Analysis, Interviews, and ReviewsArchive
Jun 16, 2011
An Interview with Banerjee and Duflo, Part 1
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.
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.