International economic development organizations agree that entrepreneurial success in the developing world can alleviate many key world problems. Daniel Evans & Louis Boguchwal, researchers from the Network Science Center at West Point, US, introduce the methodology they developed to evaluate local entrepreneurial ecosystems. This post is the first in a series.
According to the International Monetary Fund’s Perspectives on Youth Employment in the Arab World report, unemployment in the Middle East/North Africa (MENA) region is the highest in the world and is largely a youth phenomenon. Overall unemployment is approximately 10%, but the youth rate stands at almost 25%.
The report also states that over the past 50 years, MENA countries and Sub-Saharan Africa have had the highest labor force growth rates in the world due to a combination of large declines in infant mortality rates and high fertility rates. The number of MENA labor force entrants remains daunting – approximately 10.7 million new entrants are expected to join the labor force in the coming decade, compared with 10.2 million in the previous one.
This growing labor force, combined with the recent political and social changes in the region, only contributes to this high unemployment rate. As the Finance Minister of Zambia stated, this combination of a growing young labor force with a lack of employment opportunities is a potential “ticking time bomb.” A recent analysis of the Arab Spring by Filipe Campante of the Harvard Kennedy School and Davin Chor of the Singapore Management University concludes that the lack of employment opportunities was a major factor in the recent civil unrest in North Africa.
Entrepreneurship is the solution
In order to address this issue, scholars such as Mongi Boughzala, a professor of Economics at the University of Tunis El-Manar and a Brookings Institute contributor, believes that the long-term solution to this problem is the development of the private sector, especially vibrant Small and Medium Enterprises (SMEs).
Major international economic development organizations such as the World Bank, International Monetary Fund, and the United Nations agree that entrepreneurial success and the establishment of SMEs in the developing world have the potential to alleviate many of the world’s social and economic problems.
A recent World Bank report claims that successful SMEs are:
- – Engines of economic growth.
- – Essential for a competitive and efficient market.
- – Critical for poverty reduction.
- – Largest provider of employment in most countries.
- – A major source of technological innovation and new products.
- – Employers of poor and low-income workers.
- – Sometimes the only source of employment in poor regions and rural areas.
How to facilitate entrepreneurial success?
A critical question remains: How can an environment be established that facilitates the creation and success of SMEs? This challenge is critically important because of the inefficiency of economic development work over the past 50 years. According to Dr. William Easterly, a noted economic development expert at New York University, over $2.5 Trillion of aid and investment has been spent on economic development in emerging economies since the end of World War II with mixed results.
In his 2008 paper entitled, ‘Where Does the Money Go? Best and Worst Practices in Foreign Aid,” William Easterly suggests that economic development organizations need to:
- – Implement better feedback mechanisms
- – Develop more specific investment objectives
- – More rigorously define “success”
Metrics of success
General metrics of success are currently measured in aid and investment fund volumes. Easterly believes that more rigorous metrics can lead to more efficient uses of funds. For example, can specific targeted investments or policy decisions be identified as actions that will more likely result in a measurable Return on Investment?
Additionally, entrepreneurial ecosystems largely depend on their location, as history, culture, and other local factors shape the economic landscape. For example, extended families in West Africa exert great influence on each SME’s business decisions. Consequently, policies that do not account for these differences are expected to continue the inefficient spending trends seen in the past.
Bethlehem Alemu, founder of SoleRebels, a shoe manufacturer in Addis Ababa, Ethiopia employing 90 people. Employees are paid four times the legal minimum wage and receive 100 percent medical coverage for their families. The shoes are exported world-wide and they expect to generate between $15-20 Million in revenue by 2015.
Our team at the Network Science Center at West Point has developed a methodology that accurately evaluates a local entrepreneurial ecosystem. The quantitative techniques involved incorporate local customs, norms, and differences, potentially resulting in more effective policy recommendations than those seen in the past. We discuss this in our next blog post of the series.