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TOWARD UNDERSTANDING AND MANAGING UNINTENDED


OUTCOMES: A FRAMEWORK USING SYSTEMS, NETWORK,
CHAOS, AND COMPLEXITY THEORY

MICHAEL PAUL STATON

OCTOBER 2006

A THESIS

Submitted to the faculty of Clark University, Worcester,


Massachusetts, in partial fulfillment of the requirements for
the degree of Master of Arts in the department of
International Development, Community, and Environment.

And accepted on the recommendation of

DAVID BELL, Chief Instructor


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ABSTRACT

TOWARD UNDERSTANDING AND MANAGING UNINTENDED


OUTCOMES: A FRAMEWORK USING SYSTEMS, NETWORK,
CHAOS, AND COMPLEXITY THEORY

MICHAEL PAUL STATON

This discussion is an attempt to understand and manage unintended

outcomes for more successful development. Properties found in Systems, Network,

Chaos, and Complexity Theory, referred to as the new sciences, are used to explain

why development assistance does not often achieve predicted outcomes and often

instigates unintended outcomes. The premise is that much assistance has been

unsuccessful because the development industry uses the paradigm, methodology,

and standard operating procedure from the natural sciences in environments that

exhibit properties of the new sciences. The paper then uses the properties of the

new sciences to set forward several general guiding principles for future

development assistance. Examples are given of current practices that utilize those

properties and are thus likely to contribute lastingly to development.

DAVID BELL, Ph.D.


Chief Instructor

SAMUEL RATICK, Ph.D.


Assistant Professor
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ACADEMIC HISTORY

Name (in Full): Michael P. Staton Date: August


8, 2006

Place of Birth: Houston, TX Date: July 1,


1980

Baccalaureate Degree: Geography

Source: Clark University Date: May 22, 2002

Occupation and Academic Connection since date of


baccalaureate degree:

Michael Staton has taught Social Studies in Houston


Independent School District since 2004. He now teaches U.S.
History at Bellaire High School.
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DEDICATION (IF ANY)

To David Bell, Sam Ratick, Laura Hammond, Paul Ropp, Richard Peet,
Doug Little, David Zern, Laurie Ross, Richard Ford, Fred Greenaway,
and all the Clark Faculty that oversaw my intellectual development.
Most of all, to those who believed in me after I abandoned hope and
sat by patiently as I acted like it. Perhaps one day I will make you
proud.

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ACKNOWLEDGEMENTS

I wish to thank David Bell and Sam Ratick for overseeing this complex

and chaotic process and my parents for nagging me to get it done.

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TABLE OF CONTENTS

List of Illustrations
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Introduction
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Introduction to the New Sciences


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Selecting a Focus 19

What Went Wrong


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Why Do We Continue 33

Towards a New Framework for Development Policy


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Bibliography
99

Illustrations:

Cluster Formation 14

Strange Attractor 17
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TOWARD UNDERSTANDING AND MANAGING UNINTENDED


OUTCOMES: A FRAMEWORK USING SYSTEMS, NETWORK,
CHAOS, AND COMPLEXITY THEORY

“To me our knowledge of the way things work, in society or in nature, comes trailing

clouds of vagueness. Vast ills have followed a belief in certainty, whether historical

inevitability, grand diplomatic designs, or extreme views on economic policy. When

developing policy with wide effects for individual or a society, caution is needed

because we cannot predict the consequences.” Kenneth Arrow, I Know a Hawk from a

Handsaw.

The efforts of economically developed societies to provide assistance to more

deprived societies have fallen short. The prophecies of ending disease, poverty,

violence, and hunger have all been unmet. A prolific set of critics have articulated

arguments against these efforts based on evidence well documented by the institutions

that carry out these efforts. These critics usually do not stop at the failure to succeed,

but rather go on to document illustrious examples of how supposed assistance has

caused unexpected problems ever more severe and complicated.

As early as 1960, only 9 years after the Development “Industry” commenced,

investigators were commenting on the lack of lasting development that was being

accomplished. Andrew Shonfield, a journalist, commented:

Of course they would, if you offered them a lot of foreign exchange, be able to spend it. The

question was, after spending it, how substantial would be the permanent gain in their productive

power? In only a few cases was there a clear prospect that the gain would be sufficient to create

a new economic momentum in these societies with sufficient force of its own to continue even
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after the special aid from abroad has lapsed, (Shonfield 1960).

Today, popular books found at a (well stocked) bookstore come with titles like

Despite Good Intentions: Why Development Assistance to the Third World Has Failed

(Dichter 2003), The Road to Hell: The Ravaging Effects of Foreign Aid and

International Charity (Maren 1997), The Lords of Poverty: The Power, Prestige, and

Corruption of the International Aid Business (Hancock 1989) and The White Man’s

Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little

Good (Easterly 2006). These unforgiving titles are written by individuals who have

spent most of their lives working for the same institutions they criticize within them.

Much of the debate focuses on what have come be known as unintended

outcomes, or the effects which were unforeseen. Sometimes unintended outcomes have

been noted for their positive and surprising affects; more often the publicized

unintended outcomes were negative and debase any good the intervention may have

done. Many of the planners and architects of various interventions are surprised by the

unintended outcomes and claim that they cannot foresee the complete future in such a

complex and chaotic environment.

The fact that the efforts have been increased in spite of their failures poses many

questions: What went wrong? Why do we continue? and, if we’re going to continue,

how can we do better? are among the many, chosen here for the breadth and simplicity

of each question. Many of our greatest minds have tackled and are tackling these

questions. It is the subject of numerous conferences, working papers, scholarly


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journals, and books. But there are imbedded questions within those, such as: What

worldview do we use to guide our analysis? What assumptions do we make about how

the world works? What is the framework of development policy analysis and creation?

This paper is a discussion of moving towards a new framework for development

policy analysis and creation. This framework will also provide a means of

understanding and managing unintended outcomes. For this, Systems, Network, Chaos,

and Complexity Theory, when spoken of altogether here they are referred to as the “new

sciences,” provide many insights. The proposed framework is based on the premise that

the development industry has failed using the paradigm, methodology, and procedures

of the natural sciences due to unintended outcomes.

Scientists and Mathematicians are also acknowledging the failures of the natural

sciences: Stephen Wolfram, founder of Wolfram Research Institutes and the

mastermind behind the mathematical modeling software Mathematica, recently

authored a book called “A New Kind of Science,” (2002). A New Kind of Science is an

assemblage of theories and models either developed or surfacing towards the end of the

20th century that perhaps relate to most disciplines. The book is a symbol that the

scientists, the mathematicians, and the econometricians are starting to surrender to the

complexity of life.

This new science challenges determinacy and the accuracy of mathematical

models in predicting or describing more complex systems. Cellular Automata, Agent-

Based Modeling, and Network Modeling have been part of a score of techniques in

computer programming attempting to find what Wolfram terms Computational


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Equivalence, or the attempt to find parallels to nature in programmed computer models

to analyze complex phenomena where traditional forms of analysis have failed.

As Wolfram describes, “the great historical success of theoretical science have

typically revolved around finding mathematical formulas that… directly allow one to

predict the outcome,” (Wolfram 2002). However, the mathematics itself tries to

shortcut the detailed and myriad processes of the actual system, and therefore arrives at

incorrect answers. Wolfram describes many systems, especially open systems, as

“computationally irreducible.”

The “new science” has become quite trendy, or perhaps they can be more aptly

lumped under “the new sciences,” as the number of these fields and subjects of study

seems to grow all the time; a neighborhood bookstore will turn up a small library of

rather literary accounts of Chaos, Complexity, Systems and Networks for the general

public.

One of the most common applications in these accounts is in the realm of

economics, its applications nearly self evident. An economy, of course, has all of these

properties described by the new sciences – it is, after all, composed of a network of

individuals and firms forming and open, complex system, in which elements of chaos

can be seen. The most high profile yet academic efforts to apply the new sciences to

economics has been undertaken by the Santa Fe Institute and published as the Economy

as an Evolving Complex System series of books, the third volume released in 2006.

The possibilities for development policy analysis and creation are also obvious.

In terms of analysis, “these various nonlinear dynamics may go a long way toward
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explaining the apparent perpetuation of conflicting programs and the proliferation of

unintended consequences, in the face of calls for coherent strategies,” (Danake 1998).

