Brookings AGI at the Annual Meetings: When does entrepreneurship lead to growth? Lessons for Africa and Latin America

LANDRY SIGNÉ: Hello, I am Landry Signé, a Senior Fellow in the Global Economy and Development Program, and the Africa Growth Initiative at the Brookings Institution. Welcome to the Foresight Africa Podcast, where I engage with distinguished leaders in academia, policy, business and civil society to share unique insights and innovative solutions to Africa challenges.

While highlighting opportunity to advance engagement between Africa and the rest of the world. Today we are fortunate to be meeting on the sidelines of the World Bank and IMF Annual Meetings, a yearly gathering of the world, most prominent figure in the development finance space, including central bankers, ministers of finance, heads of global and regional financial institutions, corporate CEOs, civil society leaders and entrepreneurs.

Welcome to the Brookings Institution Foresight Africa Podcast Show.

BILL MALONEY: Thank you so much for the invitation.

LANDRY SIGNÉ: Before we begin, could you please state your full name and title for the recording?

BILL MALONEY: I’m Bill Maloney. I’m Chief Economist for Latin American and the Caribbean at the World Bank.

LANDRY SIGNÉ: We are delighted to have you join us during this very busy week, and we truly appreciate you taking the time to share your wonderful insights.

BILL MALONEY: It’s my pleasure.

LANDRY SIGNÉ: So, as you take part in this year’s annual meetings, which priorities do you see as most essential for driving sustainable and inclusive growth, and why?

BILL MALONEY: The question of how to stimulate inclusive and dynamic growth remains a major preoccupation in Latin America. We have been very good relative to the rest of the world in dealing with inflation in managing COVID, in managing the previous financial crisis. But we remain the slowest growing region in the world bar none. And that is not a recent issue that, was the case in the 2000s. where we’re also, we’re forecasting 2.3% this year, it wasn’t so different 10 years ago or 20 years ago. And as we showed in a very recent volume, called Reclaiming the Lost Century of Growth: Building Learning Economies in Latin America and the Caribbean, it’s actually a lost century we’re talking about.

LANDRY SIGNÉ: Wow.

BILL MALONEY: Where we could have done much better, where all the now rich countries took off. But where we started in 1850 at very similar levels as Sweden, Finland, Japan, Korea and yet we didn’t take off. And we’re in a similar position now where we have the natural resources, we have the critical minerals, we have wind, we have solar, we have everything.

And yet we are not growing. And that means we’re not creating more jobs and we’re not creating better jobs.

LANDRY SIGNÉ: That is puzzling. And what insights or lesson from the broader discussion or the assessment that you are making should Global Leaders act on to strengthen resiliency and address some of those pressing economic and social challenges?

BILL MALONEY: Somewhat oddly, I’d say the message that they should pick up on came from Stockholm and the Nobel Prize Award. Those three awardees all focus on how countries adopt technologies, and integrate them in their production processes, and convert them into growth and eventually into better jobs.

And I think all three of them are very creative and a little bit out of the box. In particular this idea of Peter Howard that there are multiple equilibria depending on the human capital that your country has at the time a new idea arrives. And my region continues to lag in human capital, in basic human capital in STEM students, in the quality of research in the universities and the linkages between the universities and the private sector.

And that’s exactly what, if you don’t have those things well tuned and well cultivated, then you miss the technology rush and you miss the growth that comes out of it. And you can see, the same, I know Africa is a couple decades behind Latin America, probably on average in terms of growth, but it’s the same issues that you’re facing.

A favorite example that I like to look at is copper. And copper is a good, that has changed very little since the Big Bang. And yet different countries have had very different experiences, development experiences with it. Chile, for instance, was the world’s largest producer in 1860, but by 1900 the industry was effectively dead until it was repurchased by foreigners and new technology were introduced. So that’s the same country, same good, very different development outcomes depending on how good you were at managing technologies. A counter example would be the second largest exporter of copper at that time, which was Japan and, three Japanese copper companies from then Sumitomo, Fujitsu in Hitachi, okay? All of those started as copper companies, and yet grew to be these very diversified, very dynamic industrial conglomerates.

LANDRY SIGNÉ: Amazing.

