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Abhijit Banerjee and Esther Duflo, co-founders of the Jameel Poverty Action Lab and co-authors of the recent book Poor Economics are at the heart of the movement to seek rigorous evidence about the lives of the poor and programs that aim to help them. As they write in Poor Economics, they believe that “we have to abandon the habit of reducing the poor to cartoon characters and take the time to really understand their lives, in all their complexity and richness.”

Recently I had the opportunity to sit down with Banerjee and Duflo for an extended conversation about the small and big pictures that emerge from their research, their critics and their plan to change the world. In fact, the conversation was so extended that I’ve had to break it up into pieces. We’ll be publishing it in four parts over the next few weeks—the full interview will be available soon via Amazon Kindle.

In Part 1, we discuss poverty, microenterprises, franchising and labor markets. You can find Part 2 here and Part 3 here.

Tim Ogden: For a long time I’ve felt there’s been a missing conversation between people looking at poverty and entrepreneurship in the developing world and people looking at poverty and entrepreneurship in the developed world. I find it particularly striking in terms of what we know about small-scale entrepreneurs—the local small business owner, the pizza shop, the strip mall gift store—in the US: they are low growth, low profitability and high failure rate enterprises. It seems none of that knowledge or research was applied when it came to microenterprises fueled by microcredit. Do you think about the implications of your research in developing countries for developed countries or look to evidence from developed countries to inform your work in developing countries?

Abhijit Banerjee: I think there is an important commonality and a very important difference. The biggest difference is that in places like the US where labor markets are strong, the incentive to go into entrepreneurship is very different from a setting where really there are no low end jobs, the low end jobs are missing. The reason why there are so many more people in the low-end entrepreneurial sector in developing countries has a lot to do with the labor markets in those countries. I think that’s an important difference where the people who become entrepreneurs in the US actually do it more often out of a desire either to be an entrepreneur or that for some particular reason they don’t want to be in the conventional labor market.

That’s the difference.

The commonality comes in exactly in the sector you described. The area of US entrepreneurship that has that flavor of a developing country are these recent-immigrant-run industries, undifferentiated and relatively low-tech businesses.

To use an example I know, imagine you come to the US because you are sponsored by your brother who is an engineer but you are 45 by the time your brother becomes a citizen and he sponsors you to come over. What are you going to do? You are not going to enter the labor market very easily. You probably also have teenage children who will have an equally hard time entering the labor market. That generates a classic labor availability driven entry into business.

That particular end of the entrepreneurship market is very similar to that in developing countries which is very family labor driven. But I think the key in the conversation is the difference in the labor market. These are the people who are excluded from the traditional labor market.

Esther Duflo: I don’t think it’s true that there’s not much conversation. I think there is a lot of conversation and I think it’s a lot of the same people doing the research like Sendhil Mullainathan, Dean Karlan, I work in France. We work in Chile which is more like the US than India in many respects. There are a number of people who work in both types of environment with the same kind of method and the same type of approach to the problems.

I think there are two reasons why they have not talked about US entrepreneurship much.  One is a good reason the other is a bad reason. The good reason is what Abhijit said: at the end of the day the people who run a business here are not really poor.

When we are interested about the poor, which in France it doesn’t mean running a business, it means having no job whatsoever, it means dropping out of school at 16 with no skills. The research is focused on things like payday loans, not on entrepreneurship.

The bad reason is more what you are talking about. I think a lot of the discourse on entrepreneurship in the US is not centered on these guys. It’s centered on Facebook and Bill Gates who are extremely interesting people but aren’t representative.

I think this is changing. I see more graduate students who are interested in this idea of whether people are running business as a result of losing a job and those sort of questions. I don’t know whether it’s a real phenomenon or just looks like it, but it does seem to be something that people are starting to get interested in. Seeing graduate students taking note of these questions is a good sign for research to come.

TO: My interest in this question came particularly from Scott Shane’s book The Illusions of Entrepreneurship where he points out that the best predictor of a person starting a business is whether they have a drug record. People with a drug record can’t get jobs so they start a business.

