A “necessity entrepreneur” is an individual who starts a business not because they recognize an opportunity to make money, but because there is no other option to make a living. Sadly, billions of people in the developing world with little access to education or reliable jobs are in this position. Their microbusinesses are often simple. Imagine a fisherman going out in the morning and selling his small catch in the afternoon or a single mother running a rudimentary grocery store out of a window in her home. It is estimated that half of the world’s workers are self-employed in this manner. The net GDP for this global informal economy is over $10 trillion, making it the second largest economy in the world behind the United States. Rarely, if ever, do necessity entrepreneurs quickly escape poverty.
Muhammad Yunus won the 2006 Nobel Peace Prize for theorizing that lack of access to loans prevented microbusinesses from flourishing. Other programs provide education to help microbusiness owners create more growth. Training takes the form of straightforward financial literacy education, covering topics such as accurate record keeping and inventory management. There is also psychological training focused on developing personality traits better suited for business success. Some programs even pair a microbusiness owner with a qualified mentor who can help them make good decisions.
Classroom lectures on proper accounting or psychological initiatives may not permanently change behavior in the real world. Similarly, mentored business owners often revert to old habits when their mentors move on. Even affordable loans often fail to provide the basis for scalable businesses that could bring families out of poverty.
One method that has shown some promise is called Rule of Thumb training. Rule of Thumb education teaches principles that provide a framework for decision-making, not just what to do or not to do. A group of microenterprise owners in the Dominican Republic received Rule of Thumb training and demonstrated better skills such as record keeping as well as slightly better profits. They also showed a consistent ability to remain more profitable than counterparts during down periods, indicating that they were able to observe the business environment and adapt to it.
How can the U.S. help the billions of micro-business men and women in the world find real prosperity? Considering the fact that eight out of 10 businesses in the United States fail within our ‘advanced’ business climate, are we even in a position to try to help others be successful? I think so.
Governments and individuals of developing countries, with the support of those in the developed world, need to focus on fostering the microbusinesses that sustain so many of their citizens. Also and equally important are humanitarian efforts to fight disease, hunger and violence. But even these will not be enough to solve the problem of widespread poverty.
The first step is to create awareness of the size of the informal economy among decision-makers around the globe. There are many basic questions that require answers such as how does a necessity entrepreneur choose his or her venture? Or, do necessity entrepreneurs even interact with each other? Once we know some of these answers, we may be even more able to invest in necessity entrepreneurs. The leadership in developing countries will also be more able to take appropriate measures at the national and community levels.
With greater awareness comes greater understanding. That understanding may lead to the steps policymakers must take. A great advance in many countries would be to cut the administrative hurdles placed in front of many entrepreneurs who want to become more formal and register their companies. But, in the end, it will be entrepreneurs and necessity entrepreneurs who will make most of the difference in ending poverty.
John Hoffmire is Chairman of the Center on Business and Poverty. He also holds the Carmen Porco Chair of Sustainable Business at the Center.
Spencer Yamada, Hoffmire’s colleague at the Center, did the research for this article.