Wednesday, March 15, 2006

Developing Nations: "Entrepreneurship in Africa"

Entrepreneurship in Africa: Thinking Outside the Aid Agency Perspective


The plight of the developing world, specifically the African continent, has been of particular concern for social scientists and economists alike. In general the substance of the debate has been whether or not the various aid agencies and lending institutions — the IMF and World Bank — are fulfilling their role in the developing world or making that region worse. Although discussing whether the IMF is good or bad, or whether aid should be increased or decreased are relevant questions to social scientists, they are outside of the purview of this paper. These debates have overwhelmingly focused on macroeconomic factors for development and growth and ignored relevant microeconomic factors, like the role of small businesses and entrepreneurs in developing countries. As Hernando De Soto has argued, some have viewed solving the growth problem as akin to “baking a cake,” add a little capital, some technology, and education and one can have a strong economy (De Soto and Litan 2001: 251). Obviously the problem is not that simple to solve, and as I suggest, the success or failure of African economies might depend on entrepreneurs and an “entrepreneurial spirit”. This essay will highlight the relevant debates on the IMF, World Bank and aid agencies, proceed to explain the importance of the entrepreneur in capitalist systems, and lastly, place the entrepreneur in the context of the African case.

IMF, the World Bank, and Aid

Devesh Kapur argued that “if the IMF had a dollar for every criticism of its purpose…it would perhaps never again have to approach its shareholders for more money to sustain its operations” (Kapur 1998: 54). The purpose of the IMF, the first pillar of the Breton Woods system, was to promote exchange rate stability and global cooperation and act as a “lender of last resort” for countries in financial crisis. But for its critics, the IMF overburdened poor countries with unfettered financial markets and placed too much pressure on debtor countries to solve their economic problems. Moreover, while the IMF spoke of the benefits of democratic government, they felt threatened by regimes with too much self-rule (Kapur 1998: 57, 59). On the other hand, supporters of the IMF argue that IMF debtor countries seek assistance voluntarily, and blaming all the problems of debtor countries on the IMF – like for example budget constraints — would be “like blaming the fund for gravity” (Rogoff 2002: 42).

The World Bank and various other aid agencies have had similar polarizing affects on pundits and scholars. The World Bank, the second pillar of the Breton Woods system, was responsible for longer-term loans to developing nations as well as providing developmental aid to build up infrastructural, educational and medical capabilities in the societies. Critics like William Easterly claim that foreign aid agencies like the World Bank create a “cartel of good intentions,” whereby the “aid” gets trapped in webs of bureaucracy and never finds its way to the people who need it most (Easterly 2003: 1). Rather, the aid agencies focus on volume — the amount of aid given — and neglect actual economic development (Easterly 2003: 6). For Jeffrey Sachs, volume does matter however, and economic powers like the United States are not doing their part to assist the developing world. Contrary to popular belief only a small amount of the United States budget is apportioned for development aid. Even more surprising is that the estimated 16 billion in aid given contributed very little to the long-term goals of development in the global south (Sachs 2005: 80).

Whether the IMF or the World Bank is the villain or the victim is out of the scope of this paper, but these arguments do illuminate the nature of the debate in the contemporary literature. Rather than focus on certain domestic attributes of the various developing nations, the aid agency debates addressed the theoretical concepts of neoliberalism and the macroeconomic agendas of the agencies. The onus for development shifted from domestic polities to the agencies, and growth became, as De Soto suggested, like “baking a cake.” These perspectives treated the developing world as a monolith also, not highlighting why some countries succeeded (like Botswana) and other countries (like the Democratic Republic of Congo) failed. Sachs has argued that some societies view their economic dominance as a reflection of their cultural or institutional superiority, “rather than as an accident of timing or geography” (Sachs 2005: 4). While Sachs suggestion seems not only intellectually and analytically problematic, as though people play no role in their own development, it typifies a hopelessness about the domestic goings-on of the Third World and implies that only with more external influence countries can get back on track. The second part of this essay will address these concerns and suggest some venues for future research.

