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PROFESSOR: We're going to talk about something we've sort of
touched on, in many different contexts, but more head on
this time, and that's entrepreneurship.
And sort of the starting point of that, I think, there's a
story that somebody once told me, which, I thought, kind of
frames one side of the debate very well.
I was on the plane with a man, who was clearly sort of a
rich, Indian businessman.
And he was quizzing me about what I did.
And I said, I study economics and poor people.
And he was very much of the view.
He said, look, you know, there's all this stuff about
poor people.
You guys don't understand poor people.
They have an entrepreneurial genius in them.
You think I'm a successful entrepreneur.
The way I learned entrepreneurship
was from the poor.
So I was kind of saying, yeah, yeah, yeah, right.
Well then he told me a story that was actually quite
compelling.
And mostly people--
whatever this means, it's never clear to me.
So I was being slightly skeptical.
But then he told me a story that was very compelling.
So he said that he had an MBA from the US.
I think from Kellogg.
And he went back to India after doing his MBA.
And when he arrived in India, his uncle, who was a
businessman in Bombay, said look, you want to be an
entrepreneur.
Let me show you what entrepreneurship is.
So basically, they got in his uncle's car.
The uncle drove him all the way to the
Bombay stock exchange.
The Bombay stock exchange, well, he thought that they
would just go inside the stock exchange.
But in fact, he parked his car in front of the exchange and
pointed to four women who were sitting on the side of the
street that goes in front of the exchange.
And he said, you know, can you figure out what those women's
business model is?
So he says, well, I looked and looked.
And they would just get up, from time to time.
They'll scrape something off the street, then they'll come
and sit down.
And then they'll be sitting and talking to each other.
It's early in the morning, like 8:30 in the morning or
9:00 in the morning.
Cars were driving by.
People were showing up to work at the stock exchange.
But what does it have anything to do with entrepreneurship?
So he kind of tried to come up with some answer, completely
didn't manage, and finally told his uncle,
look, I have no idea.
Why don't you tell me?
His uncle said, these women get up at 5:30 in the morning.
They go to the beach.
In the morning, the tide has receded, so there's wet sand
on the beach.
They collect the wet sand and then they put it in a bag.
They come to the stock exchange.
This is one place where lots of cars go by.
And there's a nice sidewalk to sit.
Before the traffic starts, they lay the
sand out on the street.
And then they sit there.
And as people drive on the stand, the heat from the tires
dries the sand.
So the sand gets heated and eventually dried by the tires.
Once the sand is fully dry, they scrape off the sand and
put it in a bag and take it back to the
slums where they live.
Women use this dry sand as like a scrubber.
To clean dishes, you use this dry sand as a
scrubber for that.
And so they use this dry sand to scrub
off their dirty dishes.
And that's all dirty--
I don't know, whatever--
cook pot and pans.
And that's how these people make a living.
They dry the sand, and they sell it.
So this was his example of how infinitely creative poor
people are.
And my reaction to that was, you know, isn't that saying
much more about how creative you have to be to make a
living if you are poor then how creative the poor are?
So it's the same proposition, in a sense.
You could say that this shows that the
poor are very creative.
Or you could show that the poor have no business
opportunities so they have to do this completely bizarre
thing to make a living.
And those are just two sides of the same coin.
And I don't know.
So what I want to talk about today is a bit on this
implicit and often explicit debate--
So before we get there--
on whether the poor are entrepreneurial in some
meaningful sense of the word or not.
So let's start at the beginning.
Who's an entrepreneur?
How do you define an entrepreneur?
AUDIENCE: I guess I would define an entrepreneur as
someone who goes about creating a new venture that
often involves a greater than average amount of risk.
PROFESSOR: So if I am someone who works for Toyota and
designs a slightly different car, am I an entrepreneur?
AUDIENCE: I would say not.
PROFESSOR: Why not?
It's risk.
I could fail.
I would look really, really stupid to my bosses.
AUDIENCE: But it creates a new venture.
I mean, right there, you're developing a product inside.
PROFESSOR: New venture?
So it has to be a new, separate company.
Is that the definition?
AUDIENCE: No, but I'd say a venture not a design, right?
PROFESSOR: But I haven't got what that means.
AUDIENCE: Like a venture in the sense that it doesn't
necessarily have to be entirely its own company, but
it's more than just a design.
In the sense of a design, but then you're not taking into
account the other things that would actually go into making
it a car and then selling that.
Like let's say Toyota decides to launch a new line, where
they're going to do a new dealership agreement, new
factory, all that, then that would be a new venture.
If I was running that, then I could be classified, under my
definition, as an entrepreneur.
PROFESSOR: OK.
So you would--
OK, go ahead.
No, you should go ahead.
AUDIENCE: I think the term, that we'd have to go into the
definition.
Besides just creating a new venture, it would be create a
new venture that is, somehow, innovative and
unique in it's own.
So I think, whether not, necessarily, the business idea
or the business strategy of the product, but maybe even in
how the person operates the company, they can be
entrepreneurs in that way.
PROFESSOR: So you don't think that if I have a set of taxis
I'm an entrepreneur?
I just bought a set of taxis.
I rent them out.
AUDIENCE: I would imagine if you were the person who took
the initiative to--
PROFESSOR: But this was after there had been 500,000 taxi
companies in the world.
If I go tomorrow, quit my job, and I start a taxi company, I
would not be an entrepreneur?
AUDIENCE: Well, to some degree, you could
that's still unique.
You're starting a taxi company, in a particular city,
with a particular set of drivers.
PROFESSOR: But then everything's unique.
Once I go down that road, I don's see how anything.
I can't have a taxi company which has the same set of
drivers as theirs, everybody else.
So this is unique by definition.
Somebody else from that side, yeah?
