Friday, December 24, 2010

Poverty, Entrepreneurship, and Development

Despite having far more people in developing countries (in proportional terms) engaged in entrepreneurial activities, and having their entrepreneurial skills frequently and severely tested than those of their counterparts in the rich countries, why are these more entrepreneurial countries poorer, wonders Ha-Joon Chang. The answer lies in the poor’s inability to channel the individual entrepreneurial energy into collective entrepreneurship.

Many people believe that the lack of entrepreneurship is one of the main causes of poverty in developing countries. However, anyone who is from or has lived for a period in a developing country will know that developing countries are teeming with entrepreneurs. On the streets of poor countries, you will meet men, women, and children of all ages selling everything you can think of, and things that you did not even know could be bought—a place in the queue for the visa section of the American Embassy (sold to you by professional queuers), the right to set up a food stall on a particular corner (perhaps sold by the corrupt local police boss), or even a patch of land to beg from (sold to you by the local thugs).

In contrast, most citizens of rich countries have not even come near to becoming an entrepreneur. They mostly work for a company, doing highly specialized and  narrowly specified jobs, implementing someone else’s entrepreneurial vision.

The upshot is that people are far more  entrepreneurial in the developing countries
than in the developed countries. According to an OECD study, in most developing countries, 30-50 per cent of the non-agricultural workforce is self-employed (the ratio tends to be even higher in agriculture). In some of the poorest countries, the ratio of people working as one-person entrepreneurs can be way above that: 66.9 per cent in Ghana, 75.4 per cent in Bangladesh, and a staggering 88.7 per cent in Benin (see 1 under further reading). In contrast, only 12.8 per cent of the non-agricultural workforce in developed countries is self-employed. In some countries, the ratio does not even reach one in ten: 6.7 per cent in Norway, 7.5 per cent in the USA, and 8.6 per cent in France. So, even excluding the farmers (which would make the ratio even higher), the chance of an average developing country person being an entrepreneur is more than twice that for a developed country person (30 per cent versus 12.8 per cent). The difference is 10 times, if we compare Bangladesh with the USA (7.5 per cent versus 75.4 per cent). And in the most extreme case, the chance of someone from Benin being an entrepreneur is 13 times higher than the equivalent chance for a Norwegian (88.7 per cent versus 6.7 per cent).

Collective nature of entrepreneurship

Our discussion so far shows that what makes the poor countries poor is not the lack of raw individual entrepreneurial energy, which they in fact have in abundance. It is their inability to channel the individual entrepreneurial energy into collective entrepreneurship.

Very much influenced by capitalist folklore, with characters like Thomas Edison and Bill Gates, and by the pioneering theoretical work of Joseph Schumpeter, our view of entrepreneurship is too much tinged by the individualistic perspective—entrepreneurship is what those heroic individuals with exceptional vision and determination do. However, if it ever was true, this view is becoming increasingly obsolete. In the course of capitalist development, entrepreneurship has become an increasingly collective endeavour.

To begin with, even those exceptional individuals like Edison and Gates became what they are only because they were supported by a whole host of collective institutions—the whole scientific infrastructure that enabled them to acquire their knowledge and also experiment with it; company law and other commercial laws that made it possible for them subsequently to build companies with large and complex organizations; educational systems that supplied highly trained scientists, engineers, managers, and workers that manned those companies; financial systems that enabled them to raise huge amounts of capital when they wanted to expand; patent and copyright laws that protected their inventions; easily accessible markets for their products, and so on.

Furthermore, in the richer countries, enterprises co-operate with each other a lot more than do their counterparts in poorer countries. For example, the dairy sectors in countries like Denmark, the Netherlands, and Germany have become what they are today only because their farmers organized themselves, with state help, into co-operatives and jointly invested in processing facilities and export marketing. In contrast, the dairy sectors in the Balkan countries have failed to develop, despite quite a large amount of microcredit channelled into them, mainly because their dairy farmers tried to make it on their own. For another example, many small firms in Italy and Germany jointly invest in R&D and export marketing, which are beyond their individual means, through industry associations (helped by government subsidies), whereas typical developing country firms do not invest in these areas because there is not such a collective mechanism.

Even at the firm level, entrepreneurship has become highly collective in the rich countries. Today, few companies are managed by charismatic visionaries like Edison or Gates, but by professional managers. Writing in the mid twentieth century, Schumpeter was already aware of this trend, although he was none too happy about it. He observed that the increasing scale of modern technologies was making it increasingly impossible for a large company to be established and run by a visionary individual entrepreneur. Schumpeter predicted that the displacement of heroic entrepreneurs with what he called ‘executive types’ would sap the dynamism from capitalism and eventually lead to its demise.