Entrepreneurship: A Pathway Out of Poverty?

Can Entrepreneurship Do Any Good?

Perhaps the most important question to tackle on this blog is whether entrepreneurship really can help lift individuals out of poverty. Professor Muhammad Yunus certainly thinks so. His groundbreaking microfinance work in Bangladesh earned him a Nobel Peace Prize in 2006. Grameen Bank, founded by Dr. Yunus in the mid-70s, has provided microloans to millions of people, mostly women, with a 97% repayment rate. The loans helped millions of borrowers to start a small business, fund their children’s education, upgrade their housing and generally improve their lot.

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But that was Bangladesh where loans were truly micro (e.g., $1.50 to $300) and the population was experiencing abject poverty. Can entrepreneurship really help lift people out of poverty in America where costs are significantly higher?

The numbers show that many immigrants have always considered self-employment the most sensible means to building a stable economic foundation. Since the late 19th Century, immigrants have always been more likely to pursue self-employment. Consider Bronx County, the county with the lowest per capita and lowest median household income in New York State [1]: 10.2 percent of foreign-born residents are self-employed versus 4.4 percent of native-born residents. Some have been wildly successful , while others have simply made enough to live on, but the fact is many immigrants come to the U.S. to build a life for themselves and 1 out of 10 decides to try their hand at entrepreneurship.

Research has shown that as states change their laws to encourage increased entrepreneurship — for instance by lowering the licensing requirements for businesses typically started by low-income residents — poverty rates decline at twice the rate of the increase in entrepreneurship. In other words, for every one percent increase in a state’s rate of entrepreneurship there is a two percent decrease in that state’s poverty rate. Correlation or causation, I cannot say for sure.

Who Wants to Be a Solopreneur?

Do low-income Americans even want to start small businesses? Or can the lower level of entrepreneurship be chalked up to the absence of interest or drive?

Well let’s start with something that anyone who’s ever lived in a low-income neighborhood knows: the entrepreneurial spirit abounds. Living the South Bronx as a teenager I regularly encountered young women braiding hair in their living room, young boys shoveling snow and mowing lawns, guys hawking CDs and bootleg movies, “street pharmacists” and high schoolers selling candy for their basketball team.  And anyone who’s been to New York City knows all about the countless singers, musicians and b-boys that ensure that everyone gets to see a show on (or under) Broadway.  Grameen America has helped launch tens of thousands of small businesses in 11 US cities with microloans of $1,500 or less using a similar model to that originally set up in Bangladesh.

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There’s just no question that many residents in low-income neighborhoods know how to hustle to earn necessary supplemental income. But they resist turning these pursuits into so-called “legitimate” businesses. Most of these jobs remain side hustles, which may limit those businesses’ ability to flourish and stunt the ability of the low-income solopreneur to move toward economic self-sufficiency.

Serious Risks

Still entrepreneurship is not for everyone. And in fact entrepreneurship can be risky business. A third of small businesses fold in the first two years and only half survive their first five. Further, native-born, low-income entrepreneurs may lose access to the social safety net that protects their families from hunger or homelessness — or worse — while they try to build their business.

But the reality is that with the shrinking of the pool of low-skilled, reasonably paying jobs there simply is no clear path to economic self-sufficiency, no road into the middle class in the traditional employer-employee workforce. But for individuals who are already solopreneurs on the side who are balancing their time between side gigs and minimum wage jobs with no benefits (and quite often poor treatment from employers and customers), over the long term this may be the most viable and empowering option.

Maybe it’s time that the law evolves to keep up with the times.

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