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Entrepreneurship key to escaping poverty

By Reuben Abraham, Special to CNN
January 23, 2012 -- Updated 1500 GMT (2300 HKT)
Indian women look at a display of sarees during the launch of a wedding collection at a mall in Hyderabad.
Indian women look at a display of sarees during the launch of a wedding collection at a mall in Hyderabad.
  • Asia's recent history shows entrepreneurship and business are key drivers of economic development
  • Promoting entrepreneurship will help generate growth and create jobs in emerging markets
  • Small and medium enterprises in developing countries face barriers to growth
  • Improving business environments in developing countries will open opportunities for western business

Editor's note: Professor Reuben Abraham is executive director of the Centre for Emerging Markets Solutions at the Indian School of Business in Hyderabad, India.

Hyderabad, India (CNN) -- Entrepreneurship and business are rarely accorded a serious place in discussions around drivers of economic development. A cursory look at the numbers makes this seem very surprising. China has pulled approximately 600 million people out of absolute poverty since Deng Xiaoping unleashed market reforms in the late 1970s. Never in human history have so many people been pulled out of grinding poverty is such a short span of time.

Similarly, South Korea has gone from a per-capita income of $291 in 1970 to $20,000 today. Even reform laggards like India have managed to pull a couple of hundred million people out of grinding poverty since economic reforms were initiated. Across the world, we find countries that created an entrepreneurship and business friendly environment were successful in reducing poverty drastically.

Despite the evidence, there are strong lobbies in emerging markets that make the claim that business friendly policies are anti-poor. Personally, I am in favor of redistribution, like these lobbies claim to be. However, what do you redistribute? One cannot, after all, redistribute poverty. One can only redistribute wealth, and to redistribute it, you have to create the wealth first.

And the only agent of society that can create wealth is business.

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One can argue whether private entrepreneurs or state-run businesses do a better job of creating wealth. I tend to favor entrepreneurs because they have better incentive systems for optimal resource allocation. Business is also sustainable without dependence on handouts and aid; and the discipline of the markets ensures that mistakes are rectified quickly. Clearly then, more needs to be done to promote entrepreneurship as an agent of economic development.

First though, we need to clarify the definition of entrepreneur in emerging markets, which has become confusing in recent times. In my mind, there are three kinds of entrepreneurs: The entrepreneur selling tea at a road side stall in India, owners of small and medium enterprises (SMEs), and the Steve Jobs/Bill Gates type of entrepreneur who builds massive businesses, creates enormous shareholder wealth and employs thousands of people. Any well-functioning society will try to eliminate the first kind and create an environment that fosters the other two, mostly because the first is survival disguised -- and often misdiagnosed -- as entrepreneurship.

In countries like Germany and Switzerland, SMEs create over 90% of all employment...By contrast, SMEs in India account for just about 10% of formal-sector job creation.
Reuben Aradham, Professor

If you speak to the "survival" entrepreneur, all he or she usually wants is a full-time, formal sector job with fixed income and benefits -- not variable, high-risk entrepreneurship. Therefore, it becomes important to focus on SMEs and high-impact entrepreneurs, since they constitute the formal sector. An expansion of the formal sector not only generates growth within an economy, but also provides viable job opportunities for survival entrepreneurs.

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SMEs are not glamorous, and neither do they jump to mind when one thinks of entrepreneurship. The numbers however reveal their crucial importance. In countries like Germany and Switzerland, SMEs create over 90% of all employment, while in the U.S. they create over 85% of all jobs. By contrast, SMEs in India account for just about 10% of formal-sector job creation. If one probes further, we find that the barriers to entrepreneurship fall into five broad categories, though some of these apply more to SMEs than the more sophisticated, high-impact entrepreneur:

• Governments remain a major stumbling block to entrepreneurship. A cursory look at the World Bank's ease of doing business index reveals that some of the poorest countries in the world are also some of the most business unfriendly countries, while some of the richest rate as business friendly. Examples of these hurdles include exit and entry barriers for entrepreneurs, and onerous labor laws.

• Early stage entrepreneurs in developing countries have a very hard time raising money of any sort. The problem is exacerbated in non-tech industries, and in early rounds of financing. Even in countries like India with a reasonably good venture capital environment, the scarcity of early stage capital remains a major roadblock.

• Entrepreneurs, even half-successful ones, have a very hard time accessing distant (most likely high-margin) markets.

• Early-stage entrepreneurs in developing countries lack access to the best technologies, best practices and knowledge networks.

• Finally, entrepreneurial ventures have a hard time attracting high quality talent, across the board.

In the next couple of decades, two sets of transformations will most likely occur. Developing countries need to, and most likely will, understand the importance of business and entrepreneurship to their continued development. Improved rankings in the ease of doing business index will become a key international metric to aim for. Moreover, subsequent wealth creation will obviate the need for handouts from developed countries.

At the same time, business friendliness in developing countries opens new markets for western business and capital, especially at a time when their domestic markets are not in great shape. Helping these countries deal with the barriers mentioned above can be very profitable for western countries; provision of capital is a great example.

At the same time, the aid establishment can continue to play an influential role if it changes gears from being primarily a source of hand-outs, to helping developing countries build strong institutions that will assist them in overcoming barriers and creating an entrepreneur-friendly environment.

After all, every inefficiency -- and there are many -- in an emerging economy is an opportunity lying in wait for the right entrepreneur.

The opinions expressed in this commentary are solely those of Reuben Abraham

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