Young Global Leaders

Leadership and Poverty

In a few weeks time, the Young Global Leaders Annual Summit 2007 will take place in Dalian, People’s Republic of China, under the auspices of the World Economic Forum. The issue we will address – leadership – is at the heart of what all of the participants do, whether in business, politics, academia or the arts.

I have been looking at leadership in the developing world, particularly in Latin America, for quite some time. The centre I direct at the Independent Institute in Washington has researched cases of entrepreneurial success in Latin America and Africa, and studied countries that have overcome poverty through free market reform in Asia and southern Europe. In the first group of studies, we researched specific companies born in poor communities; in the second, we looked at how certain, mostly unpopular, reforms can lead to wealth creation. In all cases, leadership, the virtue of turning things immaterial into concrete achievements by inspiring social cooperation, was the key factor.

In the case of successful reform, leadership means the capacity to envision and implement institutional change in order to liberate the creative energy of societies where entrepreneurship was previously penalized. In the case of successful companies, it means the capacity of poor individuals and communities to generate wealth despite stifling political and institutional environments.

Last year, the International Monetary Fund conducted econometric calculations mixing the data from the various countries in order to find out what makes free market reform likely or possible. The studies concluded that a certain degree of trade openness, freedom of the press and education are needed. Apart from the fact that in many successful countries these elements followed rather than preceded free market reform, I believe other factors are still more important, particularly one’s leadership ability in a crisis scenario. Across the board, successful reformers offered bold and visionary leadership in times of political, economic or social upheaval.

The emergence of the Meiji leadership during a time of conflict with the US in 19th century Japan led to stunning modernization. Much more recently, the leadership that brewed in clandestine circles under communism, such as Czechoslovakia’s Charter 77 or the Budapest intellectuals, was able to take Central Europe from tyranny and poverty to liberal democracy and relative prosperity in the 1990s. The crisis brought about by China’s Cultural Revolution and the subsequent reaction of Deng Xiaoping from within the ranks of the Communist Party opened a process of reform that continues today.

In Latin America, the “lost decade” of the 1980s led to a momentous clash between those who wanted to nationalize everything and those who wanted to maintain certain government protections while preserving private property. The result was reform. Even though many of the policies were flawed, the benefits brought about by liberalization and privatization are evident today, with some Latin American economies growing impressively.

Leadership is an equally decisive factor in the emergence of successful companies in poor communities. Leadership in the form of entrepreneurship is what allowed the Añaños family, which used to live in a small farm in Ayacucho – the Andean region terrorized by Shining Path in Peru – to become the biggest manufacturers of non-alcoholic beverages in Latin America. The leadership of Aquilino Flores, a rural immigrant who used to be a car washer in Lima, created Topy Top, Peru’s biggest textile exporting company, out of nothing. The “barter clubs” that emerged after a financial catastrophe at the turn of the decade in Argentina speak to us of neighbourhood leaders who re-established essential services through spontaneous team effort. No less impressive is the kind of leadership exercised by the women of Abeokuta, in south-western Nigeria, many of them illiterate, who have created a clothing design industry that employs thousands of people.

Many Peruvians could match the successes of the Añaños family and Flores if starting a business did not require at least 10 procedures over a period of 72 working days and cost the equivalent of one-third of the nation’s per capita income. Many Nigerians could replicate the success of the women of Abeokuta if opening a business did not cost a person more than half of the nation’s per capita income. What is missing is the kind of reforming leadership that has allowed Chile, for instance, to do away with many barriers to productive work, thereby reducing poverty by half in one decade.

Regulatory barriers do not necessarily prevent all entrepreneurial ventures, although they do force leaders to devote too much time and too many resources to the objective of operating within the law. While there are many different ways in which a country’s formal economy can benefit from the informal economy long before the elimination of the subsisting barriers, integral reform at the political level is what will ultimately make the proliferation of successful businesses possible.

When looking at many developing countries, I am often reminded of sociologist Stanislav Andreski’s opinion that the countries of Latin America have practiced “a parasitic involution of capitalism” based on political rather than productive rewards. The Añaños family and other such cases indicate there is nothing fatal about parasitism. Institutional reform of the kind enlightened leaders have undertaken in so many countries would not have translated into prosperity if entrepreneurial leadership were not a latent force in societies that penalize it. Countries that have yet to engage in institutional reform need to follow their example.

Therefore, the combination of reform and entrepreneurship is the key to prosperity – and both require leadership. In one case, we are talking of political leadership and, in the other, leadership throughout civil society. The absence of definitive reform explains why, in the last 30 years, every Latin American country except Chile has seen its per capita income fall as a proportion of US income per head, whereas Thailand’s has risen by 40%. It also explains why, despite the fact that only 12 years ago the size of Brazil’s economy was similar to that of China, the Asian giant now produces three-and-a-half times more goods and services than Brazil.

Yes, Brazilian leaders have created some clusters of innovation, making some breakthroughs in bio-energy, including ethanol fuel and biodiesel. But these efforts continue to be heavily dependent on government funds. And in Jalisco, Mexico, some foreign investors are developing technology too, but because of artificially generated costs, only 0.4% of the country’s GDP is invested in research and development. That will not change until bold leaders decide to go against the current and engage in profound reform. The current president, Felipe Calderón, has taken some encouraging initial steps. Let’s hope he can stay the course and inspire other Latin American countries to follow suit so that the Añaños and Aqulinos cease to be exceptional cases of success.