In terms of policy creation, policy makers should understand that “development is a

process involving enormously complex systems, composed of many interconnected

aspects, and structured across temporal and spatial scales,” (Straussfogel 1997).

In order to fully understand the foundations of the proposed framework of

analysis, one needs to have some familiarity with the new sciences.

Introduction to the New Sciences

Systems Theory operates as the basis, though not necessarily the intellectual

foundations, for the other three parts of the new sciences described here, as the other

three are really models for the exploration of systems with different properties.

Network Theory provides a framework for studying how the parts or agents behave

within relationships that then add up to a whole system, while Chaos, and Complexity

Theory provide a framework for understanding how systems behave in a manner

seemingly all on its own.

Systems Theory

Systems Theory is perhaps the oldest and most basic of the new sciences. It is

the exploration of a single idea: a system has within it interacting agents exhibiting

specific behaviors, and develop relationships with other agents; the sum of these

relationships create a broader system that exhibits its own behaviors and actions
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independent of the intentions or knowledge of the agents.

The origin of Systems Theory is largely attributed to the Austrian Biologist, Karl

Ludwig von Bertalanffy, who built and adapted existing ideas into a more complete

framework described in General Systems Theory: Foundations, Developments,

Applications (1968). The work was an attempt to unify science and counter

reductionism by showing the common relationship between many disciplines (biology,

physics, sociology, economics, etc.). His goal was to illustrate that phenomena studied

by the sciences interact in a larger environment which at larger and larger scales seems

to escape comprehension.

Studies in Systems Theory explore system dynamics, or how the behaviors of

the agents develop into relationships, how these relationships may or may not affect the

behavior of the system as a whole, and how the system responds to changes in its

environment. There are various types of systems, but all systems seem to share certain

properties.

Systems themselves exhibit characteristics and behaviors, even personalities

independent of the component parts and their relationships. The myriad way to describe

or classify them has been simplified by Jamshid Gharajedaghi categorizes systems into

three categories according to their behavior: a state-maintaining system reacts to

changes in the environment to maintain its state, a goal seeking system varies responses

to different events and different environments until it produces a particular outcome,

and the highest order of systems are purposeful systems that can actively produce not

only the same outcomes in different ways in the same environment but different
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outcomes in both the same and different environment. Systems can change in the long

run from one form to the other, (Gharajedaghi 2005).

The most common property of systems is that they can show counterintuitive

behavior. Gharajedaghi describes counterituitiveness of systems as illustrating actions

within or on a system may yield results that are unforeseen, surprising, and often even

opposite of the intentions of the actor. To elaborate on counterintuitiveness,

Gharajedaghi makes the following assertions:

• An event or action happening at a given time and place may have a delayed

effect, producing an impact at a different time and place.

• Cause and effect display circular relations in the form of feedback.

• Multiple effects can occur from the same event, the prominence of which may

shift in time.

• A set of variables that initially played a key role in producing an effect may be

replaced by a different set of variables at a different time. Removing the initial

cause will not necessarily remove the effect.

Networks
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Figure 1: (Watts 1999)

Network Theory is a way of modeling systems. Networks are composed of

nodes and links; a node has a relationship with another node through a link. Nodes

form groups that then relate to other groups. Network models are made to mimic

societal formation, and real world networks (such as the internet) are analyzed to find

consistent properties and dynamics. “Given the large and increasing prevalence of

situations where network structure are important, it is necessary to understand the

properties of these networks and how various aspects of the network formation process

determine those properties,” (Jackson and Rogers 2004).

Network Theory can trace its history to a branch of mathematics called Graph

Theory. Until recently, Graph Theory was very theoretical. Most contributions were

made to Random Graph Theory, built on the works of Paul Erdos. Network Theory

started to find fame and application when Stanley Milgram, of the Stanford Prison

Experiments fame, claimed proof that there is, in fact, an average of six degrees of

separation between every person on the planet. Since then, researchers have been
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digging deeper, trying to figure out what that network might look and act like and what

properties might guide its development.

There are many types of networks, and Network Theory is a tool of analysis for

completely abstract rather than real networks. However, Network Theory found

applications in the analysis of Social Networks by modeling computational equivalence

of societal behavior. The two postulations of Network Theory relevant to the proposed

framework are power laws based on each nodes preferential attachment to more fit

nodes, its fitness derived from the number of existing links. Second, the tendency of

Social Networks towards the most secure form of network, a small world network.

In modeling and playing with network data, Albert-Laszlo Barabasi and Reka

Albert explored the notion of preferential attachment in network formation – when a

new node attaches itself to the network it tends to attach to nodes that have access to

most other nodes. Barabasi and Albert found the famous Power Law as the principle of

preferential attachment, applicable to all real world networks. The Power Law states

that there is a direct relationship between the number of links a node has acquired, and

its fitness for acquiring other links. To analogize, the rich get richer, the popular get

more popular, and the powerful get more powerful.

Watts and Strogatz (1998) offered another reality of networks: small world

networks (see figure 2). Expanding on the postulations of Milgram and others, Watts

and Strogatz found that many networks acted to retain a small diameter as well as small

average path links, concluding “that the social networks within which we live possess a

special and hitherto unsuspected organization and structure that truly make for a small
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world,” (Buchanan 2002). They suggested that the most interesting and efficient paths

to a “small world” (when everyone links to everyone else in a short “path” distance)

happen when the preference for new links is mostly local but starts to become scale-free

(independent of path distance). They confirmed the notion that the most secure network

cluster, when everyone has a link with every one else in the network, and that localized

societies tend to form cluster networks. However, if the preference for link formation

becomes slightly scale-free (people can travel or meet people off the internet),

interesting things start to happen in the network – the world suddenly becomes small in

terms of personal associations. The small world network formation is the correct model

to use in economics because “(i) high clustering results from low costs of attachment to

similar (nearby) nodes, and (ii) low diameter results from the large benefit of attaching

to dissimilar (distant) nodes because of the substantial indirect access they provide to

other distant nodes,” (Jackson and Rogers 2004).

When nodes attempt to use other nodes to accomplish a goal, it must send out a

query. Burt (2003) describes the success of the query with the term closure, meaning

the efficiency in getting non-redundant information to the inquiring source. Burt

illustrates that closure is more likely when interconnections between nodes are strong,

such as in a cluster.

Chaos

Chaos stemmed out of a half-century of the mathematical explorations in

nonlinear dynamics. Chaos developed as a field of study at the Los Alamos Research
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Observatory, primarily by meteorologist Edward Lorenz, as a tool to analyze weather

patterns. To make a long story short, Lorenz made a nonlinear quantitative model of the

weather and with slight differences in the starting point for a few simple variables

watched his computer print out some rather chaotic, or unpredictable, patterns.

The first property of chaotic phenomena of interest is a near infinite sensitivity

to initial conditions, also known as the butterfly effect; the conditions at start of the

process, if changed in the minutest and even imperceptible way, have drastic impacts on

the process and end result. Applied to weather systems, a butterfly flapping its wings in

one location may alter initial conditions enough to cause a tornado elsewhere that would

not have otherwise occurred, or alternately it may

have prevented a tornado from occurring.

A second common property of chaotic

phenomena is a strange attractor – the plotting of

these unpredictable phenomena will often show

aggregations around areas or points (Lorenz 1993).

Complexity

The field of complexity also stems from the nonlinear dynamics of Henri

Poincare. Tomas Schelling, the 2005 Nobel Prize winner in Economics, popularized the

study of emergence with his book Micromotives and Macrobehavior (1978). The Santa

Fe Institute continues to explore economic models in their series The Economy As an

Evolving Complex System.


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Complexity refers to phenomena between chaotic and random. Interest in the

subject has grown since digital computers have proven able to model phenomena that

mathematics could not. The study of the subject, with seemingly innumerable

applications, is really experimentation with the low-dimensional rules governing micro-

agents. These models demonstrate that simple agents in simple environments following

simple rules can still exhibit complex, nonlinear, and unpredictable behavior. The

experimenter then observes this process to see if any global order or set of rules

emerges. The order that is seen is known as self-organization, or emergence.

In addition to emergence, complex systems have a number of distinct properties.

Complex systems are dynamic and are open in both time and space, meaning that

complex systems change over time and can be affected by variations irrespective of

their location or time. Complex systems contain feedback loops, both positive and

negative; all behavior affects the system which then in turn affects the behavior. Lastly,

Complex Systems are adaptive, in that the agents within them learn to adapt to

unforeseen changes in their environments without any central control.

