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# 3.2 The impacts of entrepreneurial activity

Entrepreneurial activity can have decisive effects on us as individuals. It can also make a real difference to the communities we live in, to the performance of national and regional economies, and the state of the natural environment. In this task we examine these impacts of entrepreneurship, which can be both positive and negative.

Is entrepreneurship always ‘a good thing’? Research suggests that increased levels of entrepreneurial activity can help to generate positive economic outcomes, including more employment opportunities, less unemployment, lower prices, more rapid technological innovation, and increased rates of economic growth. However, entrepreneurial activity can also act in dysfunctional ways that inflict serious economic damage. The global financial crisis of 2007–10 was a particularly dramatic example, with devastating effects on individuals, businesses, and communities around the world. In a widely cited article, the US economist and entrepreneurship researcher, William Baumol distinguished between economically ‘productive’, ‘unproductive’, and ‘destructive’ forms of entrepreneurship (Baumol, 1990). He sees productive entrepreneurship as having a beneficial impact (e.g. increasing incomes and employment and meeting people’s needs). By contrast, unproductive entrepreneurship (e.g. ‘rent-seeking’ activities, such as tax avoidance) has negative effects, while destructive entrepreneurship (e.g. organised crime) can undermine an entire economy. Baumol’s historical study explores how entrepreneurial resources have been reallocated between these three roles over the centuries.

## Activity 8

Timing: Allow about 1 hour 30 minutes for this activity
1. Watch these two videos, which examine contrasting impacts of different kinds of entrepreneurial activity in Mexico and Peru. Each video lasts about seven minutes.

