William Easterly is a development economist who runs the blog Aidwatchers.   When I read his posts, I imagine an exasperated and pragmatic man who has had it up to here with people misunderstanding and oversimplifying the problems he has devoted his life to solving.  His latest post, titled “The Answer is 42! Why Development is About Problem-Solving Systems, Not Solutions” fits this category well.   He explains exactly why some things work and some things don’t, and reveals the key to creating long-term solutions.

Here’s why direct solutions to problems cannot foster development. Each direct solution depends on lots of other complementary factors, so the solutions can seldom be generalized across different settings; Solutions must fit each local context. Solutions that generate the highest payoff in each setting should be a higher priority than the lowest payoff solutions. Since there is little or no feedback on how well each solution is working in each local situation, there is little possibility for any such adjustments.

Development happens thanks to problem-solving systems. To vastly oversimplify for illustrative purposes, the market is a decentralized (private) problem solving system with rich feedback and accountability. Democracy, civil liberties, free speech, protection of rights of dissidents and activists is a decentralized (public) problem solving system with (imperfect) feedback and accountability. Individual liberty in general fosters systems that allow many different individuals to use their particular local knowledge and expertise to attempt many different independent trials at solutions. When you have a large number of independent trials, the probability of solutions goes way up.

The problem-solving system is adapting solutions to local circumstances. And even more importantly, a problem-solving system coordinates the efforts of many different problem-solvers with nobody in charge (for example, in the market, prices serve as signals to coordinate the actions of many different suppliers to solve the problems of demanders).

Direct solutions to problems (say, using aid programs) still may be worthwhile as benefiting a lot of people. But a long list of many such solutions is not development; development is the gradual emergence of a problem-solving system.

Sometimes the solutions to which Easterly refers are like pushing on a rope.  What is necessary for sustainable development are programs that create value for the poor and are self-sustaining.  Putting the right systems in place enables solutions.  A good practical example of this comes from an article from economist Paul Collier titled “Why Natural Resources Should Help End Poverty.” Huge natural resource wealth can be a good or bad thing for a developing economy, depending on how the money earned from extraction is used.  But many countries don’t even have a good system for investing in the things that will facilitate development:

The final link in the chain is what to do with revenues that are not used up. They should be invested in the domestic economy, not used to build up foreign exchange in a future generations fund – but the issue is how to do it. Too often in the past, attempts to have a big investment push have foundered on corruption and inefficiency in public projects. During the oil boom of 1974-85 the Nigerian government spent heavily on infrastructure, but it did not get much infrastructure for its money. The capacity to invest large amounts of money productively has to be built, within both the public and the private sector. I call this “investing in investing”. Although it is the final link in the decision chain, it needs to be done early, because without it revenues cannot be spent sustainably.

This is a good example of a system that enables a solution.  Creating a pathway to smart and effective investment produces an environment where capital is more valuable.  I think creating these systems is probably the most frustrating aspect of this work for people like Easterly.  Without them, solutions are either ineffective or, at the very least, not as effective or sustainable as they could be.  But creating them is a challenge that requires slogging through entrenched bureaucracies and working with governments that have a financial interest in maintaining the status quo.  That is why I like microfinance.  Bypass the bureaucracy, empower the grass roots, give them some breathing room financially, and create a scenario where they are less constrained by the calcified political and economic environment.