AUDIENCE: I think someone was actually saying before that
created a normal amount of risk.
But it's like the financial risk, as well, absorbing that
yourself, as opposed to being responsible for it underneath
an organization.
PROFESSOR: Right.
I think that's actually one key piece of what I would
consider the definition.
The fact that you a lot of the risk comes
from raising capital.
The risk is a significant part of the reason why.
If I work for Toyota there would not be.
It could be career risk for me.
But it would not be risk that is driven by my having to
raise capital.
So I think you're making one of the key points, which is, I
think, exactly as you said.
Risk is a big piece of it.
The next piece of it is the risk comes
from raising capital.
I would not say that it has to be a new product, because I
think that's too narrow a definition.
I mean you could define it.
But I think that would mean no poor people are, essentially,
entrepreneurs.
But I think raising capital, the financing side of it.
So do you take the risk?
And a lot of the risk comes from owning the asset that's
generating the output.
That, I think, is a key part of being an entrepreneur.
The risk comes from putting money or your own
assets on the line.
It's not just that you're putting your career or your
name on the line.
When I write a book, I also take a risk in that sense.
People could say, my god, what a stupid book.
That's a risk, but I wouldn't call myself an entrepreneur.
So I think that I want to emphasize that I think the
poor are entrepreneurial.
When we talk about somebody who is an entrepreneur, I'm
going to emphasize the fact that they bear a lot of the
risk, from production, and that risk is closely tied to
the ownership of the asset.
So it is that they have to finance the asset and hold on
to the risk generated by that asset.
So they could be a farmer.
They must have to own the land and then
take the farming risk.
Yeah?
AUDIENCE: But in the US, don't a lot of the people, who we
think of as entrepreneurs, they get venture capital or
somebody else to take on the financial risk.
AUDIENCE: But it kind of defers the financial risk.
They're still taking on financial risk of their own.
PROFESSOR: But first, I think, nobody gets 100% venture
capital funding.
Even to get to the venture capital stage, you typically
spend a fair amount of money.
And nobody gets 100% funding even then.
And second, in some ways, you still take financial risk, in
the sense that the upside on the venture capital is
precisely your earnings in the future.
So you, basically, dock your earnings.
You are an owner.
You have arranged a particular form of financing, which says
that I don't make any payments for the time
being, on this financing.
But it's exactly like any other form of financing.
I have an obligation to pay you.
That obligation, in venture capital, is
maybe in five years.
If the company goes public, then I will
pay you $100 million.
That's a venture capital contract.
It's still, basically, a sharing of risk.
And I'm taking ownership of the asset.
It's just a different contract.
Yeah.
AUDIENCE: It's also the opportunity cost of actually
putting all of your energy into this venture to see it
come to fruition, like all the earnings that you could have
earned in that time working [INAUDIBLE].
PROFESSOR: But that's a bit like I could have spent my
time consulting or I could write a book.
I mean that's not that different.
I think the key is that my earnings are significantly
connected to the outcome of the project.
I was just adding to the cost of what of entrepreneur takes
on [INAUDIBLE].
AUDIENCE: I mean, if you wrote a book that sold 10 million
copies or something, then your future earnings would be
significantly.
PROFESSOR: Yeah, but mostly, I think the first order risk,
sadly, for me is that people will just think I'm stupid.
I think the risk, in my case.
You could imagine everybody has a small chance of being an
entrepreneur, but I think that mostly, most of my risk has
something to do with my ability to convince other
people that I have not lost my marbles and very little of my
risk comes from money.
AUDIENCE: Yeah, but at the same time, there's some people
who are like full-time authors.
And they take out loans.
And they write this book.
PROFESSOR: Oh, they are entrepreneurial.
I'm not saying they are not entrepreneurs.
I think I am not an entrepreneur, to first
approximation, because my risk is mostly reputational risk,
very little of it is financial risk.
AUDIENCE: Even though you're sort of doing a similar thing?
PROFESSOR: Yes.
My lifetime earnings are, essentially, with a 99%
probability, are unaffected by this decision, or almost
unaffected.
So who is and isn't an entrepreneur?
So we've sort of been talking about that.
I'm not, but who is?
So clearly, Larry Page and Sergey Brin are entrepreneurs.
Now let's take something less obvious.
What are other forms of entrepreneurship, like in the
US, less obvious ones then starting a software company?
AUDIENCE: I mean someone who owns and rents a foodtruck.
So
PROFESSOR: That's an entrepreneur, sure.
AUDIENCE: Someone who starts a laundromat.
PROFESSOR: That's an entrepreneur.
AUDIENCE: So I kind of disagree with the fact that
you've got to have some sort of earnings
attached to your venture.
I think if somebody starts a business that focused on
community service but is very unique, entrepreneurial, I
think that is still.
If it is innovative in some way, I still think it should
be considered as entrepreneurship.
PROFESSOR: I think they say, sometimes, somebody is a
political entrepreneur.
But I think that gets the term to be a little bit too hard to
understand.
I mean, I think you could make the case that you're making.
I'm going to sort of resist that a little bit.
Because I think, then, I don't know what
the limits are anymore.
Who's not a political entrepreneur?
If I go and claim that President Obama was born in
Kenya, am I a political entrepreneur or not?
Is that entrepreneurial?
Yes, it's entrepreneurial.
It's innovative.
I feel like that's making it too easy.
AUDIENCE: So were the people collecting sand entrepreneurs?
PROFESSOR: Sure.
They owned this enterprise.
Their entire earnings was subject to that.
They had financed whatever needed to be financed.
They had paid for the plastic bucket.
They collected the sand, the spade.
They had paid the bus fare to get from the beach to the
Bombay stock exchange.
They had done all of the financial
investment that was involved.
It just happens to a small amount of money.
But that doesn't mean that they hadn't done--
they had put in 100% of the capital in there.
