Unpacking India's Microfinance Meltdown

A crisis is unfolding in India’s microcredit sector that– beyond its immediate effects on borrowers and lenders– will greatly affect the future of financial services for the poor. This interview features David Roodman, senior fellow at the Center for Global Development and author of the forthcoming book Due Diligence: A Guide to Microfinance. David recently traveled to Andhra Pradesh, the epicenter of the crisis. On the Wonkcast, he shares the story of the explosive growth of Indian microcredit– and its sudden fall from grace.

Much like the recent history of the U.S. mortgage market, the Indian microcredit bubble inflated with the aid of imprudent business practices, government policies with unintended consequences, and well-intentioned investors whose capital fanned the flames. In the last half of our conversation, David considers the lessons of the crisis for each of these groups. He offers a word of warning for those who would finance the continued expansion of microcredit. “One of the lessons of financial history is that a credit market can always turn into a bubble. What we’re being taught here is that microcredit is no exception… Investors who are fueling… this rapid growth need to see themselves as potentially part of the problem, not just part of the solution.”

To hear the full interview with David Roodman, please visit:

http://blogs.cgdev.org/global_prosperity_wonkcast/2010/11/30/unpacking-indias-microfinance-meltdown-david-roodman/

The other demographic dividend: Emerging markets are teeming with young entrepreneurs

The Economist

October 7, 2010

GLOBALS is one of those fast-growing Indian IT companies that Westerners simultaneously admire and fear. Founded in 2000, it already has offices in 11 countries and customers around the world. The chairman and chief executive, Suhas Gopinath, is just 24 years old. Most of his employees are also in their mid-twenties.

Mr Gopinath is an illustration of a striking business revolution. Emerging-world businesses have traditionally been obsessed with seniority. Ambitious youngsters in countries like India have been equally obsessed with job security. Well-paying jobs, preferably with multinational firms, are the key to success in the marriage market. But this is changing rapidly.

Nandan Nilekani, one of the founders of Infosys, reports that he now comes across mould-breaking young leaders wherever he goes in India. They are even to be found in big companies such as ICICI, a leading bank, Hindustan Unilever, a consumer-goods giant, and Comat Technologies, which provides information to rural Indians. Vivek Wadhwa, an American academic who studies entrepreneurship, says he is inundated with requests for meetings whenever he visits the emerging world. He met 125 fledgling entrepreneurs during a recent trip to New Delhi and will talk to as many as he can manage in Beijing soon.

The rise of young entrepreneurs is extending the meaning of the demographic dividend. Demographers have often noted that most of the emerging world will stay young while the rich world ages. In 2020 the median age in India will be 28, compared with 38 in America, 45 in western Europe and 49 in Japan. But the dividend will be paid not just in the form of more favourable dependency ratios but also in a more entrepreneurial business culture. Young people are innately more inclined to overthrow the existing order than are their elders. This predisposition is being reinforced by two big changes in the emerging world.

The first is the information-technology revolution. The Boston Consulting Group calculates that there are already about 610m internet users in the BRICI countries (Brazil, Russia, India, China and Indonesia). BCG predicts that this number will nearly double by 2015. And in one respect many consumers in emerging markets are leapfrogging over their Western peers. They are much more likely to access the internet via mobile devices (which are ubiquitous in the emerging world) rather than PCs. That gives local entrepreneurs an advantage, says Rob Salkowitz, the author of “Young World Rising”. Whereas Western companies are hampered by legacy systems and legacy mindsets, they can build their companies around the coming technology.

The second is a pro-entrepreneurial revolution. Global institutions such as the World Bank and the World Economic Forum have helped to popularise entrepreneurialism. Mr Gopinath was encouraged to stick to his guns as an entrepreneur when the WEF elected him its youngest ever Young Leader. Several big companies have also encouraged the trend. Microsoft is helping local businesses and NGOs improve information-technology infrastructure. Goldman Sachs is spending $100m on female entrepreneurs, many of them in emerging markets.

But even more important than these external nudges are internal changes. The rise of a cohort of highly successful local start-ups such as India’s Infosys, Argentina’s Globant and Ghana’s SOFTtribe has had a dramatic effect on thinking across the region. These companies have demonstrated that young entrepreneurs can succeed mightily: the seven founders of Infosys were in their 20s when they set the company up. They have also created a group of middle-class people who have the wherewithal to bankroll risk: parents who have made money in Infosys or young people who decide to set up on their own after a few fat years in the corporate world.

