Is this the most effective development program in history?

2062106029_f6dd1be751_oIt’s a business plan competition for $50,000, and I think it’s a contender.

In 2011 the Nigerian government handed out 60 million dollars to about 1200 entrepreneurs, and three years later there are hundreds more new companies, generating tons of profit, and employing about 7000 new people.

David McKenzie did the incredible study.

24,000 Nigerians applied, the government selected about 6,000 to get some training and advice to develop their plan, the plans were scored, and about 1,200 were funded. They got an average of $50,000 each. Fifty thousand US dollars! Who the hell thought this was a good idea?

All the highest scoring plans got funded automatically, but McKenzie worked with the government to randomize among the runners up.

The results are amazing. Looking just at the people who had no firm to begin with, 54% of the control group have a firm after three years, compared to 93% of those who got the grant. And these firms are bigger. Just 11% of the control group have a firm with at least 10 employees, compared to 34% of those who got the grant. They’re more profitable too.

If you are the President of a developing country, one of the great problems that will occupy your thoughts is: how to get more people jobs? How to grow domestic businesses? Even I, Mr. Cash, did not think big grants would be the answer.

These entrepreneurs are not the deserving poor, to be sure, but the employees are more likely to be. They made $143 a month, so they probably weren’t the poorest of society. But 7000 people earning $7 a day they might not have earned otherwise—that is something. And this ignores the multiplier: the expansion of suppliers, the people employed by the 7000 employees spending that money, the taxes collected by the state, and so on.

Two other things occur to me:

  1. What if, in 10 years, we learn that after all the struggle to build infrastructure and services and other stuff was bullshit, and ALL ALONG we should have just been funneling more cash to the middle and bottom. I do not believe the cashonistas should go so far, but today I wonder.
  2. I should start responding to all the emails I get from Nigerians promising me $50,000 in cash.

146 thoughts on “Is this the most effective development program in history?

  1. “And this ignores the multiplier … ”

    it also ignores competing firms that may have been put out of business by these firms that grew.

    I think it’s reasonable to assume that the overall impact on an economy of individual firms growing is positive, on basis that their growth probably reflects higher productivity than whatever they displace, but the overall impact (in whatever sense) is not necessarily a positive multiple of whatever you see happening to those firms

  2. A couple things to think about:

    – If it is good to give cash to some entrepreneurs, isn’t it bad to take cash away in taxes to pay for it? Maybe the people being taxed are even *more* financially constrained.

    – The social benefits of the program seem challenging to measure. Simply hiring someone doesn’t mean that a job has been “created” (the person may well have worked at some other firm).

  3. Can’t we have both? Cash AND Infrastructure:
    “I’m concerned about what I see is the fetishization around entrepreneurship in Africa…Like, don’t worry that there’s no power because hey, you’re going to do solar and innovate around that. Your schools suck, but hey there’s this new model of schooling. Your roads are terrible, but hey, Uber works in Nairobi and that’s innovation.” http://qz.com/502149/video-ory-okolloh-explains-why-africa-cant-entrepreneur-itself-out-of-its-basic-problems/

  4. My bullshit detector was activated. Do you really believe any of that?

    The very similar program in European Union: Innovative Economy Programme (this is from it’s Poland implementation):

    http://www.poig.2007-2013.gov.pl/english/Strony/Introduction.aspx

    was just a **fraud-fest**. You apply for a grant, making something completely useless, but with enough bullshit, that government minion can’t tell. You make it “online” (a website), so it’s “innovative”. Bullshiting the grant is the hardest part – takes time, and creativity to write a good bullshit story. But! there are whole companies that do it for your, with a lot of experience how to bullshit government. Typical examples of projects are: social website for cat owners, something for e-commerce. Essentially just simple PHP websites with fancy names, and jargon to confuse the government.

    You get free money ($50k and more), you buy yourself TV, new PC, HD projector, and all the stuff you want. You put it into companies expenses, but use to play games in your free time. You hire a CS student to make the actual website for like $1000. You pay yourself a nice salary for “maintenance” for the next 5 years and fake statistics of usage. After 5 years, when the government is off your back, you close the “company”.

    Or you have your normal company, you open a “fake one” with a grant, and suck all the resources into your normal company, keeping the fake company afloat for just couple of years to close it eventually due to lack of profitability. It’s just free capital.

    It’s not even hard to cheat like this, as government does not care. They want the stats to look good, so they can pretend like they’re “helping the economy”. Last thing they want is the stupidity of such program to be exposed.

  5. Well, I am disinclined to believe the hype surrounding this study. The “most effective development program in history”? Really? Is such hyperbole justified?

    I have read McKenzie’s paper. As a researcher in the field of entrepreneurship, I am chuffed for at least two reasons: (1) the programme appears to have been well-designed: with randomised control for counter-factual testing; and (2) the programme targets “middle of the pyramid” entrepreneurs, not BOP or microfinance, where the results have been disappointing, to say the least.

    Yet, there are significant flaws in the study. First, the use of a single method (survey) to measure the outcomes (employment, profit etc). The respondents in the treatment group (those who received the funds) have every incentive to inflate those outcomes because continued receipt of funding is contingent on achieving those outcomes. The author of the study cannot claim that more jobs were created, for instance, without performing a secondary check such as with tax returns.

    Second, even if the treatment effects are robust, there is no guarantee that they will be sustained in the future.

    Third, and perhaps most important, the study has not been subjected to peer review; it is still a working paper. I will be more positively disposed to the study after it has endured the fire of the peer-review process.

    BTW, I am Nigerian and would love to see my country develop economically. But I am skeptical of grand claims. The world is more complex than formal economic models suppose.

  6. $60m at N250/dollar is 15 billion naira.
    It created 7000 jobs at N2.15million per job.
    You’d have better success paying people 25% of that for doing nothing.

  7. I may be late to comment on this research report, but I just have to. It is annoying to hear those claims especially from an outsider. The so-called programme has some sort of structure but has not been subjected to and evaluations whatsoever. It can’t be true based on this report that the programme was a success. There should be other reports especially from Nigeria by Nigerians to substantiate this claim. I think this was a decktop-based research and anything was accepted by the researcher as given by the respondents. So appalling.

    The researcher can’t even mention the name of the so-called successful programme. It goes to show that the report did not reflect the reality on ground. I would admit here that the so-called programme was a failure. It failed even before it started.

  8. This is particularly impressive when you compare the results of this program with the results of standard microfinancing programs (which have shown much more lackluster results). This program ensures that only the real entreprenuers are getting money. Seems like it would be worthwhile for more microfinance groups to take a look at how this is working.