But another example, just to not get too stuck on it.
Lawyers, for example, most lawyers are, effectively,
entrepreneurs.
Because most lawyers actually have a two-person,
three-person partnership.
They're bearing a lot of risk.
They pay for the staff.
They pay for the office.
They pay for the whatever, the furniture.
And so, in that sense, they would, under this definition,
also count.
AUDIENCE: I was going to say you could also say that for
doctors as well.
PROFESSOR: Doctors the same, a lot of doctors.
I think that's relevant, because the typical way--
there's no measurement of entrepreneurship in the data.
Because nobody knows who's an entrepreneur, for the same
reason as we were having trouble with it.
What is measured in the data is whether you describe
yourself as self-employed.
That's described in the data.
So if you look at most countries, one of the
employment categories is self-employed.
And that number, which includes lawyers, doctors,
consultants, many other such people, and not just
laundromat owners and Google owners, but lots of other
people, that category turns out to be about 12% of the
population.
So 12% of the population, under a very generous
definition of entrepreneur, which is self-employed, are
entrepreneurs.
That's for the OECD.
The OECD is like all the rich countries in the world.
In the rich countries, roughly 12% of the population would
call themselves self-employed.
That number is much higher among the
poor in poor countries.
And I'm going to show you some numbers.
So here's some numbers.
So self-employed in agriculture, rural population,
you can see that, in many countries, over 75 to even
100%, nearly, are self-employed in agriculture.
Take Panama or Pakistan, like 70% of these people are
self-employed in agriculture.
Meaning that they, basically, exactly using the equivalent
definition to the one that's used in the OECD, which is
that they describe themselves as self-employed.
Meaning that, typically, they are putting up the capital,
usually the land and the inputs, and they're getting
the returns.
So they are risk taking.
And they're betting a lot of risk, and they own the assets
that are generating that risk.
So that's a number that's high.
As you will see, that number is, in a sense, an
underestimate of how many people are
self-employed overall.
So this is just in agriculture.
This is how many people who have somebody who's
self-employed in non-agricultural work.
In Brazil, rural Brazil, 60-something-percent are
self-employed in non-agricultural work.
So who are these people?
They're like somebody who provides any services, a
barber, carpenters, somebody who builds, a bricklayer.
Instead of a working as a part of a company, most of these
people just work as single-person enterprises.
So bricklayers are bricklayers.
They have a brick laying company, which is themselves.
And they, typically, will do the brick laying for somebody.
In many ways, this is another.
So if you have to take the fraction of people who are
self-employed, either in agricultural or not, or
somebody in their family is self-employed in either
agriculture or outside agriculture, that's and even
higher fraction.
That's like 70% of most poor people have somebody in the
family who is self-employed.
So this is a combination of these two sets of numbers.
And some of them are both.
Some of them have one family member who is self-employed in
agriculture, one family member who is self-employed outside
agriculture.
But even if you take the average, it's
quite a high number.
So most poor people, in our definition, are at least
self-employed.
Well, why is this?
Yeah?
AUDIENCE: What would we consider sharecroppers, who
have to bear a lot of the risk?
PROFESSOR: I think, here, they are considered self-employed.
But that's a good question.
I don't know the answer to whether they should be or not.
So why should we think there is anything
interesting about this?
Why would it be at all surprising if a lot of poor
people were entrepreneurs?
Why would it be even worth commenting on?
AUDIENCE: I don't understand the question?
PROFESSOR: I said that 12% of the people in rich countries
are entrepreneurs.
Maybe 70% of the poor, in poor countries, are entrepreneurs.
Is that something that has anything
interesting about that fact?
And there I want to get you to these two questions.
Is it the case that the poor have specific advantages being
an entrepreneur?
Do they have specific disadvantages in being
entrepreneurs?
So let's start with the disadvantages.
Is that clear?
AUDIENCE: The risk is higher, because the overall capital
they have is less.
PROFESSOR: So risk is at least relatively higher, because
they have--
I don't know where this came from, but I kind of know where
it should go.
So one thing that's clear is that
entrepreneurship is risky.
If you're at the margin of not having enough money for
something really essential, then the same
risk hurts you more.
Because you're really in danger of
something awful happening.
Like you couldn't pay for your mother's hospital stay if your
business collapses.
So the risk is much more important.
We talked about this some few weeks ago.
Other reasons, other disadvantages?
AUDIENCE: It's harder to raise capital.
PROFESSOR: Sure.
It's harder to raise capital.
If you don't have a bank account, if you don't have
assets that you can pledge, if you don't have contact among
financials, it's harder to raise capital, surely.
Yeah?
AUDIENCE: You have to rely on your business more, because
it's harder for you to get a steady paying job at some
other company.
PROFESSOR: Is that a disadvantage or an advantage?
AUDIENCE: I think it's a disadvantage, because then you
bear a lot of the risk of the business.
PROFESSOR: I see.
So you may not have skills that you would get you an
alternative job, so if your business fails, then it
really hurts you.
I see.
Yeah.
AUDIENCE: Particularly, if you're really poor, in a rural
area or a slum, it's really hard to get the resources.
I mean, I feel like in America today, we have a whole lot of
resources to encourage entrepreneurship and help
entrepreneurs.
I would imagine, based on what I've read, that that really
doesn't exist.
PROFESSOR: So you may not have the know-how to be an
entrepreneur.
You may not know what market opportunities are available,
because you're not that well connected to the media.
You may not know, even, what the best prices are for what
you will buy and the best prices are for what you will
sell, where to sell, all the information that you need.
Presumably, that's correlated with being educated.
And so if you are poor in a poor country, you are less
likely to have all that information.
AUDIENCE: This is something that applies to all
entreprenuers.
But I think it would affect the poor more, specifically.
