How can entrepreneurship fight poverty?
It is something you often read: ‘Entrepreneurship is the key to fighting poverty’. But despite all of our good intentions, projects to stimulate entrepreneurship in more impoverished areas do not always deliver the results hoped for. Of what do the people initiating these projects, such as microcredit providers, NGOs and multinationals, need to be aware? As part of his doctoral research, Jacob Vermeire went to South Africa for 12 months. He believes the answer lies in the ability to place poverty and entrepreneurship within a broader perspective.
More than money
‘All too often, poverty is approached as a purely financial question and that has implications for the projects people undertake to combat it,’ Jacob explains. ‘Many people believe that if you simply increase people’s income, the rest will sort itself out. But for people who are poor, poverty is more than a financial concept: it is a lack of quality of life in the broadest sense. Increasing their income is not a goal in itself. Money is not unimportant, but it is a means to an end. Poor people want a better life, and that is a different perspective on the issue.’
Entrepreneur by necessity
Developing opportunities is what entrepreneurship focuses on: opportunities that are created and/or discovered. And that is exactly the problem, Jacob believes. ‘People in impoverished parts of the world are mainly dependent on opportunities to replicate. Go to a market in Africa and you’ll see rows of identical stalls at which the same vegetables are sold. That type of entrepreneurship doesn’t usually tend to generate much income.’
‘Furthermore, we tend to believe all too easily that all Africans are born entrepreneurs’, he continues. ‘Understandably, NGOs love to regale us with the success stories of zero-to-hero entrepreneurs. But people who rely on the informal economy are often entrepreneurs simply as a matter of necessity – for these micro-entrepreneurs, it is a question of survival. That is a whole different ball game from the CEO of a telecom company who starts up a delicatessen business as a lifestyle choice, or university students who turn a good idea into a business.’
In that context, Jacob feels it is important for us to realise that we have the luxury of being able to think in the long term. People in regions where poverty is rife, who are dependent on the informal economy, do not have that luxury. ‘Poor people want to climb above the poverty line - and preferably now and not in a couple of years’ time. Waiting for that one good opportunity is not usually an option for impoverished Africans. The clichéd image of the focused entrepreneur who puts everything on hold for his business just doesn’t apply in poverty-stricken regions either. This is because the circumstances in which entrepreneurs have to work in regions affected by poverty are fundamentally different. Among other things, they have to deal with all kinds of institutional barriers that make it difficult to create something profitable.
‘Failing institutions, bureaucracy, logistic problems, difficult access to raw materials and financial resources, on so forth.’ Jacob lists the problems. ‘There is no question of a social security system in our sense of the term. There is hardly any market for new products, either. As a result, the fear of unexpected events is also much greater. A death in the family, a theft or damage, and you’re right back to square one. Over here, we can get insurance cover for such things. What is more, there is a lack of knowledge and management skills. That is why there are also so few role models. They are there, on the websites of NGOs, multinationals and microcredit providers, but you can count the entrepreneurs who have genuinely been able to raise themselves and their families out of poverty on the fingers of one hand.’
Poor people often have different priorities as well: ‘Being able to pay for a funeral ceremony or wedding party is often far more important in Africa than investing in a business. And, yes, religion plays a more important role there than it does here. “If it is God’s will” probably sounds pretty fatalistic to entrepreneurs where we come from.’
The business or the children?
‘Non-commercial microcredit providers can make a positive contribution to the battle against poverty if, besides financial support, they also alleviate part of the risk by investing in education, training and the creation of group dynamics. Some actually do so,’ Jacob says. ‘But in my research, I have noticed that most still tend to assume that lending money is all it takes to enable people to set up a business. The trouble is that poor people need money for so many other things. That is why the money they borrow for their business is often not used for professional purposes, but to send the children to school, to buy a television or a new roof, in short, to improve their quality of life. How people experience their poverty determines how they look at money.’
You might almost think these microloans are never or hardly ever paid back, but that is not actually true: ‘One way or another they do manage to make the repayments, because they take on other loans, from their friends or family or from local lenders, often at exorbitant rates. So you would be right to ask whether microcredit does fight poverty at a structural level, whether it stimulates entrepreneurship and what the structural impact is.’
Not all opportunities are the same
NGOs and multinationals often misjudge the local situation as well. The profitable opportunities they have identified are not always as attractive to the people who live there because the context is lacking to set up a profitable business.
‘Without ongoing financial and operational support from those NGOs or multinationals, projects like these don’t stand a chance of success. Only the very few who are willing to take risks and are able to do so will be attracted by these projects. For example, there was a multinational that wanted to roll out a new way of growing avocados among avocado farmers in South Africa. The farmers were expected to plant avocado trees that were different from the ones they normally grew and to use different cultivation methods. That requires investments and knowledge as well. What is more, the avocados were intended exclusively for the export market because they were too expensive to be sold locally. A project like that entails major risks. If, for one reason or another, exporting their crops did not deliver the result they hoped for, the farmers would not have a Plan B to fall back on. The result was that not many farmers got on board.’
Things can change!
How can microcredit providers, NGOs and multinationals stimulate entrepreneurship with a structural impact that is not dismissed as messing about in the margins of the informal economy?
‘Microcredit providers who want to stimulate entrepreneurship need better control mechanisms to ensure that the money is used for the business, but in fact they would do better to adjust their mission’, Jacob says. ‘Fighting poverty is not the same as stimulating entrepreneurship and entrepreneurship does not necessarily lead to less poverty. Entrepreneurship is not for everyone and that is no different in Africa compared to how it is here. If you really want to fight poverty, you need to look at things from a broader perspective: how can we ensure that people experience an improvement in their situation? For some people, entrepreneurship will be a good solution, but others will benefit more from a loan for a house, for example.’
Above all, he believes that we need to get rid of the well-meaning top-down projects and create sustainable businesses embedded in the local context. And that means creating opportunities together instead of merely presenting them. ‘That isn’t easy, because NGOs and multinationals want to be able to tell people in their fundraising campaigns what they are going to spend the money on and what the expected results are, and if you create opportunities along with the local population, the outcome is not determined in advance. Nevertheless, I am convinced that creating opportunities together is the key to success.’
Sources: (1) Jacob A.L. Vermeire, Garry D. Bruton and Li Cai ‘Global Value Chains in Africa and Development of Opportunities by Poor Landholders’, and (2) Jacob A.L. Vermeire and Garry D. Bruton ‘Entrepreneurial Opportunities and Poverty in Sub-Saharan Africa: A Review & Agenda for the Future’, Africa Journal of Management (2016)