Properties of Interest

In sum, the following properties must be digested to properly analyze and create

development policy:

• Systems develop a behavior independent of their component parts that is

state maintaining, goal seeking, or purposeful.


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• Systems are counterintuitive.

• Networks have a tendency towards small worlds, with access to the

larger world increasing dramatically with randomized non-local links.

• Nodes have a fitness for acquiring links that increases dramatically with

each additional link according to the power law.

• Chaotic systems exhibit sensitivity to initial conditions

• Phenomena can hover around a strange attractor

• Individual actors self-organize into systems without necessarily

acknowledging their participation in the emergence or the resulting

global order.

• Complex systems are dynamic, open, and adaptive

• Systems possess feedback loops, both positive and negative.

Selecting a Focus

The multitude of agents in the realm of international assistance, also called the

development industry, is mind boggling. To discuss them all would be impossible, so it

is necessary to focus on the main actors, primarily the World Bank. The IMF, WTO are

often thrown in when discussing the World Bank, not only because their roles in the

global economy are sometimes overlapping but because their origins all lay in the

Bretton Woods conference of 1944. They are all easy targets, well known, and

overrepresented in the literature. Although my analysis and eventual recommendations


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are directed at all actors in the development business, I must submit, join the

bandwagon, and use the World Bank as my favorite whipping boy as well.

The World Bank, just like the entire development industry, is plagued by failure.

The Metzer Report, commissioned by the US Congress to evaluate seven multi-lateral

institutions in the development business including the World Bank and IMF, found:

High cost and low effectiveness characterize many development bank operations as well. The

World Bank’s evaluation of its own performance in Africa found a 73% failure rate. Only one of

four programs, on average, achieved satisfactory, sustainable results. In reducing poverty and

promoting the creation and development of markets and institutional structures that facilitate

development, the record of the World Bank… leaves much room for improvement, (Meltzer

2000).

And good on me for it, the World Bank can be seen as a barometer of trends in

the development industry. Gavin and Rodrik (1995), in their paper “The World Bank in

Historical Perspective,” devote an entire section to the topic, entitled “The World Bank

as a Source of (and Proselytizer of) Ideas on Development.” They discuss the “role as a

conveyor belt of ideas about development policy to the borrowing countries,” claiming

that “it is difficult to overemphasize the part played by the Bank in this regard.” The

Bank is profiled, not as an innovator, but of a mainstream institution that is able to

legitimate, amplify, and popularize practices developed by others; “once the Bank gets

hold of an idea, its financial clout ensures that the idea will gain wide currency.”
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What went wrong?

Abstractions are necessary to identify any particular manner in which the

development industry has failed. The world of Systems and Networks are also

annoyingly abstract. However, combine them and there can be at least three

conclusions of general truth. Based on Systems and Network Theory, particularly

World Systems Theory, the development industry fails to recognize that most efforts

benefit the global capitalist system. Based on Systems, Chaos and Complexity Theory,

the linear methodologies of science are unlikely to yield the desired results in an open

economy if not cause drastic, unforeseen problems. Third, acting to help another

society can decrease their capacity to help themselves.

1. Most efforts benefit the global capitalist system

The mainstream institutions of the development industry, most notably the

Bretton Woods institutions, were established to promote global economic stability and

prosperity. The assumption they all make is that this stability and prosperity will come

from integrated economies tied with finance and trade. The political compromise

necessary to secure the generosity of Western states, most notably the United States,

was to allow the governance mechanisms of these institutions to be dominated, through

voting and appointments, to be dominated by the West. In addition, the head offices

needed to be located in the unofficial capitols of the global economy – Washington DC,

New York, London, Geneva, etc. More often than not, large sums in the form of loans

and grants came with stipulations for contracts with firms based within and owned by
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Western economies at the behest of the Western governments providing the capital.

Systems Theory suggests that systems can be purposeful, and their purpose can

be completely unknown to the agents within the system. Theorists using Systems theory

have established a World Systems Theory, which sees the major historical process in

world history as the growth of commodity supply chains, integrating smaller, local

economies into one global economic system. The main purpose of this system,

according to Wallerstein (1974; 1980; 1989), is to expand the system in order to further

extract capital for a group of core firms and individuals. And finally, Network Theory

states that power laws assure corporations and economies with the most links are more

fit to acquire more links.

Hobson (1902), British Economist, laid the groundwork for World Systems

Theory in his book Imperialism: A Study. He suggested that colonialism was a result of

the over-savings of the British merchants and later industrialists. Banks had to invest

their deposited money; otherwise they would operate at a loss. Hobson explained how

the accumulation of wealth in Britain became so great the sums could not find outlets

within the country. So, the financial capital, and then later the products of

industrialization, had to find other markets. In this way, the capitalist system is a

purposeful one – it finds ways to operate in other environments to produce the desired

outcome: namely, the economic growth of the original system.

Theories of neocolonialism looked to the same argument, suggesting that

Overseas Development Assistance began as no more than the search for markets.

Common knowledge suggests that this is indeed the case; the bulk of assistance was
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made in response to an overabundant supply of capital caused by amassed petro-dollars

after the high gasoline prices of the 1973 and 1979. The argument of Dependency

Theory, then, is that with foreign capital comes alien (and unaccountable) ownership of

property as well as control over the organizations extracting resources and mobilizing

human capital.

One of the primary tenets of World Systems Theory states the topology of the

global economy creates a hierarchy of power in international relations: core (countries

that control others), semi-periphery (countries controlled by the core but controlling the

periphery) and periphery (countries controlled by both core and semi-periphery).

Immanuel Wallerstein, largely attributed as the father of World-Systems Theory,

describes how the World System created the current predicament of development:

From the beginning, this [capitalism] involved the establishment of integrated production

processes we may call commodity chains. These commodity chains almost all tended to traverse

the existing political boundaries. The total surplus extracted in these commodity chains was at

no point in time distributed evenly in terms of the geographical location of the creation of the

surplus, but was always concentrated to a disproportionate degree in some zones rather than

others. We mean by “peripheries” those ones that lost out in the distribution of surplus to “core”

zones. Whereas, at the beginning of the historical process, there seemed little difference in the

economic wealth of the different geographical areas, a mere one century’s flow of surplus was

enough to create a visible distinction between core and periphery in terms of three criteria: the

accumulation of capital, the social organization of local production processes, the political

organization of the state structures in creation. (Wallerstein 1991)

The key property of the system is that the system has mechanisms to expand and

indeed must expand to thrive. Systems Theorists with Marxist leanings or those who
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believe in underdevelopment believe that the economic disparities in production are

also seen in politics, and a strong political core secures their economic advancement at

the expense of the periphery. Wallerstein does not see the economic development that

has occurred as “a succession of successful national development efforts,” rather he sees

it as “the story of secular expansion of the world-economy as a whole,” and the

“constant expansion of the boundaries of the system.” The local, endogenous

economies of the periphery, which Wallerstein called mini-systems, are slowly but

surely integrated into creating surpluses for the core, (Wallerstein 1991). Krugman, an

economic geographer, acknowledged that “the economy would spontaneously organize

itself into a core-periphery geometry….” (Krugman 1998)

That development assistance is really an instrument of a global economy

seeking to expand does much to explain the behavior of the system. Upon its founding,

the World Bank was primarily interested in bankable infrastructural projects, such as

roads, power grids, and sanitation systems. These projects were actually tied to

consulting and finance from Western corporations and served as an impetus to purchase

Western made capital equipment. According to the Meltzer Report (2000), one of the

main problems of international financial institutions is the “commandeering of

international resources to meet objectives of the US Government or its Treasury

Department.” Perkins (2004) goes so far as to claim that these projects were designed

so that the amount of money going to Western firms was purposefully more than the

loans and income generated by the project. Earlier in its history, the World Bank did

much to expand agribusiness, much of which buys technological inputs from Western
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corporations like Monsanto. In terms of the IMF, “IMF loans permit some private

lenders to be repaid on more favorable terms, so the benefits have gone mainly to those

lenders,” (Meltzer 2000). Assistance can also be seen as a cultural world system trying

to expand. Kottak (1990) claims:

The faulty social design of incompatible projects has generally been based on either (1) Euro-

American social groups and property concepts – individualistic productive units, privately held

by individuals or a couple and worked by a nuclear family… or (2) cooperative systems at least

partially based on models that have been used in Eastern Bloc and modern socialist countries.