Great expectations

These young entrepreneurs have already begun to shape some markets such as mobile video games and online karaoke. They have also demonstrated an impressive ability to identify gaps in other markets. Three years ago Bright Simons, a young Ghanaian, came up with an ingenious idea for dealing with the epidemic of counterfeit drugs. He asked drug producers to tag their products with unique bar codes. Consumers can then use their mobile phones to send a copy of the bar code to the producers to make sure the drugs are authentic. Kamal Quadir turned his back on a career on Wall Street in order to found CellBazaar, which provides the 20m subscribers to Bangladesh’s GrameenPhone with a virtual marketplace where they can sell things as humble as sacks of potatoes.

This argument needs to be qualified. China, the emerging world’s most powerful engine, is ageing rapidly, thanks to the one-child policy: by 2020 the average age in China will be 37, almost the same as in America. Young entrepreneurs have plenty of obstacles to mount. In Nigeria the fashion for cyber-crime has all but killed legitimate cyber-business: PayPal will not accept payments from people with a Nigerian internet address. In Latin America many young entrepreneurs operate in an informal economy where innovation is rare and capital hard to come by.

Yet entrepreneurial energies are moving eastward. The fact that many rich-world companies have responded to the economic slump by stopping hiring younger workers will only accelerate the shift. One of the most popular films in America at the moment is “The Social Network”, about a group of young Harvard students who founded one of the world’s fastest-growing companies, Facebook. The next Facebook is increasingly likely to be founded in India or Indonesia rather than middle-aged America or doddery old Europe.

Direct link: http://www.economist.com/node/17199488?story_id=17199488&CFID=147251292&CFTOKEN=60507878

Remittances topple tourism to become Kenya's top forex earner

By ALLAN ODHIAMBO

Posted Wednesday, October 20 2010

Business Daily

The inflow of funds from Kenyans abroad grew significantly in the past 12 months to become the country’s top earner of foreign exchange helped by a renewal of interest in the real estate sector, increasing popularity of university education and growing importance of entrepreneurship as a key source of employment in the country.

A new study by the World Bank and the Central Bank of Kenya (CBK) indicates that Kenya received a total of Sh152 billion or $1.9 billion in the past 12 months – beating proceeds from traditional forex earners such as tourism (Sh100 billion), tea (Sh70 billion and horticulture’s Sh71 billion.

This volume of inflow translates to an average of Sh58,800 for each of the 2.61 million Kenyans who received money from abroad during the period and the number of recipients is equivalent to 14 per cent of the country’s adult population.

The study is the first of its kind between the two institutions and the first also to include transfers that are not received through the formal financial system, suggests that the inflow of remittances is three times more than previously thought.

The Central Bank estimate of annual remittances excluding informal channels was $609 million (Sh49 billion) last year, a marginal drop from $611 million in 2008.

This year’s receipts were expected to surpass last year’s owing to the economic recovery of the US economy and stabilisation of the weak European economy -- the major source of the remittance-- which has suffered massive job losses in 2009 following the global economic meltdown that started the third quarter of 2008.

Kenya, like many African countries that receive high volumes of remittances, has been found to be lacking in policies that could help channel the inflows to sectors that strengthen their role in enhancing economic growth – leaving much of it to go into consumption.

The joint survey established that half of the total amount received goes to meeting recipients’ daily expenses such as food, housing and medicare, with the other half going to key economic and social functions including start-up capital for small businesses (35 per cent), paying for university education (33 per cent) and buying or building houses (8 per cent).

Only a tiny four per cent of the remittance receipts are kept as savings.

Unlike the trend in other parts of the world, the World Bank study found that it is Kenya’s emerging middle-class is the main recipient of the remittances.

“This is unique because these are not people looking for money to make ends meet. In other parts of the world it is the needy, who get such remittances,” said Sergio Bendixen, an advisor with the World Bank.

Utilisation of the remittances in growth projects such as housing and business start-ups is being taken as signalling the potential that exists to deploy the funds in enhancement of economic growth.

Mr Michael Fuchs, an advisor to the World Bank’s Africa region on finance and private sector development, said that in many African countries, remittances have moved beyond ordinary support to the subsistence needs of recipients to driving actual GDP growth.

