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Infrastructure and Economic Development

Aug 31, 2007
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.

The final conclusion: without a solid infrastructure the economic development and human potential of a town, region, or country will be less than optimal.

The consequences are that both economic and human potential is restricted not only lowering the standard of living but shattering dreams, reducing opportunities and killing 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. Economies with weak infrastructures usually 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 hustling.

The value of these skills may be diminished as the supply outstrips the demand, creating a skilled labor price war. As the bidding wars spiral downward the ability of a company to train and help its employees improve is significantly reduced.

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.

One of the biggest challenges to economic and human development is how to create an economy that is driven by competition and markets, not politics or culture.

In this kind of economic environment working harder or even smarter is not enough. In this type of business environment the most likely keys to success are who you know and who they know. The net result is that internal markets become less competitive as the external demand for goods and services is diminished.

As a consequence, the subsistence economy creates a relatively small and ineffective tax base. This small tax base restricts future growth, improvements and perhaps worst of all, restricted tax revenues for infrastructure improvements.

Highways, phone systems, shipping, water, sewage, electrical power, food distribution - - all suffer from the lack of a solid tax base.

Add to the weak tax base an almost certain layer of bureaucratic ineffectiveness and 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 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 workers in weak economy. The old adage of the 'rich get richer and the poor get the shaft' is a foregone conclusion.

The only real 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 preserving the status quo.

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 higher costs of doing business do tend to provide formidable barriers to business entry and help maintain the status quo.

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 very slow to change.

To an outsider, it is perplexing in what outwardly appears chaotic though in truth is a well ordered malfunctioning system.

The infrastructure eventually becomes overwhelmed. By saving on a sewage system up front a subsistence economy then pays a subsequently higher price in citizen 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 and inexpensive phone communication the cost of doing business goes up.

The real tragedy is that a region's greatest resource -- its people -- is wasted. As pressures increase we see the lower level economic participants demand more and more from the weak systems they live under.

When those systems become too inefficient the systems themselves will be questioned and quite possibly demands made for a 'structural reorganization'. Those that have their stakes in these weak economies will not give up easily and the friction will be enormous.

Unfortunately we must acknowledge possible upheaval as these subsistence cultures die off and are transformed at what might be a very high cost. What these emerging societies will look like is not certain.

But we certainly should not be surprised when this happens...
About the Author
Jack D. Deal is the owner of Deal Business Consulting. Related articles may be found at http://www.jddeal.com and http://www.freeandinquiringmind.typepad.com
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