BILL MALONEY: So, the question we have to ask in Latin America, but I’d say in Africa as well, where we also have ample endowments of natural minerals and the like, is what’s the development strategy and how do we leverage this next wave? When we’re talking about critical minerals, how do we leverage the next century so that we get more out of it and a more diversified growth? And that is precisely in my mind what the Nobel Prize winners were talking about.

LANDRY SIGNÉ: Fantastic. I really like the comprehensive approach you take, but also the comparison between Africa, Latin America, but also Asia in general. Your office has recently published an economic review of Latin America and the Caribbean. What were your findings in this project?

BILL MALONEY: So, our findings are, that from a short term, macro point of view, we’re doing okay. Inflation continues to come down. We would’ve liked international interest rates to come down a bit faster than they are. That would relieve pressure on budget deficits and on businesses for investment. But where we focus mostly in the second chapter was on what we call transformative entrepreneurship. And this is important because, we talk about technology transfer, or we talk about the private sector – mobilizing the private sector. Private sector is individual humans. People who mobilize technology are individual humans who say, oh, that’s a really good idea. I think I should bring it back to Rwanda and implement it there. And so, who are these guys?

The paradox that we were looking at in particular is Latin America scores very well on entrepreneurship, like the Global Entrepreneurship Monitor out of Babson College, which is used around the world for benchmarking countries. We look great. Except that we don’t grow.

So, we have all these people, they’re happy entrepreneurs, and we’re not growing. Okay? So, what’s wrong? And so, the first thing we did is say, okay, let’s look at who these guys are. And it turns out that, the vast majority are, people have firms of one or two people. Many of them are in the informal sector. Most of them are in informal sector, in fact and they are not unhappy. When you, the, when we tabulated the responses from why did you enter this sector? 65-70% entered for opportunity reasons. “I like being my own boss”, or “actually, I’m earning more than I would in a formal salary position”.

So that’s important to know that these jobs are not bad jobs for the most part. So, this discussion of “this is all subsistence”, uh uh, it’s not, and it’s not in Africa either. There’s a very nice study that’s being. Finished up by a couple people here looking at, I think, Senegal, Liberia, and a couple others, and a lot of these household enterprises saying: “yep, I’m good. I want expand a little bit, but I’m not unhappy in this job.” The thing is, these guys don’t wanna expand for the most part, they’re happy is family businesses and the dynamism of our countries is not gonna come from there. Our dynamism is gonna come from what, has been called transformative entrepreneurs.

And these are people higher levels of education and when they start their firm, they start registered. This idea that, you start small and informal, and you grow and you eventually become Microsoft. That just doesn’t happen. Okay. Basically, it’s gonna be, you are opening a firm, you’re gonna start with 10 people, you’re gonna start registered, and you’re gonna have the human capital, basically tertiary education to begin with and then expand from there. And that’s where most of the dynamism is. When we look at that. We have about half as much of half the density that Asia has, for instance, in terms of transformative entrepreneurs and about a third of North America. Africa lags a little further again.

LANDRY SIGNÉ: Yes.

BILL MALONEY: But what it highlights is that a good part of the development challenge is exactly increasing the density of these high-quality entrepreneurs. In terms of quality, it’s partly tertiary education, but then there are a whole bunch of managerial skills where we also lag, both Latin America and in Africa.

The World Management Survey tabulates average management practices of, large firms and neither region does great. So we need to work on the quality and density of our entrepreneurs. At the same time, we need to work on the enabling environment, the business climate, if you will. And here in, in Latin America, they more than half say 30% of these firms are respond that they can’t expand for lack of qualified labor. Okay, this immediately says, no, you need to spend, make sure your education system is, in shape because we’re not expanding because our workers are not up to snuff. And that’s bad for them because it means there are quality jobs that require more sophisticated and be, give more satisfaction. But people aren’t trained to take them today. So that’s a huge thing.

Then the other thing is finance. Many say, look, I just, and I’ve worked with small and medium enterprises in Columbia for a while. It is not necessarily the interest rate, it’s just if they’re gonna invest in a machine, they can’t pay it back in a year. It’s gotta be multiple years. And then you ask, go, so why are our financial markets not deeper? It’s very hard to resolve contract disputes. It’s very hard to resolve bankruptcy disputes all these little things that make it, should I lend to you? Because if I lend to you and you fail, I’ll never get my money back. All those things make it so that financial systems are not serving our entrepreneurs either.