“Governments must develop legal and regulatory frameworks that will help providers of remittances move beyond simple hand-outs. They need to design and deploy innovative and functional financial products and services that facilitate savings, loans, mortgages and insurance,” he said.

While a large fraction of the flows are made up of private transfers to family members and friends, the World Bank says policy makers and service providers could play an active and supportive role in leveraging its development impact by facilitating formal flows and reducing the cost of transactions, the World Bank said.

Kenya’s Finance and Foreign Affairs ministries have responded to the emerging trends with a raft of new regulations on remittances that offer preferential treatment to flows earmarked for investment.

The critical role that remittances have come to play in the Kenyan economy is further indicated in the attention it has received from the National Economic and Social Council (NESC), a key public policy organ.

Mr Bendixen said a revolution in information and communication technology (ICT) has helped drive the flow of remittances into Kenya citing cheaper call and internet charges that have offer easy linkages between remitters and recipients.

The US, England, the United Arab Emirates, Uganda and Tanzania are Kenya’s main sources of remittances with commercial banks, money transfer firms and mobile phone platforms such M-Pesa and Zap as the main channels used to transfer the funds.

The US and England’s leadership of the list of remittances source markets has however caused concern that ongoing economic turbulence in Europe and North America could culminate to a fresh dip in the volume of remittances in the medium term.

The World Bank has however allayed the fears terming the “situation would temporary” citing the recent resurgence in economies such as China, Germany, and India as well as demand for work force in the most developed countries where births have remained low.

“People will continue to move North and money will continue to move South,” said Mr Bendixen.

Remittances to sub-Saharan Africa are currently estimated to exceed $21 billion and are expected to grow by almost two per cent this year despite a weak global economy.

To increase formal flows and deepen their financial markets, the World Bank is asking African government to encourage competition and technological innovation that will help reduce costs and increase access to financial services among local recipients.

Benjamin Musuku, an official with the World Bank’s Finance and Private Sector department, said lack of connectivity to financial systems has hampered the growth of remittances in Africa and urged for improved access to such facilities.

The survey however recorded relative advancement in Kenya where more than four-fifths of recipients received their money through a bank or money transfer firm.

“Despite significant progress in the reporting of remittances throughout the world, most official statistics in sub-Saharan Africa still under estimate the true size of the flows. This is in part due to a focus of data collection efforts on formal channels such as banks,” the bank said.

Link to full article: http://www.businessdailyafrica.com/Remittances%20topple%20tourism%20to%20become%20Kenyas%20top%20forex%20earner/-/539552/1036050/-/item/1/-/4b5sfmz/-/index.html

Enterprise Creation in Africa

Marieme Jamme, philanthropist and entrepreneur, David Otieno and Caroline Alango, from the organisation Africa Now, and Michael Opiyo, a beneficiary of an enterprise project, will be live online on the Katine Chronicles blog at 11am (GMT) on Monday, 26 April, to answer your questions and debate whether business is the way out of poverty in Africa.

http://www.guardian.co.uk/katine/katine-chronicles-blog/2010/apr/21/online-chat-enterprise

WB: Keep stimulus until private investments grow

The World Bank urges countries to invest in physical and human capital in an effort to encourage entrepreneurship.

GMA News

April 7, 2010

Measures meant to stimulate the economy in response to the global downturn should continue until private sector investments are strong enough to support economic growth, the World Bank said on Wednesday.

In a teleconference on Wednesday, Vikram Nehru, World Bank chief economist for the East Asia Pacific region, said the real test of recovery for countries in the region including the Philippines is when private sector growth returns.

"Government stimulus should be kept in place until private sector growth continues," Nehru said in a separate economic report on countries in the region.

He also said the Philippines and other developing countries in the region could achieve rapid, inclusive growth over the next decade provided they adopt deeper structural reforms.

The World Bank expects the Philippines to post 3.5 percent growth this year — within the government’s 2.6 -3.6 percent goal — on the back of more money sent home by Filipinos abroad and greater public spending.

Remittance support
Nehru said dollar remittances from Filipinos overseas are largely responsible for keeping the Philippine economy afloat, allowing it to post growth of 0.9 percent last year amid contraction in some Asian economies.

"Remittances are remarkably resilient," he pointed out. He added that for remittances to continue driving growth, governments should cut remittance costs.

