Addressing persistent market failure Private Sector Development Process and Change Facilitation Sustainable Economic Development

The MaFI-festo: changing the rules of the international development “game” to unleash the power of markets to end poverty

I am supporting great initiative of the Market Facilitation Initiative. Lucho submitted the online debate we’ve been having since 2008 into the annual Harvard Business Review/McKinsey M-Prize for Management Innovation (called MIX). I am a member of the MaFI discussions.

Lucho provides the following short summary “Bilateral and multilateral donors and NGOs re-write the rules of the International Development Cooperation System to unleash the real potential of markets and the private sector to end poverty at a large scale… easier, faster and cheaper. How? Through trust-based partnerships, complexity science, effective organisational learning, systemic M&E and co-evolutionary experimentation.”

The solution offered by Lucho (based on the MaFI dialogue) is:

A series of national and international conferences, seminars and workshops to bring donors, NGOs and leading firms to identify the rules of the development “game” that need to change to make market development initiatives more inclusive, accountable, responsive, innovative, holistic and cost-effective.
MaFI (The Market Facilitation Initiative) started in 2008 and has more than 240 experts from all over the world working in NGOs, donor agencies, private firms and academic institutions. The aim of MaFI is to advance policies and practices based on facilitation and systems thinking to make markets work better for the poor and the environment. MaFI is a working group of The SEEP Network with the technical support of Practical Action.

After almost two years of of discussions, MaFI members produced a manifesto (The MaFI-festo) which has three main objectives:

  •  To focus the attention of key stakeholders on a set of strategic changes that are urgently needed if the international development system is to effectively harness the full potential of markets to reduce poverty at scale and protect the environment
  • To promote convergence and collaboration between bilateral and multilateral donors, practitioners and academic researchers working in the fields of “aid effectiveness” and inclusive markets.
  • To inspire NGO leaders to promote the adoption of systems thinking and facilitation approaches in their own organizations and networks to increase their ability to interact with the private sector and leverage the full potential of inclusive market development programs.

The MaFI-festo focuses on four areas (in no particular order of importance):

  1. Changing how we work in the field
  2. Balancing flexibility and accountability
  3. Building the capacity of facilitators
  4. Changing what and how we measure change

The MaFI-festo will give content and focus to the series of conferences, seminars and workshops mentioned above. These are called the MaFI-festo Dialogues.

What must you do?

To see the application go to

Find out more about the M-Prize go to:

We need you to:

Comment, vote and throw in your ideas!

With each comment, like, or Tweet our submission goes up in the rankings!

Addressing persistent market failure Publications

Book announcement: Understanding Market Failures in an Economic Development Context

This is the long awaited book on Market Failures. The cover page illustration of the hard copy is by Lina Stamer and is an image that I use when I present the popular training session on how to address market failure in a practical way.

The book is available for free as a E-book, or a paperback edition can be ordered here. More books are available on the Mesopartner online bookstore.

The official description of this publication is:

Many development practitioners are familiar with the phrase “market failure”. However, not many people relate to the topic in a practical sense. Many remember boring lectures in universities where market failures were presented as abstract theoretical concepts in economics 101. In this book, Dr. Shawn Cunningham takes a perspective that the clues to begin to address market failures are in the world around us. He argues that the characteristics attributed to each market failure by clever scholars actually provide some clues to development practitioners about ways in which to address the imperfections that hinders market based transactions. Shawn also argues that market failures cannot be addressed by business management principles, and that typical market research instruments will provide little information on how to make a market system where there is demand, supply and supporting institutions work better

Addressing persistent market failure

Some market related reading

Thank you all for the comments and e-mails on my previous posting regarding markets. I promise to continue that thread in a few days time.

Here are some of my favourite books on markets!

To read more about market systems, their histories, and a broad overview of the topic, start with Reinventing the bazaar: a natural history of markets by John McMillan. Other authors that have helped to popularise the topic are Levitt and Dubner with their Freakonomics books, or Tim Harford with The Undercover Economist. For the more serious readers, take a look at John Kay’s Culture and prosperity: the truth about markets: why some nations are rich but most remain poor or Lindblom’s The market system: what it is, how it works, and what to make of it.

All of these and other books are available on our Amazon storefront!

Addressing persistent market failure Thinking out loud

Market failure or marketing failure, or just old ideas under new labels

I am often stunned at how development agencies and practitioners justify their interventions to support enterprises as “overcoming market failure”. To me it seems there is a huge misunderstanding of what a market failure is, and how one can intervene to overcome the under-performance of markets. Over the last 8 years I have done intensive research into market failures, so let me do some copying and pasting from my thesis (Cunningham, 2009). The sarcastic comments where of course added in today ;-). Sorry Anja and Lucho, this is not the summarised version yet.

Here is the theory part….

Although economists describe perfectly competitive markets, in the real world markets do not always perform perfectly or optimally. When markets do not perform in an optimal way economists refer to the situation as a “market failure”. The MacMillan Dictionary (1986) describes market failure as “The inability of a system of private markets to provide certain goods either at all or at the most desirable or ‘optimal’ level”. Reference is made to the allocation of resources not being at the desired or optimal level. Samuelson and Nordhaus (1992:741) define a market failure as “An imperfection in a price system that prevents an efficient allocation of resources”. In this definition reference is made to the importance of the price system being able to reflect the true costs and value of a product, with natural monopoly, imperfect competition, asymmetry of information and externalities cited as examples.

Market failures are often visible in the forms of the growth of monopolistic firms and other non-competitive organisations, and when factors of production stand idle or certain kinds of opportunities are not pursued by business. Markets also fail when externalities such as water and air pollution are not included in their costs by firms, so that they make private profit at the cost of society. Roberts and Boudreaux (2007) explain that when a market fails this is effectively caused by failures in the institutional arrangements that support the market.

What this means in practice

Thus addressing market failure is about getting markets to perform more efficiently or optimally in the way that resources are allocated or decisions made regarding the production of goods and services. While certain interventions will be aimed directly at the market, other interventions are needed at the institutional level, and only some will be aimed directly at enterprises.

So a quick test here would be for you to check how much time you are spending working with enterprises, and how much time on market systems and the supporting institutions (which could be organisations, but mostly means far more than this).

It takes time. Lots of it.

At this point it is important to realise that it takes demand and supply some time to find the right signals such as price. Unfortunately us development practitioners don’t like this part, but it can take a long time (sometimes a decade) for a market to figure out what the main drivers are (price, quality, value, etc). In a healthy market there is a range of product offerings at different prices targeting different customer profiles. These offerings may have very little relationship with the original products and firms that created the market in the first place.

So it takes time, that is why a market can be described as a dynamic system with feedback loops.

“But firms dont know what to produce or who to sell to – there is a market failure!”

This argument is held forward mainly by small enterprise development practitioners, although even academics in business schools sometimes argue that you can solve a market failure through better marketing.

It is important to distinguish between the economics concept of market failure, and the business management result of a marketing failure. In marketing management literature a marketing failure implies that a firm has made a poor judgement in its marketing strategy, or that marketers have failed to understand that marketing should not be seen as a functional discipline but as an integrative business process. When firms fail to capture a market share due to poor marketing strategies, this can be referred to as a marketing failure. The solution too marketing failure is not in economics or sociology, but in better business management.

The verdict

So how can a development practitioner claim to assist in overcoming market failure by assisting a firm to write a business plan, or by helping a firm to find a venture partner or a new customer? Or how can a university justify developing a product for a firm using state funds in order to overcome market failure.That is just bad development practice. Even if you could somehow justify these interventions on some sub-clause somehow related to a market failure, it remains highly un-systemic and the “failure” will persist.

Recycling old ideas under new labels

I suspect that despite huge international policy pressure for development programmes to address market failure, many practitioners are simply recycling their old tools like poverty alleviation and small enterprises development under new labels.

Perhaps it is best if  you just call what you are doing marketing and business management support, then at least you can refer to a whole pile of business management books.


Bear in mind there is a whole group of people that dispute that market failures even exist (I even agree with many of their arguments), as well as many groups that believe that markets are evil and should not exist (I agree that markets ARE NOT ALWAYS the best transaction mechanism). But let us leave something for another day.


CUNNINGHAM, S. 2009. The role of market failure in the utilisation of Quality Management services by the tooling industry. Ph.D Thesis, North West University,

PEARCE, D.W. 1986.  Market Failure. In Macmillan dictionary of modern economics. Pearce, D.W. (Ed.).

ROBERTS, R. & BOUDREAUX, D. 2007.  Boudreaux on market failure, government failure and the economics of antitrust regulation. In Library of Economics and Liberty – EconTalk.  Liberty Fund, Inc., Indianapolis, IN. [Web] [Date of access: 2 February 2009].

SAMUELSON, P.A. & NORDHAUS, W.D. 1992.  Economics. 14th ed. New York, NY: McGraw-Hill.