[Editors Note: My statement is incorrect and was based on a misreading of Shane’s book. There is a full discussion below in the comments. Thanks to commenter TGGP for noting the error.]

AB: That fits very well with the labor market theory

TO: Another example that’s created a lot of hand-wringing is that female entrepreneurs on average are far less successful than male entrepreneurs. On average women entrepreneurs’ businesses don’t grow. But you dig a layer beneath the headlines and you find that a lot of women entrepreneurs don’t want to grow their businesses. They only want to work a few hours a week, that’s all they have time for and they need a lot of flexibility. Women like that are shut out of traditional labor markets so they start their own home-based business.

AB: I think that’s exactly right. That conceptual frame helps, the idea that labor markets are the driver of entrepreneurship. The reason why these things are different comes from the difference in labor markets, where they are similar is when there are commonalities in specific people’s access to labor markets.

ED: A difference which actually might be changing over time is the slightly more blurry line in the US between being an employee and being an entrepreneur in some cases. For instance, the woman who sells cosmetics [via Amway]. She’s an entrepreneur but there is a lot of support behind her so it’s not someone who is completely constrained by their own skills. They can get advice and support. Maybe they are more productive.

One interesting thing is that path might be opening in the developing world. It hasn’t changed yet but it might change. But with better communication in principle you can start your little business of data entry in the Philippines. We have a student who did her dissertation on a platform where you can post your job like Amazon’s Mechanical Turk and anyone can do it. Most of the sample is in the Philippines and India, but some of it is in the US too. You get some of the support of the platform, potentially that could change what it means to be an entrepreneur

TO: It changes the labor market, it could make the labor market in developing countries function better.

AB: The other point you made which is I think is extremely important is that there are a lot of these businesses in the US which don’t require a lot of skills. That’s part of the reason these businesses, like Dunkin Donuts, have been developed as franchises.

To a first approximation there is no franchising model in developing countries with one very important and very notable exception. That’s selling things for cell phones. It’s one place where you see all these cellular network operators have actually created a supply chain that goes down a long way. You couldn’t do it without some form of franchising to enforce standards for connection. That’s been tremendously successful. You have a lot of people entering that particular labor market and making a decent living because it’s a particularly high quality product which nevertheless needs a very local intermediary.

TO: The providers are delivering roughly similar franchising services and support. They’re saying, “Here’s the product, here’s the branding, here’s the banners. This is how you sell.”

AB: Right. It shows, I think, that franchising can work in a developing country context, it has just not happened as much. But it think this kind of franchising is an interesting example. And it’s striking that there is almost no other kind of franchising except in cell phones, which is everywhere.

Comments

TGGP

I asked Scott Shane about Tim Ogden’s claim regarding drug records. Shane said it was absurd, and that actually people with drug records seem to have a preference for different types of work (nor is it that powerful a predictor of entrepreneurship).
http://entitledtoanopinion.wordpress.com/2011/07/05/scott-shane-was-misquoted/

July 05, 2011
Editor

TGGP,

thanks for reading closely enough to catch my error. In fact there are two errors in my statement, with two different causes:

1) First I used the word “best” as a qualifier. In fact, as you note in your blog post, the source of Shane’s statistic in his book, a paper by Robert Fairlie (available here: http://bit.ly/pA9KH0 ) finds that dealing drugs as a youth is associated with an 11 to 21 percent increase in likelihood to start a business. That’s certainly a good predictor, far better of one than many people would assume, but by no means the “best”.

2) Second, upon seeing your comment I immediately went back and re-read the passage in question in Shane’s book. It turns out that cognitive biases intervened and I misread the passage in question.

Specifically, here’s the quotation from the book, p. 44: “Finally, people who dealt drugs as teenagers are between 11 and 21 percent more likely than other people to start their own businesses in adulthood. And their higher rate of self-employment isn’t the result of wealth accumulated dealing drugs, greater likelihood of having a criminal record, or lower wages.“

I read that second sentence as: And their higher rate of self-employment isn’t the result of wealth accumulated dealing drugs, [BUT] greater likelihood of having a criminal record, or lower wages.