"It is important that the cost of remittances be reduced. It should be made as easy and as low-cost as possible," Nehru said.

Money sent home by Filipinos overseas went up by almost a tenth to $1.4 billion in January from a year earlier, supported by the increased deployment of Filipino teachers, healthcare and service workers.

Last year, millions of Filipinos working abroad sent home a record $17.3 billion, boosting local consumption and the economy amid the global downturn. Remittances grew by 5.6 percent from $16.4 billion in the prior year and accounted for 10.8 percent of the country's economic output.

In its East Asia and Pacific Economic Update — a biannual publication assessing economies in the region — the World Bank said the Philippines and the rest of the region are facing a challenging external environment given slow recovery in Europe, tighter financial conditions and rising concerns about developed countries’ debt levels.

Human capital
The Philippines and its peers — Vietnam, Indonesia, Malaysia and Thailand — should prioritize investments in physical and human capital to encourage the move up the value chain in production and exports.

"Countries like the Philippines must invest more and with greater efficiency in physical and human capital, foster substantially more innovative activity and encourage entrepreneurship and risk taking," the World Bank said.

"Moving up the value chain will require better education and skills. The development of skills involves well-functioning and efficient education systems at all levels, combined with labor policies and active employer participation in setting education standards and curricula," it added.

In a separate briefing, World Bank Country Economist for the Philippines Karl Kendrick Chua cited the need for the government to create a strong revenue base to ensure inclusive growth that benefits all sectors.

"With the additional resources, the government can spend more on growth-enhancing systems such as education and infrastructure," he added.

Chua said the Finance department is on the right track in pushing crucial revenue measures that seek to rationalize fiscal incentives and raise taxes on tobacco and alcohol.

The World Bank earlier said the magnitude of the fiscal stimulus implemented by the Philippine government in 2009 had been unprecedented.

The large fiscal stimulus, it said, had helped buffer economic activity in 2009, but it also pushed the government’s primary fiscal balance into its first deficit since 2002, the estimated public sector balance into its first deficit since 2005, and led to the highest debt-to-GDP ratio since 2003.

It noted that while the government aims to balance the budget by 2013, it should accompany this commitment with detailed measures and embed these within a medium-term fiscal and expenditure framework.

http://www.gmanews.tv/story/187887/wb-keep-stimulus-until-private-investments-grow

Worth a Hill of Soybeans

How the Internet can make agricultural markets in the developing world more efficient.

The Economist

Published: January 7, 2010

WHEN the internet took off in the mid-1990s, it was often claimed that it would improve price transparency, cut out middlemen and make markets more efficient. There is plenty of anecdotal evidence for this, just as there is for similar claims about mobile phones. Empirical data on the impact of these new technologies increasingly support the thesis.

Macroeconomic studies suggest that the internet and mobile phones boost growth. The effect is bigger in developing countries than developed ones, due to the paucity of existing communications infrastructure. The effect also seems to be bigger for the internet than for mobile phones. In a study published in 2009, Christine Zhen-Wei Qiang of the World Bank found that an increase of ten percentage points in mobile-phone adoption increased growth in GDP per person by 0.8 percentage points in a developing country, and by 0.6 percentage points in a developed one. For dial-up internet access, the figures were 1.1 percentage points and 0.75 percentage points respectively; for broadband internet, 1.4 percentage points and 1.2 percentage points.

Critics of such analyses contend that it is difficult to tell whether the adoption of new technologies is promoting growth, or vice versa. Researchers have responded by examining detailed microeconomic data to show how the spread of technology directly affects the prices of particular goods.

By examining historical data for the price of fish as mobile-phone coverage was extended down the coast of Kerala in southern India between 1997 and 2001, for example, Robert Jensen of Harvard University showed that access to mobile phones made markets much more efficient, eliminating wasted catches and thereby bringing down consumer prices by 4% and increasing fishermen’s profits by 8%. Similarly, Jenny Aker of the University of California at Berkeley analysed grain markets in Niger to see how the phasing-in of mobile-phone coverage between 2001 and 2006 affected prices. She found that it reduced price variations between one market and another by at least 6.4%, and more in remote and hard-to-reach markets. With transaction costs cut, prices for consumers were lower and profits for traders higher.