Addressing persistent market failure Complexity and Evolutionary Thinking Industrial Policy Knowledge Intensive Business Services Private Sector Development Thinking out loud

Why the advanced sectors are so often overlooked

It is amazing how little support the advanced sectors of our economy receives from public sources. It seems like this disinterest is caused by multiple factors. One, it is not in line with the priorities of the labour movement. The labour unions prefer a focus on job creation for low skilled workers. However, research has also shown that every professional worker in the knowledge sector creates a multiplier of jobs for lower skilled workers. But like an official told me last week: “the problem is that we don’t want the rich people with skills to get richer. We want the poor people without skills to benefit”. Before you laugh, many development agencies and donors are nurturing the same ideas.  Can someone please explain to me why we choose to cap the income of the ‘rich’ and ‘skilled’? The fact that there is such a high premium on skilled workers are symptoms of a much bigger problem. Can someone also again explain how we are going to get people out of poverty by focusing exclusively on the people in the trap?

Let me get back to my main argument…

The second reason why the advanced sectors are overlooked is because they are so difficult to understand. Knowledge is often not a product in itself, but an input into other production sectors. Therefore it is difficult to describe, capture, measure and report on. But the truth is that more and more of our economic sectors are becoming knowledge intensive. Even something is ‘simple’ as farming (which was done mainly be people with low academic qualifications less than 50 years ago) is now increasingly knowledge intensive. This knowledge intensity is partly due to technology, but also because of the natural specialisation that occurs within industries. A challenge is that we do not do enough in developing countries to embrace and measure the knowledge economy (which is not about clever academics).

The third reason the advanced sectors receive so little public support is because the business sector itself struggles to justify or articulate their needs. The problem with specialisation is that everyone is indeed on their own little island. Thus fragmentation is part of the character of the system.

Perhaps final reason is because development practitioners and public officials think that the clever dudes in the advanced sector can help themselves. Well, have you ever noticed what happens with collective intelligence without a facilitator – it goes down. Putting a bunch of experts in the room will not necessarily result in clever expert ideas coming out. Furthermore, the business owners in the advanced sectors are fierce rivals, all fighting or lobbying for their ideas to become standard. Perhaps I should add that even highly educated and specifically highly experienced people are also blinded sometimes, or are sucked down a dependency path. A final point is that the advanced sectors in other countries are getting really advanced support from the public sector, so leaving our advanced sectors to help themselves is not a wise idea in the longer term. If you want to see what income inequality looks like, then leave the game for just a few to play, with high risks and even higher rewards to the few people that can overcome the technical, market and government obstacles placed in their way (if it sounds familiar it is because it is already happening. Come to South Africa if you want to see this).

Might I add that many donors also prefer to work with the poor and the helpless for political reasons, despite the fact that so many research reports have shown that you cannot solve the problem by working on the symptoms.

So perhaps we need to take a step back and look at the levers created by the advanced sectors in developing countries. We need a more systemic perspective of what is driving change and prosperity in these countries.  I am convinced that we should shift our attention from trying to get one more farmer into a system with no margins, and shift our attention to the industries in the countries we work in. We should use our diagnostic tools to overcome market failures, low economies of scale, and help articulate demand that can create new industries (or new pressures to improve performance).

Addressing persistent market failure Knowledge Intensive Business Services Private Sector Development Service sector Thinking out loud Unlocking and Leveraging Knowledge

The increased importance of knowledge-intensive business services in a knowledge-intensive era

As some of you may know, my PhD research was all about knowledge intensive business services and market failures. In a recent publication I wrote a short piece on knowledge intensive business services that we did not use in the final publication. I thought that perhaps it would be useful to some of my readers if I simply posted it here.

Your thoughts and contributions would be appreciated.

Over the last fifteen years, development practitioners have become more aware of the importance of business services to small enterprises. For many, the essence of the debate about Business Development Services (BDS) was about providing commercially viable ‘business development services’ or BDS to small enterprises. Typically these services related to generic or strategic services (Committee of Donor Agencies for Small Enterprise Development, 2001). In many cases generic (and unappreciated) services were promoted to small enterprises not really interested in competition or improved performance, but in survival. Furthermore, BDS interventions were not always systemic in nature and frequently did not consider how markets function[1]. Value chain practitioners were quick to respond by identifying business services that were needed by actors in value chains, and finding ways to increase commercial transactions in these services in order to strengthen the enterprises.

Almost at the same time an academic debate was going on about the increased importance of knowledge and specialised services as inputs into manufacturing and the rest of the economy (Wölfl, 2000, Wölfl, 2003, Bryson and Daniels, 2007). In the knowledge-based era, business is becoming more knowledge intensive, resulting in certain services being labelled as knowledge-intensive business services or KIBS (Roberts, 2003:130, Toivonen, 2004, Miles, 2007:278). Miles (2007:277) explains that almost all activities in an economy are based on some knowledge, and that all societies are knowledge based. Over time the knowledge intensity not only of manufacturing (and intermediate goods) but also of farming and the service sector has increased. Knowledge-intensive business services are concerned with the collection, analysis and distribution of information and knowledge, and play a significant role in the creation, dissemination and application of knowledge both within and between firms at the level of the region and the nation and internationally (Antonelli, 1999, Andersen et al., 2000, Miles et al., 1995).

