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


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


Name (in Full): Michael P. Staton 8, 2006 Place of Birth: 1980 Houston, TX

Date: August

Date: July 1,

Baccalaureate Degree: Source: Clark University

Geography 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.

4 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.


5 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.



List of Illustrations vi Introduction 7 Introduction to the New Sciences 11 Selecting a Focus What Went Wrong 21 Why Do We Continue Towards a New Framework for Development Policy 37 Bibliography 99 33 19

Illustrations: Cluster Formation Strange Attractor 14 17



“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

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

10 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, AgentBased Modeling, and Network Modeling have been part of a score of techniques in computer programming attempting to find what Wolfram terms Computational

11 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

12 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

13 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

14 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.



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

16 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

17 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

18 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.

19 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 microagents. 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.

20 • • 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

21 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.”

22 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

23 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

24 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

25 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

26 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) EuroAmerican 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

27 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

28 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 statemaintaining, 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 statemaintaining, 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 bestselling 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.

50 (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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