The Ugandan streetscape is full of entrepreneurs: the many shops and sellers are giving the impression that half of the population is selling things to the other half of the population. There are a lot of small scale craftsmanship’s like sewing, furniture making and carpenters. And the transportation sector that consists of many boda-boda drivers (moter-taxi’s) and matatus (minibus taxis). Measured on the number of business owners and self employed individuals Ugandans are much more entrepreneurial than (for example) the Dutch!
But I think the business activities undertaken by those entrepreneurs do accurately signal the problem of inefficiency and poverty in low-income countries. Many business are similar and for this reason do not really add value to the economy.
One typical example: There are several mobile telecom providers in Uganda and most of the Ugandan people own a mobile telephone. Mobile telecom is one of the biggest industries. Almost all the subscribers are pré paid: you buy a SIM card for 3000 Ugandan shilling (€1,25) and airtime ranging from 1000 Shilling up to 20.000 shilling. Airtime is sold on every street corner. Many small outlets only sell airtime. The distribution network of the telecom providers is brilliantly dense. Dutch telecom operators would be jealous. Good for them, easy for me as consumer, but is this an efficient economy?
The same patterns shows for consumer goods (shops everywhere), food (restaurants or teashops), tank stations, boda-boda drivers: there are far too many competitors to stay busy and be productive. Low productivity equals low income. It would be better if economic activity was organized differently. So, who is organizing economic activity?
The most common definition of an entrepreneurs is someone who owns and is in charge of a business. Wikipedia defines the entrepreneurs as: An entrepreneur is a person who has possession over a company, enterprise, or venture, and assumes significant accountability for the inherent risks and the outcome. In Uganda the exact number of business owners is not known. Estimations range from 100.000 to more than 1 million, making them significantly imprecise. Partly these deviations are caused by differences in definition. But the most important reason for this is that most business owners operate it what is called the informal sector: they are not officially registered as a business.
Most of the enterprises in Uganda are called micro-enterprises. Micro-enterprises are defined a business started with as little capital as possible, or less capital than would be usual for a business. Typically they have 5 or fewer employees and a seed capital of less than $10,000 (for many of them the with significant lower). The above examples of airtime sellers, transporters and craftsmanship’s are good examples. Most micro enterprise owners are in business because it is their only way to earn some income. The little income they can generate in an already overcrowded market is more than welcome. The businesses operate on subsistence level: cash in is cash out. Most of the earnings are used for the family and the level of re-investments or expansion investments in micro enterprises is very low. The ambition to grow is limited.
It will be clear that these entrepreneurs are not really entrepreneurial. And their business models will not be very sustainable when real economic development hits in. But when this happens there will be a better alternative: paid jobs. The absence of paid jobs is essentially the reason why they are in business. So the question is: how to create jobs that add value to the economy?
It is generally recognized that in high income countries small and medium enterprises (and not micro enterprises) are accountable for a significant proportion of employment. Small and medium businesses (SME’s) account for 51 percent of America’s gross domestic product. More important: small and medium enterprises are accountable for growth in the number of employment. More than two-third of the new jobs in America are created by small and medium enterprises. From 1989 to 2004, by one estimate, they created 30 million jobs, while in the same fifteen year period, Fortune 500 companies shed 5 million.
In low income countries the contribution of SME’s to employment, employment creation and gross domestic product is much lower. The most important reason for this is the small number of SME. In the literature the absence of SME’s is called ‘the missing middle’. This is illustrated by the graph below (source: Harvard).
To reframe the question again: how to create jobs by stimulating the rise of the number and size of SME’s?
I think the answer is in another definition of an entrepreneur, also quoted in Wikipedia: Entrepreneur in English is a term applied to the type of personality who is willing to take upon herself or himself a new venture or enterprise and accepts full responsibility for the outcome. In this definition the entrepreneurs is in essence a personality type. Most mentioned character traits of entrepreneurs are: high level of energy, need for achievement, drive to be independent, high need for control, (moderate and thoughtful) risk-takers, high degree of resourcefulness, high degree of determination, sense of urgency and pragmatism, high degree of integrity and strong communication skills. My estimation is that the business owners as a subset of business owners is very small, probably a few percent.
This type of entrepreneurs (that are also more or less capable) is are the best change agents for development in countries like Uganda. Supporting them also addresses the classical challenges of developmental aid in a natural way:
- Ownership: They are self-motivated. It is their own ambition to create and develop. The entrepreneurs are real owners of their business.
- Sustainability: a successful business is the ultimate example of sustainability. Successful businesses are making a profit, are growing. They are a catalyst for wider progress to be made. They provide the owner and employees with generate the perpetual stream of income needed to uplift their lives in other areas.
In the next blog I will discuss how the needs of those entrepreneurs (let’s call them the ‘business builders’) can be addressed and how they are currently supported.
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