The discussion of knowledge in business services should focus on what knowledge services are used for. Miles (2007:277) explains that when people refer to knowledge intensiveness, they refer to highly specialised knowledge, or codified knowledge. This knowledge is about the principles, ‘know why’, and methods that can be generalised across numerous specific situations and problems, and should be contrasted with ‘know-how’ and ‘know-whom’ knowledge which is tied to particular tasks and places.

Miles et al. (1995:ii) define knowledge-intensive business services as services that:

  • rely heavily upon professional knowledge;
  • supply products which are themselves primarily sources of information and knowledge to their users (for example reports or training consultancy);
  • use their knowledge to produce services that are intermediate inputs to their clients (for example communication and computer services);
  • own knowledge-generating and information-processing activities;
  • are of competitive importance and supplied mainly to other businesses.

Knowledge-intensive business services can be classified into two broad classes. First is the social and institutional knowledge involved in many traditional professional services, with the emphasis on problem solving or applying rules and procedures (Miles, 2007:280). Accounting or communication services typically fall into this class. Second is the knowledge that has risen to the fore in recent years, which is more focused on science and technology. These services often deal with artefacts and the real world, such as aircraft, engineering, construction and infrastructure. There are services such as architectural design that often combine these two classes of services.

Kox and Rubalcaba (2007:31-34) explain that business services also play an important role in national innovation systems by performing the following functions:

  • They develop technological advances through engineering and other fields.
  • They develop non-technological innovations in areas such as accounting, organisational development and consultancy.
  • They diffuse knowledge between firms by spreading ‘best practice’ information.
  • They play an important role in surpassing human capital indivisibilities[2]. This is especially important for small and medium sized enterprises that could previously (due to internal economies of scale) not afford access to certain professional services.

Many of the services mentioned in this section operate at the frontiers of new technologies and are essential for the success of other high-technology industries (Di Cagno and Meliciana, 2005).

However, there is a tendency for business services, especially the more specialised services, to be concentrated in urban areas. This means that firms have access to specialised services and are able to outsource less critical business activities, while concentrating on their core business areas. The service providers who serve these businesses play an important role in diffusing knowledge between firms.


ANDERSEN, B., HOWELLS, J., HULL, R., MILES, I. & ROBERTS, J. (2000) Knowledge and innovation in the new service economy, Cheltenham, Edward Elgar.

ANTONELLI, C. (1999) The microdynamics of technological change, New York, NY, Routledge.

BRYSON, J. R. & DANIELS, P. W. (2007) The handbook of service industries. IN BRYSON, J. R. & DANIELS, P. W. (Eds.). Cheltenham, Edward Elgar.

COMMITTEE OF DONOR AGENCIES FOR SMALL ENTERPRISE DEVELOPMENT (2001) Business development services for small enterprises: principles for donor intervention. Washington, DC, Committee of Donor Agencies for Small Enterprise Development, The World Bank SME Dept, The World Bank Group.

DI CAGNO, D. & MELICIANA, V. (2005) Do inter-sectoral flows of services matter for productivity growth? An input/output analysis of OECD countries. Economics of Innovation and New Technology, 14, :149–171.

KOX, H. L. M. & RUBALCABA, L. B. (2007) Analysing the contribution of business services to European economic growth. Bruges European Economic Research Papers. Belgium, College of Europe.

MILES, I. (2007) Knowledge-intensive services and innovation. IN BRYSON, J. R. & DANIELS, P. W. (Eds.) The handbook of service industries. Cheltenham, Edward Elgar.

MILES, I., KASTRINOS, N., BILDERBEEK, R., DEN HERTOG, P., HUNTINK, W. & BOUMAN, M. (1995) Knowledge-intensive business services. Users, carriers and sources of innovation. Brussels, European Commission, European Innovation Monitoring System (EIMS).

ROBERTS, J. (2003) Competition in the business services sector: implications for the competitiveness of the European economy. Competition and Change, 7, :127-146.

TOIVONEN, M. (2004) Expertise as business – long term development and future prospects of knowledge-intensive business services (KIBS). Department of Industrial Engineering and Management. Helsinki, Helsinki University of Technology (Espoo, Finland).

