Entrepreneurship and “magical thinking” about poverty reduction
Two economists who have spent their careers focused on understanding and fighting poverty, Abhijit Banerjee and Esther Duflo, recently published an excerpt from their book Good Economics for Hard Times in Foreign Affairs magazine entitled “How Poverty Ends: The Many Paths to Progress—and Why They Might Not Continue”. In it, they argue that no one really knows what causes countries to achieve high economic growth. All that can be said with certainty is that good healthcare, education, infrastructure, as well as functioning public and private institutions, are pre-requisites for growth.
Banerjee and Duflo are very smart economists; after all, they won the 2019 Nobel Prize. But the striking thing about their article is what is omitted: any reference to politics. Economists avoid it like the plague, possibly because they do not understand it, and probably because they do not know how to fit it into their econometric models.
But politics cannot simply be assumed away just because it is inconvenient. What causes a government to be good (or bad) at delivering healthcare and education and building infrastructure? Politics. What causes government to ensure that courts and administrative services function well (or poorly)? Politics. What ensures that the gains from economic growth do not (or do) accrue to the people who are already the wealthiest in society? Politics.
For example, in their article Banerjee and Duflo express concern that “many countries have interpreted the prescription to be business friendly as a license to enact all kinds of anti-poor, pro-rich policies, such as tax cuts for the rich and bailouts for corporations”. They write as if such policy choices are based on an honest interpretation (or misinterpretation) of economic theory.
In reality, what drives those decisions is politics.
In the same vein, multilateral and bilateral development agencies and the organizations that work with them often act as if politics does not exist when they devise their programs and projects. Starting in the 1970s, their efforts to address poverty have increasingly emphasized private sector development. They treat politics as something separate and remote from the private sector. And then they scratch their heads when they find that poverty does not change even if GDP growth accelerates.
What began as “micro-credit”, morphed into “microfinance”, and is now called “financial inclusion” is in many ways the showpiece for this approach: poverty and vulnerability can be addressed by giving people a loan (or other financial services) and letting them interact with “The Market”. And yet, time and again, the link between financial inclusion and reductions in poverty has been proven to be weak to non-existent.
Our recent research on successful women entrepreneurs in Vietnam and the Philippines presents evidence that individual effort can lead to transformative success. Based on those findings, it is tempting to conclude that small but effective changes that address psychological constraints and foster hard work and positive attitudes can alleviate the effects of poverty and social exclusion and create better economic and social opportunities in life for financial inclusion clients.
Underlying this concept is the belief that individuals can overcome poverty through their own efforts. In reality, unequal economic, social, and (ultimately) political power, as expressed through policies, institutions, and market transactions, create enormous structural barriers to systematically reducing poverty. Rarely do poverty reduction programs address this power imbalance, and in fact the “private sector-led, market-driven” model of economic development and poverty reduction simply assumes that these barriers do not exist.
For this reason, it may never be possible to stimulate the long-awaited entrepreneurial revolution broadly among financial inclusion clients. It is simplistic to conclude from our research that the missing ingredient to the long-awaited entrepreneurial revolution has been found––and can be taught.
However, that does not mean that enterprise development should no longer be one of the main goals of the financial inclusion community. Our research results suggest that interventions that address changing mindset, confidence in dealing with gender-based constraints, combined with introductions to role models/mentors and new business contacts, could have greater impact on women’s enterprise development than traditional business development paradigm and support.
For all its limitations and flaws, financial inclusion supports millions of successful entrepreneurs around the world. Rather than downplay the role financial inclusion can play in enterprise development, the industry should be seeking to learn from successful examples in order to make its impact in that area more systematic.
Read Banerjee and Duflo’s article “How Poverty Ends” here: