Reluctant Entrepreneurs | Poor Economics
Chapter 9
Reluctant Entrepreneurs

Are there really a billion barefoot entrepreneurs, as the leaders of MFIs and the socially-minded business gurus seem to believe? Or is it just an optical illusion, stemming from a confusion about what we call an "entrepreneur"? There are more than a billion people who run their own farm or business, but most of them do this because they have no other options. 

Read more below »
Many expect that the poor will find successful business opportunities. They haven't been given a chance, so their ideas are fresher: MFIs have many examples of successful clients, like a garbage collector turned recycling empress!
The sheer number of business owners among the poor is impressive.
When tiny grants were made to small businesses in Sri Lanka, their profits increased rapidly.
However, while many of the poor operate businesses, most of these businesses are tiny.
The businesses of the poor tend to have few if any employees and very limited assets.
The businesses run by the poor are also generally unprofitable, which may well explain why giving them a loan to start a new business does not lead to a drastic improvement in their welfare.
Many business suffer from the "empty shelf" problem: a space a created for a shop, but no inventory fills the shelves. Even a small investment in more inventory will have large marginal returns, but once the shelves are full, the business has no further scope to grow.
Despite initial large returns to small investments, many small businesses hit at point at which a substantial capital investment is needed in order to continue growing. However, few people are willing to give such large loans to the poor.
Because of this trap, the poor may not invest as much (both money but also emotions and intellectual energy) into their businesses because they know that their business will always remain too small to make real money.
Often, the enterprises of the poor seem more a way to buy a job when more conventional employment opportunities are not available than a reflection of a particular entrepreneurial urge.
One of the most common dreams of the poor is that their children become government workers - a stable, though not always exciting, job.
A sense of stability may be necessary for people to be able to take the long view. People who don’t envision substantial improvements to their future quality of life may stop trying and end up staying where they are.
Creating good jobs could go a long way in increasing the stability of the lives of the poor, which will, in turn give the poor the opportunity and the urge to invest in their children and save more.
There are more than a billion people who survive off of the earnings of their own farm or business. We must be impressed by their resilience. But these small businesses will probably not pave the way for a massive exit from poverty.

Entrepreneurship studies

Javascript is required to view this map.

Reluctant Entrepreneurs

Are there really a billion barefoot entrepreneurs, as the leaders of MFIs and the socially-minded business gurus seem to believe? Or is it just an optical illusion, stemming from a confusion about what we call an "entrepreneur"? There are more than a billion people who run their own farm or business, but most of them do this because they have no other options. 

Alternate Title: 
Extended Body: 

Are there really a billion barefoot entrepreneurs, as the leaders of MFIs and the socially-minded business gurus seem to believe? Or is it just an optical illusion, stemming from a confusion about what we call an "entrepreneur"? There are more than a billion people who run their own farm or business, but most of them do this because they have no other options.

Microcredit and other ways to help tiny businesses have an important role to play in the lives of the poor, because these tiny businesses will remain, perhaps for the foreseeable future, the only way many of the poor can manage to survive. But we are kidding ourselves if we think that these businesses can pave the way for a mass exit from poverty. 
 

Spotlight

Alejandro Drexler, Greg Fischer, Antoinette Schoar / Dominican Republic / 2010

From the abstract: "Two randomized trials test the impact of financial training on firm-level and individual outcomes for microentrepreneurs in the Dominican Republic. We find no significant effect from a standard, fundamentals-based accounting training. However, a simplified, rule-of-thumb training produced significant and economically meaningful improvements in business practices and outcomes."

Are there really a billion barefoot entrepreneurs, as the leaders of MFIs and the socially-minded business gurus seem to believe? Or is it just an optical illusion, stemming from a confusion about what we call an "entrepreneur"? There are more than a billion people who run their own farm or business, but most of them do this because they have no other options.

Microcredit and other ways to help tiny businesses have an important role to play in the lives of the poor, because these tiny businesses will remain, perhaps for the foreseeable future, the only way many of the poor can manage to survive. But we are kidding ourselves if we think that these businesses can pave the way for a mass exit from poverty. 
 

Spotlight

Alejandro Drexler, Greg Fischer, Antoinette Schoar / Dominican Republic / 2010

From the abstract: "Two randomized trials test the impact of financial training on firm-level and individual outcomes for microentrepreneurs in the Dominican Republic. We find no significant effect from a standard, fundamentals-based accounting training. However, a simplified, rule-of-thumb training produced significant and economically meaningful improvements in business practices and outcomes."