On Entrepreneurs, Capitalism and History

I wrote an article in the most recent issue of the UNIDO magazine, Making It, about the role of entrepreneurs in the development of low-income countries. Entrepreneurship is a difficult issue to approach from a head-on perspective, because it’s very difficult to put a finger on what one can actually do to help entrepreneurs – their raison d’etre is to respond to opportunities, rather than to function within a wider framework of a Government plan. This tends to lead a lot of writers to the standard liberal response of ‘provide an enabling environment’, and to avoid crowding them out, which is essentially the thrust of most of Bill Easterly’s work on his Planners vs. Searchers dichotomy, though I’m not much of a fan of this distinction.

My argument is that focusing on entrepreneurship is misguided, because there’s little shortage of it, and it’s been around for a very long time. Rather, we need to think much more carefully about the systems that allow entrepreneurs the ability to move from being small businessmen to the cornerstone of an economy. What distinguishes Richard Branson or Alan Sugar from the guy selling sea shells outside my local bar in Zanzibar isn’t their basic approach to opportunity, it’s the structures in place that amplify that approach. Referencing Bayly’s Birth of the Modern World (yet again) and De Soto’s Mystery of Capital (for the umpteenth time), I argue that there are specific economic, legal and political realms in which improvements must be made, and interventions undertaken if entrepreneurship is to achieve the same kind of effects in Africa, for example, as it has in America.

These are more than simply refining a market system, but move into the realms of redefining a legal system and property structure to change the incentives and capacities of different economic actors, and in effect, move an economy into modern capitalism, rather than the kind of market-based mixed economy that actually prevails in most of the third world.

I don’t see much evidence of this kind of approach in practical development work, unfortunately, though I’d be very happy to be alerted to examples of this.

8 thoughts on “On Entrepreneurs, Capitalism and History

  1. Philip

    November 23, 2010 at 10:43pm

    I think entrepreneurship is far more abundant in the developing world than the developed. In Syria there was virtually no service I could not find someone to provide for me. Flexibility was everywhere. Could I have even hoped to get even nearly that level of entrepreneurial drive in the UK? Not a chance.

    Now, this is an entirely unfinished thought, but: to me it seems that entrepreneurship is much less important than innovation – ie, development and adoption of new technologies and ways of going things. And to get more of that you need higher skills. And you don’t get that with entrepreneurship in general, because it’s too small scale. So actually, while entrepreneurship is admirable, it’s not going to make countries rich.

    Am I completely wrong?

  2. Lee

    November 24, 2010 at 5:04am

    Philip – spot on. This paper is great – showing empirically that generally informal businesses don’t become formal and grow, rather they are eventually replaced by new formal businesses.

    http://www.brookings.edu/economics/bpea/~/media/Files/Programs/ES/BPEA/2008_fall_bpea_papers/2008_fall_bpea_porta_shleifer.pdf

    Ranil – I don’t see how your argument is different to the liberal one. Aren’t property rights a cornerstone of the enabling environment?

  3. Matt

    November 24, 2010 at 9:21am

    “What distinguishes Richard Branson or Alan Sugar from the guy selling sea shells outside my local bar in Zanzibar isn’t their basic approach to opportunity, it’s the structures in place that amplify that approach”

    I don’t think many out there would actually disagree with this overall take Ranil. Maybe they would disagree on the type of structures, but when someone says “we need more entrepreneurship”, it generally means “we need to change the system to make it more attractive and successful” the latter feeding into size and growth.

    That said, I stumbled upon an NGO who believes the opposite – which I’ll blog about soon.

  4. Ranil Dissanayake

    November 24, 2010 at 2:39pm

    thanks all for the comments.

    Lee – 2 things. firstly, the property rights thing is only one aspect of what I argue above. Just as important is the political and economic reforms and changes that are needed, some of which may be quite interventionist. In particular, moving towards stabilisation of elite groups and supporting a smaller group of larger entrepreneurs may require some level of targeting of support.

    secondly, the biggest thing about the property rights argument is how far it needs to go beyond the award and security of property rights and into the social conceptions of what constitutes legitimate an illegitimate property and how these can be followed by law. How social conceptions of property can be converted to state-sanctioned ones isn’t always clear and may need interventions for the distribution or redistribution of existing property rights as a one off event.

    Also, thanks for posting the link to the paper. I think it’s important to stress that neither de Soto or I are arguing that the tiny micro-entrepreneurs we mention have efficient or dynamic businesses, but they have dynamic business sense: it’s not surprise that as access to better systems, more capital and participation in a proper capitalist economy increases, the small informal companies are replaced by big ones. It’s not the case that informal businesses are dynamic, but that they’re the best that can be done in constrained circumstances. As circumstances change, you’d expect the type of business to as well.

    Matt – actually, doing a bit of reading around, you’d be surprised by how many people seem to think entrepreneurs themselves are thin on the ground in developing countries. they seem to think there’s a lot of indolence and lack of ‘business sense’ in Africa, hence the number of projects which do stuff like teach basic accounting and numeracy.

    Philip – New technologies and innovations are great, but even just copying existing methods of large scale production is problematic. I think the biggest problem is getting a class of people who have access to the workforce, the capital and the necessary market size to actually make a large scale production process work.

  5. Philip

    November 25, 2010 at 1:44pm

    Ranil, I’m not talking necessarily about hightech new technologies. Sometimes I’m not even talking about gadgets or machines. Just new ways of doing things. For example, the idea that a job is a role, rather than a person. I’m talking about the gradual adoption of technologies that we’ve been using in Western Europe and the US for years. Right now I would say that FDI is the best way of doing that quickly, though I’m open to other ideas.

    I just think that if entrepreneurialism itself were such a decisive factor then most of Western Europe would not be rich.

  6. Ranil Dissanayake

    November 26, 2010 at 6:14am

    Yes, I completely agree. I’ve written about FDI here before in this vein. http://aidthoughts.org/?p=1583

    This is also the thrust of my article linked: entrepreneurship is a red herring, and what really matters is the structure of industry and the economy generally. What structures promote these new ways of doing things? Clearly classical capitalism, which doesn’t exist is most developing countries.

  7. geckonomist

    December 21, 2010 at 10:37am

    As an entrepreneur I’d like to put up a factory in Tanzania.
    I have the capital and I am willing to take the political risk to invest in Tanzania.

    I’d like to import my cement from Thailand for building it,
    and I want to use my factory to process sugar imported from Brazil and sell it on the local market.
    As a side business I’d like to keep on buying Thai cement in bulk and bag it in Dar in order to supply the local market.

    Both cement and sugar are commodities that are extremely well-liked in Tanzania, I guess the local population will love the reduction in prices that my business will bring to them.
    I selected them carefully.

    Can you tell me which import and trade constraints my business will face from the Tanzanian Government before I can ever make a profit?
    Can you tell which operating constraints I shall face ? is there constant electric power, etc?

    If you have found out that yourself , Mr. Dissanayake, you can write a decent article on entrepreneurship in Tanzania, instead of reflecting blahblah on the theories you read in books.

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