Later on, the Bank recommended “structural adjustment” – peeling off of tariffs,

opening economies to investment and selling public industries to private owners –to

open local economies to the well established network of the global economic system.

According to the power law then, corporations and individuals that already own would

be the ones to buy industries, to make interest off of investments, and to open facilities

for export. The profits, of course, would head back to the West and be put back in

Western banks generally for use in Western economies. Indeed, this is what happened,

(Johnson 2004).

2. Linear methodologies of science are unlikely to yield the desired results

Probably the most obvious but least discussed pathway to failure is the

wholesale use of the standard operating procedures and paradigms most familiar to the

natural sciences. Measurements are taken, diagnoses are made, interventions are

planned, hypotheses in the form of projections and predictions are formulated,

monitoring and evaluation is carried out to measure for results, conclusions are drawn
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and what is learned is published in either internal documents or as articles for the

general public. The process starts with proposals and end in assessments in 1, 3, 5, or

10 year time frames. The location of the intervention, be it a village, neighborhood,

region, or country, is seen as a kind of laboratory. Economists do various computations

while sociologists study and observe in an effort to find the one true path to prosperity,

(Dichter 2003).

Upon the final assessment managers usually find that whatever intervention was

made did not cause the predicted effect. Many times, other studies turn up that claim

the intervention had unpredicted effects, sometimes positive but often negative. When

the Operations Evaluations Department, the independent arm aimed to assess the Banks

performance, evaluated the Bank’s progress towards water supply and sanitation from

1967-1989 against intended objectives they concluded that the Bank failed on all

counts, (OED 2002). The Quality Assurance Group in 2000 reported “the Bank’s

processes as related to Poverty Assessment are satisfactory only 38% of the time. In

terms of the economic policy changes (“structural adjustments”) recommended as a

condition for receiving financial assistance, “their research, as well as considerable

research by outsiders, finds no evidence of systematic, predictable effects from most of

the conditions,” (Meltzer 2000).

With the new kind of science in mind, it is easy to see why so many policies and

interventions fail. Specifically, the idea of measurements and time frames do not stand

up to scrutiny. Systems Theory discusses the counterintuitiveness of systems, meaning

that systems react in unpredictable and surprising ways; an event may have delayed
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effects, appearing in a different time and place; an event may have multiple effects, the

prominence of which may shift in time. Complexity offers the interactions of both

negative and positive feedback of events, long after the event has transpired; cause and

effect can have circular relations. Chaos brings to the table sensitivity to initial

conditions so that any mismeasure or measure left out will thwart prediction.

This linear project model seems to perpetuate, despite the admission, even in the

mainstream, that development is an inherently complex process. “The challenge of

development, never straightforward, has become even more complex as the number of

actors has grown and the desire for demonstrable results has intensified,” is the first

sentence in the 2001 Annual Review of Development Effectiveness published by the

World Bank Operations Evaluations Department.

So, in the face of utter failure and the infinitely complex world, the mantra has

been to continue with the paradigm and (counterintuitively) tighten reign and add to the

standard procedures. As opposed to abandoning the methodologies or at least loosening

their holds, the discussion reveals a seeming obsession with better management, better

data, better evaluation and an array of technocratic words. Sometimes, nonsensical

gobbledygook seems to lose its meaning like this text from the Quality Assurance

Group:

Country and sector strategies can be strengthened through a more transparent and objective

record of past performance. A stronger independent and self-evaluation focus would be

facilitated by a closer alignment of inputs to results, using a logical results chain and verifiable

performance indicators, (QAG 2000).


29
The Operations Evaluations Department, in evaluating Global Programs, also

emphasizes a “more systematic and regular approach for… monitoring of program

performance and provision of audit reports, introduc[ing] independent panels… to

review quality of the ongoing portfolio, and expand audits… to cover all programs

receiving… Bank support,” (OED 2002). In the Quality Assurance Group’s “Annual

Report on Portfolio Performance” in 2002, the QAG suggests “strengthening staff and

management capacities,” “pushing the measurement frontier,” and “reporting on

results,” and keeping risky investments down to 15-20 percent of the overall portfolio.

To boot, the three themes of the 2001 Annual Review of Development Effectiveness

were as follows:

1) Good Diagnosis

2) Proper choice of instrument considering country, sector, and past performance.

3) “Poor Policy and Institutional environments compromise effectiveness.”

Despite the rise of qualitative indicators, the Industry remains loyal to measured,

quantitative results in most of its projects and loans. Dichter exclaims:

“We seem to know that development is not measurable or easily quantifiable in any reasonable

time frame, yet we measure many things anyway, in wholly unreasonable time frames (e.g., two

years, three years, five years), acting as if these measurements are proxies for

development,”(2003).

Regardless of the management and measurement frenzy, many statistics and

indicators do not stand up to analytical scrutiny in the first place. Razafindrakoto and

Roubaud, in their article “The existing systems for monitoring poverty: weaknesses of

the usual household surveys,” conclude that “it is clear that the poverty monitoring tools
30
in poor countries, and indeed the statistical information systems in general, show such

deficiencies that they are unlikely to be effective in fulfilling the role they have been

assigned,” (2002).

The frenzy also affects all of the countries it serves. As it stands currently,

Highly Indebted Poor Countries must write a Poverty Reduction Strategy Paper formed

in a participatory manner at all levels of governance. This PRSP contains

comprehensive forms of measurement, multi-sectored initiatives, and “the

determination of a battery of outcome indicators and a system of monitoring and

evaluation,” (Naudet 2002). Assistance from the Bank comes in a variety of forms and

is mostly conditional on a solid PRSP.

Not only is the linear project model perpetuated, but it has also become more

grandiose in its scope. The United Nations built a consensus around the Millennium

Development Goals and the new Global Monitoring Report, subtitled “From Consensus

to Momentum,” is in its third year of publication. The Report is designated as the

central artery of monitoring and evaluation towards the MDGs. The World Bank

Annual Report in 2005, under the section “Toward Effective Development,” the first

two sections are about the Global Monitoring Report and Managing for Results, with

phrases like “a five-point agenda of actions that can help developing and developed

countries build the momentum needed to attain the MDGs,” and “efforts to strengthen

country-level statistical capacity continued.”

As opposed to de-emphasizing measurement, the World Bank Development

Reports have continually redefined poverty to a progressively more complex and


31
holistic view, now containing elements of consumption and assets as well as access to

social services, and vague and relatively immeasurable concepts like dignity and

autonomy, (Cling 2002). The aggregation of qualitative data with more traditional

quantitative data is perhaps a step in the right direction. Kottak (1990) found that

according to predetermined measures of “cultural compatibility,” culturally compatible

projects succeed 10% more often. More qualitative data is problematic only in its

limitations, mostly the expense of its broad collection and in depth analysis.

3. Acting to help another society can decrease their capacity to help themselves

The development industry knew of its failures early on. Much of the failure was

blamed on the corruption, incompetence or incorrect sets of policies. Lending and other

forms of assistance became conditional on nice sounding national plans as well as

changes in sets of policies, particularly in the era of structural adjustment. The result

was more failures, and the donor countries and international agencies taking part,

particularly the World Bank and the IMF, acted surprised.

Systems Theory states that systems are counterintuitive and can act state-

maintaining, while Complexity assures that systems are adaptive. Network Theory

states that networks are most secure in small worlds, while the power law assures that

nodes that are more fit acquire links to more nodes.

While those working in the development industry would expect governments to

reform in order to reap the financial rewards promised to them by the development

institutions, namely the World Bank, IMF, and the private capital on their coattails, it is
32
of no surprise to a systems theorist that a government is a state-maintaining system.

Nor would it be a surprise to someone versed in complexity that a government would

adapt just enough to get the promised money. These characteristics are described in the

Meltzer Report lists principal reasons for the World Bank’s poor record: number five of

six is “countries do not implement reforms unless the choose to do so, and they rarely

sustain reforms imposed by outsiders,” and number six of six is “development projects

typically succeed only if the recipient country has a significant interest in the project

and directs its efforts to achieve success,” (2000).

