Why private sector entrepreneurs are key to economic growth in 2016

EDITOR’S NOTE: In 2016, developing countries need new strategies to continue economic growth. Overseas Development Institute’s Linda Calabrese and Judith Tyson explains why turning to entrepreneurs may well be key to keeping private sector growth on track.

Developing countries had a difficult 2015. Commodities — the major export and source of foreign currency for many developing countries — saw prices reach post-crisis lows. Sharply slowing growth in China and a tentative and weak recovery in Europe and the United States have hit their export markets.

On the other hand, investors with high-risk appetites have flooded into “frontier markets” in Africa and Asia driven by the perceived new business opportunities in these regions. This has included private equity and sovereign bond investors.

In 2016, developing countries need new strategies to continue economic growth and seize the opportunity from these flows. This means moving away from reliance on commodity exports and increasing employment-intensive manufacturing and services, which can create the much-needed job opportunities for their young populations.

Private sector investment is critical to achieve this. Governments need to encourage entrepreneurial zeal and provide adequate support to investors.

So what policies can best ensure that private businesses are willing and able to invest?

Not necessarily the conventional wisdom of the World Bank’s Ease of Doing Business indicators. This says that clear rules and a level playing field encourage investment — but the results of implementing policy based on these criteria have been ambiguous.

Low-income countries with low scores on the “Doing Business” indicators do often fail to attract investment — 27 out of 29 of these countries rank below 120 (out of 184 countries globally). But the evidence suggests that while a good business environment is of course desirable, it is not sufficient on its own to attract private investment.

For example, Mozambique and Ethiopia both scored poorly on the 2015 Doing Business indicators, ranking a lowly 128th and 148th respectively. Yet they attract plenty of investment: gross capital formation as percentage of gross domestic product is 51 percent for Mozambique and 39 percent for Ethiopia in 2014.

Conversely, Kazakhstan and South Africa — which ranked a respectable 41 and 73 — had much lower levels of gross capital formation, at 24 percent and 20 percent of their GDP in 2014. In reality, there is little connection between scoring well in terms of ease of doing business, and effectively attracting investments.

What’s missing here? Look at the investors spending their money in countries like Chad or Mauritania. Even though on paper these countries do not have good investment environments, they offer the opportunity to make money.

The World Bank criteria omit one critical condition for private investment: a great business opportunity.

Equally important may be factors that create a perception of business opportunity. That includes those who see opportunity in being the first investors into a new country or sector in order to realise high returns. It also includes business environments — including political environment and infrastructure — that are perceived as stable and supportive of rewarding risk-taking.

The good news for developing countries is that opportunities to make money can be created anywhere, and governments can nurture and support them with specific policies. For example, policy can target business needs for help with public goods. This includes infrastructure such as energy and transport as well as ‘soft infrastructure’ such as trade and customs formalities.

What makes entrepreneur perceive a great opportunity, the Keynesian “animal spirits,” is always easy to see but hard to define. Nevertheless, for developing countries, making 2016 the “year of the entrepreneur” may well be key to keeping private sector growth on track — and protecting them from the threats to commodity prices seen in 2015.

Edited for style and republished with permission from the Overseas Development Institute. Read the original article.