Originally published in 1967, the modest and plainly descriptive title of Development Projects Observed is deceptive. Today, it is recognized as the ultimate volume of Hirschman's groundbreaking trilogy on development, and as the bridge to the broader social science themes of his subsequent writings. Though among his lesser-known works, this unassuming tome is one of his most influential.
It is in this book that Hirschman first shared his now famous "Principle of the Hiding Hand." In an April 2013 New Yorker issue, Malcolm Gladwell wrote an appreciation of the principle, described by Cass Sunstein in the book's new foreword as "a bit of a trick up history's sleeve." It can be summed up as a phenomenon in which people's inability to foresee obstacles leads to actions that succeed because people have far more problem-solving ability that they anticipate or appreciate.
And it is in Development Projects Observed that Hirschman laid the foundation for the core of his most important work, Exit, Voice, and Loyalty, and later led to the concept of an "exit strategy."
About the Author
Albert O. Hirschman (1915-2012) was an influential economist who is widely regarded as one of the twentieth century's most extraordinary intellectuals. His other books include Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Harvard University Press, 1970) and The Strategy of Economic Development (Yale University Press, 1958).
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Development Projects Observed
By Albert O. Hirschman
Brookings Institution PressCopyright © 2015 The Brookings Institution
All rights reserved.
THE PRINCIPLE OF THE HIDING HAND
The karnaphuli pulp and paper mill is one of the earliest large-scale industrial enterprises to have been set up in Pakistan after Partition and Independence. Planned by the official Industrial Development Corporation to utilize the vast resources of the bamboo forests of the Chittagong Hill Tracts along the upper reaches of the Karnaphuli River in East Pakistan, the mill started to operate in 1953. It had perhaps more than its share of technical and managerial teething troubles, but considerable progress had been achieved by 1959 when its management passed into private hands. Soon thereafter, a major upset endangered the very life of the mill: the bamboo began to flower, an event entirely unforeseen and probably unforeseeable in the present state of our knowledge since it occurs only once every fifty to seventy years: given the resulting paucity of observations, the life cycle of the many varieties of bamboo is by no means fully known. In any event, the variety that supplied the Karnaphuli mill with some 85 percent of its raw material flowered and then, poetically but quite uneconomically, died.
It was known that flowering of the bamboo results in death of the whole plant and in regeneration from the seeds rather than, as normally, from the rhizomes; but it was not known that the bamboo that dies upon flowering would be unusable for pulping since it would disintegrate upon being transported and floated down the river. Another unpleasant surprise was the discovery that, once flowering was over, a number of years would have to pass before the new bamboo shoots would grow to a size fit for commercial exploitation. In its seventh year of operation the mill therefore faced the extraordinary task of finding another raw material base.
In a temporary and costly way, the problem was solved by importing pulp, but other, more creative responses were not long in coming. An organization was set up to collect bamboo in villages throughout East Pakistan (the waterways crisscrossing the country make for cheap transportation of bulky cargo), sundry lumber was cut in the tracts, and, most important, a research program was started to identify other fast-growing species that might to some extent replace the unreliable bamboo as the principal raw material base for the mill. Permission was obtained to plant an experimental area of six square miles with several of the more promising species, and plans to cover a much larger area are underway. Thus, the crisis of the flowering bamboo may in the end lead to a diversification of the raw material base for the mill.
Looking backward it may be said that the Karnaphuli mill was "lucky": its planners had badly overestimated the permanent availability of bamboo, but the mill escaped the possibly disastrous consequences of this error by an offsetting underestimate—or, more correctly, by the unsuspected availability—of alternative raw materials.
The question I wish to explore is whether this experience really was a matter of pure luck or whether there are reasons to expect some systematic association of such providentially offsetting errors. A similar phenomenon often occurs in successful irrigation and irrigation-hydroelectric projects: the river that is being tapped is frequently found not to have enough water for all the power, agricultural, industrial, and urban uses that had been planned or that are staking claims, but the resulting shortage can then often be remedied by drawing on other sources that had not been within the horizon of the planners: ground water can be lifted by tube-wells, the river flow can be better regulated through upstream dams, or the water of more distant rivers can be diverted. At present such plans are afoot for the San Lorenzo irrigation scheme in Peru, and for the Damodar Valley in India, among our projects; a similar overestimate of the waters available from the to-be-harnessed river which can, however, be corrected by "newly discovered" water from other rivers and areas has been reported for the Bhakra Nangal project in India "though no specific provision was made in the project for the investment on this account."
It would obviously be silly to expect that overestimates of the availability of a given material resource are always going to be offset by underestimates of alternative or substitute resources; but if we generalize a little more, we obtain a statement that no longer sounds wholly absurd: on the contrary, it is quite plausible and almost trite to state that each project comes into the world accompanied by two sets of partially or wholly offsetting potential developments: (1) a set of possible and unsuspected threats to its profitability and existence, and (2) a set of unsuspected remedial actions that can be taken should a threat become real.
