Transcript THE ORIGINS OF SELF-EMPLOYMENT: Experiences of a Transition Economy Leora F. Klapper (World Bank) joint with: ASLI DEMIRGUC-KUNT & GEORGE PANOS NBER Entrepreneurship Working Group.

THE ORIGINS OF SELF-EMPLOYMENT:
Experiences of a Transition Economy
Leora F. Klapper
(World Bank)
joint with: ASLI DEMIRGUC-KUNT & GEORGE PANOS
NBER Entrepreneurship Working Group Meeting
March 9, 2007
Motivation
 A flexible, well-functioning, and entrepreneurial labor market can
contribute to economic growth through the efficient (re)allocation of
labor and increased competitiveness. A better understanding of the
determinants of entrepreneurship - the environment that motivates
and supports the creation of self-employment – is essential for
understanding the microeconomic foundations of economic growth.
 In transition countries, the SME sector has been the largest creator of new jobs
and the vast majority of these new enterprises are microbusinesses (Ayyagari,
Beck & Demirguc-Kunt, 2004; Klapper, Sarria-Allende & Sulla, 2004).
 Notable amount of interest on issues of mobility and transition into
self-employment in developing countries, stressing financial,
institutional, psychological & sociological factors (Djankov et al.,
2005; 2006; Paulson and Townsend, 2004; 2005;) as well as labor
market characteristics (Earle and Sakova, 2000; 2001; Dutz et al.,
2001).
 We examine the nature of the entrepreneurial decision for the
transition to self-employment in Bosnia & Herzegovina (BiH) and its
viability, using a rich panel survey for the years 2001-2004.
 BiH offers an interesting setting to examine the aftermath of reforms on the
dynamism of latent entrepreneurship.
Labor and Business Environment in
Bosnia & Herzegovina
Pre-1990s:
 Part of the former Yugoslavia, a centrally-planned economy.
 Although the environment was hostile to self-employment and
entrepreneurship, BiH had a large entrepreneurial middle class
(Earle and Sakova, 2000).
1990s: War & Transition
 Establishment after a 4-year war in early 90’s
-
6% of 4.4m population killed or registered missing
60% forced to relocate & almost 1m left the country
75% drop in GDPpc ($2,400  $600)
Informal sector accounting for as much as 50% of GDP.
 The destruction of the stock of productive capital combined with the
dislocation of private social safety nets and social capital decreased
living standards and increased the vulnerability of the population to
further economic shocks (World Bank, 2002).
More recent years:
 Facing massive unemployment and a deficient social welfare
system, the promotion of self-employment and microenterprise
became a political priority.
 New laws were passed and initiatives were taken to encourage
SMEs and new firms.
But BiH still faces major challenges….






