ILEAD Institute of Leadership, Entrepreneurship and Development

entrepreneurship and development

Women selling vegetables in Addis Ababa’s Merkato market. Photo: Manoocher Deghati/IRIN PhotoHa-Joon Chang

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).

Women selling vegetables in Addis Ababa’s Merkato market. Photo: Manoocher Deghati/IRIN Photo

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 entreprenurial 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).

Moreover, even those people who are running businesses in the richer countries need not be as entrepreneurial as their counterparts in the poorer countries. For developing country entrepreneurs, things go wrong all the time. There are power cuts that mess up the production schedule. Customs will not clear the spare parts needed to fix a machine, which has been delayed anyhow due to problems with the permit to buy USA dollars. Inputs are not delivered at the right time as the delivery truck broke down, yet again, due to pot holes on the road. And the petty local officials are bending, and even inventing, rules all the time in order to extract even more bribes. Coping with all these requires agile thinking and the ability to improvise.

So we are faced with an apparent puzzle. Compared to the richer countries, we have far more people in developing countries (in proportional terms) engaged in entrepreneurial activities. On top of that, their entrepreneurial skills are much more frequently and severely tested than those of their counterparts in the rich countries. But these more entrepreneurial countries are the poorer ones. Why?

Microfinance and entrepreneurship

The seemingly boundless entrepreneurial energy of people in poorer countries has of course not gone unnoticed. There is an increasingly influential view that the engine of development for poor countries should be the so-called ‘informal sector’, fuelled by microcredit. The recipe sounds perfect. Microcredit allows the poor to get out of poverty through their own efforts, by providing them with the financial means to realise their entrepreneurial potential. In the process they gain independence and self-respect, as they are not relying on hand-outs from the government and foreign aid agencies for their survival any more. Women are particularly ‘empowered’ by microcredit, as it gives them the ability to earn an income and thus improve their bargaining positions vis-à-vis their male partners. Not having to subsidise the poor, the government feels less pressure on its budget. The wealth created in the process, naturally, makes the overall economy, and not just the informal sector entrepreneurs, richer.

Unfortunately, there are growing criticisms of microfinance, even by some of its early ‘priests’. For example, in a recent paper with David Roodman, Jonathan Morduch, a long-time advocate of microfinance, confesses that ‘[s]trikingly, 30 years into the microfinance movement we have little solid evidence that it improves the lives of clients in measurable ways’ (see further reading).