Changing Destinies: How Entrepreneurs Help Build Democracy

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Entrepreneurs drive change. They provide ideas, initiative, and leadership that invigorate development and transform society. Young, growing firms lead economic change by propelling gains in productivity and employment. In doing so, they reshape attitudes, social relations, and institutions. They are therefore crucial to building prosperous societies that can deliver opportunity to all.

As a dynamic part of the private sector, entrepreneurs act in ways that advance democracy, both directly and indirectly. Directly, they often assume leadership roles in society. With their initiative, problem-solving ability, and new perspectives, they can become a leading constituency for reform.[1] Indirectly, the opportunities that arise from participating in free markets support the development of an entrepreneurial class with a stake in society. Furthermore, an entrepreneurial culture founded on personal initiative, independence, and service fosters a political culture of citizen engagement.

These positive effects on democracy occur at three levels: through the interrelation of economic and political systems, through social evolution, and through individual action.

Systemic Change

Democracy emerges as a political system through a convergence of social change, political action, and institution building. Tracing the influence of entrepreneurs on this complex process can be challenging, yet entrepreneurship has made its mark. There have been instances when entrepreneurs joined with others to demand greater freedom and accountable government. Although politics may not be their natural vocation, entrepreneurs took to the streets during the 1986 Edsa “people power revolution” in the Philippines and to Tahrir Square during the 2011 Arab Spring in Egypt. These were exceptional moments. One must look beyond protests to discern a pattern of social change.

Healthy democracies feed off pluralism, which accommodates diverse views and interests and prevents social cleavages from ossifying. “One theory is that political change, and within it, democratization comes from shifts in the socio-economic structures of a country. When the economy changes, power tends to be redistributed to include newer actors. This, in turn, enhances demands for further political participation by new actors.”[2] Entrepreneurship brings new entrants into the economy, displaces incumbents, and develops new markets, thereby generating economic pluralism. Economic pluralism, in turn, contributes to political pluralism. A competitive private sector balances the power of the state and fosters a vibrant civil society.

One aspect of systemic change involves lowering the barriers to entrepreneurship. In 2006, the Young Entrepreneurs Association (YEA) in Jordan partnered with the Center for International Private Enterprise (CIPE) to pursue an advocacy agenda aimed at easing the process of starting a business. YEA emphasized throughout its campaign that the pursuit of entrepreneurship should be open to all. In response to advocacy, the government adopted an amendment to the Companies Law, which reduced the capital requirement for businesses seeking limited liability status from 30,000 to 1,000 Jordanian dinars (the equivalent of lowering the costs from 42,300 to 1,400 U.S. dollars). This amendment stimulated business activity and encouraged previously extralegal operations (businesses operating informally)to join the formal sector. By the end of 2008, the reduction in the minimum capital requirement led to over 1,800 registered small and medium enterprises.[3]

Another aspect of systemic change is removing incumbent advantage. In Armenia, abuse of tax laws seriously impaired the business and investment environment and stalled the democratic process. The Association for Foreign Investment and Cooperation (AFIC) teamed up with CIPE to establish a Business Advocacy Network. In August 2008, Armenia’s National Assembly adopted a legislative reform package that included AFIC’s recommendations. Under the previous simplified tax law, large businesses were able to misrepresent their annual revenues in order to qualify for lower taxes. AFIC’s recommended revisions to this law restricted the ability of large businesses to manipulate the tax system and simultaneously promoted the growth of small and medium enterprises that needed tax breaks. The tax reforms eliminated bureaucracy and opportunities for discretion in tax administration, reduced incentives for businesses to pay bribes, and lowered tax-related business costs by 12 to 15 percent.[4]

Social Change

Below the systems level, one can observe how entrepreneurship raises groups within society. Entrepreneurship “provides a pathway to advancement based on merit, as opposed to family, ethnicity, social class, or other factors that often impede social mobility and spread discontent.… It opens doors and gives a broader sector of the population a stake in the economy, and thus, as well, in its ongoing and peaceful functioning.”[5] Among disadvantaged populations, the spread of entrepreneurship democratizes opportunity and opens up a channel for economic inclusion. This active participation in the economy creates a level of ownership that simple redistribution could not.

Entrepreneurs’ stake in society can be manifested in their mobilizing to defend rights that enable independent business. Polish entrepreneurs, for example, have fought for lower administrative burdens and engaged in broad social dialogue.[6] Increasingly, entrepreneurs and those who support them recognize the need to constructively engage an entire ecosystem of actors, including public officials and community leaders. Such ecosystems—being complex, organic systems—contrast with command-and-control systems. They thrive on stakeholder engagement and collective impact.[7] This type of decentralized, coordinated engagement builds social capital and a strong foundation for democratic dialogue.

To defend their interests, women entrepreneurs can raise their voice in policymaking. CIPE encouraged the Bangladesh Women’s Chamber of Commerce (BWCCI) to shift from simply training entrepreneurs to engaging in policy advocacy. In March 2009, BWCCI launched the first Women’s National Business Agenda, which contained recommendations covering five social barriers, 13 capacity-building and training needs, and 12 financial barriers. By 2014, the agenda was showing results. According to the Central Bank, SME loans totaling 93 million U.S. dollars were provided to nearly 10,000 women, helping to create tens of thousands of new jobs. Three BWCCI board members were nominated to the boards of state-run banks, where they could increase the focus on women borrowers. More than 65 percent of the country’s banks now have “dedicated desks” for women borrowers. Overall, the proportion of women entrepreneurs receiving commercial bank loans rose from 19 percent in 2007 to over 50 percent in 2015.[8]

In 1986, Hernando de Soto published “The Other Path: The Invisible Revolution in the Third World,” which offered the poor an alternative to revolution: entrepreneurship. The book and its policy prescriptions challenged the vision of Peru’s violent Shining Path communist insurgency. De Soto’s analysis overturned the prevailing notion that entrepreneurship was only for the elite. Rather, it identified weak institutions as the primary barrier to entrepreneurial growth. De Soto then advised a series of institutional reforms—land titling, business registration, and administrative simplification—that integrated the poor into the market economy and made the rule of law accessible to all. Consequently, these measures crippled the Shining Path’s recruitment efforts, as acknowledged by the communist group’s official newspaper.[9]

Individual Change

At the level of the individual, an entrepreneurial mindset, personal initiative, and business leadership form a strong foundation for civic leadership. The entrepreneurial mindset includes creative thinking, a problem-solving orientation, independent action, resourcefulness, and accountability. Entrepreneurial leaders feel empowered to solve challenges without depending on government action. This mindset—partly individual and partly cultural—has many applications outside startup enterprises—from large companies and social enterprises to nonprofit enterprises and open innovation platforms. Combined with a sense of civic values and ownership, such entrepreneurial attitudes can strengthen civil society.

To address the perceived lack of opportunities among youth in rural Peru, CIPE partnered with Instituto Invertir to develop the EmprendeAhora youth program. By teaching university students about the benefits of democracy and the free-market economy, together with training in entrepreneurial and leadership skills, EmprendeAhora provided an economic alternative and encouraged civic engagement. To date, nearly 800 young Peruvians have acquired skills that allow them to become change agents in their regions. Program alumni have organized dozens of replica workshops on democracy and entrepreneurship, spreading the values of EmprendeAhora to more than 14,500 elementary, high school, and university students. Roughly ten percent of program graduates are already implementing their own businesses. Furthermore, alumni volunteer with nongovernmental organizations on social issues and incorporate social projects into their line of business.[10]

In Nepal, the Samriddhi Foundation’s Arthalaya School of Economics and Entrepreneurship educated hundreds of university students on topics such as markets and policies and trained them on practical entrepreneurial skills. The program’s aims were to encourage university students to explore alternative ideas for addressing Nepal’s problems, emphasize the value of entrepreneurship, and help aspiring entrepreneurs open their own businesses. Out of more than 400 university-level students who have attended the program, more than two dozen have launched their own business ventures. Additionally, alumni have created more than 20 entrepreneurship clubs to promote entrepreneurship in schools and communities. Some of the graduates even moved into Samriddhi’s work on the policy environment for entrepreneurship, such as the Nepal Economic Growth Agenda (NEGA).[11]

Is Entrepreneurship the Answer?

Despite the various systemic, social, and individual factors described above, the contributions of entrepreneurship to democratization are mediated by other factors. To begin with, William J. Baumol famously described the phenomenon of destructive entrepreneurship: it takes the form of “rent-seeking” (increasing one’s share of existing wealth without creating new wealth) or organized crime. Not only does destructive entrepreneurship detract from productivity and innovation, it breeds corruption and privilege. Baumol argues that the “rules of the game”—the system of entrepreneurial rewards— determine the incentives for engaging in either productive or destructive entrepreneurship. Entrepreneurs who depend heavily on the state or political favor will not champion democracy.[12]

In addition, the benefits of productive entrepreneurship can be contained in ways that do not bode well for democracy. By one measure, 78 percent of the world’s total entrepreneurship ecosystem value is comprised of just 11 ecosystems, including San Francisco, Boston, Beijing, and Shanghai.[13] These locations appear to have the highest concentration of startup resources and opportunities. In many emerging markets, the highly visible rise in technology entrepreneurship has not extended to other sectors of the economy. When entrepreneurship occurs within a geographic, industry, or social bubble, it threatens to exacerbate inequities and divisions instead of facilitating social mobility.