My priors interfered with me absorbing what was really being said.

So thanks for helping me update those priors and catch an error in what I “know” that I never would have caught myself.

July 05, 2011
TGGP

To err is human, to acknowledge it is a step forward. I appreciate your responsiveness.

July 05, 2011
Barbara Magnoni

TO, thanks for this interesting interview. In reference to your comment: “On average women entrepreneurs’ businesses don’t grow. But you dig a layer beneath the headlines and you find that a lot of women entrepreneurs don’t want to grow their businesses. They only want to work a few hours a week, that’s all they have time for and they need a lot of flexibility. Women like that are shut out of traditional labor markets so they start their own home-based business. “

We worked on a study in LATAM on women entrepreneurs and didnt find this at all. In “A Business to Call her Own…http://www.iadb.org/document.cfm?id=35327678, we spoke to women throughout the region and found that it isn’t that they didn’t want to grow, but that they were severely constrained by the choice of sector they went into, their limited time, limited savings to use to make capital investments, low skill levels. If you have a business that is ‘hand to mouth’ you want it to grow. Maybe not to become a huge company, but to become sustainable and offer a decent living for your family.

I would be interested in any further substantiation on your comments. The issue of women and business is understudied, and is clearly linked to many of the issues posed in your interview.

Thanks!

Barbara Magnoni

July 12, 2011
Editor

Barbara,

thanks for the link.

I agree that most microentrepreneurs want their businesses to be self-sustaining and to generate cash flow (though their profitability seems to depend entirely on whether you account for the cost of family labor, see Poor Economics and David McKenzie on this). But there doesn’t seem to be much evidence that microentrepreneurs, women or men, aspire to grow their businesses to the scale that would have a societal impact or push a family into the middle class. When they do have access fresh capital, they don’t seem to invest much of it in their businesses. Surveys tend to indicate that their aspiration is for a job, not to run a growing business.

Certainly this isn’t true for everyone but it is true for many. And if the evidence from developed nations is any guide, then it is more likely that men aspire to build these larger, truly profitable businesses. For the evidence for this claim, see Scott Shane’s book referenced in the interview, pp 130 to 133 where he cites more than a dozen studies. Given my mistake noted above, I’ve gone back to verify that I have this right.

One of the explanations that is consistent, as you note, is that women tend to run businesses in industries that have less profit potential. In some cases this is clearly a societal construct around “appropriate” women’s work (see for instance McKenzie’s work in Sri Lanka), but it’s also likely that it has something to do with the choices women make about what industries to be in—in other words they choose low-profit, low-growth businesses because those are the ones that offer the flexibility they need to be able to meet their other commitments.

This is not an argument for restricting women’s access to capital. But it is an argument to think very differently about the value and purpose of microcredit focused on women. I believe it’s a mistake to think of such a product as entrepreneurial growth capital.

Tim

July 12, 2011
Barbara Magnoni

Hi Tim,

Thanks for the follow up, although I am still skeptical of this evidence. I dont have the book handy, but it seems to be only one source and also focused on only developed markets. In many of the developing countries that i work, formal sector wages for similar skilled people are lower than those in the informal sector and many SMEs pay their employees under the table, so they arent often in the FORMAL sector, although they are employed rather than independent workers.

While I agree with many of your points, I am concerned that the limitted recent research is leading to recommendations that promote lending to men’s business for growth rather than betting on women. Perhaps it depends on your goals, but i think that women’s businesses (some not all) could be equallly if not more successful with some capital, and additional support and mentoring. If we give up on that possibility, we give up on trying to reduce the gender gap, and promote the status quo, of men earning money and women in the household with limitted financial resources.

I believe development experts over 30 years ago agreed that this economic structure was not ideal in providing families with health, food and education they needed.

Of course another approach would be to work to change men’s role in the household so that they take on greater financial and family repsonsibilities, and thus prioritize those expenses more, but that may just lead to research saying that people shouldnt provide men with investment capital, because they won’t put it to work.

Thanks for allowing me to provoke on this a bit. I think ultimately, we dont know enough and more research should be done around these questions.

Best.

July 12, 2011

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