High & Rigid Wages in the Formal Sector.
High Taxation of Wages and Profits – High Employer Contributions.
Large & Growing Informal Sector (No Social Insurance).
Persistent Unemployment.
Slow Privatization – Public Sector dominates Formal Sector.
Difficult Access & High Cost of Credit.
 Lack of Systemic Trust in the Regulatory & Financial Environment.
 World Bank Doing Business Data (2005): Particularly low
ranking, with respect to ease of starting a business, dealing with
licenses, registering property and trading across borders.
Data
 World Bank Living Standards Measurement Survey.
 4 Panel Waves, 2001-2004.
 Sample designed to be representative at the country level, the entity
level, and for urban, rural and mixed municipalities.
 The individual- and household-level questionnaire included modules
covering demographics, housing, education, labor, migration, health,
credit and social assistance.
 Waves 1 and 4 also contain modules on consumption
 Sample: Labor force population, aged 16-65.
 Final sample includes 5,370 individuals and 2,273
households
Labor Force Composition
 Self-Employed:
 Owner/co-owner of: (a) enterprise with workers (employers), (b) enterprise without
workers (own account).
 Carrying out independent (non-agricultural) activity.
 Validation: Declared work-related characteristics such as earnings and paid
pension and health contribution. (The remainders are considered informal sector).
 Formal Sector Employees:
 Employed in: private sector, public enterprises, and international organizations
(with paid pension contributions).
 No distinction between full-time/part-time (flexible employment not common).
 Informal Sector:
 Workers in private sector for whom pension contributions and taxes are not paid.
 Unpaid supporting family members, farmers on own farm, workers engaged in
other activity, such as sale of agricultural products.
 Inactive, but reporting earnings or hours of work.
 Common rule-of-thumb practice (World Bank, 2002).
 Involuntarily Unemployed:
 Individuals without a job, actively searching for one (able to take it if offered)
 Inactive:
 Students, pensioners and housewives (with no earnings-hours).
 Individuals inactive in all four waves of the panel are dropped.
Figure 2: Labor Force Composition, "Living in Bosnia and Herzegovina, 2001-2004"
40.00%
35.00%
Formal Sector
30.00%
25.00%
20.00%
Inactive
Informal Sector
Unemployed
15.00%
10.00%
5.00%
Self-Employed
0.00%
2001
2002
2003
2004
New Entries into S.E. in 2002-2004,
by individuals not S.E. in 2001
The data allows us to directly identify individuals that switched during the
sample to self-employment, as well as the ex-post performance of new
entrepreneurs in terms of their survival in the early period in business.
New Entrants
(%S.E.t)
Exits
(%N.E.t-1)
Survival
(%N.E.t-1)
New Entrants
(%S.E.t)
NEW SELF-EMPLOYED
2002
2003
2004
Total BiH
112
72
45
229
2002
2003
2004
Total BiH
60
25
13
98
41
47
88
(36.6%)
(65.3%)
(47.8%)
(35.0%)
(64.0%)
(43.5%)
Survival
(%N.E.t-1)
HOUSEHOLD HEADS
71
25
96
(63.4%)
(34.7%)
(52.2%)
56
40
23
119
(65.0%)
(36.0%)
(56.5%)
52
47
32
131
EMPLOYERS
21
16
37
Exits
(%N.E.t-1)
23
28
51
(41.1%)
(70.0%)
(53.1%)
33
12
45
(58.9%)
(30.0%)
(46.9%)
32
16
48
(61.5%)
(34.0%)
(48.5%)
OWN-ACCOUNT
39
9
48
20
31
51
(38.5%)
(66.0%)
(51.5%)
Predicted Determinants of Entry into S.E. :
1- Individual Characteristics:
 MALE: Positive
 AGE & AGESQ: Positive and Concave (Job Shopping: Miller, 1984)
 EDUCATION: Mixed (Le, 1999; Bates, 1995; Parker, 2004)
 MARRIAGE & CHILDREN: Positive (Borjas, 1986)
 HEALTH & DISABILITY: Mixed – The disabled have access to both
targeted grants/microcredit schemes (to address discrimination) and
government social benefits.
 REGIONAL VARIATION: Mixed (Urban vs. Rural, FBiH vs. RS),
(Parker 2004)
2) Psychological & Sociological Traits:

The self-employed are more likely to be risk-takers than the rest of the
population, since they are faced with more uncertain future prospects and
lifetime earnings profiles. They are also more likely to depend on social
networks.

Cantillon, 1755 (Uncertainty Resolution); Say, 1828 (Coordination Ability);
Knight, 1921 (Alertness); Schumpeter, 1934; 1939 (Innovation, Instinct,
Leadership); Leibenstein, 1968 (Risk-Taking), Gomez & Santor, 2001; Ravallion
& Lokshin, 2006 (social capital/risk sharing)
SOCIAL CAPITAL: “Is there someone you can count on to listen or help in
a time of crisis?”

Entrepreneurial decisions are much likely to be influenced by attitudes,
emotional predispositions (“optimism”) and cognitive biases.

Arabsheibani et al., 2000; Puri & Robinson, 2005, Heaton and Lucas, 2000;
Moskowitz and Vissing-Jorgensen, 2000; Hamilton, 2000; Gentry and Hubbard,
2001; Parker, 2006; Fraser and Greene, 2006
OPTIMISM: Index from 8 GHQ questions about mental health and
anticipatory feelings (i.e. “Felt hopeless in terms of the future?”)
3) Labor Market Experience:
 UNEMPLOYED, INFORMALLY EMPLOYED,
(Formally Employed)
 Unemployment : “Pushing”
 Past formal employment experience: “Pulling”
• Ability Learning (Jovanovic’s, 1982), Human capital acquisition
(Lucas,1978), Small Firm experience (Boden, 1996)
 Informal sector experience: “Pushing” or “Pulling”?
 Could informal sector experience - despite all its negative
consequences – be valuable for economic development in
transition? (Kaufmann & Kaliberda, 1996; Johnson, Kaufmann
and Shleifer, 1997; Blau, 1985)
 Informal work experience develops skills and abilities, which
could later foster healthy transitions to formal entrepreneurship
when circumstances allow it (Entrepreneurs as “jacks of all
trades”, Lazear, 2004).
 In a weak regulatory environment, the informal sector could be a
subsistence shelter for unmatched employees and latent
entrepreneurs (Harris and Todaro, 1970).
4) Wealth, Access to Finance & Institutions:

Access to capital has been extensively analyzed as an important constraint in new business
establishment, usually indicating a positive relationship between wealth, instrumented or not, and
entrepreneurial activity.

