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Labour market

Don’t bank on self-employment

by Kevin Hempel
Policymakers increasingly consider youth entrepreneurship as a possible solution to the youth employment crisis. However, experts believe that only 20 % of all people are fit to run their own businesses. Moreover, people with some experience are more likely to succeed as entrepreneurs. [ By Kevin Hempel ]

Last year, the title of a report published by the World Economic Forum read: “Educating the next wave of entrepreneurs”. It was one more paper pointing out that entrepreneurship education serves to spur economic growth and that young people are crucial for the development of any society.

The argument is not new. As early as 1995, the United Nations’ “World Programme of ­Action for Youth to the Year 2000 and Beyond” called for more opportunities for self-employment. In 2001, an initiative of the ILO and the World Bank, the High-level Panel of the Youth Employment Network, stressed entrepreneurship, employability, equal opportunity and employment creation (“the four Es”) as global policy priorities. Accordingly, the promotion of entrepreneurship was also considered one of eight core elements when the ILO reviewed its Global Employment Agenda in 2003.

Entrepreneurship (including of youth) figured prominently in the Latin American and Caribbean Summit on Integration and Development in December 2008 and the Summit of the Americas in April 2009. African countries like Nigeria, Malawi, Uganda and Kenya started programmes to promote entrepreneurial skills. Several expectations are associated with youth entrepreneurship (Chigunta, 2002). Typical hopes are
– that young people will find livelihoods for themselves and even provide livelihoods to others they employ once their businesses take off,
– that alienated and marginalised young people will be brought back into mainstream society, thus stemming socio-psychological problems and delinquency that arise from unemployment,
– that innovation will take hold due to young entrepreneurs’ particular awareness of new opportunities and trends,
– that entire communities will be revilitalised as young women and men develop new skills and attitudes that may serve them when rising to other challenges in life and
– that entrepreneurship allows youth to develop new skills and experiences that can be applied to many other areas of life.

Reasons for caution

The benefits of youth entrepreneurship are obvious. However, the notion of entrepreneurship being the key to solving the youth employment crisis is certainly exaggerated. Indeed, there are at least three important reasons for caution:
– Self-employment is by definition risky. Some of the most successful entrepreneurs failed several times before creating the businesses that finally proved sustainable. Crucial elements to starting a successful business include generating and refining ideas, networking, earlier work experience and accumulated savings. Obviously, experienced adults are more likely to succeed than youngsters. Indeed, young people in Chile, Ecuador and Peru were found to be twice as likely to abandon self-employment than adults (Weller, 2007). Other data (Llisterri et al., 2006) suggests high mobility among the self-employed youth, with about 40 % transitioning either into wage employment or unemployment within a three-year period, and only very few actually creating additional jobs and becoming employers.
– Self-employment is mostly necessity-driven in developing countries. In Latin America, for example, over 90 % of the young entrepreneurs had no other choice (Llisterri et al., 2006). The people concerned normally dropped out of school early and then engaged in very basic economic activities with low productivity, such as retail commerce. Most of them belonged to the two poorest income quintiles and would have preferred other employment opportunities.
– Running a business of one’s own requires particular skills (like keeping accounts) and attitudes (like risk awareness). Even practitioners who promote youth entrepreneurship say the share of potential entrepreneurs is only about 20 % of any given population (Schoof, 2006).

The promotion of self-employment among youth is thus a delicate topic. It is worth emphasising, moreover, that young people who fail at an attempt to start their own business are likely to be in a worse position than they were before. After all, they may have to pay back microcredit and are likely to have spent whatever savings they or their families had.

Empirical studies of youth entrepreneurship programmes are scarce, and the results are mixed. It is true that the World Bank’s Youth Employment Inventory (Betcherman et al., 2007) reckoned that entrepreneurship programmes have the best impact compared with other interventions. However, the authors had to admit that “the number of these interventions in the inventory was too small to draw firm conclusions”. Indeed, the inventory relied on only three youth-specific entrepreneurship programmes with net impact evaluations: a government-run programme in Bulgaria and two NGO programmes in Peru. Moreover, the authors did not find any of the programmes to be cost-effective.

Even in rich countries, studies are not exuberant (see box). The mixed evidence is consistent with the literature on promoting adult self-employment. An assessment of the evaluations from 13 entrepreneurship programmes stated: “Most unemployed are looking for jobs rather than entrepreneurial opportunities.” Positive impacts were found to be more likely among older and better educated workers. Moreover, it proved important to provide business advice on top of credit.

Clearly, more evidence is needed to know what works and what does not in promoting youth entrepreneurship, and NGOs will have to play a crucial role. As they are key players in the field of youth self-employment, their experience matters. To make the most of that experience they should move on from mere advocacy by providing solid evaluations of their work.

Moreover, for the sake of a better understanding of youth entrepreneurship in general, researchers should pinpoint exactly what segment of potential entrepreneurs they are targeting. It does not make sense to compare those who simply do not find an alternative to self-employment in the same terms as those who are truly enterprising individuals.

No panacea

For start-ups in rich nations, issues such as higher education, well-targeted internship programmes and business-incubation services are known to make a difference. Moreover, start-ups always depend on a favourable business climate. If such issues are relevant for genuine entrepreneurs in North America and Western Europe, they are certainly at least as important for those who attempt self-employment because they lack other opportunities in the poor regions of the world.

Therefore, policymakers must not stress self-employment as an excuse for failed social and economic policies. Rather, they should do their best to limit the need to become self-employed out of necessity. This requires, for example, preventing youngsters from dropping out of school in the first place.

Nonetheless, it makes sense to foster entrepreneurship, including among youth. Self-employment, however, should not always be considered the desired immediate outcome. Initiatives with a long-term perspective that focus on the acquisition of transferrable skills rather than immediate business creation are more likely to succeed.

Entrepreneurship programmes can thus be meaningful ways to foster more competitive and dynamic economies in the long run, but they are no quick fixes for the global challenge of youth unemployment. More conventional policy interventions like skills training and better labour intermediation are just as relevant.

It may well be true that many countries do not make full use of their youth’s entrepreneurial potential. But potential must not be confused with capability. Becoming a successful entrepreneur takes time and experience. Potential entrepreneurs struggle with constraints in terms of financial or physical capital (money and other inputs), human capital (skills) and social capital (contacts). Policymakers should focus on easing these constraints according to specific needs and priorities.