Emergency has proven throughout history to be a primary source of institution

building, innovation, and economic growth. Societies that have made their own

weapons, organized their own militaries, and created relationships during periods of

crisis are the same societies that we look at today as “developed.” The US, in particular,

flourished in the wake of World War I and World War II and reaped myriad benefits

continuing to this day. Intervention in emergencies often prevents societies from

reaping the inadvertent benefits of their increased organizational capacity.

Even seemingly tragic conflicts can reap benefits by increasing organizational

capacities. Crowley and Skocpol (2001) investigated the roots of American civic

organizations and concluded that “Modern American civil society took… very much in

the wake of the Union victory in the Civil War.” This contests modernist arguments that

civic society develops magically with increased urbanization, the development of

communication and transportation networks, and increases in educational enrollments.

Using the assumption of the preferential attachment and the power law in
33
Network Theory, any individuals from recipient societies who develop the skills to

organize and manage emergencies or development needs would be likely to join

existing organizations centered in the West (Gates Foundation, UN, World Bank, etc.).

Just as Brain Drain assures talented, skilled, and educated members join the ranks of the

scientific community of the Core, the talented, skilled, and educated economists and

bureaucrats join the ranks of Core bureaucracy and philanthropy.

If Network Theory is a good model of analysis, the development industry, as a

network, develops links to governments, organizations, and individuals in the act of

helping and keep this link. If the International Red Cross is running refugee camps, if

later conflicts produce refugees again they will know to look for the Red Cross and

local institutions will not develop to provide that need. Powerful organizations like the

World Bank or Oxfam, who have a fitness for acquiring more links, are more likely to

be solicited for consulting and financial help than local groups. Out of these

relationships comes a dependency, one in which local individuals and organizations,

when in need, reach out to external groups for help, which in turns assure that no local

capacity is developed. Dichter explains his frustration with the development industry:

“If development were successful in fostering institutions, attitudes, and laws and in enhancing

human resources, we - as professional developers - would not have to do things like build

schools or roads. The institutions of a functioning society would see to it that it got built,”

(2003).

If small world networks really are the most secure, than a reliable local network

to provide for needs is far superior to an international response team. No one will

advocate for genocide, but interventions during crisis assure that the only organizational
34
capacities that will develop will be the ones of the organizations serving the needy. If

those are based in other countries, it creates a situation of dependence.

Why do we continue?

Assume that more developed societies are actually using assistance to assist

more deprived societies and that these institutions are actually for the intended purpose

and not the capitalist conspiracy depicted in Confessions of an Economic Hit Man,

(Perkins 2004). Why would we continue to provide assistance if it has continually

proven to be not worth it? Once again, general truths can be concluded by looking at

Systems Theory and World Systems Theory: the development system is state-

maintaining, goal-seeking, and purposeful, and bureaucratic and philanthropic capital

have perceived higher moral returns in poor societies.

1. The development system is state-maintaining, goal-seeking, and purposeful

The development industry, since its birth, has been a growth industry in spite of

near complete recognition of blatant and near universal failure. The number of

professions within the industry and the type of products has multiplied. According to

the World Bank’s operational summary for the year 2005, the IBRD gave 23 projects

under development policy lending, up from 15 in 2001, while the IDA loaned money to

32 projects under development policy lending, up from 15 in 2001. Gross

disbursements of the IDA have rise from 5.5 billion in 2001 to nearly 9 billion in 2005.

The future of the development industry is secure – it is a growing field.


35
Within the development industry, each institution and organization that has the

capacity to attempts to grow by taking on more and more responsibilities.

Organizations multiply around the same sets of issues, problems, or crises. The Meltzer

Report (2000) identifies “overlapping missions and mission creep” as the first main

problem of the international financial institutions.

As Systems Theory would predict, a system would seek to promote, enlarge, and

diversify itself, regardless of the ideas of the agents within who want to work

themselves out of a job (i.e. eradicate disease, violence, and deprivation). It does this

by acting as a state-maintaining system when under attack, as a goal-seeking system

when finding new challenges it can take on, and as a purposeful system when it acts in

various environments to meet established goals.

The development industry has constantly had to innovate new norms and

behaviors for development assistance, even since before its own birth, to keep the

system going. The premise of its founding – improving life for others – has been forced

to adapt to national, supranational, and extra-national codes for how to behave: ideas

such as government ought to be accountable to the governed (Social Contract), to the

idea that modern societies ought to help the backward ones (White Man’s Burden), to

the idea that wealth ought to be shared (Gospel of Wealth).

With the advent of the Marshall Plan and the Bretton Woods institution, a

framework of global institutions with formally stated global mandates has arisen. These

institutions, built out of the ideals of post-WWII globalism and the institutional capacity

among heavily administered nations, are primarily an arm of the populations they come
36
from. Even Japan describes western notions of Overseas Development Assistance as a

noblesse oblige, or a moral must of the better off derived from Judeo-Christian cultural

roots, (Akira and Yasutami 1998).

In a clear summary of the history of the operating ideas of the World Bank,

Gavin and Rodrik (1995) explain that the Bank began as a traditional bank, with an

emphasis on creating a “portfolio of concrete, bankable projects” that were largely

related to measurable infrastructural investments such as roads and power grids. In the

1950’s came an emphasis on coherent, achievable national development plans of its

client countries; after seeing unacceptable results, the Bank moved towards private

sector and rural development projects more bent on ending poverty, particularly in the

70s under the leadership of Robert McNamara. As conservative economists as chief

researchers for the Bank grew in influence, they began the famously criticized era of

“structural adjustment” and “outward orientation” where countries were manipulated

into adopting conservative, laissez-faire economic policies. Now, the Bank is trying to

find its new role after structural adjustment.

A system just up and dissolving itself, even with a history of complete failure, is

unlikely – systems just don’t do that. If more people attack it and more failures are

documented, it will just adapt in order to maintain its state. The World Bank, for

instance, has managed to adapt by a serious public relations makeover, abandoning

altogether (at least in rhetoric) structural adjustment programs and broadcasting

grassroots programs and debt reduction all over its website. The internal organization

has yet to live up to the public relations make over, but the organization has maintained
37
its state as the amplifier of development trends and will go on to become a goal-seeking

and then purposeful organization once it finds its new voice.

2. Bureaucratic and philanthropic capital have perceived higher moral returns in

poorer societies

The public attempt to meet the demands of poverty is called bureaucracy and the

private attempt is called philanthropy. Using Hobson’s theories on the origins of

Imperialism originating from an over-abundance of financial capital, the myriad and

multitudinous organizations that are working to alleviate poverty around the world

originate from an over-abundance of what I term bureaucratic and philanthropic capital.

Bureaucracy and philanthropy, though organized differently and around different

tenets, are more or less the organization of providing for social needs. These forms of

capital are a luxury, part of the results of production and the procurement of profit

becoming so efficient that significant portions of society can find employment in

meeting the more subtle demands of the population. Dichter describes:

“the core characteristics of an organized form of activity in the modern world are obvious.

Complex actions need to be planned, carried out, and paid for. Specialized functions come into

being, such as production, supervision, management, administration, bookkeeping, public

relations, research, and human resources,”(2003).

In “developed” societies, the capacity to mobilize money and resources, write policies,

draft forms and paperwork, theorize, hypothesize, analyze, produce statistics, form

committees to make streamlined procedures is so great that it has to look to other


38
markets in order to employ all the individuals with these skills. Unfortunately, the

industry of development is little more than the export of our organizational capacity.

In more wealthy societies poverty takes on a less absolute and less pitiful image,

so excess bureaucratic and philanthropic capital looks for other markets where they

might find higher moral returns. The returns in the poverty stricken populations in the

lower strata of the developed economies are perceived as marginal. So long as Western

societies continue to think of foreign problems as more weighing than domestic

problems, we can be sure that Western bureaucrats and philanthropists will export their

efforts.

Towards a New Framework for Development Policy

By assuming this meta theoretical perspective, we allow ourselves a range of theoretical and

possibly methodological tools from complex systems theory to help us grapple with this

particular complex system, (Straussfogel 1997).

If there is a meta-theme to a new framework derived from the new sciences, it is to

concur with World Bank’s publication on one of their major recommendations: “Aid

can nurture reform in even the most distorted environments – but it requires patience

and a focus on ideas, not money,” (World Bank 1998). The ideas (and the money),

need to be focused on a Means not Ends, Process not Outcome approach. The

development industry should not be efficiently trying to meet measurable goals, but

rather taking sets of actions that are known to have a positive effect. The number of
39
recommendations based on this framework could be numerous, but for clarity there are

listed and embellished five general recommendations.