By its very nature, entrepreneurship is disruptive and unpredictable. Therefore, it cannot offer a direct path to democratization—indeed, nothing can. However, those who wish to promote democracy cannot afford to ignore entrepreneurs. Nascent democracies like Tunisia acutely feel the need for democracy to deliver through economic opportunity and economic inclusion. Countries with entrenched business interests fall prey to oligarchic and crony capitalism. When the state dominates the economy and public welfare, it leaves little space for independent thinking and independent social activity.

Granted, entrepreneurs may not always set out to create democracies. Yet collectively, their creative and rejuvenating spirit can reshape political economy, spark new mindsets and awareness of freedom, and build a constituency for inclusive politics. Ultimately, entrepreneurship shares core values with democracy: open competition, participation in public life, individual responsibility, serving others, and a preference for finding solutions within the rule of law. A world in which diverse entrepreneurs thrive is a world in which democracy can flourish. This would please a great many entrepreneurs, as they are citizens too.

Kim Bettcher leads the Center for International Private Enterprise’s knowledge management initiative, which captures lessons learned in democratic and economic institution-building around the world. The initiative shares strategies, best practices, and lessons with an international network of reform leaders. Bettcher has written and edited numerous resources for CIPE, especially toolkits on public-private dialogue and anti-corruption, a report on Creating the Environment for Entrepreneurial Success, three case study collections, the CIPE Guide to Governance Reform, and CIPE’s 25-Year Impact Evaluation. Bettcher has published articles in the Harvard Business Review, Party Politics, SAIS Review, and the Business History Review. He has taught as an adjunct professor at George Mason University's School of Public Policy and was previously a research associate at Harvard Business School. Bettcher holds a PhD in political science from Johns Hopkins University and a bachelor’s degree from Harvard College.

Sources Cited:

  • [1] John D. Sullivan, “CIPE’s Approach to Building Environments for Entrepreneurial Success,” in Creating the Environment for Entrepreneurial Success, Center for International Private Enterprise, 2014.
  • [2] International Institute for Democracy and Electoral Assistance, “Private Sector Development and Democratization,” Policy Brief, November 2016.
  • [3] Ngozika Amalu, “A Voice for Young Entrepreneurs,” in Strategies for Policy Reform, Volume 2: Engaging Entrepreneurs in Democratic Governance, CIPE, 2010.
  • [4] Ngozika Amalu, “Fighting Corruption Through Tax Reform,” in Strategies for Policy Reform, Volume 2, CIPE, 2010.
  • [5] Monitor Group, “Paths to Prosperity: Promoting Entrepreneurship in the 21st Century,” January 2009.
  • [6] Andrzej Arendarski, “Economic and Democratic Reforms: The Polish Example,” Free Enterprise & Democracy Network interview, available on www.cipe.org.
  • [7] Erkko Autio, “Managing Entrepreneurial Ecosystems,” blog post on LinkedIn, November 16, 2015.
  • [8] Marc Schleifer and Maiko Nakagaki, “Empowering Women Entrepreneurs in Bangladesh,” in Strategies for Policy Reform, Volume 3: Case Studies in Achieving Democracy That Delivers Through Better Governance, CIPE, 2015.
  • [9] Nafisul Islam, “Making the ‘Extralegal’ Legal,” in Strategies for Policy Reform, Volume 1: Experiences from Around the World,” CIPE, 2007.
  • [10] Brent Ruth, “Developing Entrepreneurial Talent and Leadership Among Youth in Peru,” in Strategies for Policy Reform, Volume 3, CIPE, 2015.
  • [11] Sarita Sapkota and Teodora Mihaylova, “Improving the Environment for Entrepreneurship in Nepal,” in Strategies for Policy Reform, Volume 3, CIPE, 2015.
  • [12] William J. Baumol, “Entrepreneurship: Productive, Unproductive, and Destructive,” Journal of Political Economy, vol. 98, no. 5, October 1990.
  • [13] Startup Genome, Global Startup Ecosystem Report 2017.

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