Entrepreneurs are considered a source of innovative ideas, unique perspectives and much-needed enterprise, but their role in a developing country is even more critical. The entrepreneur drives both growth and productivity.
A close examination of financial access is essential to this discussion, as financial liberalization is a driving force behind productivity growth in developing countries. Typically, access to financial systems increases over time; in Thailand, we see growth from 6% of the population to 26% over the years between 1976 and 1996. Such access results in better allocation of capital, labor and talent – and increases in efficiency.
To better understand the necessity of financial access and the sources of inefficiencies in developing countries, think of a poor, but talented household with no access to credit. Although the household could set up a business, it is likely destined to remain relatively unproductive because of the constrained scale on which it must run. Likewise, we find inefficiencies at another household in the same village. This household, a wealthy but rather untalented group, puts its wealth into a business for lack of better, interest-bearing savings options. We find that a similar problem ensues – the household’s lack of talent translates into an unproductive enterprise.
Consider a scenario where enterprise is supported by access to savings and borrowing mechanisms. The talented, poor household can receive a loan and operate its business on a larger, more efficient scale. The wealthy but not-so-talented household will abandon enterprise in favor of savings as its wealth is put to better use. When the ability to borrow from a bank is introduced in a developing economy, the result is better allocation of talent, greater profits, increases in wealth and improvements in efficiencies.
Enterprise continues to play a role as an economy grows and matures. Talented workers leave jobs as unskilled workers, instead devoting time to entrepreneurship. The demand for labor increases with enterprise formation, consequently boosting wages. Furthermore, enterprise pursuits increase capital so interest rates fall. Each, in turn, contributes to growth and productivity.
Ultimately, entrepreneurship can be used as a tool in addressing poverty in developing countries. Its ability to open new possibilities for others and create wealth is instrumental in creating economic growth and improving productivity.
For Townsend and Jeong's full text article, please visit http://cier.uchicago.edu/papers/Jeong/TFPjtETSpecial.pdf.
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