1. Build Human Capital with Training

2. Build Local Networks

3. Embrace Emergence and Self-Organization

4. View Predictions, Goals, and Planning with Perspective

5. Plan and Embrace Spillovers: The Unpredicted Outcomes

(1) Build Human Capital with Training

The passage from object to subject, or from victim to actor, is the foundation of all processes of

social development. The challenge for organizations involved in providing humanitarian

assistance is to take the time and to make the investments—in the midst of what is objectively

perceived to be an emergency—to ensure that there is, in fact, ownership of the process and that

implementation strategies will contribute to developing capacity and empowering social actors.

(Magnones 2002)

Arrow, in his paper entitled The Economic Implications of Learning by Doing

(1962) states that “learning is the product of experience. Learning can only take place

through the attempt to solve a problem and therefore only takes its place during

activity.” Robert Lucas further develops this idea in microeconomics into the notion of

“product-specific learning,” the idea that that human capital organizes itself around the

production of certain products, and that human capital development is dependent on the

entry of new products requiring and evolving and escalating set of training or

educational experiences.
40
With this idea in mind, an economy will grow only when (1) the skill sets of its

citizens are trained on the job, (2) the skill sets are gradually diversified towards growth

industries and higher-income jobs, particularly in management and ownership. Any

assistance that does not work towards these two goals are not fostering the capacity of

the society to develop.

The literature published in the Industry often speaks of investing in Human

Capital and building “capacity” but it does so mostly in reference to the development of

educational systems, minimum nutritional inputs and medical treatment so that a body

is healthy. On the job training is virtually unmentioned. The World Bank

acknowledges that “projects need to focus on creating and transmitting knowledge and

capacity,” and “even where money may not stick, the local knowledge and institutional

capacity created by the catalyst of aid projects can,”(World Bank 1998). However, it

states that the way to do this is “to have objective and rigorous evaluation of outcomes

and dissemination of new information.” Nowhere does it say that each technocrat

should take on shadows and interns.

Assistance, if not operated delicately with a focus on training and capacity

building, only assures the bureaucracy and philanthropy of the Western world learns

how to better organize, give, and share wealth and information with its recipients. The

recipient society, then, would develop systems that adapt to receiving Western

assistance. The problem is not necessarily trying to meet needs but lays in the fact that

the organizational capacity that develops in meeting these demands is the necessary

component missing in societies having trouble accumulating more wealth.


41
Lucas describes a human capital gap that amplifies itself over time in the

absence of intervention. “The comparative advantages that dictate a country’s initial

production mix will simply be intensified over time by human capital accumulation,”

(Lucas 1988). An economy that settles on low-skill industries will be bound to keep

itself in a trap, particularly as more economies join the supply chain for those products.

Arrow states that “learning associated with repetition of essentially the same problem is

subject to sharply diminishing returns,” (Arrow 1962). Lucas states that “a more

satisfactory treatment of product-specific learning would involve modeling the

continuous introduction of new goods, with learning potential on any particular good

declining with the amount produced,” (Lucas 1988). If a the population of an economy

is working in, lets say, a sweatshop in a free-trade zone for 16 hours per day with little

opportunity to increase the number or level of their skills, that economy is idling their

human capital. The eventual result would be low economic growth.

Lucas paints a larger picture in which economies that do not diversify the goods

they create also do not diversify its human capital; the end result will be that they create

a low-skill and low-wage global niche in the long run. Lucas states “if different goods

are taken to have different potential for human capital growth, then the same

considerations of comparative advantage that determine which goods get produced

where will also dictate each country’s rate of human capital growth,” (Lucas 1988). A

developing economy would also constantly push the types of capital investments

towards industries that use and require higher levels of education and training.

Alvin Toffler, a popular futurist, points toward the even use of information
42
technology as the new manner in which to empower the rural poor to gain wealth. His

new book with his wife Heidi, Revolutionary Wealth, is more or less about the ways that

the information based economy will restructure the current distribution of wealth. The

book relays the exciting possibilities for creating prosperity while breeding equality by

utilizing the various new forms of technology.

(2) Build Local Networks

Efforts towards education, training, health care, and information sharing to build

human capital do so with the inherent assumption that an “educated” and “healthy”

body then has the “freedom” to use their “human capital.” However, their “human

capital” is nothing of the sort if they do not have access to an available niche either as

an employee or an entrepreneur. In order to build available niches and assure that there

is access to them, it is necessary to carefully build local, productive economic and

information networks.

The exploration of emergent structures in Network Theory can give us a

framework to imagine how economies evolve from a stagnant to a booming economy.

As each node (economic agent) experiences a surplus beyond its individual necessity, it

goes looking for something to do with this surplus. In the case of individuals, it will

likely be in the form of consumption and will make a link to a business. A business will

make a link to the labor market or input producers in the form of expansion or

investment spending. Out of this original market interaction, a market economic

network is made.
43
According to Network Theory, a cluster is the most stable form of network. For

an economy, this means that each business would have economic ties with every other

local economic actor. In this way, if a business loses one customer, it has other

customers to rely on. An unstable market economy would be one that relies on one firm

or one industry to provide jobs. One can debate the meaning of local, but in this

particular case local can be considered within the targeted region or defined economy.

Clustering coefficients can be increased with policies that focus on building

input industries. A true cluster is impossible to achieve except on extremely small

scales, but in order to build a local economy analogous to a cluster, development policy

must focus on the diversification of industries and their interdependence through

economic links, ultimately increasing the complexity of the economy. The most secure

way to do this is to focus on input industries, or industries that are created around

products that are used in existing industries, particularly industries tied to location; For

example, if the local industry is centered around mining and garment production (tied to

cheap labor markets), making mining equipment, textiles, and sewing machinery would

be a good start. The end result will be that a local economy will retain not only direct

income and employment but indirect income and employment, or the income and

employment that is generated by supplying the keystone industry with the components

they need to produce their product. Thus, the necessary magnifiers are present as

positive feedback.

In addition to building networks, it is necessary to stop leakage promoted by

assistance. Shonfield (1960), Johnson (2004) and Perkins (2004) specifically criticize
44
the manner in which international assistance ties aid and loans to the purchase of

Western goods and services. In a realm of economics called Input-Output Analysis,

matrices are used to analyze how industries demand inputs from other industries.

Leakages are inputs purchased from external economies, and counterbalancing flows

are the demand generated by the external economies from the income of said inputs.

Leakages must be prevented by import substitution policies.

Information networks – particularly social networks through which information

passes. In economics, people use social networks as a resource to satisfy both the

search for jobs and financial capital. Social Capital was originally defined by Loury

(1977) as the resources resulting from family relationships and community that affect

child development. Subsequently, the concept has been broadened to encompass the set

of relationships with individuals and organizations that make the achievement of any

possible end, particularly securing opportunities. Ioannides, Yannis, and Loury (2004)

establish three facts about job information networks: (1)“there is widespread use of

friends, relatives, and other acquaintances to search for jobs and it has increased over

time….” (2) “this use varies by location and by demographic characteristics….” (3)

“and it is generally productive.”

The properties of the network determine the ease of closure, or the success of

the query. Burt (2003) acknowledges that networks with closure tend to be composed

of links with strong interconnections, or close to the model of a cluster. However, in

order to broaden the opportunities available to find closure, the local clusters must have

access to the broader world – the network must look like a small world network. In
45
addition, Granovetter (1973) and subsequent researches have concluded that “weak”

ties (acquaintances rather than close friends) are the primary source of social capital.

Dodd, Muhamad and Watts (2003) add that professional relationships carry a

disproportionate amount of inquiry in the social search process. Armengol and Jackson

(2003) suggests that agents that begin operation in a network with worse initial starting

conditions are more likely to drop out of the network.

It is easy to imagine a model of how this might work. An agent with an inquiry

first goes to the most appropriate of its own ties, which will most likely be a weak tie,

and then the closure within the network depends on the strength of the interrelationships

between the agents of the network processing the query. It is the model of “Power

Networking,” taught in Business schools the world round and the topic of many best-

selling books.

