This Chapter discusses the theoretical framework for economic growth and development and highlights the features and problems of developing countries. It further discusses the basic theories of economic growth and highlights the economists who introduced entrepreneurship in the debate of the determinants of economic growth. Selected empirical studies relating entrepreneurship and economic growth are reviewed.
The industrial revolution, a period from the 18th to the early 19th century, changed the face of Europe and indeed the Americas. This brought in its wake socio-economic and cultural changes which moved nations away from agriculture to industry, but most important it raised the standards of living of the people. In the first part of the 20th century many economists started realizing that most of mankind did not enjoy a high standard of living as that enjoyed by the industrialized countries. Attention to this problem was drawn by Colin Clark in his quantitative study Clark (1939). At this time and immediately after the World War II, there were concerns about the reconstruction of Europe after the war. Attention was turned to Asia, Africa and Latin America after the war. A lot of effort has since that time been put into the process of developing these countries. The formation of the United Nations and its agencies like the World Bank, International Monetary Fund
33 (IMF) and International Labour Organization (ILO) among others provided an avenue for addressing the development issues in these countries.
Despite this effort, many countries around the world remain poor. Almost one half of the worlds’ population of six billion live on less than two dollars a day (World Development Report, 2000/01). Many countries today are said to be underdeveloped or referred to as Third World countries. These are countries which are typified by low incomes, are dependant on export of a few major exports usually of agricultural products. They usually have high illiteracy rates, high population growth rates and unstable governments (Jhigan, 2005). This has led to the study of how the poor nations can transition from subsistence to industrialized economies. The desire to transform these countries led to interest in the field of development economics. The focus of development economics was on the methods of promoting economic growth and improving the lives of the poor people (Bell, 1987). The theories have foundations in Mercantilism which was developed in the 17th century and the related theory of economic naturalism associated with Alexander Hamilton and Henry Charles Carey. But it is the post war theories that are at the heart of the studies which were authored by Simon Kuznets and Arthur Lewis. The early theory of development economist was formulated in the 1950s by W. W. Rostow (Rostow, 2003) in the stages of growth, a Non-Communist Manifesto following the work of Karl Marx. These stage theories posit that there are stages of growth through which countries go through. The Harrod-Domar Model provided the mathematical illustration of these theories (Easterly,
34 1997). Among the modern theorists are Amartya Sen and Joseph Stiglitz who are Nobel Prize winners who contribute to the debate (Stiglitz, 1994; Sen, 1999).
The classical economists also emerged and are responsible for the modern conception of economic growth. They began with the critique of Mercantilism especially the physiocrats who emphasized agriculture. Led by David Hume and Adam Smith, they extended the notion that manufacturing was central to an economy and growth. (Smith, 1937)
The neo-classical economists have their idea of growth modeled in the Solows growth model (Solow, 1956). The model involved a series of equations showing the relationship between labour, time, capital goods, output and investments. This was the first attempt to model long-run growth and it gave technology a more important role than accumulation of capital.
Unsatisfied with Solow’s explanation, Paul Romer proposes a model that includes a mathematical explanation of technological advancement (Romer, 1985). The model endoginizes technology and incorporates human capital, which unlike physical capital in Solow’s model has increasing rates of return.
Since then, as stated, the gap between the rich and poor has been growing bigger. In the developing countries, the number of the poor has been increasing. Despite all the effort put in by various governments, poverty has
35 continued to exist. Various models and conditions have been put forward to explain economic growth or its absence. The World Bank in its report, (2001/02) has posited that growth is the outcome of countries’ initial conditions, its institutions, policy choices and the external shocks they receive. The report shows that there is evidence that growth also depends on education and life expectancy especially if the country is low income.
Among the policy choices mentioned by the Bank is openness to international trade, sound monetary and fiscal policies, a well developed financial system and a moderately sized government. Aid and the internal and external trade shocks play a role. The factors that lower growth rates are reported by the World Bank to be wars, civil unrest, and natural disasters. Besides these, macroeconomic volatility, adverse terms of trade shocks, poorly sequenced reforms can lead to macroeconomic disruptions and slower growth. The World Bank also cites institutional factors like evidence of rule of law and absence of corruption as factors that lead to growth. Geography is also said to influence growth. Remote, landlocked countries tend to grow more slowly. The different economic models reveal that capital formation is an important vehicle. Human capital which is the quality of the human resource, represented by the level of education and training of people has also become part of the capital formation process. Capital formation is determined by the savings rate of the country and the conversion of those savings into investments. Other barriers to growth include the role government plays. This
36 is the ability of government to create and maintain political stability and peace.
The list of factors which may influence economic growth has been growing in recent years. For example, good governance and social capital are among other factors that have been added as growth drivers in recent years (World Bank 1985; Collier, 1996; and Goldsmith, 2000; EAGER Reports, 2000). The one factor that has received little attention in mainstream economic thought is entrepreneurship. There is no mention of the entrepreneur or his or her role in the mainstream economic growth literature. The stress is on exogenous macro environmental and institutional factors rather than the role of individuals.
It is not that entrepreneurship is the only factor associated with economic growth, or that non-entrepreneurial factors are not important. Rather the issue is how far entrepreneurship does have a place and whether it is a major factor. Neo classical economists and Austrian economists differ widely on this. In this Chapter the nature of economic growth and the role of entrepreneurship as a growth factor will be reviewed in detail.