Jack D. Deal
On a recent trip to a developing country I became more aware of the influence of infrastructure and its impact on economic and business development. This insight brought out the need for an adequate infrastructure on which to build an economic base.
The final conclusion I made on this particular trip was: without a solid infrastructure the economic development and human potential of a town, region, country will be less than optimal. The consequences are that both economic and human potential is restricted: this loss not only lowers a standard of living but shatters dreams, opportunities and innovation.
Perhaps the most obvious symptom of a weak infrastructure is that people will do what they have to do to survive. On Maslow's hierarchy of needs, the basics like food and clothing come first. It is very difficult to innovate and create when hungry. Economies with weak infrastructures often evolve into subsistence economies.
What are the outward symptoms of a subsistence economy? For one thing, everybody hustles the basics. Everyone opens a small store at their house (or hut) or becomes a street vendor. Basic commodities become cheaper and the margins for selling these commodities become quite small. In the case of food, only large stores selling high volume can generate sufficient margins to become profitable. Smaller stores and vendors make very small margins, just enough perhaps to feed themselves. The subsistence market continues and is even strengthened as more 'entrepreneurs' enter the subsistence commodities market.
Another symptom can be seen in the skilled and semi-skilled labor markets. If an individual has a skill they can trade on, they will do that rather than opt for subsistence vending. The value of these skills may be diminished as the supply outstrips the demand, creating a skilled labor price war. This makes it hard for all but the large and specialty labor suppliers to exist profitably as they are always threatened by those in the market that will do the job for less. As the bidding wars spiral downward the ability of a company to train and help its employees improve is significantly diminished. Service industries such as construction (including plumbing, electrical, roofing, etc), auto-related businesses (such as auto repair and autobody), and transportation (bus, taxi, freight, air) as well as other service industries are negatively effected. On an international or interregional basis these industries become less competitive and more susceptible to outside competition. This slows development and creates another symptom of the subsistence economy: a lack of discretionary income in large segments of the population.
So a population ends up 'hustling' and very likely becomes 'corrupt'. Instead of looking for ways to improve production, services, quality, etc., the preoccupation becomes one of the hustle, scam and the bribe. Here lies perhaps the greatest challenge to economic and human development: how to make an economy be driven by competition/markets and not politics or culture. In this kind of economic environment working harder or even smarter is not enough: the most likely keys to success are who you know and who they know. Again, the net result is that internal markets become less competitive and the external demand for goods and services is diminished.
As a consequence, the subsistence economy creates a small and ineffective tax base. This small tax base restricts future growth, improvements and perhaps worst of all any future tax revenue improvements. Highways, phone systems, shipping, water, sewage, electrical power, food distribution - - all suffer from lack of a solid tax base. Add to the weak tax base an almost certain layer of bureaucratic/government corruption, then all the ingredients are set for a long term subsistence economy. In the globalized economies of the 21st century, the subsistence economies will become increasingly threatened by outside competition and perhaps more importantly less competitive in international markets. Protectionism becomes a political tactic, imports increase along with a negative trade balance, and the prices of many goods and services go beyond the reach of many in that limited economy. The old adage of the 'rich get richer and the poor get the shaft' is a foregone conclusion.
Unfortunately the only growth these subsistence economies can count on is internal and not external ...usually from internal population increases or internal migrations to urban areas. Those that 'have' in these stifled economies often spend all their energy and resources in 'protecting' what they have. Their view is 'I've got mine and any change in the status quo can only hurt my relative position'. The protectionism, corruption, and consequently difficult and high costs of doing business do tend to provide formidable barriers to entry and help maintain the status quo It also develops many industries that are ineffective and less able to provide opportunities --industries that might not survive in open markets. Mature industries, especially in the service sectors, become overly saturated. New industries find the barriers to entry too severe so innovation is stifled. Eventually interregional and international opportunities are lost.
And the cycle is repeated. It becomes not only a way of doing business but a way of life. Each individual in the subsistence system tries desperately to hold on to their tiny chunk of economic advantage. It becomes a cultural issue and hence very slow to change. To an outsider, it becomes incomprehensible in what outwardly appears chaos though in truth it is a well ordered albeit malfunctioning system.
The infrastructure eventually becomes overwhelmed, ineffective and inefficient. By saving on a sewage system up front a subsistence economy then pays a subsequent price in illness and poor health. By corruptly taking tax funds out of highway repair, the costs of transporting goods becomes higher, eroding margins on those goods. Without reliable, cheap phones communication is hampered in the connected world of today further driving up the costs of doing business.
The real tragedy is that a region's greatest resource -- its people -- is wasted. Yet the forces of change, especially changing markets, are creating pressure on weak infrastructures and their accompanying subsistence economies. As these pressures increase we will see the lower level economic participants demand more and more from the weak systems they live under. When those systems become too inefficient then the systems themselves will be questioned. When those questions and pressures become too great an eruption of social unrest and quite possibly demands for a 'structural reorganization' will occur. Those that have their stakes in these weak economies will not give up easily and the friction will be enormous.
As we approach a new business era we should all be aware of the unlimited opportunities the New World will bring. But we must be very much aware that these opportunities will not apply to all. Unfortunately we must acknowledge upheaval as these old subsistence cultures die and are transformed at what may be a very high cost. What these emerging societies will look like is not certain. Yet, we should not be surprised when this happens...
Jack D. Deal
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