WÖLFL, A. (2000) The service economy. Business and industry policy forum series. Paris, Organisation for Economic Co-operation and Development.

WÖLFL, A. (2003) Productivity growth in service industries: an assessment of recent patterns and the role of measurement. OECD Science, Technology and Industry Working Papers. Paris, OECD Publishing.

[1] This is the topic that I dealt with extensively in my PHD dissertation.

[2] Indivisibilities refer to the difficulty of subdividing something into smaller parts. For instance, it is not possible to divide an engineer into smaller pieces. You either appoint an engineer, or you cannot afford to. With the emergence of the knowledge-intensive service sector, a small enterprise cannot gain access to a service provider for a fraction of the cost of appointing a full-time engineer.

Addressing persistent market failure Sustainable Economic Development

Why the theories underlying economic development matters

I have been accused on several occasions of being too theoretical in my training approaches. These comments typically come from highly experienced development consultants and not from the target groups of my training, namely government officials, development facilitators and experts based within developmental organizations. I am not denying that I like to raise some more nerdy-like topics during my training, but this is based on my belief that you cannot be a developmental practitioner without understanding what the deeper knowledge bases are that we are working with.

I am always amused by this negative attitude towards of theoretical bases, especially when these consultants themselves start blurring the lines between the bases that they work from and the outcomes that they prefer.

Why do theories matter?

Bodies of knowledge, or theoretical basis are useful to development practitioners and are not only the domain of clever academics. Not only does a body of knowledge or theory provide us with some guiding principles, it also provides us with lines of inquiry or research questions. A theory also provides a boundary which typically explains what a theory does not cover. You could say that each theoretical base has its strengths (which means that it can structure, explain or questions certain phenomena) and its limitations (which means it does not provide structure, explanations or questions for other phenomena). So the main point is that a theory gives a development practitioner guidance as to what a theoretical base can inquiry, what questions it can find answers to, and which topics it does not provide much insight into. The main function thus of a theory is it helps us structure questions so that we can develop robust answers.

The importance of questions in development practice

Very often we find that developmental practitioners have posed very weak or generic questions at the start of a project or intervention. For instance, the question “how can we help the poor in this region?” is a poorly defined question as you will not be able to deal with the hundreds of answers ranging from “they must do it for themselves” all the way to “we must do it for them“.

Einstein is quoted as saying “if I had an hour to solve a problem and my life depended on the solution, I would spend the first 55 minutes determining the proper question to ask, for once I know the proper question, I could solve the problem in less than 5 minutes“.

So we have to ask more specific questions that lead to more precise questions. These questions are shaped by our theoretical bases. For instance, someone from an engineering background (using an engineering base) will ask that question slightly differently than someone from a business background (using business management) or a social worker (using certain social subjects).

The result of blurring the lines between theories is that questions becomes blurred, leading to vague answers. When questions becomes blurred by experienced consultants, manipulation may occur.  This can be achieved by sequencing questions in a way that people (beneficiaries, donors, organizations, political interests) are lead into one or two “solutions” or conclusions. These conclusions, recommendations, or solutions (call it what you will) are also sometimes known as “magic bullets” or recipes for success. We all know that magic bullets are blind, because they are so dependent on a specific context or the experience of the expert advising them.

You should never trust the answer of a research study or report if you do not understand which questions were asked to guide the study. Despite the content of the research, the questions gives an important hint as to which theoretical bases where used, which also provides us with a clue to the limitations (or blindspots) of that theory.

I am not arguing that we cannot combine theories, rather, I am arguing that we should always remember which theories we are combining in our work. For example, if you are promoting value chains and you are not basing your questions on business management theories (including production, industrial, strategic and other forms of management), then on what bases are you relying for your questions? Are you depending on gut feel, past experience, anecdotal experience, ideology or personal value systems? Or even worse, do you see value chain promotion as an answer to an unasked question? (What was that question again?). And let us say you are depending on the example I provided of business management as a basis for value chain promotion, then what are you blind to because of the choice of theory? Business management theories provide very little insight into social issues, market functioning (not to be confused with marketing management) poverty alleviation, or more technical or scientific issues that you are typically confronted with when working with value chains in a developmental context. I could have of course used another example, but this is one that I am frequently confronted with.

Perhaps it is worth your while to reflect for a few moments on which bases you draw when you come up with recommendations or are confronted by a specific problem. You will be surprised to find that there are many other bases that will provide you with different questions that you might want to consider reading up on. Perhaps you will even find some explanations why some of your favourite viewpoints seems to be so vulnerable or prone to failure within certain contexts, or why people resist some of your ideas. Let me know what you find!!