I was thinking about the benefits you get from working
for a corporation.
Sometimes you get health care, things like that.
And so being an entrepreneur is like taking a risk with
respect to that.
And then for the poor, depending on where they live,
or what atmosphere is around, it might disproportionately
affect them.
PROFESSOR: Yeah, that's also possible that there's some
additional benefits to having a steady job.
That's particularly important if you have no
other source of support.
Yeah?
AUDIENCE: On the advantages side, couldn't you say--
PROFESSOR: Let's do the disadvantages.
Hold that.
AUDIENCE: Wouldn't your income not be regular.
It would be really uncertain.
PROFESSOR: Yeah.
So that's related to, I think, the first point that was made.
AUDIENCE: Chances are, you're not going to
have an original idea.
You're going to be copying what other people are doing.
PROFESSOR: Yeah.
But why would it be less true of the poor than the rich.
AUDIENCE: The rich might have access to educational
resources that will allow them to come up with better ideas.
AUDIENCE: You could also make the converse argument that
since the rich have access to more stuff, they're more
likely to copy other ideas.
PROFESSOR: Good.
AUDIENCE: But that would also mean they might not be as
likely to make a lot of money.
So those would be the bad, rich entrepreneurs.
AUDIENCE: Not necessarily.
Microsoft copied Apple's architecture [INAUDIBLE].
AUDIENCE: Well, that's a different story.
AUDIENCE: I mean this was already said before.
But just thinking about like, if you're poor, you're going
to have to use--
an entrepreneur, let's say you had some savings or you had
family that was helping support you.
You have support system that has some sort of capital, even
if it's not that much.
But when you're poor, you have to use everything that you
have to put into that business.
And that takes away from just living, even things like that.
PROFESSOR: So the risk is higher, and your ability to
self-finance is lower.
Anything else?
Yeah?
AUDIENCE: You could say, if other people copied your idea,
it would hurt you more, because then they'd just
increase the supply and decrease your overall--
PROFESSOR: But why would it be any different
from anybody else?
If I'm rich and you copy my idea, that still hurts me.
It is not clear, especially in the sense if the poor use
ideas that are particularly--
they've already copied from somebody.
They're less hurt by copying.
Yeah?
AUDIENCE: Perhaps, if you think about the social
infrastructure, people are more able to copy ideas,
because of the lack of legal support or an ability to check
or to enforce that people are not copying your ideas.
PROFESSOR: Right, so you might thing that they have less
access to lawyers and things like.
They may not understand the law well.
So they may not be able to use the legal system to protect
themselves as effectively.
What's another thing that helps an entrepreneurs other
than money and ideas?
What's the third thing that?
AUDIENCE: Sort of broadly speaking, a social safety net.
In the sense that, let's say, in American, you're
entrepreneur and you absolutely fail, there's still
a social safety net that you could at least rely upon.
And that doesn't exist in poor--
PROFESSOR: Right.
That's true of poor countries, but not necessarily more of
poor people.
That's a point about poor countries,
less about poor people.
One other thing that I think matters a lot is contacts.
I think that, if you know somebody, if your uncle is the
CEO of a company, they may be more willing
to give you a try.
If you're starting up, you're making widgets, somebody has
to buy them.
It's much easier if you know somebody than if you don't.
I mean, why would anybody trust you?
So you often get your first breaks by having some
connection to somebody else, who will do the buying.
And I think that's a very big piece of what makes it very
difficult for the poor to be effective entrepreneurs is
that they actually don't know anybody.
And so it's much harder for them to
break in with a products.
So I think contacts are a very big piece of it.
The other part of it is that it might be that, in order to
be in business, for example--
take the venture capital example.
Typically, the way a lot of start-ups work is that you
know that you're going to lose money for a while.
Because you have to build a reputation.
And the way you build a reputation is by going to
someone and saying, look, you're buying from him for $5.
I'll sell it to you for $3.
And you know you lose money at $3, but you're willing to lose
money for a while, because that way he'll see that you're
really good at doing it.
And then, maybe, you could charge $4 and get the market.
So a lot of way new businesses start is by actually
undercutting other businesses and losing money.
So if you can't lose money, effectively--
so if you're poor and you can't afford to lose money,
it's often very difficult to enter a new product.
Because part of the way you enter the new product is by
actually selling it very cheap.
And it's very difficult to sell it very cheap if you
can't afford to lose money.
So those are all the disadvantages.
Are there advantages?
So I don't know how many of you know, but there's a very
famous book called The Fortune at the Bottom of the Pyramid.
If you've read that book, it makes the case that there's
actually lots of entrepreneurial opportunities
for the poor.
And that, in some sense, they might have an advantage.
What are potential advantages?
Yeah?
AUDIENCE: Because you have access to a unique market that
the rich don't even know about, like the
women who sell sand.
PROFESSOR: So they might know about things which are
underserved.
So maybe the way capitalism has developed, it's better at
serving the demands of the middle classes.
The poor might demand certain products which are not
supplied by the market.
So at this point, it might be easier to find a new product
to supply if you know what the poor want .
That's one of the cases that's being made.
We'll see to what extent that's true.
Any others?
You were going to mention something?
AUDIENCE: Maybe it's easier to make use of some resources
than it would be if you were a richer person trying to start
a [INAUDIBLE].
Like, for example, the women with the sand, they can go to
the beach and dig up some sand and carry it away.
No one's going to say anything to them.
But if someone was trying to do this on larger scale, then
there would be issues.
PROFESSOR: That's exactly right.
So it may well be that, if I'm the person who comes and--
imagine that I'm rich.
Let's say, I can either take a job or I can be an
entrepreneur.
To compensate me for my job, I would need to be able to do
the business at a particular scale.
Imagine I'm in the business of sorting through garbage and
finding things which are sellable.
