Why Entrepreneurship is Overrated as a Solution to Poverty

Congratulations Uganda, you are the world’s most entrepreneurial country!  A recent analysis found that a whopping 28% of Uganda’s adults have started a business in the last 3.5 years, beating #2 Thailand (16%) by a country mile.  Developed countries were not even close: the first rich country to appear on the list was Australia at #26, and the bottom-15 included many of the world’s biggest economies, including Germany, France, Japan, and Italy (12th, 5th, 4th, and 3rd from last, respectively).  Each of these countries had entrepreneurship rates of less than 2.5%, putting them from 1/10 to 1/20 of Uganda’s.  Ugandans, it seems, just cannot be held down by the 9-to-5, and are insatiably driven to go out there and start their own businesses.

You might wonder, then, why did the owner of a successful solar business in Western Uganda recently ask me for a job with BBOXX?  That’s not what entrepreneurs are supposed to do!  And if entrepreneurship is how wealth is created, why does a country’s GDP seem to increase as rates of entrepreneurship go down?

The answer, I think is that most of these 28% of Ugandans who are entrepreneurs don’t actually want to be.

When we hear the word “entrepreneur,” we think of larger-than-life visionaries and risk-takers who saw an opportunity and capitalized: people like Bill Gates, Steve Jobs, and Richard Branson (the article I read about Uganda appeared on the Virgin website).  People who threw off the corporate shtick and certainty of a steady pay check to risk it all in pursuit of freedom, fortune, and a dream.

So when we hear that 28% of Ugandans are entrepreneurs, we conjure up a vision of a super-human country overflowing with Steve Jobses, Bill Gateses, and Richard Bransons.  We start to think that maybe all we need to do to “solve poverty” is give poor people business skills training and a bit of start-up cash, and they’ll lift themselves out of poverty through entrepreneurship.

But when you talk to people like the solar shop owner, the truth starts to look at lot less sexy.

This entrepreneur—we’ll call him Bwambale—did all the right things.  He graduated from secondary school, earned a diploma in electronics, and looked for a full-time job.  But there were just no jobs to be found—after all, Uganda’s youth unemployment rate is 80%.  So after “looking for what to do,” he saved up a bit of money from working odd jobs, and opened his solar and electronics store.  The business seems fairly successful: it’s on a well-trafficked road, is known in town, and is constantly busy with customers buying light bulbs, wires, and cheap Chinese solar panels.  I have little doubt that he makes more money as a solar entrepreneur than he would as a solar employee.

But then, Bwambale never wanted to be an entrepreneur.  He only opened his own business because he couldn’t find a job.  As soon as the opportunity came along to stop being his own boss and go work for someone else, he jumped at it.

And who can blame him?  For most humans, being an entrepreneur sucks.  You never know if you’ll get paid.  You wake up every day and have to figure out every little thing yourself.  You bear all the risk if your shop burns down.

As an employee, on the other hand, you know you’re going to get paid next month, and how much.  You don’t have to think so hard every day because there’s a boss to tell you what to do.  If the shop burns down, it comes out of the company’s profits, not your pocket.

With this certainty, you can start to plan—buying that refrigerator now since you don’t need to worry where money will come from next month if your kid gets sick; saving for your children’s education; buying more nutritious foods.

Sure, you might make more money as an entrepreneur, but it doesn’t seem to be this upside that humans want—it’s the security and certainty of a steady pay check, and safety in numbers of working for an organization, that most of us crave.  It’s a rare person indeed who would give up all that security for the uncertainty of success in their own business.

And a lot of evidence seems to bear this out.  In their book Poor Economics, Abhijit Banerjee and Esther Duflo of MIT found that when poor parents were asked their aspirations for their children, 75% said a government job, and another 18% said a salaried employee of a company.  The authors write:

The poor don’t see becoming an entrepreneur as something to aspire to.  The emphasis on government jobs, in particular, suggests a desire for stability… the enterprises of the poor often seem more a way to buy a job when a more conventional employment opportunity is not available than a reflection of a particular entrepreneurial urge… it is entirely possible, therefore, that many business owners, and especially female business owners, do not particularly enjoy running a business, and indeed, dread the thought of expanding it.

And indeed, the stats from above show that in countries like Germany and Japan where people are not forced into entrepreneurship by the lack of other available opportunities, only 1-2% of people choose the riskier route.  If anything, we will know Uganda is succeeding when its rate of entrepreneurship starts coming down from 28%!

Which brings us to the question: if conventional employment is the best way to lift poor people into the middle class, if most humans are not particularly good at running and growing a business—and indeed, dread the thought of doing so—then why is so much development money being spent trying to make poor people into entrepreneurs?

I want to suggest an alternative approach.  Rather than spending directly on helping poor people to start businesses they don’t like running, spend instead on helping already-existing businesses create the employment opportunities that poor people actually want.  There are lots of companies working in poor countries (full disclosure, I work for one of them), and they’re employing lots of local people (we employ more than 150 people in East Africa).  These companies are training people in skills they will immediately use, which takes the burden off NGOs to train people without the certainty of results.  As a rough calculation, If you accept that 9 out of 10 businesses will fail, and assume an average employee attrition rate of 10%, then spending $1 million supporting private companies’ expansion and training programmes would yield 9x the impact of $1 million spent training and financing micro-entrepreneurs.

Many of these businesses just find themselves stuck at a point where they need more capital to expand and employ more people.  By identifying such businesses and helping to finance their expansion, donors and investors can spark an employment revolution in the developing world that lifts millions into the middle class, at a much lower cost than traditional entrepreneurship-focused programmes.

Just ask people like Bwambale: they want employment, not entrepreneurship.

Related Posts:

The Employment Revolution: How BBOXX’s Rural Shops are Fighting Youth Unemployment in Africa

Advertisements

2 responses to this post.

  1. […] « Why Entrepreneurship is Overrated as a Solution to Poverty […]

    Reply

  2. I live in the country neighboring Uganda, Kenya, and I do not agree with your premise.
    ***
    1. The successful entrepreneurs are the ones that pushed unemployment rates in Germany and Japan down. So people now benefit from the consequence. Like Kenya now having a second brewer of alcohol (Keroche Breweries).
    ***
    2. The reason poor people say they do not want it is because of the environment of the country. The richest people are tied to the political class. There is no value creation/wealth creation. Wealth is seen in a way that it can only be stolen. That is why these countries still export vegetables and other primary products. That is why there’s so much desperate corruption.
    ***
    3. Entrepreneurship is still looked down upon in Africa. It’s a cultural thing, same with the creative arts, and it emanates from the type of education instituted in colonial times. Opening a business is seen as plan B. It is seen as fallback for failing to gain employment.
    ***
    4. Entrepreneurship is the “natural selection” that promotes innovation. Innovation makes life better for everyone. It’s a great tool to fight poverty.

    Reply

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: