VULNERABILITY AND ENTREPRENEURSHIP

Written by Wim Naudé (MSc Quantitive Development Economics, 1990-1991)

Entrepreneurship is a positive concept, conjuring ideas of progress, growth and development - and rightly so. However, incentives produced by society can often make a more corrupt route to success more appealing. Wim Naude from the World Institute for Development Economics Research (at the United Nations University, Finland), has been investigating the role of entrepreneurship in global development, and the relationship between vulnerability and entrepreneurial behaviour.

Twenty years ago - when I first arrived at Warwick as an eager development economics (MSc) student from South Africa – the world was quite an optimistic place. The Berlin Wall had just fallen and the Cold War was coming to an end, Nelson Mandela stepped as a free man from prison, the UN adopted the Human Development Index, the Hubble telescope opened up a wonderful view on the universe, and the three tenors sang for the first time. The future seemed bright. But then the great unraveling started. Both human-made and natural disasters struck. Between October 1989 and the present at least thirteen financial crises with global repercussions struck. Natural disasters also seemed to be on the increase: around 1990 natural disasters caused around US $50 million in damages – by 2005 this had risen to over US $200 million, with the number of reported natural disasters almost doubling between 1990 and 2000. Food and energy prices embarked on a seemingly unstoppable upward trajectory – between 1990 and 2008 the Food and Agricultural Organization’s (FAOs) food price index doubled and UNCTAD’s index of crude petroleum prices skyrocketed by around 400 per cent between 1990 and 2008. At the same time the threat of climate change rose to become one of the bywords of the age. And initial hopes that civil conflicts in Africa, the world’s poorest continent, would come to an end after the Cold War was dashed by the persistence and escalation of conflicts in places such as the Democratic Republic of Congo (DRC), Sudan, Ethiopia/Eritrea, Zimbabwe and others.

Today, the fundamental challenge facing development economists is to find a way in which policy makers, development institutions, aid agencies and other economic actors can address the aspirations of more than a billion people who subsists on less than a dollar (US $1.25) per day against the backdrop of a world seemingly more prone to crises, and more vulnerable than ever.

Entrepreneurs are in the wide public view seen as unambiguously good for economic development.

At the World Institute for Development Economics Research (WIDER) I have been particularly concerned to better understand the nature of household vulnerability, state fragility, the role of entrepreneurship in global development, and the interrelationships between vulnerability, state fragility and entrepreneurial behaviour. A number of recent publications emanating from WIDER's research on these aspects have recently seen the light and in the remainder of this article I will share some of the core findings, conclusions and recommendations contained in these.

Let me begin with entrepreneurship – perhaps because soon (2011) it will be the 100th anniversary of the publication of Joseph Schumpeter’s magnum opus ‘The Theory of Economic Development’, wherein he firmly placed entrepreneurship centre stage in development and started the scientific study of entrepreneurs. Entrepreneurs, generally defined as individuals who spot and utilize opportunities for the creation of goods and services, often through creation of a new firm, are in the wide public view seen as unambiguously good for economic development. Indeed, lack of economic development is often equated with lack of entrepreneurship. Governments and development organisations spend huge amounts of money annually trying to support new firm start-ups.

Reality is not so straightforward. Yes, entrepreneurs, especially through innovation and trade certainly have brought about incredible progress. Without entrepreneurs demanding highly skilled labour to compete with others in pushing out the world’s technological frontier, there would be little incentive for anyone to attend University. Unfortunately, entrepreneurs are not always productively contributing to growth and development. Many engage in unproductive and even destructive activities. They can contribute to, even cause global crises, and many entrepreneurs are especially harmed by global crises. Understanding the relationship between entrepreneurs, the incentives they face, and global crises and vulnerability is therefore important if the world is to somehow find it way back to the optimism of 1990.

Understanding the relationship between entrepreneurs and global crises and vulnerability is therefore important if the world is to somehow find it way back to the optimism of 1990.

‘Incentive’ is perhaps economists’ favourite word. We are all motivated in various ways, minor and major, in our choice of actions. On a broad societal level some economists have referred to the ‘reward structure of society’ to discuss the incentives individuals face. In the context of entrepreneurship, the crucial question to ask is what occupational choices do those individuals with the best entrepreneurial ability make? Do they become productive entrepreneurs, starting up a new firm, employing other people and adding value to the economy? Or do they prefer to engage in rent-seeking, corruption and even illegal activities – capturing governments, exploiting natural resources, dealing in drug, human and weapons trafficking? In many societies the incentives (reward structure of society) is such that the ‘best and the brightest’ choose the latter route – it is often far easier becoming a predator and expropriating what someone else has produced rather than produce something new.

Let me share a few examples of this thinking applied to some of the recent crises mentioned earlier. There is now substantial agreement that the global financial crises of 2008-2009 was largely due to a perverse incentive structure that favoured predatory lending, excessive risk-taking, and non-productive (‘financial’) innovation that caused asset-price bubbles. This perverse incentive structure is reflected in the extent of regulatory capture that has occurred in the USA (which lead to poor supervision, deregulation and bail-outs of banks) and the rising relative remuneration in the financial services sector. Despite the crisis many USA banks enjoyed greater profits and rising market shares.

Consider secondly, continued violent civil conflict in many African countries. There is now also substantial agreement that such wars are the result of both ‘grievance’ as well as ‘greed’ – with the latter perhaps playing the dominant role and fuelling the former. This is due to the fact that conflict is often fuelled by access to abundant lootable natural resources. Entrepreneurs play a vital role in benefiting from and contributing to such conflicts. As John Prendergast wrote in the Foreign Policy Magazine (26 February 2010) ‘Congo’s conflict, the world’s deadliest since World War II, is not really a war – it’s a business based on violent extortion….millions of dollars are made monthly…the spoils are tin, tungsten, tantalum, and gold, minerals that go into laptops, cell phones, MP3 players, and jewellery stores in the West’.

And what about natural disasters? Certainly we do not see entrepreneurs as causing natural disasters, but natural disasters can often be avoided – it often is not, because of perverse incentives at work. For instance drought, the most common natural disaster in Africa, often result in food insecurity because global and local incentives are stacked against the African farmer, perhaps one of the world’s toughest entrepreneurs. And earthquakes do not have to kill people in such large numbers as they have (for instance in Haiti on 12 January 2010 when more than 200,000 people died) if proper building codes and regulations can be instituted and followed. Finally in addressing the climate change challenge the world will have to contend with the fact that incentives are perhaps overwhelmingly aligned in favour of accelerated carbon emissions by newly emerging and developing countries whose peoples aspire to Western lifestyles. The market for carbon-intensive goods and cheaper carbon-based energy in the rising developing countries is huge, and tempting.

So what should be done? Clearly incentive re-alignment on many global scales are necessary. This will require institutional reform, and allowance and support for institutional entrepreneurs to play an increased role in crafting new and better institutions (it is a task not well understood by social scientists). Productive, and innovative entrepreneurship has become perhaps more important than ever.

Wim Naudé is senior research fellow and project director at the World Institute for Development Economics Research of the United Nations University, based in Helsinki, Finland. He obtains the M.Sc in quantitative development economics from the University of Warwick in 1991 – first class. He joins the University of Oxford as lecturer, and research officer at the Centre for the Study of African Economies. Between 1998 and 2006 he is professor of economics and director of research at North-West University in South Africa. In 2005 the South African Minister of Finance appoints him to the council of Statistics South Africa. In 2007 he joins the United Nations University. Wim has published widely on development economics and entrepreneurship, and according to IDEAS/Repec he is ranked amongst the top 5 % of authors in economics and amongst the top 10 economists in Finland. He has edited a book on Entrepreneurship and Economic Development that will be published in 2010 by Palgrave Macmillan, and co-edited books on Innovation, Entrepreneurship and Development, and on Small Island Developing States, that will be published in late 2010/early 2011 by respectively Oxford University Press and Routledge. He lives in Espoo, Finland with his wife and four sons.

Further reading:

Naudé, W.A., A.U. Santos-Paulino and M. McGillivray, and, eds. (2009). Vulnerability in Developing Countries. Tokyo and New York: UNU Press. 292 p.
Naudé, W.A. ed. (2010) Entrepreneurship and Economic Development. Basingstoke: Palgrave MacMillan, forthcoming.