The experience of several of the projects visited fits this very broad proposition. For example, the San Lorenzo irrigation project in northern Peru suffered serious, and at times exasperating, delays caused by political change and second thoughts on the kind of irrigation farming the project should promote. But the considerable economic losses implied by the delays were in part offset by the fact that, as a result of the second thoughts, the San Lorenzo irrigation eventually became a pilot project for the subdivision of land into small but viable family farms and for the granting of credit and technical assistance to previously landless farmers. The project thus set an entirely new pattern for Peruvian agriculture and turned unexpectedly into a breeding ground for administrators who could apply elsewhere in Peru the lessons learned in San Lorenzo.
The Uruguayan livestock and pasture improvement project also experienced extraordinary delays, first because of slowness in political and administrative decision making and then because the key technical task of improving the natural grasslands by introduction of legumes into the soil turned out to be unexpectedly complex. Yet the solutions that were gradually found through scientific research and practical experimentation and were then applied over an expanding area have now started to make this program into a particularly successful operation and have served to spread the spirit of innovation among a large group of Uruguayan farmers.
Somewhat similar sequences can be found in other projects, although the experience of the Nigerian Railway Corporation serves as an emphatic warning that by itself trouble does not constitute a sufficient condition for a "creative response."
The common structure of the Pakistani, Peruvian, and Uruguayan projects can now be formulated as follows:
1. If the project planners (and this usually includes the World Bank officials involved in financing the project) had known in advance all the difficulties and troubles that were lying in store for the project, they probably would never have touched it, because a gloomy view would have been taken of the country's ability to overcome these difficulties by calling into play political, administrative, or technical creativity.
2. In some, though not all, of these cases advance knowledge of these difficulties would therefore have been unfortunate, for the difficulties and the ensuing search for solutions set in motion a train of events that not only rescued the project but often made it particularly valuable.
WE MAY BE DEALING HERE with a general principle of action: Creativity always comes as a surprise to us; therefore we can never count on it and we dare not believe in it until it has happened. In other words, we would not consciously engage upon tasks whose success clearly requires that creativity be forthcoming. Hence, the only way in which we can bring our creative resources fully into play is by misjudging the nature of the task, by presenting it to ourselves as more routine, simple, undemanding of genuine creativity than it will turn out to be.
Or, put differently: since we necessarily underestimate our creativity, it is desirable that we underestimate to a roughly similar extent the difficulties of the tasks we face so as to be tricked by these two offsetting underestimates into undertaking tasks that we can, but otherwise would not dare, tackle. The principle is important enough to deserve a name: since we are apparently on the trail here of some sort of invisible or hidden hand that beneficially hides difficulties from us, I propose the Hiding Hand.
Before relegating the Hiding Hand to the developing countries as its special realm, we shall briefly elaborate the statement that we may be dealing here with a fairly general phenomenon that permits us to understand or reinterpret certain aspects of human behavior and history. The principle suggests that, far from seeking out and taking up challenges, people typically take on and plunge into new tasks because of the erroneously presumed absence of a challenge, because the task looks easier and more manageable than it will turn out to be.
What we are trying to say can be well conveyed by taking Marx's famous sentence: "Mankind always takes up only such problems as it can solve," and by modifying its wording slightly, but its meaning fundamentally, to read: "Mankind always takes up only such problems as it thinks it can solve." Addition of the italicized words thoroughly blurs the neat determinacy of Marx's original statement; for, with this version, it is possible that, as a result of various misconceptions about its problem-solving ability, "mankind" will take up either more or fewer problems than it actually can solve at the moment it takes them up. Up to a point, the Hiding Hand can help accelerate the rate at which "mankind" engages successfully in problem-solving: it takes up problems it thinks it can solve, finds they are really more difficult than expected, but then, being stuck with them, attacks willy-nilly the unsuspected difficulties—and sometimes even succeeds.
Looking backward on this kind of sequence, an interpretation in terms of some challenge-and-response mechanism seems to be quite consistent with the facts and, of course, it is much more flattering to our ego. Indeed, people who have stumbled through the experience just described will tend to retell it as though they had known the difficulties all along and had bravely gone to meet them—fare bella figura is a strong human propensity. While we are rather willing and even eager and relieved to agree with a historian's finding that we stumbled into the more shameful events of history such as war, we are correspondingly unwilling to concede—in fact we find it intolerable to imagine—that our more lofty achievements, such as economic, social, or political progress, could have come about by stumbling rather than through careful planning, rational behavior, and the courageous taking up of a clearly perceived challenge. Language itself conspires toward this sort of asymmetry: man falls into error, but not into truth.
WHILE SOME PRESENCE OF THE Hiding Hand may be helpful or required in eliciting action under all latitudes, it is no doubt specially needed where the tradition of problem-solving is weak and where invention and innovation have not yet been institutionalized or routinized. In other words, in developed countries less hiding of the uncertainties and likely difficulties of a prospective task is required than in underdeveloped countries where confidence in creativity is lacking. In the former there are large numbers of achievement-motivated actors who have acquired "the conviction that [they] can modify the outcome of an uncertain situation by [their] own personal achievements"; in the latter, on the contrary, new tasks harboring many unknowns must often be presented as though they were all "cut and dried" in order to be undertaken. Hopefully, the experience that difficulties can be successfully handled will eventually permit a more candid appraisal of tasks and projects.
The Hiding Hand principle has several fairly close relatives. The idea that failure fully to visualize prospective internal costs can be growth-promoting is, in a sense, an extension of the more familiar and more obvious thought that disregard of the costs a new project or industry will inflict on third parties—that is, failure to internalize external costs—can serve as a stimulus to enterprise. In both cases, total costs are underestimated and investment decisions activated in consequence. There is, however, an important difference: When internal costs or difficulties are inadequately visualized, the project or firm will find itself in financial trouble unless an offset to these costs is encountered. When external costs are disregarded, on the other hand, the venture can yield a private profit without further ado. Nevertheless, the external costs too require an offset if the venture is to be judged a success from society's point of view."
An even closer approximation to the Hiding Hand principle was formulated several years ago by an economic historian, John Sawyer. Having looked at development projects that were undertaken in the first half of the nineteenth century in the United States, he noted that underestimates of cost resulting from "miscalculation or sheer ignorance" were, in a number of great and ultimately successful economic undertakings—particularly in transport and in the opening up of new resources—"crucial to getting an enterprise launched at all." "Had the total investment required been accurately and objectively known at the beginning, the project would not have been begun." The eventual success of these ventures, in spite of the large initial miscalculation and the consequent financial trouble at various stages, derived from the fact that, once the necessary funds were secured and the project was brought to completion, "the error in estimating costs was at least offset by a corresponding error in the estimation of demand."
The resemblance between this idea and the Hiding Hand principle is obvious. There is a double underestimate of both costs and benefits in Sawyer's scheme, while we have observed similarly, if more broadly, a double underestimate of the various difficulties that lie across the project's path, on the one hand, and of the ability to solve these difficulties, on the other. The difference is that Sawyer's model is focused primarily on the underestimate of costs which is presented as being due to the entrepreneur's activity drive and optimism combined with the knowledge that there is a ceiling to the amount that can be raised for the project. The underestimate of benefits is unexplained and acts rather as a deus ex machina to save selected projects that turn out to cost much more than expected.
In our Hiding Hand principle, Sawyer's unexplained underestimate of benefits becomes the underestimate, on the part of the project planner, of his own problem-solving ability and, as we have seen, this underestimate has a satisfactory rationale. The principle then goes on to state that in view of this underestimate an offsetting underestimate of the difficulties themselves is required so that perfectly feasible and potentially productive projects will actually be undertaken. We shall now explore in more detail the circumstances under which the Hiding Hand is likely to come into play. Which are the projects, in other words, that tend to be undertaken because their difficulties are liable to be underestimated? And which ones tend to be systematically neglected because their difficulties are too obvious? These questions make it evident that the Hiding Hand, while permitting an increase in the rate at which projects are taken up, also leads to a bias in project selection.
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Table of Contents
ContentsForeword: Albert Hirschman's Hiding Hand Cass R. Sunstein, vii,
Author's Preface: A Hidden Ambition, xv,
Author's Acknowledgments, xxi,
ONE The Principle of the Hiding Hand, 8,
TWO Uncertainties, 32,
Varieties of Uncertainties, 34,
Supply Uncertainties: Technology, 35,
Supply Uncertainties: Administration, 42,
Supply Uncertainties: Finance, 52,
Excess Demand, 54,
Inadequate Demand, 60,
Digression: The R&D Strategy, 69,
Mitigation of Uncertainties, 75,
THREE Latitudes and Disciplines, 79,
Spatial or Locational Latitude, 80,
Temporal Discipline in Construction, 87,
Temporal Discipline from Construction to Operation, 95,
Latitude for Corruption, 99,
Latitude in Substituting Quantity for Quality, 103,
Latitude in Substituting Private for Public Outlays, 110,
FOUR Project Design: Trait-Taking and Trait-Making, 118,
The Dilemma of Design, 120,
Implicit Trait-Making: A Failure in Nigeria, 128,
Entrained Trait-Making, 137,
The Autonomous Agency as a Hybrid, 141,
FIVE Project Appraisal: The Centrality of Side-Effects, 148,
Side-Effects as Essential Requirements, 149,
Pure and Mixed Side-Effects, 151,
Smuggling in Change via Side-Effects, 156,
Cost-Benefit Analysis and the Offensive Against Side-Effects, 161,
Modesty and Ambition in Project Planning, 172,
Afterword: Albert Hirschman Observed Michele Alacevich, 175,