(3) Embrace Emergence, Self-Organization, and Strange Attractors

The world society has reached a higher level of complexity with higher structural contingencies,

more unexpected and unpredictable changes (some people call this 'chaos') and, above all, more

interlinked dependencies and interdependencies. This means that causal constructions,

(calculations, plannings) are no longer possible from a central… point of view. They differ

depending upon observing systems, that attribute effects to causes and causes to effects, and this

destroys the ontological and the logical assumptions of central guidance, (Luhmann 1997).

Change should focus on local actions meeting local needs. Much of the new

science seems to agree on a principal that distributed intelligence is better than any of

the various forms of central intelligence. Distributed intelligence is the idea that
46
individual actors at all levels have a base of knowledge and that all actors would be

better at making local decisions because of their familiarity with local knowledge.

Distributed intelligence is, in fact, an implicit assumption of laissez-faire economic

thought: the idea that entrepreneurs, businesses, and consumers should be able to act

without the intervention of a central authority.

Assistance should target societies on the brink of success. Aid often follows the

direction of our philanthropic nature rather than heading towards economies on the

brink of development. Successful economic development depends upon an array of

factors so multitudinous and so uncontrollable they can not all be centrally planned.

Rather than plan economic development by targeting assistance, assistance should be

targeted towards economies that have stable and complex economic networks.

Moreover, targeted assistance should accompany policies that are aimed to activate

business around well framed strategies.

Project assistance often creates new structures rather than build upon previous

ones. This runs into problems with Systems Theory which exclaims systems under

stress will behave as state-maintaining systems. Kottak (1990) confirms this idea:

“Implicit in all the successful projects I examined was the goal of changing so as to

maintain – preserving systems while making them work better;” for example, “irrigation

projects that aimed at rehabilitating, improving, or expanding existing systems were

more successful than projects designed to create entirely new structures.”

Activate investment from existing firms rather than securing investment

elsewhere. Kinoshita and Mody (2001) found that the new investments in emerging
47
markets of Japanese firms were positively correlated with the firms own previous

investment and with the current and planned investment of their competitors. They

attribute this to the firms existing and private knowledge of the emerging market.

Krugman identifies economic applications of the strange attractors from Chaos

Theory: he refers to them as “centripetal forces – forces that tend to make

manufacturing concentrate in only one region… – emerge from the from the three-way

interaction among scale economies, transportation costs, and factor mobility.”

Agglomerations form as firms are motivated to concentrate production near markets and

suppliers while “factors of production move gradually toward locations that offer higher

current real returns,” (Krugman 1998). Harris (1954) first postulated that “producers

will tend, other things being the same, to choose sites with access to good markets,”

(Krugman 1998).

(4) View Predictions, Goals, and Planning with Perspective

The world is far more sensitive than we had ever dreamed. We may harbor the hope that we will

regain predictability as soon as we can learn how to account for all variables. But in fact these

desires for mastery and prediction can never be satisfied in this non linear world. We would do

better to abandon that search entirely. In nonlinear systems, iteration helps small differences

grow into powerful and unpredictable effects. In complex ways that no model will ever capture,

the system feeds back on itself, magnifying slight variances, communicating through its

networks, becoming disturbed and unstable – and prohibiting prediction, ever, (Wheatley 1999).

In the admitted failures of the development industry, they also fail to recognize

that if economic systems are truly complex or chaotic, that their success could be in a
48
different time and place, affecting an aspect of society not measured or even noticed.

With the current procedural model of proposal, implementation, monitoring and

evaluation based on specific measurable indicators, the system is bound to go on failing

by its own definitions.

Sensitivity to initial conditions is a well discussed property of chaotic and

complex systems. The Butterfly Effect, referring to sensitivity of initial conditions, is

the title of Ormerod’s book that discusses the applications of Chaos Theory in

Economics. Ormerod concentrates on the role of “positive feedback… in which an

initial impact of actions or events tends to be magnified over time” (1998). Considering

that the Economy is a network, Watts also identifies the butterfly effect: “equally

significant changes in global structure can result from changes in local structure that are

so minute as to be effectively undetectable at the local level,” (Watts 1999).

However, most students of Economics would not want to recognize the chaos in

an economy. “The complex systems approach makes life more difficult, not just for

policy-makers but for scholars and businessmen alike. Unfortunately, the world cannot

be changed to suit our convenience.” (Ormerod 1998). It is a heavily mentioned but

narrowly studied phenomenon. However, existing studies show that the larger the

economy the more elements of chaos can be found. Kelsey (1988) sees chaos as the

answer between the deterministic variables in microeconomics but the seeming

randomness of the variables in macroeconomics. Dechert, using Monte Carlo analysis,

shows that when modeling networks, as the size and complexity of systems increase,

the probability of Chaos increases to 100%. Dechert infers in his conclusion that “most
49
large systems are chaotic,” (1996).

The new sciences all point to the fact that economic growth is almost completely if

not utterly unpredictable. Ormerod’s book on Butterfly Economics is littered with

statements like this one:

“Despite the respectable background in economics which insists that successful short-term

prediction of the overall economy is not feasible, economic policy in Western economies

continues to be dominated by short-term economic forecasts….” (1999)

Yet the business of development is more or less to set goals, try to achieve them, and

measure results. Much effort is also gone into explaining why or how (including the

efforts of this author) the results were not met.

The World Bank acknowledges “the top-down, technocratic approach to project

design and service delivery has not worked in areas critical for development….” The

whole industry might be better served to focus less on measurement and predictable

outcomes and choose process oriented goals. Luhmann (1995), noted as the intellectual

responsible for bringing system theory to sociology, describes the role of the observer as

primarily someone who creates a role for himself in the system being observed. With

the ideas of a kind of philanthropic and bureaucratic imperialism previously stated, the

development business should be aware of their self-creating role as goal consultant,

project manager, and outcome analyst, respectively. At what point can we conclude that

this role is redundant and a waste of resources? It is up to those working in the field to

decide.
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(5) Spillovers: The Unpredicted Outcome

In the absence of absolute certainty that a project or policy will have the desired

outcome, it is necessary to assure that all outcomes, intended or unintended, will be

positive. While the necessity of managing process has been discussed, managing all

outcomes also deserves treatment. Chaos is seemingly built into mainstream models of

economics in the form of spillovers and externalities, though traditional models do not

cope with spillovers and externalities as potential magnifiers into unmonitored parts of

the economy. The major outcomes will be in capacity: training and education,

institutions and companies, economic and social networks, infrastructure, and money

circulation.

In his book In Defense of Globalization, Bhagwati (2004) reviews available

economic research regarding the effect of spillovers from multinationals as competition

in developing economies. Critics declare that spillovers are negative, that multinational

presence inhibits local business and entrepreneurship through both economies of scale

and by employing local talent in ventures that eventually profit the home nation of the

multinational. However, Bhagwati claims that positive spillovers of knowledge and

experience in those industries exposed to multinational presence gives local firms a

stronger footing: “when the growth of productivity in domestic firms was isolated, it

was seen to be higher in the presence of multinationals….”(Bhagwati 2004). He also

reviews many studies proclaiming that overall growth of an industry, including

domestic firms, correlates with the presence of multinational competition. It is just such

spillovers that need to be coveted and nurtured. Good policy would force
51
multinationals to pick local partners, train local management, and share certain

intellectual property to foster such open competition.

The ideas of chaos and complexity may complicate the process of development

considerably, but it does not necessarily mean that assistance can have no positive

affect. Paul Omerod confirms:

“The inability to control the economy or society in a precise way in the short term does not mean

in any way that the actions of governments have no effects. They most certainly do. But

conventional thinking offers an account of such impacts which is at best incomplete and at worst

positively misleading….” (Omerod 1998)

In order to not be misled, assistance needs to be designed to work with spillovers,

magnifiers, and feedback in mind. The obsession with particular targets and goals

should stop, and the embracing of process needs to become the focus.

The question that needs to be asked is not whether or not a project met its

foreseen goals, but whether or not the project contributed to the capacities of the

locality or region targeted. For instance, how many people were employed at a level

which increased their social or economic capital? how many individuals were trained in

such a capacity as to use it for their future advantage? how many relationships were

developed among local actors? or how much money was spilled into the local economy

so as to contribute to local capital accumulation while not affecting the greater rate of

inflation?

The first and foremost way to manage spillovers would be to stop leakages.

Shonfield (1960), in his investigations, was finding that the inflow of money was not

leading to the capacity of a society to self organize a functional and interdependent


52
economy. He particularly was perturbed at the management style of contracted

engineers that tried to minimize costs by using imported capital goods rather than the

multitude of available labor. The monies importing goods was a leakage. He discussed

the shadow price of having the flow of money go back to developing countries and not

into the belly of the recipient of the assistance. Shonfield goes on to recommend that

the World Bank take “the lead by getting rid of the powerful built-in bias towards the

employment of scarce capital goods and away from the use of surplus labor.”

Iraq might as well be the pinnacle of textbook cases that will go utterly wrong.

The US Government is hiring American corporations to do all of the work, leaving most

Iraqis unemployed. The leakage is blatant, American corporations reaping the benefits.

The occupying American army and government are doing most of the learning, while

Iraqis standby and get angry. The US will find that when they leave, if they ever can,

that local capacities will not pick up where they left off, but will have to start over from

scratch (perhaps in a civil war).

Policy that Works

There are particular types of assistance, policies, and institutions that match the

theoretical foundations of the new sciences and therefore would be apt to be more

successful. A few are listed here:

Local Banks: Banks are the quintessential mechanism of wealth creation. In more

impoverished countries, the wealthy put their money in foreign banks that are more
53
secure and profitable, thus again money leaks out of local economies. Swiss, British,

and US Banks contain the financial capital for most of the rest of the world. These

international banks then invest in ventures in industrialized countries, sucking capital

back into the core. They do not find small entrepreneurs and businesses trying to

provide for the local economies in nations less well off. Schumpeter, throughout his

body of work, made a hero of the entrepreneur and the institutions that allowed them to

flourish – banks and the corresponding systems of credit (Danake 1998). Any economy

with hopes of developing must not only have stable banks, but also must stop the leaks

of capital. Article 8 of the Chinese-Foreign Joint Ventures Law of 1979 actually

requires that the joint venture open an account with the Bank of China or an approved

bank and must be insured by Chinese insurance companies. It states explicitly “a

foreign joint venturer shall be encouraged to deposit in the Bank of China foreign

exchange that it is entitled to remit abroad.”

Microfinance: We have seen the birth of the Microfinance movement, and thank

goodness. However, excellent development policy would focus on the security and

financial stability of commercial banks and credit unions within poorer nations. Until

the wealthy begin to put their money in institutions that will keep capital within the

nations’ borders, development will be slow going.

Locate offices in developing nations: Washington DC is the home of the World Bank

and the IMF, New York is the home of the United Nations. All emissaries, technocrats,
54
bureaucrats, secretaries, office workers, janitors and other employees live in and support

economically the American economy. If the development industry has achieved nothing

else, it has circulated much cash in the United States. However, if the Western world is

serious about sharing wealth, these offices should be relocated.

Emphasize Social Networking: As Jackson (2004) states:

The structure of social network then turns out to be a key determinant of (i) who gets which jobs,

which has implications for social mobility, (ii) how patterns of unemployment related to ethnicity,

education, geography, and other variables, and for instance why there might be persistent differences

in employment between races, (iii) whether or not jobs are being efficiently filled, and (iv) the

incentives that individuals have to educate themselves and to participate in the workforce. Related to

all of these issues are what the impact of these things are on how people ‘network’ or what social ties

they maintain, and ultimately whether the resulting labor markets work efficiently, and how different

policies… will impact labor markets and how they might be best structured.

Active civil societies provide possibilities for networking – public meetings, political

rallies, educational events, ceremonies and celebration with heterogeneous participation

all play a role in creating societies with opportunities as well as information and cultural

transfer across classes. The World Bank allows an added benefit; “an active civil

society improves public services,” (World Bank 1998). Projects should not forget the

role of social events and civic institutions as the potential foundation for more

resourceful social networks.

Chambers of Commerce: A completely overlooked factor in development policy is that


55
it is human networks and social capital through which commerce is activated.

American cities have had Chambers of Commerce since early on in their history. A

Chamber of Commerce is a networking society for local businesses, it allows businesses

to find input producers, new customers, and manage relationships with competitors.

Remittances: Remittances could be channeled with guest worker programs, focusing on

savings for capital investment in the home country of the guest worker. Stahl (1986)

argues that the tens of billions of dollars sent home by overseas workers to Asia is a

significant economic benefit. He does acknowledge that the “overall development

impact… has not been well established….” and only a small proportion of remittances

are directed into productive investments…” However, “this does not warrant the

conclusion that the development value of remittances is negligible.” Adams (1991;

1998) does empirical studies to shed light on the debate over whether or not remittances

goes toward investments or consumption and finds most income goes towards

household improvement (1991), but a significant correlation between remittances and

rural asset accumulation over a five year period in Pakistan (1998). The only optimistic

discussion in Despite Good Intentions (Dichter 2003) is about the overwhelming

positive contributions of remittances in comparison to the shoddy results of planned

international aid.

Ease Market Participation: The Mystery of Capital (De Soto 2003) describes the

inhibitive nature of barriers to participating in the market, whether by acquiring


56
property or starting a company. The book illustrates how in many countries it is

necessary to go through years of expensive paperwork and meetings with government

officials to get a legal framework for property development, business creation, or

intellectual property claim. Economies where this process is sped up and made

available to all who want them experience success with market economies.

Local Partners, Joint Ventures: All assistance should hire locals and train them, even for

management and other skilled positions. The Chinese-Foreign Joint Ventures Law of

1979 assures that China has exercised the lure of its market size to enforce Chinese

partners with all foreign ventures, called joint ventures. Joint ventures assure that

foreign capital develops local capacity, and that profit is shared with local entities rather

than completely repatriated into the global economy. “Ventures were a means of

gaining not only additional capital but also “advanced” foreign technology and foreign

management skills that would help transform Chinese enterprises into efficient and

internationally competitive producers,” (Pearson 1991).

Galvanize Expatriate Investment: In a world where capital moves around the planet

freely, a general concern is how to keep capital grounded. China and Israel, in specific,

have found members of its “global tribe” excellent sources of loyal and culturally

important investment, (Chang 1995).

Input Industries: Emergence when exposed to the global economy depends on a


57
preference for links within the economy. Emergence can only occur if local firms with

a large contract or volume of sales can activate the local economy through buying

products and services from input industries. If homes are built, this only boosts the

economy with the labor to build the home and the profit from the sale of the home

unless the lumber, nails, brick, cement, etc. are bought from within the economy.

Despite the claims of free-trade economists who claim that removing trade barriers is

the gateway to wealth, it is only those economies with institutions that can appropriate

capital back into other local industries that will succeed.

Accreditation: It has been stated that the primary purpose of interacting with the IMF is

to assure that an economy is accredited and acknowledge as a safe spot for investment.

Alerting the commercial world about economies with the proper human capital and

institutions where they are likely to find trading partners or suppliers would be more

effective than any project, as it would embrace self-organization and provide the strange

attractor for capital and buyers, perhaps even tourism.

On the job training: In his article Making a Miracle, Robert Lucas claims the “main

engine of growth is the accumulation of human capital,” stating that “for understanding

periods of very rapid growth in a single economy, learning on the job seems to be by far

the most central,”(Lucas 2002). All assistance should be tied to on the job training,

even for management and other high skill positions regardless of the inconvenience or

costs.
58
Aid Selectivity: The recent doctrine of ‘aid selectivity,’ discussed in 1998 in the report

entitled Assessing Aid: What Works, What Doesn’t, and Why, embraces emergence and

self-organization. “Policy-based financing should go only to countries with a strong

track record or where there is a demonstrable basis for optimism….” (World Bank

1998). Market economies are rather self-organized, therefore the only economies

equipped to utilize investments are those that are experiencing or have experienced a

state-change. The report speaks about complementing private investment, strengthening

institutions and policies, The report acknowledges:

A $10 billion increase in aid would lift 25 million people a year out of poverty—but only if it

favors countries with sound economic management. By contrast, an across-the-board increase of

$10 billion would lift only 7 million people out of their hand-to-mouth existence, (World Bank

1998).

Competitions: Supporting grassroots movements also makes sense, whether by

competition or application. OED claims that most global programs are less than five

years old, and the Bank has avoided defining top-down approaches in favor of

supporting grassroots requests and opportunities. Competitions such as the

Development Marketplace also activate local energies and provide a situation where key

relationships can be formed.

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