​By Mike Field, Market Systems Specialist, EcoVentures International

In a previous blog on this site, “Diversity and Inclusion in Market Systems Programming,” contributed by Anoushka Boodhna and Devi Ramkissoon, the authors raised an important evidence-based discussion on why diversity and inclusiveness are central to more durable economic growth. ​​
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​During many conversations around resilience and economic growth at the 2019 Market Systems Symposium, I found it useful to reframe the purpose of a market system. If you can, think of a market system as evolved social mechanisms that, when most effective (i.e., provide the greatest good for the society), can proactively manage risks, solve problems and generate more resources. The challenge when market systems are not working at their best is they often become tools of the powerful and connected to extract resources and consolidate power. So the question remains: what to do when a market system is not working effectively for the wider society? Specifically, there are three interconnected and interdependent capacities that a market system requires to effectively perform its functions for a society. Without these capacities a market system cannot effectively allocate human, financial and other resources in response to emergent risks and opportunities. These three systemic capacities include:

• Systemic Capacity 1 - Bridging Capital Capacity:  Through a combination of many mechanisms, functions and norms, a society can lower the social, political, and economic costs/risks of agents to engage other agents outside their identity group. Central to this discussion is how a society tends to either amplify or lower the perceptions of barriers between identity groups. Societies that lower the cost/risks evolve the following aspects/components that form effective guarantee mechanisms that de-risk bridging capital: 
  • fair and equitable judiciary/disputes resolution mechanisms,
  • cultural norms that reward individual accomplishment (i.e., over loyalty), 
  • cultural norms/morality that value equity (i.e., across identity groups), 
  • civil society that actively advocates for its constituents on the basis of equity/fairness,
  • effective, fair, evidence-based, and participatory political system that constantly develops/adapts regulations and laws that encourage testing, failure, and cross group interaction (i.e., contract law, bankruptcy, ease of registration, ease of compliance, etc.),
  • market forces that reward value add and sanction extractive strategies and tactics, 
  • formalized social safety net services/insurances delivered through public and civil society systems, and 
  • media that is independent and advocates for its audience on the basis of evidence/equity/fairness.  

​Through a combination of these components/mechanisms/etc, the cost/benefit of bridging capital can be substantially increased, which in turn, increases the level of interactions among agents across identity groups. Low costs and/or higher rewards for agents bridging across identity groups to work with other agents on goods and services like improved seeds, better IT apps, more effective health remedies, etc., are essential for a market system’s ability to innovate ways to mitigate, neutralize, or avoid risks, as well as take full advantage of emerging opportunities. 

• Systemic Capacity 2 - Churn: Churn is the process of agents and firms engaging in a cycle of connecting and testing ideas/relationships, and if the ideas/relationships add value, then they are supported with more resources (i.e., human and financial). If the ideas/relationships do not add value, then the agents/firms separate. When a system has an effective moral bridging capital capacity, the agents can cost-effectively engage with new agents/firms creating a new combination. High performing market systems can have failure rates as high as 80%, which is important in allowing significant testing and retesting with many combinations of agents/firms. The more a system includes as many people as possible in a cost-effective process of testing and retesting combinations, the higher the likelihood that the system will generate novel and increasingly more effective solutions to emerging risks/opportunities. This process creates an internal capacity for the system to constantly adjust resource allocation (i.e., human, financial, etc.) to solve/address complicated risks/opportunities in ways that demonstrates real value addition. The idea of churn also highlights the tension between agent and system level functions. From only an agent level perspective, high rates of failure could indicate a problem, but from a systemic level it is central to a system being inclusive, resilient and competitive. 
• Systemic Capacity 3 - Commercial/social feedback: Feedback in market systems is related to how agents/firms learn what the society thinks/defines as adding value, as well as sets the guidelines for how the system sanctions and rewards market behaviors. It is through effective feedback on collective demand that a society communicates how it prioritizes risks and needs that allow agents and firms to reframe that information into market opportunities for new products or services. When markets are effectively oriented to add value (i.e., solve problems, reduce risk, improve lives, etc.), feedback will evolve to sanction market actors that are unresponsive to demand and/or actively extractive in their strategies/tactics.  In addition to less demand being a common sanction, other types of feedback, especially across other interconnected systems, would emerge. For example, poor customer service experiences can be amplified via word of mouth in community systems, media can amplify extractive behaviors via investigative journalism, civil society can advocate for their constituents publicly, and the legal/political system can act where cases flaunt laws. The combination of certain feedback evolving to be more influential is central to a market system favoring value addition.

