About one in five people in the world live in poverty. Even in many developed countries like the US, the poverty rate exceeds 12%. In an age of incredible technological progress and revolutionary social change, poverty has stubbornly persisted.
As a business professor, I am interested in an important question: Can poor people create their own path to success? In other words, is business creation an effective tool for poverty alleviation?
My work has shown that it can be – with the right kind of support. However, that support is often lacking.
A big part of the problem is ignorance: Most people simply don’t know much about poverty and business. There are many myths when it comes to programs for the poor, due to the lack of solid information about the businesses of those who are poor.
These misconceptions have influenced public policy officials, economic development experts and academics. As a result, they often underestimate the important economic and social role these businesses play.
In an effort to set the record straight, here are six facts people should know about poverty and entrepreneurship.
Fact 1: Poor people start businesses – lots of them
It is just a myth that entrepreneurship is only for the rich. In fact, most jobs around the world are started by people who are poor – in fact most of them are. Although hard data is hard to come by, the evidence we do have is suggestive. For example, in some of the poorest countries in Sub-Saharan Africa, two out of three adults are working or in the process of starting their own business.
Such small businesses are arguably the backbone of many developing economies, where more than 50% of the population may be poor. Even among advanced economies, such businesses can be responsible for a significant portion of the gross domestic product.
Fact 2: Businesses owned by poor people are profitable
Although poor people disproportionately create “livelihood businesses” that generate less profit, it is wrong to think that this makes these programs less useful. Such businesses provide jobs to millions of poor people, representing the foundation of the economy. They create value in the marketplace, filling niches that are unattractive to existing firms.
And they create more than just economic value: These businesses are embedded in communities, providing a source of social stability. They pay taxes and can produce spillover benefits such as reduced crime, increased school completion rates and community pride.
Fact 3: Entrepreneurship can help reduce poverty
A growing body of research suggests that higher levels of entrepreneurship are associated with greater reductions in poverty. For example, one analysis found that areas with high rates of entrepreneurship among the poor showed the greatest decline in poverty over a six-year period.
This should not surprise us too much. After all, although poor people often create viable businesses that generate little profit, entrepreneurship represents an important means of human development. Entrepreneurs learn to plan production, manage cash, serve customers, set prices and coordinate supplies.
In addition, business knowledge can enable independence, self-improvement, pride and purpose, and the ability to give back.
Fact 4: Off-the-books businesses are beneficial to society
Poor entrepreneurs often start what economists call “illegal businesses” – businesses that are not registered with the government and operate under the radar. These often attract criticism.
But while informal businesses may be illegal, the informal sector represents 50% or more of the economy in many developing countries, and as much as 20% in some developed countries. It represents a large incubator that supports the poor as they explore businesses and learn. In my opinion, this hidden business culture should be nurtured.
Fact 5: The biggest challenge is not always lack of money
People often think that the key to helping the poor is to provide more money. But despite the clear need for funding, some entrepreneurs may not be ready to put the extra money to good use. No matter how motivated or hardworking they are, the main problem for entrepreneurs is the ability to turn means into ends.
If an entrepreneur lacks key skills, such as bookkeeping, sales or asset management, research suggests that to be effective, financing should be accompanied by other forms of support. Investments are likely to be more productive if they are linked to participation in training and mentoring programs. Access to incubators, attending networking events and related development activities are also important.
Fact 6: There are many ways to be successful
People in the business world love a great success story. It’s all about picking winners. That kind of thinking works against poor entrepreneurs, who often start basic businesses that don’t use new technology, and who often have very limited resources.
To see the power of entrepreneurship, it is worth rethinking the definition of success. For the poor, success can be establishing a business and selling, making a profit. It can be to change the economic conditions of entrepreneurs, to hire workers – especially some of the poor – or to add another place.
It could be keeping the business going for a certain number of years, providing some kind of legacy. Other indicators of success may include reducing dependence on personal labor, customer satisfaction and the ability to give back to the community.
Ultimately, success is about having a better life. And research shows how an entrepreneur can do this.
Venture creation is not a silver bullet. Poverty is complex, and building a sustainable business is difficult. Achieving the promise of commerce requires us to move past these myths and develop the kinds of supportive environments that level the playing field.
Michael H. Morris is a professor of practice at the Keough School of Global Affairs at the University of Notre Dame.
This article is republished from The Conversation under a Creative Commons license. Read the first article.
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