Just doing that, physically, if I started to use that much
garbage, I'll need a lot of space.
Whereas a poor person may be able to cover her daily wage,
which is very low, by just sorting through the garbage
she finds in the neighborhood or something.
Another advantage of being poor might be that you may be
less considered or less easily monitored, so you may be able
to bend the rules more effectively.
So you might be able to make products, which somebody else
would not want to do, because it would too easy to
scrutinize.
So you may be involved in--
I'm not saying illegal products, but you might use
techniques which are possibly less hygienic or something.
So if I setup a big factory dyeing garments, that pollutes
the water supply.
And the city will shut me down.
If I have a very small operation inside my house,
dyeing garments, nobody will notice.
And I could use the city's water supply and pollute it.
This doesn't mean that I'm doing a good thing.
But it means that it might be easier for me to be an
entrepreneur, the producing and dyeing garments than
somebody who's richer than me.
So there's some potential advantages.
Still, I think my sense is that everybody would think
that, basically, it's easier for the rich to be
entrepreneurs than the poor.
So that's on balance.
And we'll look at this a little bit, in
the data, in a bit.
So then why are the poor entrepreneurs?
That's the question that comes back.
If we say it's easier for the rich to be entrepreneurs, but
the rich are less likely to be entrepreneurs than the poor,
then we have a kind of a puzzle.
Why are the poor entrepreneurs?
What is it that?
So one view of this is sort of Muhammad Yunus's view.
Muhammad Yunus is the guy who started Grameen Bank.
And he's on record saying that the poor are natural born
entrepreneurs.
So there's one view, which is to say that something about
the poor, which, by being poor, they learn to be
entrepreneurial.
They can't really survive on anything else, so they become
like these women we were talking about. they become
very clever at finding opportunities.
They are natural entrepreneurs.
That's one way to think about it is that, when you are poor,
you're just better at thinking about opportunities.
Now, one way we can kind of address this is by looking at
the businesses of the poor.
What do you know about these businesses?
So these are people who are under $1 a day.
And if you take the business of people, who live under $1 a
day, I think the striking fact is that, in most countries for
which we have data, let's say, 10%, so the average number of
employees in a business is 0.15.
It's one in seven businesses have an
employee, a paid employee.
They took two countries where it's different, but even in
those countries, they don't have one employee.
They have 0.6 employees.
So these are very small businesses.
The first thing to note is that the businesses of the
poor are kind of very, very small businesses.
This includes your unpaid employees, which is like your
son or your wife or you, yourself.
And that number is just over one.
So the average number of employees is just over one,
meaning that it's you plus somebody who works, maybe,
part of the time.
Or alternatively, it's you and no one or you plus one person,
but not much more than that, so very few employees.
Second, what fraction of the businesses own a vehicle?
Just to measure some other measure of the size of the
business, it's only a vehicle.
And Pakistan is the one country where
many people own cycles.
They might be delivering stuff, but then, all the other
countries, it's really, really small, like 5%.
If you look at an even more obvious question, what
fraction own machines, any machine?
The answer is not 100% even there.
60% in the Ivory Coast own any machine.
What's the average machine that they own?
They own a weighing scale or sort of a piece of metal for
digging something, but no more than that.
So it's really like these businesses have no assets
whatsoever.
So the first point about the businesses of the poor, they
are very small, by all of these measures.
They have no employees, no machines, no vehicles.
The second, related point, I wanted to make is that the
fact that they don't have any machines is telling you
something quite important, which is that these are not
very sophisticated businesses.
You're not surprised to hear that.
But it is very, very clear that the average business has
very little skill involved.
And to be honest, there's not a lot of diversity.
If we look at the top five businesses, they are things
like tailoring, a small corner store, selling snacks on the
street, embroidering or stitching clothes and selling
them as a retail sale, not a tailor, but someone who retail
sells garments.
And I think the last one is--
I forget-- carpentry, I think.
It's like none of these businesses, except, I think,
carpentry, possibly, require huge amounts of skill.
So they tend to be very low skilled businesses.
And this is most businesses.
So these are not people who are creating
very original ideas.
Indeed, the usual problem that people write about is most
people, in the same neighborhood,
have the same business.
They're also selling snacks.
They're all delivering loads.
They're all tailors, rather than a lot of innovation.
There's no evidence that they're very creative in what
business they go into.
On the other hand, many, many people own multiple
businesses.
That's the other very, very common fact.
This is the fraction of people who get incomes
from multiple sectors.
So that's like somebody who was has farming business but
also has income from, let's say, he does some bricklaying
on the side.
That's somebody who has multiple sources.
And the striking fact is how common it is.
In most countries, it's close to 50% of the population have
income from multiple sources.
So in other words, they're not putting all their time,
available time, into their own business.
Why would they not do that?
If you have a business, in your family, why aren't
putting all of your effort into it?
Why would we observe this fact, that most people, many
people, have multiple business or multiple occupations?
AUDIENCE: It might be comparable, then, to
[INAUDIBLE].
PROFESSOR: Right.
So, for example, you might be only able to
sell one kind of snack.
And people might want snacks only, maybe, in
the evening or something.
In the morning, you go to work.
There's no demand for snacks.
Or you might sell breakfast, and you can only sell
breakfast till 10:00 AM.
After that, breakfast is over.
And so you have to find something to do.
So one thing could be there's a natural capacity constraint.
There's not much demand for the product.
And so you can do it for two hours a day but not for eight
hours a day.
Yeah?
AUDIENCE: There might be seasonal variations.
You might be able to a certain type of business only during
certain times of the year, [INAUDIBLE].
PROFESSOR: Absolutely.
So agriculture is one classic business, where you can work a
few months of the year, but the then the rest of the time,
you don't have irrigation.
There's nothing to do.
So you work on something else.
