Poor Economics Summary

Chapter 9: Reluctant Entrepreneurs

-By FYA Acad Group 4

The number of entrepreneurs is roughly the same among the somewhat less poor in the same
countries. The sheer number of poor business owners is astonishing. After all, everything
appears to be working against impoverished people establishing businesses. Moneylenders,
who are the principal source of unsecured funding for those who are unable to borrow enough
from friends or family, charge monthly interest rates of 4% or higher. As a result, the poor are
less able to make the necessary investments to run a successful business and are more
exposed to any additional risk posed by the firm itself.
The fact that they are still approximately as likely as their wealthier counterparts to start a
firm can be viewed as an indication of their entrepreneurial spirit. The fact that the poor are
able to repay their loans while paying extremely high interest rates must imply that they are
making much more money per rupee invested.
While the marginal returns (return on investment per dollar invested) of microenterprise
investments can surpass 50%, the firms themselves are tiny, and overall returns are quite low.

The majority of the countries in the data set have no paid staff and limited assets. For
example, Hyderabad has only 20% of businesses running in their own room. The businesses
of the poor and near poor are not making much profits. Obviously, if these people had large
and successful businesses, they wouldn’t be poor any longer. But the problem is sustaining
the costs for a long period of time without making high profits. The data from the survey
shows that most businesses were not able to survive the three-year period in Mexico. 
Due to the low profitability of poor-owned firms, microcredit does not appear to lead to a
fundamental transformation in the lives of clients. If the poor's businesses are generally
unprofitable, it may explain why giving them a loan to start a new business does not result in
a significant improvement in their situation.

There are two possible uses of the word "return."

The answer to the question "What would happen to your revenue net of all operational costs
if you invested $1 less, or $1 more?" is the marginal return on a dollar.
On the other hand, the overall return on a business is the total income minus operating
expenses (the cost of materials, any wages you pay to your workers, and so on). At the end of
the day, you can take this home with you. The paradox is explained by the fact that marginal
returns can be high even though overall returns are low.
This paradox can be explained through production technology, which says that as investment
increases, the marginal returns to production decreases.

The poor are very energetic and resourceful. However, they are unable to earn a liveable
income because what they do is indistinguishable from the others around them, as seen in the
observations of the author in the case of the shop on the outskirts of Gulbarga, which had a
very limited inventory like countless other shops, and also the case of multiple dosa sellers in
Guntur. Many of these businesses have high marginal returns but very low overall returns.
One possible reason could be that they don't borrow, as it can get expensive. Increasing the
capital might require increasing storage space or hiring a new employee, which would only
cost more money. Expanding their business will require new skills and management that they
cannot afford to buy. Therefore, many businesses stay small.

The general idea behind Entrepreneurship is too hard is that the low-income class finds it
difficult to grow their business simply because of a lack of enough investment to reach the
consumption goal. This in turn leads to a lack of enthusiasm to save and invest when
compared to the middle class. Through the case study, we understand that the initial amount
invested is so trivial that about 100 times the same amount and about 40 years are needed to
buy the capital needed to reach the consumption goal. In India and Peru, the business training
programmes by MFIs did add to the knowledge of the entrepreneurs but did little to grow
their businesses. Instead, a simplified curriculum and "rules of thumb" (such as keeping the
business and household expenses separate, and paying oneself a fixed salary) led to an
increase in profits.

Through a case study of Pak Awan and his wife from Indonesia, the authors very deftly aim
to portray why the poor frequently embrace entrepreneurship as a way to buy a job rather
than due to a special entrepreneurial drive. The authors go on to state that women,
particularly those from low-income families, start businesses because they have some spare
time and a wish to contribute, even if only a little, to the household's earnings. Males in the
west have only recently acknowledged female effort, in spite of the fact that it is still
overlooked elsewhere. The authors identify this as one of the many reasons why the
entrepreneurial spirit of disadvantaged females is primarily limited by the needs of their
families, as opposed to male and rich entrepreneurs, who are typically motivated to make
investments in their businesses.

The results from a number of surveys show that most of the poor prefer their children to get
government jobs over anything else, mostly due to the stability and job security associated
with them. Citing various examples, the chapter also shows how the establishment of
factories in rural areas promotes wage growth to a large extent and has an overall
transformative effect on families. A steady income gives people the confidence to invest their
money in their children’s education, businesses, etc., creating a virtuous cycle.

A way to acquire these "good jobs" is through migration. Moving to the city, in many
instances, can change a family’s trajectory completely. 

We find that job and financial security provide the much-needed incentive to educate their
children and hence escape the clutches of illiteracy. It is found that the educated give better
education to their children as compared to the illiterate. To get access to a better education,
one needs to go to urban areas, and this requires people living in rural areas to permanently
shift. Shifting permanently can be very difficult as urban housing is very expensive compared
to rural areas. And the uncertainty of a seasonal or casual job makes it all the more difficult.
However, if one person manages to break through this barrier, it becomes much easier for
others to follow. Policies on urban land use and low-cost housing will largely help the cause,
but to think that these policies will be able to execute a mass exit from poverty is nothing
short of a dream.