In a forthcoming paper*, Aparajita Goyal of the World Bank has carried out a corresponding study for the internet by examining how the gradual introduction of internet kiosks providing price information affected the market for soyabeans in the central Indian state of Madhya Pradesh. Farmers in the region sell their soyabeans to intermediaries in open auctions at government-regulated wholesale markets called mandis, a system that was set up in order to protect farmers from unscrupulous buyers. The intermediaries then sell on the produce to food-processing companies. The problem with this approach for the farmers is that the traders have a far better idea about the prices prevailing in different markets and being offered by processing companies. With only a few traders at eachmandi, they can easily collude to ensure that they pay less than the fair market price; they can then boost their profits by selling on the beans at a higher price.

ITC Limited, an Indian company that is one of the largest buyers of soyabeans, felt it was paying over the odds, but was unable to monitor the traders closely. Starting in October 2000 it began to introduce a network of internet kiosks, called e-choupal, in villages in Madhya Pradesh. (Choupal means “village gathering place” in Hindi.) By the end of 2004 a total of 1,704 kiosks had been set up, each of which served its host village and four others within a five-kilometre (three-mile) radius. The kiosks displayed the minimum and maximum price paid for soyabeans at 60 mandis, updated once a day, along with agricultural information and weather forecasts. ITC also posted the price it was prepared to pay for soyabeans of a particular quality bought direct from farmers at 45 “hubs” (mostly in the same towns as mandis). By setting up the kiosks, ITC enabled farmers to check that the prices being offered at their local mandi were in line with prices elsewhere. It also gave them the option to sell direct.

Bean there, done that

To evaluate the impact all of this had on prices, Ms Goyal used historical data frommandis and the locations and installation dates of the kiosks. She found that the presence of kiosks in a district was associated with an instant and persistent increase of 1.7% in the average price paid at mandis in that district. As expected, the availability of price information increased the level of competition between the traders, raising prices and reducing the variation in prices between nearby mandis. Farmers’ profits increased by 33%, and the cultivation of soyabeans increased by an average of 19% in districts with kiosks. And by buying some produce direct, ITC reduced its costs, which paid for the kiosks.

All this supports the anecdotal evidence that the internet can indeed make agricultural markets more efficient, just as mobile phones can. But whereas the expansion of mobile-phone access is now rapid and commercially self-sustaining—even very poor farmers can benefit from having a phone, and find the money to buy one—the same is not true of the internet. Its use requires a higher degree of literacy, for one thing, and computers cost more than handsets. The e-choupal approach, in which a company pays for the kiosks, offers one model; another is for entrepreneurs to resell access to the internet from village kiosks, which is how mobile phones first caught on. Ms Qiang’s figures suggest that in the long run, the internet could have an even greater impact on economic growth than mobile phones did. But that will depend upon finding sustainable business models to encourage its spread in the poorest parts of the world.

Direct Link: http://www.economist.com/businessfinance/economicsfocus/displaystory.cfm?story_id=15211578

A Hand Up, Not A Hand Out

Adjusting international development policy to encourage entrepreneurship would go a long way toward helping the poorest countries pull themselves out of poverty. This was India's strategy--and it is paying off.

Forbes Magazine

Published: January 12, 2010

By: Phillip Vassiliou

President Obama recently nominated Dr. Rajiv Shah to lead the U.S. Agency for International Development. Dr. Shah's appointment will hopefully inject a fresh perspective into USAID. It will also give the international aid community an opportunity to rethink its approach to poverty reduction.

Over the past few decades, it's become evident that traditional "top-down" development, in which large amounts of aid are distributed to governments in the developing world, is ineffective. Africa, for instance, has taken in $568 billion in economic aid over the past 42 years. Yet per capita economic growth for the median African country has remained stagnant.

Meanwhile, once-poor nations receiving comparatively little aid, like India, have experienced immense growth. Since the mid-1990s, the Indian economy has grown over 7% almost every year, and its poverty rate has fallen dramatically. This year, India's economy is on track to grow by about 6%--an incredible figure given the global downturn. There is a great deal further to go with market liberalizations that will assist the millions of people in India living below the poverty line, but the foundations are being laid to provide for sustained economic and social development where people are given a "hand up" rather than simply a "handout."