It is through the interdependent interactions of these three capacities that a market system can effectively allocate resources to various combinations of people and ideas that most resonate with the society, as well as an ability to define relative value between different types of risks and associated products and services.  A key point here is how market systems self-organize to be responsive to consumer/societal demands by innovating ways to meet demand and add value (i.e., by mitigating, neutralizing or otherwise managing risk proactively). These dynamic allocation processes ensure enough diversity and inclusiveness are integrated into the market system to best secure the wider society’s ability to proactively manage risk and add value.

By Mike Field, Market Systems Specialist, EcoVentures International

​Over the last few years there has a been an interesting evolution in my thinking that initially was grounded in questions about systemic resilience.  Central to understanding resilience has been how societies manage risks around shocks and stresses.  However, from a systems thinking perspective, how communities are managing risks is only a small part of the challenge.  How to do societies mange risks across communities, regional etc.?  What are the patterns in investment, policies, etc. that indicate an orientation in how societies perceive and think about risks related to stresses and shocks?   In starting to investigate these and other questions regarding how a society could shift in ways to better manage known and knowable risks.  IN particular, why and how could a society via its political and market systems manage risks across groups/communities at a systemic level, which has in more developed countries limited the burden placed on individual isolated communities. 
 
Taking northern Kenya as an example, the communities have evolved ways to manage risks from shocks and stresses based primarily on their ability to absorb the risks through strong communal fabric.  All members of the community are essential threads in the fabric, and as long as community members can maintain their roles the fabric can absorb enormous amounts of hardship.  In addition to communal loyalty, communities seek to accumulate resources and see outsiders often as rivals for scarce resources.  Resilience programming has primarily sought to bolster a community’s ability to weather shocks and stresses by reinforcing their absorptive capacity, which makes complete sense. 
 
While much of this is not new, when systems lenses are applied to this landscape some interesting insights and questions arose.  Primary among them is a question about how does this landscape and the efforts around it align with efforts to get a country to middle income status.  More specifically are these efforts leading to an improved capacity at a nation-state level to manage stresses and shocks over time so they can remain on a path to middle-income status?   This question has implications past resilience tied to shocks like drought in northern Kenya as many NGOs that focus on the most vulnerable also focus on the resilience of those communities in relation to day-to-day stresses that leave them on a knife’s edge.   For organizations and practitioners working in areas prone to bigger shocks and stresses or those working in areas where vulnerable populations are often under stress related to basic needs, they have tended toward focusing on social safety net services as essential to stabilize the communities.  While this is makes sense, as practitioners have become more aware of systems thinking and applied systems lenses question continue to arise related to how such programming aligns with supporting a country towards becoming self-reliant. 
 
It would be expected that as a country moves toward middle income status and greater self reliance, it would also see the value in investing in mechanisms and tools to manage stresses and shocks in ways that reduces the burden on its populations.  This expectation brings to light an important conversation that has started, but needs to progress much further.  Specifically, how should/could practitioners engage around shifting the way the system provides social safety net services, as opposed to providing the services themselves.  The challenge here is that any such suggestion has to recognize that there would be a gap around social safety net services.  This challenge would not be easy to address but it is critical, especially once it is understood that social safety net services are central to market system development.  They are also essential to a society’s ability to manage resilience at a higher systemic level in ways that can mitigate and neutralize known and knowable risks without forcing individual communities to always take it on the chin. 
 
A serious conversation about how societies manage known and knowable risks including how that affects markets, political, social, etc. systems is essential.  It is increasingly clear that as a result of international development evolving multiple stove-piped areas of investment, many efforts now work at cross purposes.  Systems thinking has provided effective lenses to see how and why alignment across these domains is needed and possible – even if it is not going to be easy.

