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emerging economies

Cloudy Job Prospects: Why Entrepreneurship and Not Leadership Is Critical in Transitioning Economies

(Wordcount: 3,120; Pages: 8) In global comparisons of relatively new democratic economies, workers switching jobs to companies with higher profitability than the company they leave may actually experience declines in wealth, not increases. This can be attributable to these economies not institutionalizing profit-sharing programs where workers are permitted to own a piece of the company they work for, and consequently, profit from it, as is the case in the U.S.

Naturally, this loss of wealth from switching jobs makes these global workers less inclined to leave the job, preferring to stick it out with the hopes of accumulating wealth at one company. But sadly, promotion schedules can be measured in decades, slowing the velocity of wealth accumulation to a strenuously slow schlep. This sort of career prospect has been attributed to the lack of organized labor, but just like organized labor, it yields the same results: diminishes job prospects for the rest of the workforce (since there is little-to-no transition by workers between jobs) and harms the next generation of workers who want to enter the labor pool but are hindered by their parents who feel they can't quit a job better suited for their kids. (It also promotes stagnancy in national educational standards.)

The challenge in an emerging democratic economy then appears to be how to liberate its workers from this vicious, spiraling cycle of no incentives to stay, yet no incentives to leave jobs that, as time goes on, become obsolete, rendering the employer uncompetitive in the marketplace, and ultimately, to economic ruin for all.

The Problem is Lack of Entrepreneurship

If employers (and employees) are hoarding jobs and pay for those jobs, or there aren't enough jobs for everyone, that's a lack of entrepreneurship in the economy, not the employers' fault, as an ignorant worker can easily be lead to believe. Thus, create more programs, through government or industry support (support from banks) that foster easier access to capital and resources to launch new companies. Farmers are entrepreneurs. Rural families are entrepreneurs. So people don't just forget how to be entrepreneurial as they ascend the economic ladder.

On the other hand, according to the World Bank, it's infinitely harder and costlier to launch a new venture in anything but the most democratic democracies, and even then, it's not always so cheap (1). Thus, to further stimulate entrepreneurship, ideas are crucial; ideas that are less capital- and resource-intensive; ideas that depend on the current infrastructure (which no doubt is the reason for the difficulty of starting new businesses in the Middle East and North Africa, for example), rather than require the entrepreneur to build his own from scratch. And by infrastructure, it also means a solid legal system and an abundance of professional managers.

Where Have All the Entrepreneurs and Ideas Gone To?

Figure 1: Bureaucratic and legal hurdles an entrepreneur must overcome to incorporate and register a new firm
Source: World Bank International Finance Corporation Doing Business Report: Starting a Business; al berrios & co. analysis

When faced with class and wealth distinctions, a society will either "capitalize" whereby the natural, unencumbered progression of wealth accumulation and dissemination creates two distinctions of upper and lower-income cultures among the population (middle-income is a uniquely democratic government innovation to keep the "masses" from becoming restless at the inevitably poor quality of life that results from no government intervention within a purely capitalist society); or "socialize" whereby the government, through subsidized social services, special taxation and other mechanisms "equalizes" wealth across the entire population or in a more extreme scenario, eliminates property rights entirely from the population, concentrating those rights in itself as a dictatorship, monarchy, or some form of authoritarian government.

A (government regulated) capitalist society has natural incentives to spur select members within any segment of the population to launch a business. The ideas for these businesses originate primarily from the desire to incrementally improve some facet of modern living, the impetus being, "Why not?" Relatively easy access to funding and resources, including professional management, is guaranteed to turn the venture into a jobs-producing, tax-generating, wealth-creating organization, where all constituents are happy. (Professional management training, of course, is what the business of business schooling is all about.)

A socialist society evolves from the (unenlightened) perspective of select members of the poorest segment of the population that there is an uneven, and thus, unfair, distribution of wealth and resources among the population, and no clear means of equalizing this disparity (they, after all, are rarely economic experts. And the rich and educated never feel things aren't fair).

Thus, with government intervention (sometimes involving force) being the simplest (and often, deeply ingrained) answer to these sort of "societal ills", assets are redistributed, but not from person to person, since that would also be perceived as unfair, but rather, from population to government.

