Life in most of the developing world is a struggle. Human rights abuses, malnutrition, disease and poverty are just some of the maladies gripping regions like Africa, Latin America and the Middle East.
Yet, perhaps the biggest myth about the developing world is that it suffers from insufficient entrepreneurship. In The Mystery of Capital, Hernando de Soto writes that people in developing countries “are not pitiful beggars, are not helplessly trapped in obsolete ways and are not uncritical prisoners of dysfunctional cultures.” In fact, he says, the developing world is teeming with entrepreneurs who possess an “astonishing ability to wring a profit out of practically nothing.”
Quick Feedback and Cashflow
The world’s poor as a group are not as poor as we are at first led to believe. Hernando de Soto discovered that the cumulative value of their savings is more than forty times higher than all foreign aid received worldwide since 1945. Unfortunately, shaky property rights systems in these countries limit what entrepreneurs can do with their capital. Pledging a home as loan collateral, for instance, is often impossible.
As a result, developing world entrepeneurs are extremely conservative by necessity. InternationalEntrepreneurship.com uses early-2000′s Mexico as an example, pointing out that Mexican entrepreneurs prefer businesses with “relatively high success probabilities” that offer quick feedback and cashflow.
This helps explain why developing world entrepreneurs tend to run vegetable carts and simple storefronts instead of software companies and biotech firms. The margin for error is too slim – and access to expansion capital too scarce – to roll the dice on businesses for which there is not obvious and immediate demand. Corruption also necessitates keeping a low enough profile to avoid detection by government officials.
Tourism and Real Estate
In nations that are a bit safer and more developed, entrepreneurs have a wider sphere of opportunity. Interviewed by Universia Knowledge (a project of the Wharton School at Pennsylvania University) in 2008, Chilean entrepeneurs Hernán Herrera and Daniel Brown said that the most thriving new businesses Latin America were tourism and real estate. While many Latin American countries are blessed with natural beauty and comfortable climates, much remains to be developed before a genuine tourism sector is in place.
According to Herrera and Brown, the gap between what is and what could be (including new construction, resorts, technologies and designs) can only be filled by entrepreneurs in these countries. Beyond Cuba, Venezuela and Bolivia (which are politically opposed to business growth), Herrera and Brown report that capital is flooding into Latin America to finance expansion in these industries.
Keeping it Simple
Most of the recent buzz about developing world economies involves microlending. The concept of making small but profoundly helpful loans to impoverished business owners has caught on, and one Senegalese entrepreneur estimates in the Huffington Post that roughly 110 million microloans (mostly to women) have been made since the 1970′s.
But some entrepreneurs are finding success in time tested, “old-fashioned” business models – like manufacturing. The New York Times Freakonomics blog introduced readers to Magatte Wade, the above-mentioned Senegalese entrepreneur who, outraged that her favorite local soft drinks had been displaced by Coke and Pepsi, founded Adina For Life in 2003. Since she used hibiscus from local women’s co-ops to make her earliest beverages, now that Adina For Life products are now on sale at Whole Foods locations nationwide, those hisbiscus-growing co-ops “take orders years in advance.”
Although Wade has no illusions of competing with China and India on cost, she does feel that Africa can become the world’s premier producer of high-end organic foods and beverages. Echoing Hernando de Soto’s sentiments, Wade also has a vision for Africa that includes business-friendly legal reforms and the enthusiastic encouragement of young entrepreneurs.
What Africa (and the rest of the developing world) needs above all, according to Wade, is a society that promotes participating in the modern world. Partial Kenyan descendant Barack Obama, she told the Huffington Post, did not become president by living in an African village but by living in a society characterized by schools, computers, cars and table manners. “People who do not know how to use a fork or who do not know what laundry detergent is will never be respected in the world at large,” Wade wrote.
Despite being pushed into the extralegal sector, extorted for bribes and restricted to using hard cash, businesses are started and operated in the developing world every single day. What is missing are legal environments that encourage entrepreneurs to take bigger steps. Every industrialized nation on Earth – including the United States – underwent the same process en route to becoming economically powerful. If badly needed legal reforms ever reach these struggling nations, their pent up entrepreneurial energy will come to the forefront.