Entrepreneurship as driver of growth
By Shahid Javed Burki
Monday, 21 March, 2011
WITH Pakistan being the poorest performing economy of South Asia, is there something the policymakers in Islamabad and the provincial capitals could do to get the economy moving again?
In fact, there is something that can be done by the state to revive the growth process. It is about the role entrepreneurship can play in reviving and developing the economy and, in the process, developing the underdeveloped Pakistani firm.
Initially the developing world relied on their governments to create the environment which would make possible the transfer of workers from low productivity activities as well choose the activities in which these workers would get engaged. India under Jawaharlal Nehru, the country’s first prime minister, became the most articulate advocate of what can be called the “state-led model of economic growth.” With many regime changes, Pakistan wavered between the approach to put the state on the commanding heights of the economy, and the approach to free private entrepreneurs to work on their own without too many restrictions placed in their way. It is the latter approach that is now at the centre of what is called entrepreneurship-focused model of development. In this model the kitchen is left in the hands of the private sector to mix the ingredients for growth in the way that is the best to produce the best results. What good entrepreneurs do is to develop “production recipes”.
The “recipe” metaphor was used recently in a report done by group of consultants for the Planning Commission. Professor Philip Auerswald of George Mason University who headed the team explains that in traditional development economics the emphasis is placed on inputs and outputs – so much labour and capital need to combine to produce so much output – but not on the “recipe” that will turn the inputs into outputs. It is the recipe that really produces growth at the margin.
He calls this the “production recipe” to distinguish it from the “production function” of growth economics. Even though in recent years other variables such as human development, technological improvements, and institutional capacity have been brought in directly into the production function, there is still not the full recognition that it takes individual firms to play the role of a chef to produce the best meal out of the available ingredients.
Firms only exist when the cost of doing business is reasonable and what economists call “transaction” costs are not excessive. If these are high as can be the case when the political and bureaucratic systems suffer from a great deal of corruption, or when the state of infrastructure is poor, or when the regulatory system is very demanding, efficient firms will not develop. Too much entrepreneurial energy will be spent on dealing with these distractions in the production process. These are Pakistan’s conditions today; resolving them would help entrepreneurship to play an important role in economic revival and growth.
Auerswald also maintains that the growth of an economy usually means growth of firms and only those firms be come growth oriented when they work on their recipes to improve the efficiency of the production process as well as the quality of the output being produced. There are three different ways in which ordinary firms become growth firms.
First, they make modifications to the existing production recipe. This they do by learning from their own experiences. Second, they create their own recipes. This requires investment in research and development and, of course, entrepreneurship. Third, when an environment is created that allows the entry of new firms that bring in new ideas while encouraging the exit of those that have lost the cutting edge because they are set in their own ways. At the margin, much of the growth that occurs comes about because of the entry of new firms.
If it is expected that a growth strategy must give considerable attention to the development of firms, what are precisely the policy options the state must emphasise. Here some international experience should help to point to some of the areas of considerable importance to forge ahead. The first is investment in the development of human capital, a neglected area in the country.
Those who study China’s extraordinary economic growth since 1979 when the reformist Deng Xiaoping established his control over the Communist Party and thus over the country, should recognise that he would not have been able to achieve his miracle, unless Mao Zedong had not prepared the Chinese population to develop themselves and the economy in which they worked.This was done by providing universal education and healthcare and by liberating women. That said Deng would not have achieved the remarkable transformation of the Chinese economy had Mao not preceded him.
If the development of human resource is critical for the development of the firms, it will need the expenditure of enormous amount of resources to close the gap that exists in Pakistan in terms of what needs to be done in this area and what has actually been accomplished.
While the state’s performance has been weak, the private sector – often led by entrepreneurial women – has done very well. The Beaconhouse is said to be one of the largest schooling system in the world. This is a classic case of entrepreneurs improving the production recipe to provide an output with high demand. In their case, the demand is by the large middle class for quality education that is not provided by the public sector. The Pakistani state stood aside and let these systems develop.