Beyond BSE and the Mad Meso Disease in Business Development Services

Jörg Meyer-Stamer
jorg@meyer-stamer.de

Draft paper
Any feedback is appreciated

January 2001

Introduction

Once upon a time, technical assistance was called aid and expatriate experts were unsung heroes on the trail of Hemingway & Ambler. Foreign agencies were drilling wells and building health stations and fertilizer plants in developing countries. It also happened that they started to think about the driving forces in the local economies of developing countries, or rather their absence or weakness. In the really early days this did not really appear as a problem as the developmental state promised to take care of everything. But when it became increasingly obvious that this kind of state rarely managed to take care of anything, the foreigners started to look with interest and hope at the private sector.

Now, the problem was that there often was little private sector there, and developmentally-minded governments were rather embarrassed about what was there. It is not particularly encouraging to observe a small businessman cutting metal sheets with hammer and chisel, especially if you’re a president of an African country and you’re dreaming of a national car industry. But nevertheless, there was no way around supporting the private sector.

From BSE to the Mad Meso Disease

This is where BSE comes into play. BSE in this case stands for Business Surprise & Entertainment. The typical sequence went like this. A given country did not really get anywhere, except maybe deeper into the pits. So the donors looked into the causes and detected little economic dynamism. So they tried to understand this and detected that the private sector was not dynamic. That is, the big firms were lame and the small ones where struggling to survive. The big guys were part of the problem, not the solution, and also they were rich, so supporting them was not acceptable for the donors. So SME support became a high priority. So it was decided to conduct a needs assessment. Now, it is a scientifically proven fact that 11 out of 10 SME-related needs assessments lead to the conclusion that SME suffer from too little managerial capacity, too little skills of the employees, too little technology, and too little capital. It’s 11 out of 10 because some needs assessments in the end are not conducted, because there are no consultants available right now and since the result is always the same anyway. So it is decided that there is a need for support institutions in the fields of management, skills development, technology extension, and provision of capital. Now we come to the S, because when they are launched there is a big surprise among SME owners. They do not really know what to make out of this, since it might for instance be an undercover operation of the internal revenue service. Also, they are far too busy doing business, so that they have no time to deal with bureaucrats who pretend to offer support. Moreover, they think that government should spend its time and money doing more sensible things, such as cutting down all the obstacles it has erected for private business activities. So in the end there is little demand, and the bureaucrats in the supporting institution are happy because they can leave office early to go earn some money. But this is temporary happiness, since there are foreign experts, and more foreign experts evaluating the foreign experts, and they want to see some result. Now we’re coming to the E, because it used to happen sometimes that such support institutions then came up with fringe benefits, such as free lunches, i.e. management or technology or financing seminars for free in nice resorts with excellent food.

But real life being what it is, this nice setting could not continue forever. It’s bad enough that we’re burning bucks by the billion so that our own SME guys can go have some fun. Burning some more millions in poor countries was not acceptable, like because there are so few voters there. So the search for something beyond BSE began. This takes us to the Mad Meso Disease. Meso is the new term for supporting institutions, and Mad Meso is the idea that supporting institutions have to be slaughtered, except if they smake money. We always thought that Meso by definition is not profit-oriented, and not even cost-recovery oriented. If it were profit-oriented, it were Micro, not Meso. But then again, so what. The idea to not throw good money after bad one is always convincing. And also, maybe things work in poor countries even though they never work in rich countries. As far as I can make out, the number of Business Development Services in advanced industrialized countries which cover their costs is exactly zero.

Features of the Mad Meso Disease

To be fair, one must admit that what is going on here is not really simple madness. It appears as madness, but might also be a proposition which must be extreme and exaggerated so that in the end, after lots of resistance and negotiation, it leads to some incremental changes towards the right direction. But then again, it might also be that the mad meso disease is the outcome of the confusion of proxies and goals. The ability of a supporting institution to sell some of its services is a proxy for real and true demand and demand-orientation. It is a useful proxy in order to overcome another common confusion, namely that between needs and demand. There are always all sorts of needs, but only some of them are being translated into demand. And talking about businesspersons and there needs and demands, it is important to understand that the demands they articulate, and the propensity to pay for supply which meets this demand, are a statement about the hierarchy and priority of the different needs. Microeconomics call this utility functions and preference orders. It is something economics students learn in the first two weeks of the first term, and it is sad to notice that this simple concept took so long to make it into development assistance.

At the same time, there is an important lesson the proponents of the new BDS approach apparently have failed to learn. Depending on where you live, you probably have heard of Tamagochi, Diddel, or Beanie Babies. It might appear that, using a demand-driven view, nobody in his sane mind would imagine products such as these. Nevertheless, they have been roaring successes in various parts of the world. In fact, surprising customers with new products and thus creating demand is a key aspect of entrepreneurship. Actually, it is almost identical with product innovation. It might be useful for those involved in the BDS discussion to have a closer look at how firms manage product innovation.