Skip transcript

#### Transcript

NARRATOR:
The cost of food across the world is on the rise, and many have blamed the scale of price spikes on one thing-- rampant food speculation on the global financial markets. The ecologists travelled to Mexico, the birthplace of corn, to find out how speculation is forcing up the price of the country's staple food, with profound effects felt across Mexican society.
In the mountains of Oaxaca State in southern Mexico, it is coffee production that fuels the local economy. Rural communities like these are not self-sufficient in food and are dependent on a cash crop, making them vulnerable to sudden price rises of staples such as corn.
IGNACIO CANSECO:
[Speaks Spanish]
NARRATOR:
Lorenzo Hernandez and his wife [? Genovena ?] Olivera look after their grandchildren during the day, while the rest of the family work in the coffee fields.
LORENZO CANSECO HERNANDEZ:
[Speaks Spanish]
NARRATOR:
Food price volatility on this scale has been linked directly to speculation.
MURRAY WORTHY:
Food speculation is basically the way in which banks and other financial traders can essentially bet on the price of food. And this takes place through what are known as futures markets. So these were originally set up to help farmers, and food producers, and buyers-- to kind of manage their risk of prices changing over time. But instead, what we're seeing now is other people coming who've got no connection with the food supply whatsoever, coming in and using these markets just to bet on the rising and falling price of food.
ALFONSO MURILLO:
The speculation is going stronger and stronger. Right now, we think that about 20 per cent of the total market for corn is in the area of investor-- financial investor, speculators-- that are just making a contract and re-selling the contract. They don't need the grain for any other purpose.
NARRATOR:
At a wholesale market in Oaxaca City, traders have seen prices rise in recent months.
MARIA VELASRO:
Corn prices have increased due to the cold front in February that happened in Sinaloa. It supplies nearly all of Mexico’s corn, and so supplies were affected
ALFONSO MURILLO:
In Sinaloa, that is the principal state of production of corn, there were frosts, very heavy frosts. So the production expected went down. About half of the total production was lost. So during the year we have been importing corn from the US and from South Africa also.
MURRAY WORTHY:
What we're seeing somewhere like Mexico is that when there's a good local harvest, things are fine. They can rely on the local crops. But increasingly, particularly in Mexico, domestic maise production is being undermined by free trade deals with America, where maise is much more heavily-subsidized. So now what we see is, when there are poor harvests, Mexico now relies on importing food from abroad, which is where the high prices that have come from food speculation really hit them hardest.
NARRATOR:
For Mexicans, that means higher prices for their daily tortilla.
LUIS HERNANDEZ NAVARRO:
[Speaks Spanish]
ALEIRA LARA GALICIA:
[Speaks Spanish]
LORENZO CANSECO HERNANDEZ:
[Speaks Spanish]
MURRAY WORTHY:
It's not just hunger that's the real problem here. It has massive impacts across different aspects of poverty. So for example, we found that when food prices have risen, families had to eat less fruit, and less vegetables, less meat and dairy, and have a far less healthy diet. We've also seen households that have had to eat into their savings or take out loans, just to be able to afford food. And we've also seen them have to cut back on expenditures such as health care and education. And all these things have much longer-term impacts than just the impact of a shortage of food in the short term.
KENNETH SHWEDEL:
The impact of the higher prices is felt throughout the expenditures of the poorer Mexicans. And then subsequently, it's felt in terms of a lower demand for other things within the Mexican economy, which is a real concern because we don't see the domestic demand growing as fast as would be necessary.
MURRAY WORTHY:
Food speculation has become a real issue now because of deregulation of these markets that happened about 10 years ago. What we've seen since then is big investment banks-- people like Barclays Capital and Goldman Sachs-- moving into commodity markets. So over the last 10 years, we've seen about $100 billion pour into these markets-- flooding, as I said-- the farmers and food producers that normally are around these markets and overwhelming them. And that's why this has become such a problem now. NARRATOR: In an unusual move, the Mexican government has itself begun speculating on the food futures market, in an effort to counter volatility in corn prices. But many believe that the only answer is regulation. KENNETH SHWEDEL: My particular opinion is, if you look at any regulation in the market, we've got to look at some sort of regulations, or some sort of movements, or some sort of actions which would limit the volatility in the market, as you move into the future. I'm not really worried about the large money coming in. I'm worried about the coming in, moving out, and coming in, and moving out. That's the real concern on the future. MURRAY WORTHY: So what we're calling for is a limit to be introduced, that limits the amount of the market these traders can hold. At the moment, they're dominating the market. They make up much more of the market than farmers and other traders, who actually rely on these market day-in and day-out. What we want to see is new rules put in that cap that, that limit their influence, and can then allow prices to be more fair, more stable, and more transparent in the future. End transcript Interactive feature not available in single page view (see it in standard view). Download this video clip.Video player: b205_2016j_vid022-320x176.mp4 Skip transcript #### Transcript [ON-SCREEN TEXT:] Barbara Stocking, Chief Executive, Oxfam GB. BARBARA STOCKING: You do need aid in the poorest countries because there’s no way that they can afford to put in the health and education services or even the agricultural development support that’s needed to help people get out of poverty. You need that as a base. And many of the countries, I think about the East Asian Tigers, have put a lot of energy and money in their early stages into making sure that, for example, there are good education systems. NARRATOR: A good educational system is the basis for the creation of competitive, viable jobs. Infrastructure that functions well attracts investors. Providing support to developing countries in these areas gives them the leverage they need to then help themselves. [ON-SCREEN TEXT:] Mo Ibrahim, African entrepreneur MO IBRAHIM: We need to focus on infrastructure, the arteries of commerce of trade we’ll call it. Do you have good telecommunications? Do you have roads? Electricity, power, clean water. All the basic infrastructures are really necessary for the development of the country; Education. So if that was a hardware for infrastructure, the software is the people. And we need to focus on the people. This is the people who are going to create wealth, are going to run the businesses. NARRATOR: Entrepreneurship is self-help. And it’s probably the only way that leads out of the crisis. [ON-SCREEN TEXT:] Hernando De Soto, President, Institute for Liberty and Democracy, Peru. HERNANDO DE SOTO: There is never enough money to alleviate poverty. There’s just not enough in the world. People will end up creating their own wealth the same way Europeans created their own wealth. Nobody came and aided you, you had to create it yourself. That’s the only sure way to do it. NARRATOR: Many states are aware of the relevance of capital investment and building up their economy. But they also know that they have to create a climate conducive to investment and also fight corruption. [ON-SCREEN TEXT:] Joaquim Chissano, former President of Mozambique. JOAQUIM CHISSANO: Actually, the private sector, foreign or national, is a very important tool for economic development because it’s a way of doing things which the state itself is not yet prepared to do. We have to work with the donors also in order to avoid corruption. And so we should decrease the probability of the corrupters to have a success. NARRATOR The fight against poverty is not just the task of the poor countries or just the wealthy ones, it needs both of them in partnership, with both parties openly and honestly sharing their needs and their capabilities. However, this also requires mutual trust. And above all, it needs the will of the developing countries to be in control of their own destiny. [ON-SCREEN TEXT:] Yash Tandon, Executive Director, South Centre. YASH TANDON I think there’s a misconception in the developed part of the world that development is their responsibility. It’s not. Development is responsibility of the people in the developing countries. And the best thing that the developed countries can do is to allow the people in the developing countries to define for themselves what is development. NARRATOR: Entrepreneurs need money to finance their business ideas and most do so via loans. Usually, however, only someone who has collateral, such as capital or properties, gets loans from the bank. This is where microcredit comes in. It’s based on the applicant’s reputation and not on their collateral. One institution which offers this type of loan is Pro Mujer in Peru. WOMAN 1: [SPEAKING SPANISH] NARRATOR Despite the trust factor, the loan has to be paid back in full with interest as any other commercial loan. Microcredit was developed in Bangladesh in the 1970s. The loans are very small, usually only$100. But this is often enough to help someone to become self-sustaining.
Pro Mujer not only offers money to various organisations, but also offers advice and experience on how to make the most out of small financial means.
WOMAN 1
[SPEAKING SPANISH]
NARRATOR:
These fisherwomen at Lake Titicaca have been able to invest in new fishing nets thanks to credit from Pro Mujer and are now earning their own money every day on the market as small business women.
WOMAN 2:
[SPEAKING SPANISH]
NARRATOR:
Pro Mujer’s microfinance system has a clear focus.
[ON-SCREEN TEXT:] Carmen Velasco, co-founder, Pro Mujer.
CARMEN VELASCO:
I think that one of the biggest differences between Pro Mujer and the rest of - some other institutions is that we are mainly, we’re focused on women because we see them as the engine to help their families and to bring their kids to a different level. We have been, from the very beginning, very active listeners; listening to what they need, and tailoring the answers to the needs they have. So every single programme that we have developed in Pro Mujer was as an answer to what they needed, to what they were asking. That’s why, at the beginning, we were only a training institution. And then, little by little, they began to ask more and more. We included health training and we included business training. And they asked us, now we need money to begin a business.
End transcript

Interactive feature not available in single page view (see it in standard view).
1. Having watched the videos, categorise the examples featured using Baumol’s (1990) categories of economically ‘productive’, ‘unproductive’ or ‘destructive’ entrepreneurship, then add one or two additional examples from your own experience. Include a brief explanation as to why you have placed each example in the chosen category.
Interactive feature not available in single page view (see it in standard view).

### Discussion

This task referred to the work of a US economist and entrepreneurship researcher, William Baumol, who distinguished between economically ‘productive’, ‘unproductive’, and ‘destructive’ forms of entrepreneurship (Baumol, 1990). He suggested that productive entrepreneurship has beneficial impacts. By contrast, unproductive entrepreneurship has negative effects, while destructive entrepreneurship can undermine an entire economy.

The fish farming venture illustrates how entrepreneurial activity can be economically productive, generating higher incomes and providing new employment opportunities for women in this remote Peruvian community. The venture was initially supported by micro-finance provided by a regional women’s development organisation, Pro Mujer [Tip: hold Ctrl and click a link to open it in a new tab. (Hide tip)] . The work of this organisation could also be described as productive (social) entrepreneurship. The video shows how it has successfully adopted an innovative approach to financing very small enterprises pioneered in Bangladesh by Muhammad Yunus and the Grameen Bank. By contrast, the Mexican example illustrates how opportunity-seeking entrepreneurial activity can be economically unproductive, or even destructive. In this case, unregulated commodities market speculation has inflated the price of the corn used to make tortillas, which are a key part of the national diet. While speculation is nothing new, technological and financial market innovations have enabled it to exert much more powerful effects on world markets. By creating high and unstable prices, this kind of speculation can undermine the confidence of investors and damage the economic livelihoods of individuals, families and small businesses.

During this task, you may have identified examples that could be placed in more than one of the boxes. For example, entrepreneurial activity that has increased mobility (e.g. low-cost airlines flying to islands in the Indian Ocean), could be seen as economically productive in the short term, helping to promote tourism and other forms of economic development. However, this kind of activity may prove to be economically destructive over the longer term due to its environmental impacts (i.e. increasing carbon emissions, contributing to global warming and rising sea levels).

This task has raised several important issues around the impact of entrepreneurial activity, and of particular kinds of innovation.

B205_1

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