roots of prosperity

22Jan10

In the history of economic success, no two countries have ever followed identical paths. But there is a universal pattern nonetheless: Nations rise out of poverty when elements of a thriving business sector replace the previous economic system. The lessons of history suggest that if we want to reduce poverty in emerging markets, regulation reform and business success are prerequisites, not outcomes. Since 2004, the World Bank has tracked them each year in countries around the world for its Doing Business report. The report specifies 10 forms of government regulation that affect the various phases of a company’s life cycle: starting a business, obtaining licenses (such as construction permits), employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business. In 2009, Singapore ranked first out of 181 countries on the list. It was followed by New Zealand, the United States, Hong Kong (China), and Denmark. The Democratic Republic of the Congo (Kinshasa) ranked last.

Venice

The European commercial system started in the 1100s in Venice, just beyond the borders of the Arab Empire to the south, the Byzantine Empire to the east, and the Holy Roman Empire to the north. Venice traded with all three. The merchants of this city-state essentially reconstructed the Roman business system, with improvements. Early Venice had innovated the “fraternity,” in which brothers kept their family business together after the death of the father. In the 1100s this evolved into a “company,” in which nonfamily could join in too. The company came together under contract to take on specific activities for a specific time, usually a trading voyage by a single ship, with a specific return for each member. The partners then renewed the contract for the next voyage, changing as needed the list of contributors, but keeping decision-making control, while outsiders just put in money. That outsider contribution was essentially an interest-bearing deposit, much like a modern bond.

The key to the new Venetian system was the dominant role that these companies played. The business owners elected a Great Assembly, a Senate, and a doge as chief official. There was no hereditary king, no role for the church, and no ban on Christians charging interest. Pawnbrokers, deposit banks, and merchant banks gave loans large and small to individuals and companies. Low taxes on a large volume of trade paid for a strong army and navy to protect the system from marauding pirates, tribes, kingdoms, and empires. As the Venetian system spread up the fertile Po Valley and across northern Italy, it began to look like the business sector we know today. Large numbers of ordinary people prospered as never before.

Fostering a Business-friendly Climate

Emerging nations that want to create economic growth have to do what others have done before them — put in place the elements on the Doing Business list, and deliberately create a more business-friendly climate. Some countries are doing just that. Most notably China and India, but also Azerbaijan, Georgia, Macedonia, France, Portugal, Egypt, Saudi Arabia, Colombia, Mexico, Guatemala, Ghana, Mozambique, Rwanda, and others are putting in place the necessary reforms. According to Doing Business 2009, initial studies indicate positive results: more registered businesses, increased employment, and falling prices, thanks to competition from new entrants.

Excerpt of business+strategy article by R. Glenn Hubbard and William Duggan. The also wrote about  “The Forgotten Lessons of the Marshall Plan,” s+b, Summer 2008. It’s always nice to know your history..although it can be interpreted in many ways.

link: business models and new business models for art (in dutch)

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