George W. Bush, the former US president, is reputed to have complained that the problem with the French is that they do not have a word for entrepreneurship in their language. His French may not have been up to scratch, but Mr Bush was articulating a fairly common Anglo-American prejudice against France as an un-dynamic and backward-looking country full of lazy workers, sheep-burning farmers, pretentious left-wing intellectuals, meddling bureaucrats and, last but not least, pompous waiters.
Whether or not Mr Bush’s conception of France is right (more on this later, and see Thing 10), the perspective behind his statement is widely accepted – you need entrepreneurial people to have a successful economy. In this view, the poverty of the developing countries is also attributed to the lack of entrepreneurship in those countries. Look at all those men sitting around having their eleventh cup of mint tea of the day, observers from the rich countries say, these countries really need more go-getters and movers-and-shakers in order to pull themselves out of poverty.
However, anyone who is from or has lived for a period in a developing country will know that it is 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. In many poor countries, you can buy a place in the queue for the visa section of the American embassy (sold to you by professional queuers), the service to ‘watch your car’ (meaning ‘refrain from damaging your car’) in street-parking slots, 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). These are all products of human ingenuity and entrepreneurship.
In contrast, most citizens of rich countries have not even come near to becoming entrepreneurs. They mostly work for a company, some of them employing tens of thousands, doing highly specialized and narrowly specified jobs. Even though some of them dream of, or at least idly talk about, setting up their own businesses and ‘becoming my own boss’, few put it into practice because it is a difficult and risky thing to do. As a result, most people from rich countries spend their working lives implementing someone else’s entrepreneurial vision, and not their own.
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.[1] 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 US and 8.6 per cent in France (it turns out that Mr Bush’s complaint about the French was a classic case of the pot calling the kettle black). 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 vs. 12.8 per cent). The difference is ten times, if we compare Bangladesh with the US (7.5 per cent vs. 75.4 per cent). And in the most extreme case, the chance of someone from Benin being an entrepreneur is a whopping thirteen times higher than the equivalent chance for a Norwegian (88.7 per cent vs. 6.7 per cent).
Moreover, even those people who are running businesses in the rich countries need not be as entrepreneurial as their counterparts in the poor countries. For developing-country entrepreneurs, things go wrong all the time. There are power cuts that screw up the production schedule. Customs won’t clear the spare parts needed to fix a machine, which has been delayed anyway due to problems with the permit to buy US dollars. Inputs are not delivered at the right time, as the delivery truck broke down – yet again – due to potholes on the road. And the petty local officials are bending, and even inventing, rules all the time in order to extract bribes. Coping with all these obstacles requires agile thinking and the ability to improvise. An average American businessman would not last a week in the face of these problems, if he were made to manage a small company in Maputo or Phnom Penh.
So we are faced with an apparent puzzle. Compared to the rich 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. Then how is it that these more entrepreneurial countries are the poorer ones?
The seemingly boundless entrepreneurial energy of poor people in poor 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’, made up of small businesses that are not registered with the government.
The entrepreneurs in the informal sector, it is argued, are struggling not because they lack the necessary vision and skills but because they cannot get the money to realize their visions. The regular banks discriminate against them, while the local money-lenders charge prohibitive rates of interest. If they are given a small amount of credit (known as a ‘microcredit’) at a reasonable interest rate to set up a food stall, buy a mobile phone to rent out, or get some chickens to sell their eggs, they will be able to pull themselves out of poverty. With these small enterprises making up the bulk of the developing country’s economy, their successes would translate into overall economic development.
The invention of microcredit is commonly attributed to Muhammad Yunus, the economics professor who has been the public face of the microcredit industry since he set up the pioneering Grameen Bank in his native Bangladesh in 1983, although there were similar attempts before. Despite lending to poor people, especially poor women, who were traditionally considered to be high-risk cases, the Grameen Bank boasted a very high repayment ratio (95 per cent or more), showing that the poor are highly bankable. By the early 1990s, the success of the Grameen Bank, and of some similar banks in countries such as Bolivia, was noticed, and the idea of microcredit – or more broadly microfinance, which includes savings and insurance, and not just credit – spread fast.
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 realize their entrepreneurial potential. In the process, they gain independence and self-respect, as they are no longer relying on handouts from the government and foreign aid agencies for their survival. Poor women are particularly empowered by microcredit, as it gives them the ability to earn an income and thus improve their bargaining positions vis-à-vistheir male partners. Not having to subsidize 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. Given all this, it is not a surprise that Professor Yunus believes that, with the help of microfinance, we can create ‘a poverty-free world [where the] only place you can see poverty is in the museum’.
1
OECD, ‘Is informal normal? – Towards more and better jobs in developing countries’, 2009.