Building Entrepreneurial Economies

Carl J. Schramm

From Foreign Affairs, July/August 2004

Article preview: first 500 of 3,571 words total.

Summary:  The "Washington consensus" approach to development -- which urges other countries to emulate American capitalism -- misses one vital ingredient: the role that entrepreneurs play. Jump-starting growth in the developing world will require an understanding of the American entrepreneurial system, which involves four sectors of the economy.

Carl J. Schramm is President and Chief Executive Officer of the Ewing Marion Kauffman Foundation.

POOR IMITATION

The United States, using its own direct-aid programs and its influence over development agencies, has encouraged other nations to adopt the features and institutions of post-Cold War American capitalism. But this approach -- the so-called Washington consensus -- has often yielded disappointing results. Many economies in Latin America, eastern Europe, and elsewhere are stagnant or backsliding, and most of the world's poorest economies show few signs of new life. Going forward, the American economic model should not be abandoned, as some development economists advocate, but it must be improved. The current template is incomplete. In particular, it fails to reproduce a vital element of the U.S. economy: support for entrepreneurship.

Not only does the United States have a high rate of new business starts, it breeds a constant flow of new high-impact firms -- the kind that create value and stimulate growth by bringing new ideas to market, be they new technologies, new business methods, or simply new and better ways of performing routine tasks. These firms do not appear automatically, as a natural by-product of having free-market institutions. Nor are they the result of any single factor. Rather, the United States has evolved a multifaceted "system" for nurturing high-impact entrepreneurship -- a system that, with the right development policies, might be cultivated in many other countries as well.

Such an approach has been missing so far. The Washington consensus focuses on macroeconomic issues such as finance and trade, along with general institution building. Nations are urged to create good banking systems, reasonable interest and exchange rates, and stable tax structures. They are expected to privatize, deregulate, and invest in infrastructure and basic education. Entrepreneurship, meanwhile, is considered only as an afterthought and in piecemeal fashion. Some policymakers, for instance, have suggested that venture capital firms should be added to the list of financial institutions that developing countries ought to have. But venture capital will do no good without ventures to support. Micro-enterprises are not sufficient either. Existing programs to support small businesses, such as those promoted by the U.S. Agency for International Development and nongovernmental organizations, offer livelihoods to many people. But these ventures tend to involve cottage industries that add little to the economy in terms of productivity or growth. Even micro-entrepreneurs with great potential cannot succeed without national mechanisms to feed and sustain them. Nor can a developing nation prosper in the long term only by attracting outsourced work, which has a disturbing tendency to migrate to still lower-cost locales. Real opportunities arise only when a nation is the initiator: a breeder of new firms, based on new ideas that add unique value.

START-UPS' STARRING ROLE

The system that generates and supports entrepreneurship in the United States is surprisingly unappreciated. Perhaps this is because when modern economic thought first took shape in the early and middle decades of the twentieth century, the West already had a mature industrial economy. With a universe of large corporations and modern equity markets already in place, economists ...

End of preview: first 500 of 3,571 words total.