Yeah?
AUDIENCE: You might diversify your portfolio as part of
[INAUDIBLE].
PROFESSOR: Right.
So you may bear less risk by having multiple businesses.
Yeah?
AUDIENCE: It might be the return for business is so low,
that even if you invested more time and energy into it, it
wouldn't be worth it.
PROFESSOR: But why don't you take the one which is the
highest return and put all your time into it?
AUDIENCE: Maybe I don't want to [INAUDIBLE].
PROFESSOR: Why?
AUDIENCE: Because even if that was the highest return,
[INAUDIBLE].
PROFESSOR: But why would you ever start a second, even
lower return business?
If there's one business that has the highest return, why
won't you put all your eggs into that basket?
AUDIENCE: Diversity.
PROFESSOR: Yeah, so that's what she said, which is that
want to diversify risk.
What other reason could you imagine?
AUDIENCE: It could also be that you might have one
business that's really profitable, let's say, you're
selling something in the morning for breakfast, but it
might be the time--
PROFESSOR: Right, that's, I think, also
someone brought up.
AUDIENCE: I think there are like some businesses which are
like needlepoint, which physically hurt you if you do
it too much.
People like become blind.
PROFESSOR: Right, so maybe, just you don't want to do it
for too long?
Another obvious reason.
AUDIENCE: Didn't they say in the book that a lot of people
don't like running their own businesses, and so they don't
want to put time into it.
PROFESSOR: But why would you do three different ones?
I'm Asking a simpler question than the one you're answering,
which is people seem to do two or three different
occupations.
Why would do two or three rather than?
Say I want to work eight hours.
Why wouldn't I put all eight hours into one?
We've gone through a bunch of reasons for that.
AUDIENCE: Is that the marginal returns decline, especially
for this type of a business?
PROFESSOR: So it could be that the marginal returns on the
extra piece of effort is low.
Another possibility that I think is even more
straightforward.
Maybe some businesses require capital
and others less capital.
So you have a certain amount of capital.
You put into the capital intensive business.
And then use still don't have some time left.
So you work in the other one.
For example, to do needlepoint, you'll have to
buy fabric first.
And you can only afford fabric that covers half your day.
And you buy fabric for half your day.
You work half your day on needlepoint.
The rest of the half of your day, you have to find
something else to do.
So it may just be that you don't have enough capital to
make it possible to spend your whole day working on it.
So in any case, we do see this evidence that people don't
seem to be excessively committed
to any single business.
That has the cost, obviously, that they're not getting a lot
of benefits from specialization.
They're not learning or improving very fast, because
they're doing many, many things at the same.
What is striking about this picture is says, in even rural
households, a lot of them have a non-agricultural business.
So they'll actually, if you look at how many people have a
non-agricultural business, like about a third of them
have a non-agricultural business,
even if they're rural.
So these are people who live in rural areas.
They do farming as one of their businesses, probably.
But they also have a second business, which is
non-agricultural.
And that's sort of striking.
We think of, often, rural areas in developing countries
as farmers kind of living in isolation.
In fact, most of these people are in a
second business as well.
So the next fact about businesses of the poor is that
these businesses are very fragile.
So if you look at Mexico, in 85% of the people, the poor
didn't have a business in 2002.
15% had a business.
By 2005, out of those 15%, only 6% still had a business.
So 60% of all businesses just closed.
So the they're also going in and out of
business all the time.
On the other hand, many other people started new businesses.
And you look at the fraction of the people who retained
their existing labor force.
They're just 1.8%.
So most people either grow their business or shrink it or
shut it down.
So businesses are very, very fragile.
It's not that you set up a business and it lasts forever.
It's quite a high risk outcome.
And this is sort of the answer to the question, do the poor
feel entrepreneurial?
And this is a survey we've done in many countries, now.
We always find the say answer.
You ask people, you have a child, what occupation do you
hope for your child to be?
And we ask it two ways.
One, we ask them, what occupation do you hope for
your child?
Then you might worry if you ask that question.
They might be conditioning on their condition.
And so they'd look, you know, my child he'll never be able
to do the right kind of business, because he doesn't
have enough money or something.
So we asked them, if you won a lottery and you would invest
in something, what occupation would your
child want to be in?
It doesn't make a difference.
They always give you the same answer, which is that they
don't want to be in business.
The answer is very, very clear.
18% want them to be a private firm employee, 41% to be a
non-teaching government job, and 34% to be
a government teacher.
So that's 93% don't want them to be an entrepreneur.
So basically, the poor don't like the idea, at least, of
their children being entrepreneurs.
And it's consistent with everything else we see, which
is that they don't seem to invest all their time in a
single business.
Even if they have a business, they'll put only a part of
their time into it.
We saw, earlier, that they don't try very hard to save
their way out of debt.
We saw that when we looked at the fruit vendors, that they
were not saving a lot and tried to get out of debt.
So it seems like they don't seem to be hugely committed to
growing their business.
There's no evidence.
And we see the businesses don't grow.
Many of them shrink or shut down.
Very few of them actually add an employee.
At best, these business are always small.
They stay small or they shutdown.
They rarely grow.
So there is no evidence that the poor are actually dynamic
entrepreneurs, in the sense that they are looking for
opportunities to grow their business all the time.
Now, that doesn't mean that there are not a million
dynamic entrepreneurs among the poor.
One should not confuse the statement that the average
poor person is not a dynamic entrepreneur with the
statement that there are no dynamic
entrepreneurs among the poor.
There may be exactly the same fraction of dynamic
entrepreneurs among the poor as there are among MIT
students, for all I know.
It's just most people are not cut out to dynamic
entrepreneurs.
And the poor, maybe, just like everybody else,
they don't like risk.
They don't like the idea of worrying about all of the
problems that running business has.
