Academic journal article The Cato Journal

The Plight of Underdeveloped Countries

Academic journal article The Cato Journal

The Plight of Underdeveloped Countries

Article excerpt

The question of the wealth of nations has been at the center of economics for more than two centuries. There is now increasing focus, both in academic and policy realms, on the entrepreneur as the driver of economic growth. For policymakers, the focus on entrepreneurship has been a recent phenomenon. In 1998, the OECD launched a program, "Fostering Entrepreneurship," to better understand the role of entrepreneurs in the economy at large. Governments throughout the world have launched various initiatives designed to promote entrepreneurship and economic growth (Reynolds, Hay, and Camp 1999). The importance of the entrepreneur in economic development has also been realized by the key international aid organizations. The World Bank, the U.S. Agency for International Development (USAID), and the International Monetary Fund (IMF) have all commissioned studies and undertaken initiatives to understand and promote entrepreneurship.

Although many articles in the academic literature recognize the importance of the entrepreneur (e.g, Kirzner 1973; Left 1979; Baumol 1990, 2002), this topic has not received the widespread attention that it deserves. This lack of focus results primarily from the fact that it is difficult to formally model entrepreneurial behavior. The entrepreneur has been characterized as an innovator (Schumpeter 1950, 1961), an arbitrageur (Kirzner 1973), one who bets on ideas (Brenner 1985, Mokyr 1990), and as a forecaster and capitalist (Rothbard 1963). Each of these interconnected elements undoubtedly plays an important role in the notion of entrepreneurship. However, for the purpose of our analysis, we are most interested in understanding entrepreneurship as alertness to and the seizing of profit opportunities.

It is typically assumed that a lack of economic growth means that there is a shortage of entrepreneurs and, more generally, "entrepreneurial spirit." This view, however, overlooks the essence of entrepreneurial alertness. Understanding alertness to profit opportunities as the central tenet of entrepreneurship makes clear that a lack of progress results from a lack of profit opportunities tied to activities that yield economic growth--not from a lack of entrepreneurial activity. Although it is usual to think that the existence of profit opportunities necessarily leads to economic growth, this may not be the case. Different institutional contexts create higher payoffs to differing sets of activities that may possibly lead to economic growth but may also lead to economic stagnation or even retrogression. In short, profitability is not synonymous with positive economic growth. Instead, what is important is the type of activity that yields profit opportunities to alert entrepreneurs.

Our core thesis is as follows: Institutionally dependent payoffs determine the direction of entrepreneurial alertness and efforts. In order to understand the plight of developing countries, it is critical to understand that it is not a lack of entrepreneurship that is the problem, but rather the institutional context directing entrepreneurial activities toward perverse ends. Specifically, some institutional regimes channel entrepreneurial activity into economically destructive avenues, while other frameworks direct this activity in a way that creates wealth.

We distinguish between productive, unproductive, and evasive entrepreneurship. After exploring this distinction, we present a general framework for considering the key institutions that constitute the social order. Original evidence from fieldwork in Romania is provided to support our claims. (1) We conclude with some general policy guidelines regarding entrepreneurship, institutional regimes, and economic growth.

Entrepreneurship: Productive, Unproductive, and Evasive

Entrepreneurs are present in every country and every cultural setting. We observe different outcomes from entrepreneurial activities because activities yielding the highest payoffs vary across societies. …

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