Courtesy Reuters

Building Entrepreneurial Economies

POOR IMITATION

The United States, using its own direct-aid programs and its influence over development agencies, has encouraged other nations to adopt the features and institutions of post-Cold War American capitalism. But this approach -- the so-called Washington consensus -- has often yielded disappointing results. Many economies in Latin America, eastern Europe, and elsewhere are stagnant or backsliding, and most of the world's poorest economies show few signs of new life. Going forward, the American economic model should not be abandoned, as some development economists advocate, but it must be improved. The current template is incomplete. In particular, it fails to reproduce a vital element of the U.S. economy: support for entrepreneurship.

Not only does the United States have a high rate of new business starts, it breeds a constant flow of new high-impact firms -- the kind that create value and stimulate growth by bringing new ideas to market, be they new technologies, new business methods, or simply new and better ways of performing routine tasks. These firms do not appear automatically, as a natural by-product of having free-market institutions. Nor are they the result of any single factor. Rather, the United States has evolved a multifaceted "system" for nurturing high-impact entrepreneurship -- a system that, with the right development policies, might be cultivated in many other countries as well.

Such an approach has been missing so far. The Washington consensus focuses on macroeconomic issues such as finance and trade, along with general institution building. Nations are urged to create good banking systems, reasonable interest and exchange rates, and stable tax structures. They are expected to privatize, deregulate, and invest in infrastructure and basic education. Entrepreneurship, meanwhile, is considered only as an afterthought and in piecemeal fashion. Some policymakers, for instance, have suggested that venture capital firms should be added to the list of financial institutions that developing countries ought to have. But venture capital will do no good without ventures to support. Micro-enterprises are not sufficient either. Existing

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