They like a steady job.
And then a few people really like being an entrepreneur.
I don't know that this makes them any different from
anybody else.
It just says that they're not.
You see a huge over-representation of the
poor among entrepreneurs.
That doesn't mean that this is what the poor want to be.
It's not that they're entrepreneurial in some
natural sense.
They're not that they want to be an entrepreneur.
They're an entrepreneur for some other reason we'll come
to in a minute.
None of this evidence seems to suggest that they're dying to
be entrepreneurs and to grow their businesses.
That doesn't mean that there aren't some who are.
There's this story that you saw in the microfinance movie
of some woman who started as hair collector.
Remember this person?
And she's now a hair tycoon.
And they exist, people like that, everywhere in the world.
I'm even willing to believe that there are as many
genuinely entrepreneurial people among the poor as there
are among anybody else.
But that's a very different sentence from saying that most
poor people have businesses because they're
entrepreneurial.
Because they're so massively overrepresented.
They're really unlikely people to be entrepreneurs.
So if they are entrepreneurs, it's not because
they want to be.
This is all consistent with the fact that, if you look at
these businesses, they're not really attractive
economically.
So one place where we have detailed data, we could
actually calculate how much revenues these businesses were
making, calculate profits.
Now a key part of the profit calculation--
remember, almost none of these firms have employees.
So you have to evaluate the time spent by the owner in
running the business.
Somehow, how do you price that?
So you price that at minimum wage.
These businesses lose money.
So if I went out and worked at minimum wage, I would make
more money than if I did this business and spent all the
time I'm spending in the business.
Now, I'm not necessarily working as hard in the
business as I would be working in other things.
But it isn't the case that I'm making lots of money.
I think this is a pattern that people have noticed.
Now, here's a puzzle.
I just said they don't make a lot of money.
They're not very profitable, these business.
Before, I've also told you that they
pay very high interest.
So they must be generating an extra $1.
They must be generating at least that much.
So if I'm paying 60% interest, $1 must be generating more
than $0.60.
If I'm investing $1 and then paying 60% interest, that $1
must be generating more than $0.60.
How do those two facts fit with each other?
I said, A, they're not very profitable.
B, the marginal $1 must be making a high return, because
otherwise they wouldn't be investing their marginal $1.
You won't borrow money at 60% unless you can cover 60%.
So we know that they're making lots of money.
Yeah?
AUDIENCE: This talked a lot about in the book.
But basically, there's two different types of return.
One is marginal returns, [INAUDIBLE]
where an extra $1 spent, what's their return.
The other's the total return.
For a lot of these businesses, there is a point, early on,
with this very high, marginal return, and then it really
levels off.
So that's what you run into, where it's possible that, if
you have a very small business, like the
example in the book.
Let's say you have a shop, but you really can't put anything
on the shelves.
If you spend an extra $20, you can actually have some candy
on the shelves, then that will produce very
high marginal returns.
But if you spend $300 and have a lot of inventory, you might
have to hire another employee.
There's risk of stuff spoiling,
et cetera, et cetera.
PROFESSOR: So I think that's absolutely right.
But I was making an even simpler point, here, which is
that think of that business.
The person who set up a shop.
You invest your time into the shop.
And you invest the space.
You invest the shelves.
You invest the inventory.
Then you start selling.
So in particular, your time is a fixed investment.
Because you have now decided that instead of working
outside, I'm going to stay in the shop.
So you need to cover.
To become profitable, you need to cover your own daily wage.
Let's say you make $2 a day.
Then even if you made a total of $2 a day by selling, you
would have just covered your wage.
Then you recover your inventory, your
capital cost, et cetera.
So unless you operate at a high enough scale, you're not
going to cover your time.
And so one of the problems is these people are often
operating at a very small scale.
So they rarely manage to cover their cost.
But then why don't these people just grow their
businesses?
Maybe if they're not making a lot of money, because they
have to cover their fixed cost, then why not just keep
investing till you make a lot of money.
Your marginal returns are high, so you could invest more
and make more money.
And then the answer is, your marginal are high, but not
high for a very wide range.
So they start falling fast as well.
So this is the picture that is in the book.
And it's worth, probably, understanding that picture.
So that picture, it tells a story of two technologies.
There's one technology which is gives you a high return but
quickly flattens off.
And if that was the only technology in the world, then
we would not observe any large funds.
Because that's a technology which stops becoming
profitable after a point, very quickly.
But there's another technology, which starts way
to the right of that.
And that technology is only profitable if you invest.
So what that curve says is that there is two
technologies.
Production from technology two is lower than production for
technology one until you cross a particular point.
So you need to make enough investment to make that
profitable.
So you're going to buy a machine which produces a lot
of garments.
But if you can't buy the cloth that goes with the machine,
there's no point in buying the machine.
You're going to lose money for sure, because you have nothing
to use the machine with.
Garments need a machine and they need cloth.
And you have only money for the machine, then you should
not buy the machine.
You should buy the machine only if you can buy the
machine and buy the cloth.
So there that are more profitable technologies and
less profitable technologies.
But the disadvantage of the more profitable technology
turns out to be that you need to invest enough in them to
make money.
So the problem is that the poor are caught between a kind
of a rock and a hard place, which is that they can't
really get up to the level at which they
would make real money.
Because that technology is just too expensive for them.
They don't have that much money.
The technology that they can access has very fast
diminishing returns.
So that one also is not worth growing a lot.
So that's the sense in which they're between a rock and a
hard place.
They can't grow the technology fast enough.
The one that they have, they can't grow.
And the one that can grow, they can't have.
And that's what this picture is about.
If this is what the world looks like, then the poor are
stuck at a point, like M, and the rich are stuck at point
like that second ball up there.
So the poor are stuck, because the technology that has growth
is not available to them.