By: Mike Field, Senior Technical Advisor, EcoVentures International

When working on private sector development it is often cited without question that profit motives are good.  The thinking goes that a firm that makes a profit would have to make their customers happy in order to sell to them and as a result generate that profit.  While this thinking on its surface makes sense, it is founded on a set of assumptions that when seen through various systemic lenses is quite flawed.  Let’s start with a definition of profit. As a banker once stated in a training, profit is an opinion based on accounting rules.  It is not a universal thing, but an evolved definition related to accounting and tax requirements.  So in most cases, when people say profit they really mean gross margin or what is left of revenues once you subtract out costs.  Even if we leave aside the detailed accounting definitions and only frame the discussion around a very general idea of profit meaning what a business person gets to take home, then we are still left with a range of assumptions related to how markets function.  Understanding how markets function is where systems lenses have proven very valuable in uncovering important misguided assumptions about profit.
 
Going back to the original statement that profit motives are good, the assumption is that markets and market forces universally reward business that add value through customer satisfaction and that companies that cheat customers are sanctioned effectively.  This assumption in how markets reward and sanction firm behavior is at the core of the concerns that good systems thinking highlights.  More specifically, in most countries where there is widespread poverty, market systems are biased in favor of more extractive behaviors like rent seeking, mis-information, fake products, adulteration, etc.. – i.e., tactics and behaviors that business people can do to extract revenues without providing value in return.  In many cases such biases can become rooted in social systems resulting in a process of institutionalization where norms emerge reinforcing the behavior.  For example, if we take a case of an ag input provider that sees an opportunity to begin selling fake seeds, how would the market sanction that input firm if:

• there are no consumer protection services available to farmers,
• farmers are not effectively linked to information sources or networks to ask/learn about seed quality relative to other factors that might affect yields;
• farmers are not tracked or engaged so their feedback further up the retail distribution network is muted/not heard by other potential seed companies,
• the lack of effective competition to provide better/more customer-oriented options,
• the limited role media plays in advocating for its audiences, etc.

 
The multiple important mechanisms required in a market to sanction poor behavior relative to value addition are not present so sanctioning is not effective.  In this scenario, it is likely that the farmers would not be able to recognize that the seed seller is cheating them, and since competitors or third party organizations like media or consumer protection NGOs are not organized to advocate on behalf of the farmer and against the seed seller, it is unlikely for the seed seller to be sanctioned.  More likely, the seed seller would be rewarded for cheating the farmers by gaining more revenues with lower costs.  Further it would be rational for the seed seller in such market conditioned to think that maximizing profits would mean cheating more. 
 
In this case above, the profitability of the shop is not an indicator of adding value as the shop is specifically reducing value in the system – it is extracting value from the system not only in real financial terms in that it is taking financial capital in exchange of something that has no productivity value, but also because it is reducing the efficacy of social capital by further eroding trust.  The systemic feedback via the lack of sanctions and rewards from having immediate higher margins would also reinforce that kind of behavior to be normalized, which is exactly what is observed in many developing country contexts.  The result is that firms that are profit driven in systems that reward extractive business practices would, as a normal course of business, engage in behaviors (i.e., selling/buying tactics) that capture value at the expense of their customers/suppliers.
 
Given that in international development where many if not most market systems are biased in favor of extractive business practices, profit is especially a poor indicator of positive change at firm or market system level.  Even further, the greater the profit orientation of firms within such a system often suggests that the underlying incentives pushing extractive behaviors is deeply rooted in the system and will be difficult to change.  If most firms are aggressively applying tactics to extract value from their suppliers, staff, and customers then that would be an indication of a system’s strong bias in favor of markets that have self-organized to capture resources (i.e., and not add value).   It is important to understand that such biases are mostly likely related to a risk management strategy that accumulates resources as a means to deal with shocks/stresses. 
 
The table below provides specific firm and systemic patterns that indicate an extractive or a value addition orientation of a market system.
 
A good market systems project will focus its efforts on catalyzing firms to see the value in behaving in ways that align with a value addition orientation.  They would also try to catalyze systemic changes that also align with a value addition orientation.  Simply assuming profit motive is good further a myth in how market work and why they are not providing appropriate benefits to a wide enough set of citizens.  Systems thinking is critical to understanding the orientation of market systems and how to shift that orientation to being more value added.

A good market systems project will focus its efforts on catalyzing firms to see the value in behaving in ways that align with a value addition orientation.  They would also try to catalyze systemic changes that also align with a value addition orientation.  Simply assuming profit motive is good further a myth in how market work and why they are not providing appropriate benefits to a wide enough set of citizens.  Systems thinking is critical to understanding the orientation of market systems and how to shift that orientation to being more value added.