But let us come back to the proxy thing. So the ability of a supporting institution to convince its target group that they hand over some money for the service they receive is a proxy for the demand- and customer-orientatedness of the institution. There is nothing wrong with this, quite the contrary. In fact, addressing the target group as customers, rather than clientele or beneficiaries, is a big step in the right direction. Also, organizing a business support institution in a business-like way rather than as a public administration organization is an important step in the right direction.

But there is something deeply wrong with donor interventions which try to create supporting institutions which aim at full-cost recovery or profitability. It is a capitulation vis-à-vis the weakness of the public sector in developing countries, it is creating distortions and perverse incentives, and in the end it may lead to perpetuated underdevelopment of the private sector.

Before we look at each of these issues, let us recapitulate some of the typical features of private sector development, especially small business development, in developing countries.

It is easy to see why the BSE syndrome could flourish in such a setting. It is much more difficult to see how the BDS approach is supposed to break through the vicious circles involved in this setting.

Capitulating vis-à-vis the weakness of the public sector in developing countries

The BDS approach ascribes only a very limited role to government, namely as one of several (albeit not the preferential) providers of support for BDS firms. Now, there is little doubt that in most developing countries government has not played a convincing role in stimulating a vibrant private sector in the past. At the same time, there can be no doubt that not a single case of successful latecomer development is known without government taking an active role, including in terms of direct promotion of the private sector, i.e. doing much more than creating favorable macroeconomic conditions.

The BDS discussion falls back into the simplistic macro-micro-world of the structural adjustment discussion we had more than ten years ago. It should by now be understood that we need more than this to stimulate dynamic business development, such as a vibrant, efficient, competent meso-level of institutions and associations. This relates to demands such as the one that government should reinvent itself. A government which is hardly or not at all active in business promotion knows little about the private sector, and it is thus likely that it will not even create macroeconomic conditions which favor the domestic private sector. Thus, rather than going back to a minimalist BDS approach, trying to circumnavigate an incompetent public sector, it is essential to link business promotion with state reform.

Creating distortions and perverse incentives

The key idea of the BDS approach is that promotion agencies, including foreign donors, should cease working directly with firms and instead create stimulate business development service firms. Now, it is not easy to understand why a firm is not a firm. Moreover, there is no clearly discernible inherent mechanism which would prevent this kind of approach from creating competition to private service providers which are already there. BDS may easily come into a position where it is subsidizing new entrants into the business service market, thus creating distortions and maybe even crowding-out established providers. It would not be for the first time that foreign donor-supported initiatives went for the soft option, thus crowding out endogenous initiatives.

Perpetuated underdevelopment of the private sector

In the end, the Mad Meso Disease comes down to slaughtering the meso-level, leading developing countries back to a simple world of macro and micro. To put it differently, in the categories of Michael Porter, the new BDS approach addresses the supporting industries. It does little about factor conditions, except for the provision of those factors which do not involve externalities, i.e. where there is full appropriability. In the case of those factors where there is no full appropriability, such as large parts of skills development or technology development, there will be a severe underprovision, especially since government is no longer supposed to solve this problem.

In the maybe not so far future, maybe some conspiracy theorists will come up and state that this whole idea was just another chapter in the vile story of keeping poor countries poor. And donors which adhere to the BDS approach will find it quite difficult to defend themselves against this accusation.

Alternatives

What are alternatives to BSE and the BDS approach in the way it is currently being presented? In my view, there are at least two obvious elements of an approach which goes beyond BSE and Mad Meso Disease.

First, there is no reason why meso institutions should not learn fund-raising, preferably from the beginning. There are always funds. In developing countries, an important reason for this are donor interventions. Apart from that, in both industrialized and developing countries there is the political economy of meso policy. As politicians come under pressure to do something about specific problems, such as unemployment, government launches regional policy, structural policy, technology policy, employment policy, and so on. In a democratic country there is no way of avoiding this. The choice we have is to leave meso policy to political opportunism or to try to support those political actors who want to see an effective meso policy.

Second, there is no reason why there should be no competition at the meso-level. It seems to be a widely held belief that meso institutions should be consolidated, perhaps even into unified SME support institutions. This is nonsense. I know a number of cases of competition between meso-level institutions, in particular the Porter variant of fierce localized rivalry, and it usually has led to highly competent, agile, and customer-oriented institutions. Moreover, exits among meso institutions are OK. It is in this sense that business is a strong metaphor for meso-level institutions.