Entrepreneurship: Critical for Capitalism

One of the other surprising aspects of the aid agency debates is the absence of any discussion of business or entrepreneurship as contributing to economic growth. Historically, the literature on capitalism and free-market economies has placed entrepreneurs at the center of those systems. For Joseph Schumpeter, the entrepreneur is the lifeblood of a free-market system. The entrepreneur was responsible for revolutionizing “the pattern of production by exploiting an invention…an untried technological possibility for producing a new commodity or [for] producing an old one in a new way” (Schumpeter 1950: 132). Schumpeter’s fear in the 1950s was that without these talented, risk-taking entrepreneurs, the walls of capitalism would crumble and give way to socialism of a “very sober type.” (Schumpeter 1950: 130). Although Schumpeter’s fears were not realized in most of the world, his emphasis on the importance of the entrepreneur would be one of the definitive legacies of his work. Another scholar, economic historian Alexander Gerschenkron, believed that the “entrepreneurial spirit” was critical to development among industrializers. In Gerschenkron’s analysis of Italy and Germany, entrepreneurial guidance was pertinent for growth and development (Gerschenkron 1970: 88). In Germany private investors like the Rothschild’s helped to finance large-scale industrial projects like railroadization and industrialization (Gerschenkron 1962: 13).

The role of entrepreneurs was important for the development of the Western economic powers, and many economists and social scientists have recognized this. The role of entrepreneurs in the developing world, places like Africa, however, has been understudied. My analysis will engage several African states — Botswana, Ghana, Kenya and the Democratic Republic of Congo — to show the variation among different states and also demonstrate the trials that entrepreneurs and small business owners face in Africa. Moreover, I hope to show that economic growth is more than just an external problem, and that the decisions of domestic actors matter also.

Entrepreneurship in Africa: Signs for Hope or Despair?

In the United States and other Western countries, many of the best students leave business schools and pursue jobs in the private sector, where both money and prestige await them. Interestingly, in African states the money and prestige lay in government and bureaucratic work, and entrepreneurs and small businessmen join the private sector with a great deal of reluctance (Enwegbra 2002: 1). The entrepreneurial class that developed in Africa very much represented aspects of the informal sector that cropped up throughout the post-colonial continent. The informal sector, by its very name, ran opposite to the ruling class, accomplishing tasks like fixing potholes without help or sanction from the government. These second economies, as they are sometimes referred, have long histories in some countries in Africa where citizens had to fend for themselves to address their basic needs.[1] De Soto and Robert Litan’s work on Peru highlights the widespread presence of informal sector arrangements in developing nations throughout the world. Those who accept informal arrangements do so not because they are principally opposed to the regime in power, argues De Soto and Litan, but because citizens make a rational decision to forego certain benefits in favor of what works, formal or not (De Soto and Litan 2001: 252).

Informal sectors were particularly important in Kenya, Botswana, Ghana and the Democratic Republic of Congo (DRC) in providing services and goods to people. In Kenya, the informal sector was seen as a key provider of jobs for Kenyans and critical in Kenya’s effort to industrialize (Bosire and Gamba 2003: 1). Botswana had a long history of indigenous trade networks that lasted through the colonial era and were in many ways more successful than European trade networks in infiltrating markets like cattle (Silitshea 1980: 151). Ghana’s informal sector, it has been argued, developed completely parallel to Ghana’s financial crisis in 1980s. Whereas the informal sector was non-existent in 1965, the sector contributed as much as 36-percent of GDP in 1982 (Hutchful 2002: 32). In the DRC, Janet Macgaffey argues, informal sector activities occur so frequently that it directly challenges the power of the state as it has played out in economic and social science literature (Macgaffey 1987: 24).