Poverty statistics from the World Bank tell this story best. In 1981, 1.9 billion people lived on less than $1.25 per day. By 2005 that number had dropped to 1.4 billion. Most of that reduction, though, can be attributed to economic growth in East Asia. In 1981, 80% of East Asia's population lived below the poverty line. Today it's just 18%. In Africa the poverty level hasn't changed in 25 years.

Adjusting international development policy to encourage entrepreneurship would go a long way toward helping the poorest countries pull themselves out of poverty. This was India's strategy--and it is paying off.

Consider cellphone penetration in India. When the Indian government opened up its wireless spectrum in 1992, a handful of entrepreneurs jumped at the opportunity, even though conventional wisdom predicted that mobile service would never become a profitable enterprise in India. Today the nation is home to more than 200 million mobile users, and service has reached the most rural of villages thanks mainly to entrepreneurs who facilitated the use of prepaid charge cards. Recent studies have shown that increasing cellphone penetration by an extra 10 phones per 100 people can lead to as much as a 0.6% increase in a country's GDP.

The impact of cellphone penetration in India continues to grow thanks to innovators like Ravi Inukonda. Ravi saw India's rural cellphone subscribers as an untapped market. So he is developing mobile phone applications to help rural villagers keep up-to-date on water and power shutdowns, produce prices and weather forecasts. This is just one example of the innovation that markets inspire and how the profit motive increases prosperity for entrepreneurs, consumers and producers alike.

Africa as a whole can certainly take steps to encourage a business-led approach to achieving sustainable development.

Every year, the World Bank releases an "Ease of Doing Business" report, which ranks 183 countries by how conducive their regulatory environments are to the operation of business. In the most recent edition, just three African nations--Mauritius, South Africa and Botswana--made the top 50. Among the 25 countries at the bottom of the list, all but three are in Africa.

Some African nations have already started shifting from relying on handouts from Western countries to creating policy environments more conducive to business, entrepreneurship and long-term economic growth. Botswana is a good example. Forty-five years ago, it was one of the poorest nations in the world. Yet between 1966 and 1999, Botswana had the highest average economic growth rate on the planet. During that same period private-sector employment in Botswana rose by an average of 10% per year.

The case of Botswana reminds us that good business is good development. Relative to other African countries, Botswana enjoys strong property rights, economic freedom and a fair judicial system. The country's friendly economic environment has attracted foreign investment from companies such as Heinz and Hyundai. And the Botswanan government is the least corrupt in Africa, according to Transparency International.

For centuries, free markets and free people have proved to be the best remedy for poverty. Unfortunately, the Western world's development strategy has failed to properly consider this fact. There is no reason why that can't change. It makes sense, for instance, to apply the lessons learned in India's telecommunications sector to the developing world's need for clean water and electricity.

For many years, telecommunications services were run as centralized utilities. This is still the case in many African nations. To most people, this made sense--expanding telephone, mobile phone and Internet service to the developing world's rural areas was perceived as uneconomical.

Today, many entrepreneurs are looking to leverage groundbreaking advances in technology to deliver water and electricity to the world's poorest, given the enormous size of the opportunity and lack of any scalable and sustainable solutions. Indeed, light-emitting diodes and thin-film solar cells are already allowing entrepreneurs to provide low-cost power to people living on less than $2 per day. Compared to existing technologies like kerosene lamps and diesel generators, LEDs and solar cells are cleaner, safer and healthier. And often, they are cheaper.

At heart, entrepreneurs are problem solvers--they identify a need and meet it with a product or service. Nowhere are their problem-solving skills more desperately needed than in the developing world. Handouts from the foreign aid community have proved incapable of solving the development issues plaguing the world's poorest. A hand up to budding entrepreneurs may be the development tonic global leaders have been looking for.

Philip Vassiliou is a managing director of Legatum, an investment organization that allocates proprietary capital in the global markets and to programs that promote sustainable human development.

Fish Out of Water: Promoting Entrepreneurship

Policymakers are turning their minds to the tricky subject of promoting entrepreneurship.

The Economist

Published: October 29, 2009

UNEMPLOYMENT is creeping ever higher. In the United States it will soon exceed 10%. In parts of Europe it is closer to 20%. Around the world young people are finding it all but impossible to get a job.

So far policymakers have focused on rescuing the economy from free fall, boosting demand, however indiscriminately, and rescuing failing companies, however expensively (AIG received $180 billion-worth of government support). But policymakers are beginning to turn their minds to the potentially more rewarding question of creating tomorrow’s jobs, rather than trying to save yesterday’s. The buzzwords in government circles are entrepreneurship, innovation and venture capital.

This makes perfect sense, in theory. Innovative start-ups are efficient engines of job creation and long-term economic growth. In America start-ups have accounted for almost all the net job creation in the past couple of decades. In the developing world, new technologies are helping to break the cycle of poverty. An extra ten mobile phones per 100 people in a typical developing country boosts GDP growth by 0.8 percentage points, according to the World Bank, by helping small entrepreneurs flourish.

Governments have also played an important role in igniting entrepreneurship. As well as creating some of the vital infrastructure of innovation by investing in higher education, they have also had a direct hand in driving entrepreneurship itself. Governments helped bring into being the venture-capital industry: witness the work of American Research and Development (ARD) after the second world war or the Yozma Fund in Israel in the 1990s. They have also supercharged high-tech clusters: Silicon Valley was created as much by the Pentagon’s demand for new kit as by freewheeling entrepreneurs. Most of the world’s other great entrepreneurial hubs, from Bangalore to Guangdong, bear the stamp of government intervention.

But replicating these successes is difficult. The road to the entrepreneurial future is littered with failed government schemes. Malaysia’s massive BioValley complex, which opened in 2005 at a cost of $150m, is now known as the “Valley of the BioGhosts”. Dubai’s entrepreneurial hub is awash in a sea of red ink. Australia has little to show for its ambitious BITS (Building on Information Technology Strengths) programme. The European Union’s European Investment Fund, which was started in 2001 with an endowment of more than €2 billion ($1.8 billion at the time), has failed in its mission to burnish the sorry record of the European venture-capital industry.

How can governments do a better job? Two well-timed new books provide some clues: “Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed—and What to Do About it”, by Josh Lerner, and “Start-Up Nation: The Story of Israel’s Economic Miracle”, by Dan Senor and Saul Singer.

Mr Lerner, a professor at Harvard Business School, outlines some common failures. Too many countries are seized by ambitions that bear no relation to their particular comparative advantages. Although Malaysia had few skilled biologists, its politicians decided to build BioValley on the ruins of Entertainment Village, an attempt to create a Malaysian Hollywood that failed for lack of media nous.

Too many politicians treat entrepreneurship as yet another gravy train. Norway squandered much of its oil wealth investing in new businesses that were founded by the relatives of politicians and bureaucrats. Policymakers are also lax when it comes to designing venture funds. They try to insulate them from risk or allow public investments to crowd out private ones. The Canadian government’s experiment with venture capital failed because the Canadian Labor Fund Program had so much money that it frightened off private venture capitalists, while earning mediocre returns itself. New Zealand’s government, in contrast, did much better because it invested public money in private funds.

Mr Lerner points out that two foolish tendencies are particularly hard to resist when politicians are struggling with high unemployment. The first is the temptation to spread the wealth around to every region and interest group. France’s attempt to transform Brittany from one of its more backward regions into a hive of high-tech activity failed dismally for an obvious reason: entrepreneurial firms cluster in particular places. The second is a suspicion of foreign investors. The Japanese government lavished money on start-ups in the 1990s but was reluctant to embrace foreign venture capitalists. Japan now has one of the rich world’s weakest venture-capital markets.

Levantine wiles

The country that has led the world in promoting entrepreneurship has also done the most to plug itself into global markets. The Israeli government’s venture-capital fund, which was founded in 1992 with $100m of public money, was designed to attract foreign venture capital and, just as importantly, expertise. The government let foreigners decide what to invest in, and then stumped up a hefty share of the money required. Foreign venture capital poured into the country, high-tech companies boomed, domestic venture capitalists learned from their foreign counterparts and the government felt able to sell off the fund after just five years.

Last year Israel, a country of just over 7m people, attracted as much venture capital as France and Germany combined. Israel has more start-ups per head than any other country (a total of 3,850, or one for every 1,844 Israelis), and more companies listed on the NASDAQ exchange, a hub for fledgling technology firms, than China and India combined. It may not have the same comforting ring as “the Swedish model” or “the polder model”, but when it comes to promoting entrepreneurship, “the Israeli model” is the one to emulate.

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14743944