(No sooner does this occur than these individuals realize that their solutions were misguided. Unfortunately, there's something addictive to poor, uneducated people about authority, especially when financed in the short-term by their perceived enemy, the rich, and when that runs out, and their greed evolves, that authority is financed in the long-term by taxing everybody, including the poor).

The government then "logically" - but with a methodology that's often considered less-than objective - rations out necessities, because, in the perspective of these sorts of governments, individual citizens can live without wants (for the benefit of the government).

Since the population of a socialist economy (if it can even be categorized an economy) is deprived of wants, there are no needs for incrementally improving their lifestyles, and thus, a severe dearth of ideas. And without ideas, the most obvious entrepreneurial endeavors are those that mimic government endeavors, all of which undoubtedly require immense effort, cost and capital to launch.

You Can't Teach or Learn Entrepreneurship

"Quickly teaching the thoroughly risk-averse to take risks after a lifetime of programming is about as effective as convincing them to jump off tall buildings as a remedy for headaches."

There are countless programs by global institutions that train potential leaders how to be leaders in an effort to sow the seeds of entrepreneurship and reverse the damaging effects of the death-cycle discussed above. Unfortunately, quickly teaching the thoroughly risk-averse to take risks after a lifetime of programming is about as effective as convincing them to jump off tall buildings as a remedy for headaches. (Even these "teachers" aren't fully aware of what an entrepreneurial leader is since they've rarely lead anything but an obedient classroom and even more common, have never launched a business venture).

Consequently, the leadership training refers to professional management training; but all that professional managers can manage are already existing enterprises. Since new enterprises in emerging democratic economies are few and far between (many enterprises likely being former government agencies and highly bureaucratic), there are few posts available for this sort of "leader".

In order to halt the inevitable cycle of economic ruin brought about by a trapped labor pool, inefficient industries, and policies that do more harm than good, the true "leader" required by emerging democratic economies are entrepreneurs, entrepreneurs with exciting creativity, burning ambition, and passionate selling ability - things that can't be taught or learned in a classroom.

To understand how to draw out this segment of your population, we must isolate the behavior that drives entrepreneurship. There are three types of entrepreneurs and therefore three categories of behaviors:

1) Serial entrepreneurs - require constant stimulation brought about by constant change (this expands their risk parameters while diminishing the number of ways to motivate them); require constant attention (the consequence of, or perhaps, the spark for, their magnetic and passionate personalities); big, nearly-insurmountable goals.

2) Entrepreneurial managers - are organized, "experienced", and measured (to minimize fall-out from "calculated risks" gone bad); are easily motivated by material goals; have to work harder to prove themselves and gain confidence of their constituents.

3) Lifestyle entrepreneurs - start businesses to survive, not accumulate wealth (thus rarely exhibit a passion for anything); readily adapt to intense sacrifices (which inevitably dulls their senses, including common); value security and familiarity above all else. (2)

Fixing the Imbalance of Capitalism in Emerging Democracies By Growing Your Own Entrepreneurs

Figure 2: Cost involved in launching a commercial or industrial firm with up to 50 employees and start-up capital of 10 times the economy's per-capita gross national income (GNI).
Source: World Bank International Finance Corporation Doing Business Report: Starting a Business; al berrios & co. analysis

First, set the rules. The rules (laws) should be absolute, so as to fix things like prices, eliminate rationing of resources, and permit the first swath of entrepreneurs to take a few first steps by protecting property, rights, and enforcing decisions between two parties. (Regrettably, in many instances, local entrepreneurs aren't the first to exploit these new rules, but instead big foreign firms. Consequently, a certain level of protectionist regulations may be required in order to allow local entrepreneurs to get a decent start).

Second, if the mission is to spur the economy using internal resources, the government must commit to investing their own funds in the foundations of change, from education (from which a talented labor pool, infrastructure, and sophisticated lending programs evolve) to hiring (to demonstrate to its population that it has confidence in its investment in its people. Heavy importing and dependence on foreign involvement in local industry and the loans that come with it skews this perception, causing the government's authority to erode amongst its people.)

