What Role for Entrepreneurship in Economic Development? Peter J. Boettke 2004 Hayek Fellow, LSE Oxford University October 12, 2004

Types of Entrepreneurship Arbitrage  Discovering the price gaps that exist and acting on that margin to close the gap Buy low – Sell high Innovative  Discovering new trading opportunities (Smith)  Discovering lower cost or new technologies (Schumpeter)

Graphical Representation A BC GUNS BUTTER

But What Determines the Type of Entrepreneurship in a Society? The quality of institutions in any given society  Rules of the game  The Legitimacy of the rules Social capital issues  The enforcement of rules Public Policies Adopted in any society  Security of Private Property Rights  Freedom of Contract  Monetary restraint  Fiscal responsibility  Free Trade

The New Comparative Economics Framework: Analyzing Institutional Choice Public Predation Private Predation Socialism State regulation Common law courts Self-government Questions: (1) how do you move between different enforcement regimes, and (2) how do you shift the entire institutional possibilities frontier in to get less ‘bads’

Institutions and Entrepreneurship Effectiveness of different regimes is a function of relative price of enforcement Relative prices guide behavioral adaptations Entrepreneurial activity responds to relative prices  Productive  Unproductive  Evasive

Evidence – papers with Chris Coyne Productive  New start ups (not privatizing old firms, but new entrants)  Rates of innovation and technological absorption Unproductive  Rent-seeking Friedman evidence on regulatory burden  Corruption and Theft Soviet Union Romania Evasive  Expenditure on avoiding detection Romania Dom Republic

Conclusion Entrepreneurship is omnipresent – Entrepreneurs are present in all settings. Cultural explanations for a lack of entrepreneurship overlook what people have in common – namely alertness for profit and to improve their general situations. Underdeveloped nations do not lack entrepreneurship. Rather, entrepreneurial activities exist, but are not directed toward productive ends conducive to economic progress. Government cannot create entrepreneurship – Given that entrepreneurs are omnipresent, government policy cannot “create” entrepreneurship. Instead, emphasis should be placed on creating a general institutional framework, making payoffs to productive entrepreneurship relatively high compared to unproductive and evasive activities. Resources should not be allocated to “encouraging” or “training” entrepreneurs, but to developing the necessary institutional context to allow productive activities to come to the forefront.

Conclusion (continued) Transparency and accountability are critical for reform – In many cases, the lack of transparency and accountability allows officials to abuse the law for personal gains. One key mechanism for creating transparency is a free media industry which serves as a check on those in positions to abuse the political and legal institutions (see Coyne and Leeson 2004). Increased transparency and accountability reduce the payoff to unproductive activities. Reform needs to be decentralized – Reform efforts should be decentralized to the local level so that those that truly understand these challenges are involved in the reform process. For example, as discussed previously, entrepreneurs in rural Romania face a special set of challenges. Currently, the national government controls all reform efforts and neglects the unique situation of rural entrepreneurs. Identifying and maintaining indigenous institutions is key – Indigenous institutions are embedded and accepted means of coordinating activities and overcoming situations of conflict. As such, they provide a ready-made framework for increasing coordination on a large scale. Institutions, practices and markets that are informal or “black” should be incorporated into the formal sector.