The talents that bode well for entrepreneurship — risk-taking, ingenuity, hard work — were not absent from African culture and society and can be seen in some ways as a product of these informal arrangements. Thus, states where informal sectors were robust are also states that have been witness to the proliferation of entrepreneurs and small business owners. Technology specialist Hermann Cinrey-Hesse of Ghana started his software company with basically no money in 1988 and by 2000 he was the principal owner of the largest software company in Ghana (Lagace 2000: 1). Botswana, the African state with the largest growing economy, has given way to a more active entrepreneurial effort over the last five years (Selolwane 2002: 14). Moreover, there is a plethora of anecdotal evidence about the successes of the entrepreneurial class, from South Africa to Zimbabwe (See Donald S. Fick 1999).

It is the failures of entrepreneurs, however, in each of these African states that has given some pause for concern. In Kenya, researchers found that despite the outgrowth of an entrepreneurial class, business owners lacked certain management skills and capabilities that severely hindered businesses (Bosire and Gamba 2003: 17). For example, rather than hiring employees who are most adequately trained for a given position, entrepreneurs were more willing to hand down a business to an inadequately trained family member (Enwegbra 2002: 1). Ghanian entrepreneurs felt as though the institutions of government and political leaders were generally antagonistic to their efforts. In surveys of 437 Ghanian businessmen, an overwhelming majority believed that laws concerning business were either inconsistent or not explicit (Amponsah 2000: 19). Ghanian entrepreneurs also operated under conditions where property rights, the hallmark of a free-market, capitalist system, were not respected. When property rights finally were recognized, business investment increased throughout the country (De Soto and Litan 2001: 263). In Botswana, obtaining the proper licenses was a bureaucratic ordeal and businesspersons had to operate within an inordinate amount of regulations (Silitshena 1980: 156). Lastly, the DRC had a particularly parasitic relationship with private business entrepreneurs, allowing some entrepreneurs limited ability to acquire wealth before pillaging and plundering it for themselves (Macgaffey 1987: 16). To this day, the DRC is one of the poorest, and most repressive, countries in the world.

Conclusions and Future Research Implications

The problem that exists for entrepreneurs is an obvious one, but a problem that is largely ignored with all of the attention paid to external aid agencies. Although there are signs of hope for small business in Africa, the reasons many avoided the formal sector to begin with are all too apparent when entrepreneurs try to make their businesses proper and legal. Too often state elites view private entrepreneurs as a rival political class that is to be viewed with suspicion. But if the state cares about economic growth, they must understand as Schumpeter and Gerschenkron did, that entrepreneurs were essential to a strong capitalist, free-market system. Of course, entrepreneurs are not the only factor that contributes to economic growth. Relevant economic factors like stable global markets, political factors like stable regimes, and other factors like health and education play their part for a proper functioning economy. Indeed, the survival of the entrepreneur depends on the success of other economic, political and social sectors.

This essay has hopefully been a call for a more thoroughgoing and systematic explanation to determine the importance of the entrepreneur in the developing world. Most of the research used in this study was compiled from journals on economics, history and oddly enough, social psychology. Political science has unfortunately avoided this important topic in favor of more structural and macroeconomic explanations. I can think of two reasons for this lapse. First, the time and effort it would take to conduct field research on entrepreneurs in some of the most remote and dangerous parts of the world would be hard to accomplish. The task would not be so simple as to look up World Bank statistics and indices, but require rolling up the sleeves and immersing oneself in the everyday goings-on of the entrepreneurial class.[2] Second, political science as a discipline is hesitant to propagate so-called Horatio Alger “myths”. In other words, celebrating the entrepreneur as one who “pulls himself up by the bootstraps,” ignores the big economic picture and sets an unrealistic standard that everyone has the equal opportunity to amass wealth. Hopefully those that endeavor to understand the role of the entrepreneur in the developing world are sensitive to this critique, and do not lay the burden for economic growth solely at businessperson’s hands. Nevertheless, we must realize the potential role they do play in not only creating growth but sustaining it.

[1] Second economies are of course not alien to other parts of the world. The former Soviet Union developed quite a robust second economy in the 1980s.

[2] I can think of James Scott’s work on peasant classes in Southeast Asia as an example of this kind of fieldwork.

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