Third, once the groundwork has been laid, invest in the actual infrastructure, from energy production to transportation, so first and foremost, enterprises can move their goods around the country, but also, so their workers can get to their jobs easily and cheaply. Note that it took over 100 years to get the oldest democratic governments to this point. Despite not needing to invent the light bulb, steel, or the automobile, it should still take well over 30 to 50 years for an emerging economy to reach a similar point. And since democratic governments (and priorities) change relatively fast, it should not surprise anyone if this development takes longer. Thus, in order to ensure such long-term commitment in democratic governments pans out to the benefit of the economy, these investment decisions must be codified into laws, laws which even politicians can take credit for as evidence of their productivity at their posts. (Granted that nothing says productivity like a new bridge or hospital, but in politics, favorable press leaves as memorable a legacy as actions. More importantly, what good a bridge without roads to lead to it or hospitals without trained workers to use them?)

The first response of select people within an emerging democratic economy is to look for work. But after a lifetime depending on an infallible government to survive, that's the first place they look for a job. If the job-seeker can't find work within government, the citizen is left without recourse except to migrate someplace easier to survive or recognize their need to evolve along with the economy in order to exploit it. (Ironically, in the pursuit of a lifestyle within an industrializing economy, agricultural skills are either forgotten or made obsolete by the rules the government [should have] instituted to spur economic growth.)

This transition introduces the population to a lifestyle where incremental improvements are indeed superior to what they had before, and in short-order, serial entrepreneurs will arise. In their efforts to launch businesses, they'll overcome the near-insurmountable tasks of finding funding, registering their business with the appropriate government agencies, and learning how their business contributes to the overall economy through jobs and taxes. The experience can then be used by government to tweak their system (if they so choose, since it also introduces new opportunities for graft, a legitimate business for lifestyle entrepreneurs since the name of their game is survival in an overstaffed and inefficient government that rarely promotes or increases pay to equal the newly increasing costs of living).

Serial entrepreneurs aren't happy being the first guinea pigs, but they eventually recognize that if they succeed, their status also presents them with opportunities to exploit government, too. This mutual exploitation ultimately benefits only the few, and always the key few. And this, more than elected officials' term limits, is what hinders the planned recognition of economic benefits brought about by infrastructure investments; as long as human greed exists, it's also absolutely unavoidable.

When Entrepreneurial Managers Rule, The Vicious Cycle Winds Down

But human greed can be exploited also, particularly if you're the serial entrepreneur in an emerging economy that's instituted the fixes above. The symbiotic relationship between entrepreneurial managers and serial entrepreneurs exists so strongly only because where the serial entrepreneur enjoys starting and doesn't mind, in fact, prefers, leaving the company they founded to launch new ideas, they always leave plenty of wealth on the table for the next generation; and that's exactly what entrepreneurial managers need to thrive: a profit-generating enterprise.

(Founding entrepreneurs who never leave their businesses are not serial entrepreneurs because they're trapped by the same job-switching paradox that regular workers are trapped by, so they hold on, like a hungry coyote to its prey, to the companies they founded because doing it again is nearly impossible.)

In order to extricate himself from the venture while simultaneously taking the wealth he feels he's entitled to - the wealth that made launching the enterprise worth the while - the most widely accepted option is distributing the ownership among a larger group of people. The ownership is distributed when this group pays for it, just as the serial entrepreneur did. These payments are made to the entrepreneur, but so much remains, that a new crop of managers, hired by these new owners to manage their investments, is incentivized to take risks on the new enterprise. (And this is why entrepreneurial managers are a category of entrepreneurship.)

This new ownership dynamic is the ideal environment for entrepreneurial management and indeed, is a gift for the population of an emerging economy, because it is at this phase of the evolution of the economy that the ordinary worker has the most leverage. Entrepreneurial management is only interested, capable, or trained to reallocate resources in order to maintain the vision and direction of the founding entrepreneur, since it's that vision and direction that's generating the most money and that's what the new owners want. So, since entrepreneurial management didn't start the enterprise, they rarely interfere with this vision and direction (in fact, they may even be characterized as professional managers or caretakers, regardless of the changes they make. Of course, there are always exceptions).

The entrepreneurial manager is thus quicker to arrive at a consensus among all his constituents in order to keep the cash (and more of it) coming in. Not surprisingly, this consensus typically includes representation of the ordinary worker (by unions), representation of the customer (by marketers), and most importantly, representation by the owners (stockholders).

