"Double Dip Warning"

Another crisis looming?

Since the financial crisis of 2008-10, I've followed the commentaries and opinions of Paul Krugman and Noriel Roubini to make sense of how the world financial system works (or doesn't work).  In my opinion, these two economists have made the most sense of how fragile the global financial system is due to the structural (and cultural) deficiencies of the American banking system.

Now the two are saying that a "double dip" is becoming more and more possible (for various reasons).  Paste the links below on your browsers for a good heads-up on what could happen within the next few months. We might have escaped the first one, but will we be able to do so if it happens again? 

http://www.nytimes.com/2010/08/27/opinion/27krugman.html?_r=2&partner=rssnyt&emc=rss

http://voices.washingtonpost.com/political-economy/2010/08/roubini_aka_dr_doom_predicts_d.html

http://www.gurufocus.com/news.php?id=105576

http://www.propublica.org/article/banks-self-dealing-super-charged-financial-crisis

Entrepreneurship: Promote Entry BUT also Exit

Schumpeter's "entrepreneurship" revolves around the idea of creative destruction: that endless cycle of competitive firms forcing uncompetitive ones to retire and exit.  In this view, resources will naturally follow those that can innovate better and produce "temporary monopolies" that the market appreciates.  These competitive firms will benefit from their "monopolies" until more innovating players come along and pushes them out of the market.

Schumpeterian entrepreneurship implies then that a healthy economy is one where firms are allowed to enter but also exit.  Supporting uncompetitive firms will distort the cycle of creative destruction and to some commentators, will "stunt" the real value of entrepreneurship to the economy.  In the end, intervening to keep uncompetitive firms afloat prevents the efficiency of the market to allocate resources to more deserving ones.

This is not to say, however, that interventions to push for entrepreneurship must be avoided.  It only means that the interventions, both on firm and sector levels, need to be more conscious of the possible repercussions to the natural efficiencies of the market to choose which firms can multiply resources and value better.  While it has long been established that the market cannot do it alone and fails miserably a lot of time, it has to be admitted (and it has been established empirically too) that it's doing a pretty good job in keeping wasteful firms out of the playing field.

Does the government and "the academe" understand "entrepreneurship" in the same way?

In research literature, entrepreneurship as a strategy for development arises from an understanding of Schumpeterian growth theory. The basic thesis of this understanding is that the level of entrepreneurial activities in a given economy influences economic growth and development through the process of “creative destruction”. Creative destruction is rooted in Joseph Schumpeter’s view that economic expansion will come from a continuing cycle of replacing uncompetitive economic actors and systems (i.e. firms and industry structures) with competitive ones that possess short-term (temporary) monopolies of innovative business activities (referred to as firm entry- exit; turbulence). In this view, the basic imperative to improve growth and development is to provide a correct set of incentives that will increase and sustain entrepreneurial habits in a given economy.

With the foregoing in mind, it is quite interesting to assess whether government initiatives on entrepreneurship is consistent with and actually rooted in the opinions of research and the academe. This could be done by reviewing actual government policies on entrepreneurship vis-a-vis the literature on entrepreneurship, and finding out whether the two sets of "thinking" are converging or not.


(A recent review of literature, mostly revolving around the works of Audretsch, Acs, Baumol, Miniti, Thurik, Reynolds, etc. and other colleagues, will suggest that the government's understanding diverges with those asserted by theoretical and empirical entrepreneurship research.)

Entrepreneurship: Did the government get it right?

The past administration was able to release its target of P310B worth of loans to M/SMEs--at least according to their press release.  In the 2004-2010 MTDPD and SMEDP, the expectation is that this amount will be able to help about 3 million entrepreneurs (mostly start-ups as there are less than 1 million registered micro, small and medium sized enterprises) who are then expected to consequently generate 10 million jobs.  Reading the numbers, the arithmetic seems quite simple--1 entrepreneur who will be assisted with loans will be able to provide about 3 to 4 jobs each.

(But if they targetted to assist about 3 million entrepreneurs, and assuming that there is less than 1 million enterprises (as of NSO statistic there are just about 800,000 to 900,000 firms in the Philippines, with M/SMEs comprising 99.7%) in the Philippines, were they really able to create 2 million nascent enterprises?  Or did they include lending to unregistered firms through wholesale tie-ups with MFIs, et. al.?) 

However, the actual count of jobs generated from the program was just about 1/3 of the target--also according to government press releases.  If they are not mistaken, this means that either the targets that the government set for itself were too high, or that something went terribly wrong.

(Is there existing data regarding the GVA that M/SMEs were able to contribute during the period?)

Recent data from the global entrepreneurship monitor (GEM), a consortium of academic institutions monitoring entrepreneurship around the world, will suggest that the targets were set too high.  Entrepreneurship simply do not have the capability to provide those numbers in a very short period of time.  As per GEM statistics, of nascent entrepreneurs in developing countries in Asia, only 3% of enterprises can actually provide about 5 jobs and 90% can only provide 1 < 5 jobs.

While I have reasons to believe that the findings of GEM can explain the shortfall (and thus should guide future policy interventions for entrepreneurship development and what to expect from it), this does not mean that nothing went terribly wrong, too.

Enterprises as Vehicles for Development

Due to their sheer number, micro, small and medium-sized enterprises (M/SMEs) are being pushed by the government, civil society and by the private sector to be more productive so as to increase their gross value added contributions to the economy and provide more opportunities for employment.

While these are worthy endeavors, it might also be a good idea to "discipline" M/SMEs as early as now with practices of eco-sustainability and social consciousness.  Again, due to their sheer number, the effects of the operations of M/SMEs to the environment and society will be ambiguous if not consciously considered.  To be safe, it has to be expected that MSMEs will not act "rationally" and therefore safeguards have to be instituted.