Academic journal article Independent Review

Entrepreneurship and Growth: A Latin American Paradox?

Academic journal article Independent Review

Entrepreneurship and Growth: A Latin American Paradox?

Article excerpt

In recent Latin American history, economists have advanced many different recipes to promote the region's economic growth. Given these differences of professional opinion and the region's on-again, off-again development, populism and political instability have been frequent responses to economic setbacks in many countries.

That economic growth continues to be discussed as a mystery seems, in any case, surprising to us. A convincing argument can be made that economic growth is intimately related to the development of productive entrepreneurial activities in the context of an appropriate institutional setup. Historical evidence shows that the great improvements in standards of living achieved during the past two centuries have been associated with the development of personal resourcefulness and ingenuity under a system of private-property fights and contractual liberty (Landes 1999; Baumol 2002). To be sure, entrepreneurship may take various forms, and certain forms are antithetical to economic growth, so we must bear this fact in mind as we develop our arguments here.

In this article, we examine the evolution of entrepreneurship in Latin America as presented in the Global Entrepreneurship Monitor (GEM) studies. These studies present a key set of internationally comparable statistics on entrepreneurship, which have supplied the data for important studies of the role and determinants of entrepreneurship. Here we propose another study along these lines, relating changes in entrepreneurship to changes in economic performance. We obtain an apparently paradoxical result: Latin America has high levels of entrepreneurship, but relatively modest rates of economic growth. Is it possible that, after all, entrepreneurship does not matter much for economic growth? Or is Latin America somehow immune to the beneficial effects of entrepreneurship? We attempt to explain this apparent puzzle.

Economic Growth and Entrepreneurship

Economic growth has been studied extensively over the years. In a highly influential contribution to economic theory, Robert Solow (1956) identified technological progress as the key to a process of sustained growth. Yet Solow's neoclassical growth model, however useful it might have been in accounting exercises related to the sources of sustained growth, failed to explain the causes of such growth.

Developments in the field of endogenous growth theory may be seen as attempts to deal with this fundamental problem. The point of departure for these developments was the fact that the neoclassical model explained growth by relying on an exogenous factor, technological progress, which was not explicitly modeled. Endogenous-growth theorists took into consideration that agents can make conscious decisions to invest in technology, whether in the form of physical innovations, new knowledge, or specialized human capital. (1) Moreover, to the extent that these investments take forms with increasing returns to scale, they serve as a mechanism for attaining a process of sustained economic growth (Romer 1986, 1990; Lucas 1988).

More recently, attention in the literature has focused on the role that institutions play in upholding responsible economic policies, respecting the principles of private property and contract, and hence promoting economic growth. Institutions determine the structure of incentives in the economy. William Easterly (2001) has been especially effective in arguing that because people respond to incentives, when a nation's incentive structure is not set up correctly, the agents who interact under those rules may not find it advantageous to undertake growth-enhancing activities. In modern times, these ideas owe a great deal to Douglass North's (1990) work. Today, economists and professionals in the field of development economics widely appreciate these observations on the relationship between institutional design and economic performance (see Acemoglu, Johnson, and Robinson 2005). …

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