So, focusing on those things, the quality of entrepreneurs, and then the ambience they’re working in is absolutely critical.

LANDRY SIGNÉ: Fantastic. Dr. Maloney, and how will you compare Latin America to other regions of the world? I know you have done so, but do you mind elaborating more.

BILL MALONEY: So, I’m impressed by this. Obviously, everyone thinks that “those people are different. They’re doing things differently” – I’m amazed by the similarities. And when I look at the success stories in Asia, in let’s start with Japan. Japan caught up with the Western, basically a generation after the Meiji Reformation.

This is incredibly impressive, and it was going out, getting to the technological frontier, learning everything they can and then developing their own industries around it. LAC hasn’t done that. It didn’t do it in the last century and we’re still lagging in terms of most of the indicators that would suggest that we need to do it.

I would say Africa also has that we are tied with Africa for last place with the linkages between universities and and the private sector. And we need to really be working on this national innovation, on both raising the quality of our, of our people in terms of their education and the quality of our institutions in terms of what they’re supposed to be doing in terms of finding ideas, identifying them, financing them, implementing them, creating that environment.

I, when I was in Rwanda the last time, I was struck by two things. One was the effort they were making with Carnegie Mellon to establish this program. They wanted to get a program at the frontier so they could be training African engineers at the frontier. I think it was good. It was a bit expensive, but I got the idea and then there was an associated tech lab nearby to help explain. That’s all Great. So that was, has the right idea. We have to be at the frontier. On the other hand, there was a, when I was visiting some of the agricultural research institutes, it’s clear that it was not as much of a linkage to external research institutes that there needed to be, to make sure the best technologies were coming to Africa.

And that there was not a tight linkage with the extension programs. And if you look at the United States in the 19th century, the whole land grant system, colleges was from the beginning knowledge but extension to research and then extend the knowledge to the farmers.

And what worries me a little bit is in a volume we did a couple years ago on called harvesting prosperity half of African countries have actually decreased their R&D spending in agriculture over the last decade. That can’t be, we’re facing climate challenges unlike anything. We’ve got a huge population. We have boom, we have to increase. The productivity of agriculture.

LANDRY SIGNÉ: Absolutely.

BILL MALONEY: And so, this is exactly, people say agriculture, that’s not high tech. No, it very much is high tech. And we need to be at the frontier and bringing the right technologies so that, productivity gets expanded. That’s the way a great example was in Rappa in Brazil, which was so maybe there’s some lessons there. But we know how to do this. Chile learned from the University of California Davis because basically, Northern California is Chile upside down.

So, there’s so much to learn and Africa can do the same thing and really improve their agricultural productivity. I think AgriConnect is trying to do something similar, but it needs to really have this focus on technology transfer and how, when we interact with global value chains, we think about how they’re helping resolve market failures and at the same time ensuring that we are transferring learning to the local economies

LANDRY SIGNÉ: Insightful! Finally, what bold, actionable ideas from this week do you see shaping global policy and practice, and how do you plan to translate them into tangible outcomes or in supporting the countries of your region, translating them into tangible outcomes?

BILL MALONEY: Many of these ideas are in motion, in Latin America, but usually at the municipal or at the city level, which is actually where I think much of the experimentation is happening. I think there are very exciting things happening in in Guadalajara where they’re asking them this themselves, this question. We’ve had Hewlett Packard and IBM here for many years. How do we leverage that so that we do get our own entrepreneurs, high tech entrepreneurs going?

And Costa Rica? Yes. They had an on. A varying relationship with Intel, but again, they’re learning from that process. And I think this whole issue of using, whether it’s manufacturing, FDI, global, agricultural value chains, natural resource investors, whatever, how to leverage that for learning. And that’s what I take from the Chinese experiment. I think that’s where we need to be focusing, is in everything that we do in this institution. It’s like. How does this contribute to our country’s learning and getting to the technological frontier?

LANDRY SIGNÉ: Fabulous. What a beautiful way to conclude.

BILL MALONEY: All right.

LANDRY SIGNÉ: Thank you so much for joining.

BILL MALONEY: No, that was good fun. That was good fun.

LANDRY SIGNÉ: Amazing.