Entrepreneurship as a Weapon Against Poverty

Sreya SarkarReview of Lessons from the Poor: Triumph of the Entrepreneurial Spirit, edited by Alvaro Vargas Llosa, The Independent Institute (2008).

There is a growing mass of literature discussing various facets of private industry becoming an involved and effective player in the realm of poverty alleviation. The poor have been considered the constituency of the government for a long time, but now that perception is changing. For example, Nobel laureate Muhammad Yunus’ autobiography, Banker to the Poor, takes commercial banks to a clientele base they have never really served before. C.K. Prahalad’s The Future at the Bottom of the Pyramid is a rallying cry for big business to position serving the world’s four billion poorest people at the heart of their profit-making strategies. Lessons from the Poor: Triumph of the Entrepreneurial Spirit, edited by Alvaro Vargas Llosa, is one of the latest books in this category, adding one more dimension to this discussion. Lessons from the Poor demonstrates how indigenous enterprises in developing countries serve as catalysts for economic and social growth and progress.

This collection of well-researched business stories from South America and Africa reveals how the entrepreneurial spirit can exist anywhere in the world and “can operate” in unfavorable political and business environments with complex barriers to entry. They uphold the central idea of theoreticians like Mancur Olson and Richard Cantillon, who believe that development of entrepreneurial assets is very significant in the “journey from poverty to prosperity.” But for that journey to continue, official institutions like stable law-and-order-enforcement systems that grant economic freedom and arrange for security for their citizens’ possessions are important in the long run.

In the introductory chapter, Llosa very wisely remarks that a business climate with all the right incentives is not the only element responsible for the existence of entrepreneurship in a society. Yet, it does play a significant role in making it possible for entrepreneurs to flourish and to boost a nation’s productivity.

Bureaucratic red-tapism, corruption, complicated business regulations and suppression of local markets in many developing countries have forced much entrepreneurial energy to operate subversively in black market economies. In Peru, for example, despite significant reforms in recent years, starting a business requires at least “ten procedures over a period of seventy-two working days and costs the equivalent of one-third of the nation’s per capita income.”

The two Peruvian success stories discussed in the book could be replicated by more businesses had the business climate been more favorable. In the first example, a family-owned soft drink empire, Kola Real, had subsidiaries in Mexico and an estimated $1 billion in annual sales by 2002. The second was the story of Aquilino Flores, who began selling cotton T-shirts at car washes in the mid-1960s. The company he built, Topy Top, became Peru’s leading textile and garment exporter, generating annual sales greater than $100 million today. These examples show that capital can be generated locally and that economic performance depends on many other elements besides a healthy business environment, such as personal and cultural factors.

Lessons from the Poor also carefully documents three more cases: Kenya’s Nakumatt, Nigeria’s Adire and Argentina’s barter clubs. Kenya’s Nakumatt started as a small retail shop selling blankets and mattresses and eventually grew into a retail giant with 3,000 employees. Nigeria’s clothing design industry, the Adire, is a business based on traditional indigenous culture that employs thousands of people in southwestern Nigeria, most of whom are women with little or no education. In the wake of a devastating economic crisis in 2002, Argentina’s barter clubs representing the informal economy surfaced and allowed creation of wealth and the survival of citizens, despite the failure of the state.

Many business schools consider these stories to be outstanding business models because of their departure from prevailing business practices. However, there is still a “specialized” tag attached to them, as they mainly serve the poor base-of-the-pyramid population. But in the broader sense, they indicate a steady march toward active inclusion of the poor in mainstream economies.

The last chapter analyzes the relationship between entrepreneurship, freedom and economic growth. Empirically, it has been proven that a positive relationship exists between a measure of entrepreneurial innovation and economic growth in the U.S. and in OECD countries (Organization for Economic Co-operation and Development). Ranking countries by their levels of economic freedom and rates of entrepreneurship is useful for making comparisons and justifies the conclusion: “Institutions of freedom are associated with entrepreneurship and innovation at the international level?for developed, developing, and transitional economies.”

But the policy implications of Lessons from the Poor are mainly for developed countries. The recommendation is to promote entrepreneurship through institutional reform that constrains or minimizes government’s role, rather than focusing on expanding government programs, such as subsidized loans, workforce education, and programs aimed at increasing “entrepreneurial inputs.” Well-meaning attempts to centrally plan the entrepreneurial process, through subsidies and tax incentives, are counterproductive, as they encourage more unproductive entrepreneurial activities at the expense of productive entrepreneurial activities. Inordinate regulations seem unnecessary (for example, expensive professional licenses for interior designers and even hair braiders in several U.S. statesi), yet they exist. But a crucial distinction that should be made in this area is the difference between “institutions” and an ever-expanding government. The indiscriminate use of the term “institution” (which can be both formal governmental, like the police force, and informal social, like private schools) without clearly defining it can cause confusion for readers.

It was a sensible chapter but not necessarily a natural successor to the earlier sections. From in-detail analysis of the individual success stories in developing countries, there is a sudden switch to a forced policy recommendation for developed countries like the U.S. It might make the reader wish for an additional chapter explaining what “institutions”ii really mean. The real problem in developing countries is lack of proper formal institutions like an established judicial system or a reliable police force. And the problem in many developed countries is overdeveloped formal institutions, like the Department of Human Services in the U.S., that tend to do too much. And there is a difference between the two.

As is the case with many edited books, readers often might feel overwhelmed with so much detail and information packed in a single book. The dense material keeps it from being a lucid read. One special feature, however, is the presence of many enlightening smaller stories within the bigger narrative. For example, Kola Real of Peru used an extraordinary distribution model through which it outsourced their product distribution duty to self-employed secondhand vehicle taxi and minibus operators. Each story has the potential to become a separate book. Business schools will pay a lot of attention to the business process analysis, which is quite innovatively presented in this book.

Overall, the book is a bold step in the direction of interpreting entrepreneurial lessons from the developing world. It establishes the fact that the private business sector is not just a disinterested bystander when it comes to solving social problems involving the poor. They are interested because they need “workers” and “customers” and they are increasingly looking for both at the four billion “bottom of the pyramid” socioeconomic group. Lessons from the Poor certainly offers a thought-provoking experience to its readers and dissolves certain traditional mental categorizations that separate entrepreneurial activities from poverty alleviation around the globe.

i Adam B. Summers, Occupational Licensing: Ranking the States and Exploring Alternatives, August 2007, Policy Study 361, Reason Foundation, CA.

ii “Institutions are the humanly devised constraints that structure human interaction. They are made up of formal constraints (rules, laws, constitutions), informal constraints (norms of behaviour, conventions, and self imposed codes of conduct), and their enforcement characteristics. Together they define the incentive structure of societies and specifically economies.” This definition of “institution” is taken from Douglass North’s 1993 Nobel Prize Lecture.

Sreya Sarkar is Director of the Asset Ownership Program at Cascade Policy Institute, Oregon’s free market research center.

© 2008, Cascade Policy Institute. All rights reserved. Permission to reprint in whole or in part is hereby granted, provided the author and Cascade Policy Institute are cited. Contact Cascade at (503) 242-0900 to arrange print or broadcast interviews on this topic. For more topics visit the QuickPoint! archive.

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