The identifier of an economy transitioning from emerging, where prospects for the labor pool are always cloudy and growth is shaky, to a growth economy, where prospects are unbounded, is when entrepreneurial managers are running more companies (launched by serial entrepreneurs instead of government) than serial entrepreneurs and their families. And this transition takes a generation (or two), which is why historically, the "entrepreneurial spirit" is most potent in every other generation.

Fighting The Vicious Cycle Before It's Run Its Course

"Even politicians yield to mobs."

Of course, nothing prevents society from trying to correct its economic imbalances ahead of schedule. And here are some consequences for the impatient:

- What does one do when someone is being greedy? Stop wanting what they have. Thus, if entrepreneurs are being greedy with jobs and pay, organize worker strikes until they permit the opportunity to unionize or grant pay more in line with increasing costs of living. Last time we checked, they can't force people to work in a democracies; well, in most democracies, anyway.

In these sort of stand-offs, two things occur: a) workers give up too quickly since they can't financially support themselves or b) the quality of the company's products, and subsequently, their consumer base, deteriorates, causing them to consent to union demands.

To avoid the first scenario, history has shown that unionization efforts require pre-arranged financial support, usually in the form of savings by participating workers. (Later, "member dues".) Since no human being knows how to save for rainy days without the most disciplined will-power, and is even less inclined to spend it on fighting their employers, unions also depend on the psychological support of camaraderie of other workers in the industry or related industries to pressure wavering strikers, employers and the influential people in their lives to support their demands. Remember, even politicians yield to mobs. The pressure tactic works quickest with entrepreneurial management. Serial entrepreneurs tend to fight tooth and nail (and sometimes guns) to fight pressure, quality and customer erosion be damned.

- And regarding promotions, if a manager, despite his/her qualifications, is complacent enough to remain at a job a decade or two before their "qualifications" are recognized and a raise or promotion is granted, that's their fault for letting him/herself be exploited in that manner. And the owners love suckers like this; works for peanuts and makes them richer! When professional management displaces entrepreneurial management (these are the bureaucrats and they take decades to materialize in an evolving economy), career counseling programs to help get these workers out of their ruts will evolve.

A Word on a Mature Economy - the U.S.

It's fascinating how selfish the perspective of people with few prospects can become. They believe that their situation is unique, when in fact, many people are going through the same thing. It's the exploitable drawback of a mature democratic economy, often labeled "the system" by select members of the population, that makes these same labelers forget to collaborate with their fellow "little people", where they remain stuck in their individual circumstances, unable to challenge or even question "the system".

This is what is happening in the U.S. with minorities, particularly blacks and Latinos. No matter how many incentives are provided by government through laws and employers through "special" programs (many of which whites consider unfair to them, and other non-whites couldn't care less about), these minorities consistently fail to move to a status satisfactory to them in the economy.

(The delineation by skin color has always been starker in the U.S. than in any other country. This is because despite countless generations of immigration into the U.S., they've all arrived in waves from different parts of the world, not simultaneously from all parts. Thus, since the mid-1800s, when mass immigration really became feasible - and even necessary for many - and throughout the 1960s, Irish, Italians, Jews, then Blacks and finally Hispanics, Asians and everyone else all crossed the borders or moved North and at every point in time, each wave thought they "owned" the country or communities they landed in - and none of them like to share.)

The fault doesn't lie in "the system", but in the lack of entrepreneurial leadership within minority communities (which is completely opposite to their white counterparts who have always collaborated and supported their entrepreneurs in all their forms admirably.) The "leaders" minorities currently look towards are some of the greatest athletes and entertainers on the planet (a direct consequence of what American society has always applauded them for as opposed to their mental abilities) and regrettably none of them are qualified to seriously lead their communities.

(1) World Bank International Finance Corporation Doing Business Report: Starting a Business

(2) Berrios, Al, "Entrepreneurship: Job Description or Lifestyle?"

Al Berrios is Managing Director of al berrios & co., an innovative strategy consulting firm advising leaders on the impact of human behavior on their strategies and on how to change their organizations to address the behavior. Write to Consumer Strategies Report at editor @ alberrios.com.


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