And the one that's available to them does not
have growth in it.
So there's no point in their putting a lot of effort into
growing their technology, because they're really not
going to make a lot of money either way.
That would explain why they don't really want to be
entrepreneurs, because they know that they're never going
to get very far in this process.
So then that leaves us with the last slide, well,
actually, one slide that suggests that
this picture is right.
There was this experiment in Sri Lanka, where people were
given, randomly, either $250 or $500 for investing.
And this was just a gift.
The World Bank, basically, did this experiment, where it went
to people and said, here's $250.
These were all small businessmen.
Use it in your business or do something with it.
And some people, they offered $500.
It's kind of nice experiment to do, because you can find
out what's the effect on getting money on people's
investment.
And strikingly, if you give $250, you get
high marginal returns.
So these people who get $250, they invest $250, and they
make about 60% a year on that.
So that's pretty good returns.
On the other hand, if you give them $500, they don't invest
the second $250.
They just use it for repairing their home.
So they don't believe that the second $500 are going to grow
their business that much more.
They believe that there's diminishing returns.
That's why they don't invest it.
So basically, the poor seem to be acting as if they also
believe exactly that picture, that they have high returns on
the first $250 but not on the second $250.
Yeah?
AUDIENCE: So [INAUDIBLE]
they just save up enough money or take a loan out so that you
can achieve or you can jump the curve and buy the
technology.
PROFESSOR: Absolutely.
AUDIENCE: So it's like, technically, giving loans to
small businesses should work.
PROFESSOR: Well, it depends on how big the loan is.
I think the problem is that the jump is not at $500.
The jump is at $10,000.
So none of the loans they are being offered allow them to
make that jump.
That's the problem.
AUDIENCE: And they're still too small to
go to a normal bank?
PROFESSOR: Yeah.
that then brings us to the final question, which is, if
this is all not such a great deal,
why are they in business?
Yeah, go ahead.
AUDIENCE: Because they have to be.
PROFESSOR: Yeah.
One is that they have to be.
There's a vicious cycle, here.
Suppose no one can create a business that's big enough to
hire employees.
Then I can never be an employee in
somebody else's firm.
What else can I do?
I can start my own business, which can't hire anybody.
So if nobody is creating businesses which have
employees, then, in a sense, I'm stuck.
I can't get a job, because nobody else is
creating those jobs.
But if nobody else is creating those jobs, then I can't
really work for anybody else.
But I still have to earn a living, so I go and find my
own thing to do.
So I think the primary reason why you have a lot of
entrepreneurs is because no entrepreneur is big enough to
hire the others.
So everybody's an entrepreneur, a
mini-entrepreneur.
Nobody gets to the scale where they can hire others.
And therefore, everybody's kind of stuck.
So if I start a business that hires 10 people, then that
stops 9 other people from being an entrepreneur.
That's one reason.
A second reason has to do with flexibility.
I think a lot of poor people don't have
access to social services.
So if I have to have childcare, pay for childcare,
I'm never going to able to afford my business, because
childcare is too expensive.
So if I have to go out and get a job, which is 9-to-5, and I
have to work all the time, who's
going to provide childcare?
So often, they choose businesses which are designed
to work well with childcare.
Like I took a snack making business.
Why?
Because I can do it at home.
I make the snacks at home.
And then I go out to sell for two hours.
At that time, I take my child with me.
And then I bring the child back.
And that way, I don't ever have to deal with the
childcare issue.
So flexibility is a second one.
The third and most worrying one--
and microcredit makes me worry about this most--
is whether or not a lot of men are very enthusiastic for the
wives to work even harder.
So they feel that, you know, I'm working at a job.
I would like my wife to work harder.
And the way they get their wives to work harder is by
making them start a business.
So I don't know whether microcredit is necessarily
wonderful for all of these women.
I think that, historically, men have found it difficult to
understand that women, even though they don't go out to
work, actually have to work.
They have like cooking and cleaning
dishes and washing up.
They're all hard work.
And if you think that that's a problem in the US, now, then
you can imagine in a lot of developing countries, it's
even more of a problem.
So it may well be that a lot of men are under the illusion
that their wives are idle.
And that they are very willing, therefore, to start a
business for them, so they can work a little harder and add
to the family pie.
So I don't know how much of these businesses are a result
of that, rather than any desire to start a business.
Comments, questions?
So just to close this whole thing, I think the key policy
question, that we don't know the answer to, is how to not
get more businesses, but more businesses
that hire other people.
That's the key policy question we haven't
managed to solve yet.
And it's an absolutely central policy question for most
developing countries to figure out how to get not
micro-businesses but small businesses.
And this is often called the missing middle problem.
In many countries, in poor countries, you'll find that
there are many micro-businesses and some
large businesses, but not enough middle-sized
businesses.
So that's the policy problem that many, many countries are
wrestling with.
And it's one that, I think, we haven't yet got a
very good handle on.
But it's something to think about is how to
generate those jobs.
Yeah?
AUDIENCE: So specifically in developed countries, then,
what provides the capital for the middle businesses?
PROFESSOR: So for one, the state does a lot.
Like in the US, for example, there's a Community
Reinvestment Act, which means that banks are required to
provide a certain fraction of their loans to the community
where they are raising the savings.
So the CRA forces them, then, to finance local businesses.
And so there is a lot of intervention, even in a
country as uninterventionist as the US, to help small
businesses set up.
This CRA is a very good example.
The Small Business Administration is huge in the
US, by the way.
And they provide all kinds of help to small businesses,
including capital, including guarantees.
They give a lot of loan guarantees.
Even the US, which is one of the world's least
interventionist countries, tends to be very
interventionist when it comes to promoting small businesses.
That's probably the direction that policy needs to go in
developing countries.
But it's something we know less about.
OK.
Thank you.