Which economy?

AR Thurik, a professor of economics and entrepreneurship, presented a distinction between the models of the managed and entrepreneurial economies, and argued that the central theme of the entrepreneurial economy is exploration, whereas a managed economy focuses on exploitation.

Understanding the relevance of both in a country’s development has implications for policy formation.

Globalisation, or the free movement of goods, capital, people and ideas around the globe allowed countries to participate in the world economy with consequences for trade, foreign direct investment, capital flows and labour mobility. This development challenged traditional sources of competitiveness, and established companies eventually responded by shifting the source of competitiveness and growth from physical capital to knowledge and ideas.

The model of the managed economy is the political, social, and economic response to an economy dictated by the forces of large scale production, reflecting the predominance of the production factors of capital and (mostly unskilled) labour as the sources of competitive advantage. By contrast, the model of the entrepreneurial economy is the political, social, and economic response to an economy increasingly dominated by knowledge as production factor, but also by a different, yet complementary, factor that had been overlooked: entrepreneurship capital, or the capacity to engage in and generate entrepreneurial activity.

The managed economy revolves around the links between stability, specialisation, homogeneity, scale, certainty, and predictability on the one hand and economic growth on the other, whereas the entrepreneurial economy focuses on the links between flexibility, turbulence, diversity, novelty, innovation, linkages, and clustering on the one hand and economic growth on the other. In the managed economy, production labour and capital are the dominant production factors, but knowledge is the dominant factor of production in the model of the entrepreneurial economy and the competitive advantage in the entrepreneurial economy is driven by innovative activity.

Interestingly, one of the most conspicuous policy options in the model of the managed economy is that unemployment can be reduced only at the cost of lower wages. In the model of the entrepreneurial economy high employment can be combined with high wages. In fact, small firms in general and new ventures in particular, are the engine not only of employment creation, but also of productivity. Under the model of the managed economy, job creation by small firms is associated with lower wages but in the entrepreneurial economy model small firms may create both increased jobs and higher wages.

At a particular stage of development, the issues developing countries are faced with are primarily concerned with the move from a rural to a managed economy. Here the quest for consolidation is important. However, the Trinidad and Tobago economy has long moved passed been a rural economy. We must note that Thurik has argued that it is culture rather than regulation which determines whether entrepreneurship flourishes and in many developing countries such as ours, business is dominated by the incumbent and privileged who are not open to entrepreneurial newness.

At this stage in our development, we must begin to accept that entrepreneurship is a prerequisite for economic growth in the modern economy. The essential question remains how the proposed model translates into policy guidelines.

The World Economic Forum has suggested key recommendations for government policy in the fostering of entrepreneurial ecosystems which include the following. First is to make the formation of entrepreneurial activity a government priority. The formulation of effective policy for entrepreneurial ecosystems requires the active involvement of Government Ministers working with senior public servants who act as ‘institutional entrepreneurs’ to shape and empower policies and programs. Second is to ensure that government policy is broadly focussed. Policy should be developed that is holistic and encompasses all components of the ecosystem rather than seeking to ‘cherry pick’ areas of special interest.

Third is to allow for natural growth not top-down solutions. Build from existing industries that have formed naturally within the country rather than seeking to generate new industries from green field sites. Fourth is to ensure all industry sectors are considered not just high-tech and encourage growth across all industry sectors including low, mid and high-tech firms. Fifth is to provide leadership but delegate responsibility and ownership. Finally, develop policy that addresses the needs of both the business and its management team.

Entrepreneurship has emerged as an important element in the organisation of economies and empirical evidence indicates that developed countries are transitioning from managed economies to entrepreneurial economies.

The concept of entrepreneurship is not confined to the role of small businesses and business owners but it is being recognised as a pervasive socioeconomic mindset of thinking in terms of opportunities rather than in terms of resources. Our understanding that an entrepreneurial economy is best suited for our stage of development and the policy measures needed to encourage such an economy are needed.

If the pace of economic growth is to continue, policymakers must address the fact that institutions that thrived under the managed economy may no longer be relevant in an entrepreneurial economy.

Making this part of the thinking and decisions of economic planning if these are occurring at all is critical.