now bout business man. He cyant even run wan cake shop and he talk bout businessman. Hey hey hey...
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The entrepreneur and Guyana’s economic development
By Tarron Khemraj On May 20, 2018 @ 2:12 am In Business Page |
Next week I am presenting a paper at the first entrepreneurship conference to be hosted by the School of Entrepreneurship and Business Innovation, University of Guyana. My task is to tease out the role, if any, the entrepreneur plays in Guyana’s economic development. This is not a straightforward assignment, so I consulted the economics literature. At minimum a definition of entrepreneurship is necessary before we can discover its role in development. In my presentation I argue that if entrepreneurship is contributing to Guyana’s development, and will continue to do so, it must have the potential to influence the very long-term trend per capita income. The cycle around the trend will be determined by short-term business sentiments and external shocks.
Economists define entrepreneur as a risk-taker, innovator and someone in control of a production technology. The person owns a business and as such is the also the manager of the business. She looks for opportunities and in doing so is allocating society’s resources, hopefully in an efficient useful manner. However, not all managers are business owners. For example, the CEO, chief executive officer, company secretary and other management of a publicly traded company may not be owners of the company. They manage the company that is owned by shareholders, but they can also innovate and they take risk, albeit with the funds of shareholders. The mismatch between management and ownership could result in information-based problems and abuse. A major issue in corporate finance is to address exactly this problem.
The same can be said about state-owned corporations like GuySuCo. The company is owned by the people of Guyana, but it is managed by professionals. An enlightened government would be able to design an incentive system to make sure the managers’ interest is aligned with the best national interest. The task of government is to minimize the kind of incentive problems that can occur. Therefore, the second point of my presentation is the University of Guyana should be thinking about management, public and private, as an equal complement to entrepreneurship. In my time as a student there, the university had a general management degree that was closely aligned to the economics programme. I cannot fathom how one can study entrepreneurship without a broad perspective in the natural and social sciences and statistics, as well as arts and literature. Jeff Bezos and others are well aware of the necessity of a broad education, thus pointing out how well liberal arts students do as entrepreneurs.
We can think of entrepreneurs as the self-employed person out of necessity. These folks could be our vendors and small shop owners. Another category would be opportunity-based entrepreneurs and yet another category would be disruptive or innovative entrepreneurs. The use of the word disruptive goes back to Schumpeter who saw Capitalism as a malleable system of creative destruction. The entrepreneur, according to Schumpeter, is the innovator churning out new technologies that destroy old ones, but overall do more good than harm. Schumpeter got the metaphor of creative destruction from the Hindu Trinity: Brahma, Vishnu and Shiva.
It is important to consider what we mean by technology. A technology is a process of production that transforms labour input, machine, land, management, etc, into useful goods and services. We have technological innovation when a new technology can produce the same output with less inputs or produce more output with same amount of inputs. A technology does not necessarily mean a gadget like the iPhone or laptop computer, although they become an important input in the management decision. A technology could be a management method that organizes businesses better for greater productivity. For example, containerized shipping, just-in-time management and 3D printing are important innovations resulting in efficiency gains. While the former two enhance efficiencies for existing businesses, 3D printing is creating small and medium-scale enterprises catering for niche and heterogeneous demands.
In addition, there are fundamental innovations that result from the basic sciences invented at universities, government research labs and private labs. There is a debate among economists, however, that the new internet-based technologies of today are not creating the kind of broad prosperity like old ones such as the light bulb, power generation, steam ships, air travel, automobiles and many others. This prompted the great Joseph Stiglitz to say that the invention of toilet was much more important than invention of Facebook.
In the Guyanese context, we can think of the entrepreneur as producing in the tradable sector, non-tradable sector and underground economy. The tradable sector is the one which is the net earner of foreign exchange. This would be your exporter of various kinds. Innovation would be necessary for export success since preferential prices are gone. The non-tradable sector would be the net user of foreign exchange, but involves important production activities where innovation can take place. This sector includes education, healthcare, legal services, telecommunication, internet providers, accounting firms, waste management, builders and contractors, barber shops and all the small mom and pop businesses. Clearly this sector presents the potential for innovation, particularly in the area of drainage of the coastal plain. The accounting or legal firm are non-tradable and likely opportunity-based.
The underground economy includes the small itinerant vendor or the big time smuggler of all things like fuel, gold and illegal substances. The curb side vendor is non-tradable and driven by necessity. He would probably prefer employment with benefits in a large corporation. It is true the gold or drugs smuggler might bring back some foreign exchange, but this cannot compensate for the destruction and corruption of legal management and police work. It also redirects human resources from the official to criminal economy. It destroys human capital more than migration. This can never be a good thing as it destroys the society’s capacity to generate new systems and innovation. Furthermore, money laundering inflates asset prices, such as homes and land, thus making life more difficult for teachers, nurses, business managers, civil servants, vendors and others. The only innovation the smuggler does is in cheating, corrupting and undermining, which can never result in broadly shared prosperity.
No doubt, entrepreneurship and management – both public and private – will be crucial if Guyana is to escape the natural resource curse. The reader can discern which sector is more likely to have contributed to Schumpeterian innovation and will continue to do so. I think tremendous possibilities exist in the non-tradable sector as well. Over the years, I have identified a few of the deep constraints inhibiting the private sector in Guyana. I provided some trend analysis in my paper and a discussion of deep structural constraints that must not be misplaced for prima facie constraints. For example, survey data from an IDB study indicated that financing is a problem. As a result, many small businesses self-finance. Self-financing, however, has been around since before and after 1838 in Guyana when Africans pooled savings for buying land. Financing is therefore a prima facie constraint, signalling a deeper constraint pertaining to the contestability of banking in Guyana. Contestability means the extent to which new banks are challenging incumbents for entry. If the banking sector is not very contestable, then it is no surprise why small enterprises have to self-finance. This is important from a policy standpoint. If we focus on the prima facie constraint, then we look towards microfinance. If we think about contestability, then we cannot take industrial policy and development banking off the radar.
My paper closes off with a mathematical model of growth scenarios, determined by innovation, under the following: (i) central government provides the public goods that complement private enterprise; (ii) central government has a predatory relationship with private sector; and (iii) central government receives oil rents and has to decide whether to be developmental or predatory. The results point to multiple equilibria that depend on the initial conditions. There are hints of hit and/or miss for Guyana for the next 50 years.
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