastination and last bust not least of our shady deals. It is not the reflection of some geographic curse, of some meteorological blessing or of the proximity or farness of large markets or trading trails as some economic growth theorists would like us to believe.
Otherwise, how would you account for the high per capita income of seventeenth century Low Countries, eighteen century Scotland or modern Iceland (for more on this see Brenner (1997)? Who would have thought that Japan would outperform Argentina by such a fat margin? Latitude and longitude do not matter as long as governments are themselves open and eccentric-minded. Hence, the divide does not have to be so.
The divide is not only between poor and rich countries. The divide gnaws rich countries too. Being poor, being exposed to a game of chance is not a fatality. Poor people, poor regions, poor countries have the same vitality as rich ones. The only difference is that it lies dormant. Proper (open, eccentric and accountable) risk sharing is the key to wake it up.