image: By moving from agriculture to business, villagers in Thailand have improved their incomes. view more
Credit: University of Chicago
The John Templeton Foundation has provided a $3.3 million grant for a new project to focus on wealth creation and poverty reduction in developing countries by bringing together some of the nation’s leading economists and scholars to form The Enterprise Initiative, based at the University of Chicago.
University scholars will join researchers at the Massachusetts Institute of Technology’s Poverty Action Lab and Yale’s Economic Growth Center.
The researchers will assemble data and develop high-quality models that will focus on the role of enterprise and simulate the impact of various alternative polices, according to project director Robert Townsend, the Charles E. Merriam Professor of Economics and the College at the University of Chicago. The new models will evaluate the choice of occupation, education and access to credit and insurance at the household levels, and simulate the impact on growth, inequality and poverty reduction at the regional and national levels.
“This project will help us explain the story behind successful enterprise and its impact,” Townsend said. “Traditionally, economic research has been divided in its approaches and fields. We will seek to integrate subfields and promote a more holistic approach to looking at development.” He termed the approach “applied general equilibrium enterprise economics.”
Townsend’s work in Thailand, in which he examined individual decisions in the home and determined the relationship of those choices to economic changes on a national level, spurred the Enterprise Initiative. Thailand is a prototypical developing Asian economy with a strong culture and history of entrepreneurial activity.
Townsend’s research integrates survey and geographic data from government ministries with his own longitudinal survey data. The Townsend Thai data comes from the Thai Family Research Project, which Townsend helped establish and has co-directed for more than 10 years. That project is an ongoing longitudinal study of nearly 3,000 households in Thailand. Townsend’s upcoming book, Financial Systems in Developing Economies: Growth, Inequality, and Policy Evaluation in Thailand, features important new findings on the relationship between individuals’ choices and entrepreneurial behavior and overall economic growth, including:
Poverty has decreased by more than 60% in the past 35 years, with dramatic regional patterns of growth, first concentrating around urban centers, and later in more remote areas. However, inequality persists.
Households have made persistent transitions from rice farming to other occupations, including business. Since profits from business are high relative to wage labor, and early on there were few households in business, this transition is associated with an increase in per-capita income and a growth in inequality. However, this income differential has decreased as demand from industrialization eventually increased the wages of unskilled labor.
Occupation shifts, education and enhanced intermediation account for 39% of income and inequality change.
Approximately 80% of the growth in productivity at the national level is due to entrepreneurial activity, along with an expanding formal financial sector.
After Thailand faced an economic crisis in 1997 and wages dropped, the share of households in business for themselves nearly doubled to 40%, though these businesses were not as profitable as those established before the crisis.
The availability of credit from government loan programs and community-based cooperative loan arrangements has had a notable impact on consumption, profits and wages.
Building from Townsend’s research, The Enterprise Initiative will use the precise data from Thailand to construct the monthly income, balance sheets and cash-flow statements of scientifically sampled households, to evaluate the effects of entrepreneurship on macro-economic growth.
Additionally, the Initiative will seek to collect new data from other emerging economies, such as Ghana, Mexico and India, to test economic theories and evaluate enterprise on a wider scale.
Housed at the University’s distinguished Economics Department, the Enterprise Initiative will tackle questions developed by economists as they incorporate their expertise to evaluate the range of choices and consequences that arise as an economy grows, or fails to grow.
The researchers’ high-quality data will assist policy-makers in modeling different policy options. Researchers will be able to suggest, for instance, how constructing a road in a particular area could boost business and what financial products and services could be most effective in encouraging development.
The project will also shed new light on the circumstances that lead to the growth of entrepreneurialism, a critical asset in emerging economies.
The project intends to examine how people in ordinary circumstances become involved in the creation of wealth for their own benefit, and ultimately the benefit of many others. It will examine factors, such as mindsets, aspirations and talent, which enable people to overcome obstacles and become accomplished entrepreneurs.
By gathering data, sharing the stories of successful individuals who have made transformations from poverty to relative abundance, modeling choices and modeling their impact on the larger economy, the project hopes to provide guidance to policy-makers and others who are looking to alleviate world poverty.