Empirical evidence on the role of financial institutions is relatively scarce (Paulson and
Townsend, 2004).

The effect of remittance receivership from abroad on local entrepreneurial activity is ambiguous.
(Funkhouser, 1992; Ahlburg, 1995; Rodriguez and Tiongson, 2001; Muço et al., 2004; AmuedoDorantes and Pozo, 2006).

Financial Indicators:
 LHHCONS (Wealth): Equivalized per capita household consumption, deflated by
the regional poverty line.
 Customer Affiliation with Financial Institutions:
INFORMLOAN, MICROLOAN, BANKLOAN
 Remittances:
REMITDOM, REMITABROAD
 Grants:
GRANT, SOCIALSERV
Summary Statistics
NEWSE
[229]
MALE
MARRIED
EDLOW
PASTSE
OPTIMISM
NOSCPTL
INFORMAL
UNEMPLOYED
OTHSE
LHHCONS
INFORMLOAN
MICROLOAN
BANKLOAN
REJLOAN
REMITDOM
REMITABROAD
GRANT
SOCIALSERV
69.00%
75.55%
21.83%
12.23%
92.50%
6.11%
37.55%
21.40%
16.59%
8.04
16.16%
2.62%
13.97%
11.35%
5.24%
6.99%
2.62%
22.71%
Never
Self[5,108]
50.49%
60.28%
34.83%
1.70%
90.07%
20.22%
20.09%
44.95%
6.25%
7.82
17.17%
2.55%
11.51%
10.57%
8.59%
11.57%
2.06%
27.68%
t’s
***
***
***
***
***
***
***
***
***
***
*
**
*
NEWSEEMPL
[98]
60.20%
78.57%
17.35%
14.29%
93.48%
9.18%
23.47%
20.41%
13.27%
8.13
10.20%
3.06%
20.41%
8.16%
3.06%
2.04%
2.04%
20.41%
NEWSEOA
[131]
75.57%
73.28%
25.19%
10.69%
91.76%
3.82%
48.09%
22.14%
19.08%
7.96
20.61%
2.29%
9.16%
13.74%
6.87%
10.69%
3.05%
24.43%
t’s
**
*
***
**
**
**
**
Probit Results (Tables 6 & 7):
 The profile of the newly self-employed is more likely to be male,
aged 43, residing in an urban area, likely to be married and have
some formal education, in good health, and with past selfemployment experience.
 Optimism and social capital have a significantly positive effect, both
when included together and separately.
 The inclusion of the consumption variable indicates a significant
positive effect of past wealth on current self-employment.
 The affiliation with informal sources of finance is not likely to foster
entrepreneurial activities. Remittances from abroad exhibit a
significantly negative effect on the probability of becoming selfemployed, in accordance with the “disincentive effects” of
remittances*.
 Grants from institutional sources, such as international initiatives,
have a positive impact on the probability to become self-employed,
although the overall use is low.
 Results are fairly robust when household heads and sub-samples
of non-farmers and individuals coming from employment are
examined separately.
Multinomial Probit Results (Table 8):
 Multinomial Probit regressions distinguishing between (a) S.E.
Employers (2%), (b) Own-Account S.E. (3%) and (c) Not S.E.
 SE of either type are more likely to be male, older, and less
formally educated. All SE individuals are also more likely to
have previous SE experience and greater personal wealth.
 Individuals creating employment for others are also more
optimistic and have greater social networks. They are also less
likely to be previously unemployed, receive informal sources of
finance or remittances from abroad, and importantly, (weakly)
more likely to make use of bank financing.
 Individuals creating own account businesses are not more
optimistic, but very likely to have strong social networks and
other family members that are SE. They are also more likely to
have informal sector experience.
Self-Employment Performance:
 We examine the individual-specific determinants of survival in selfemployment for at least 2 consecutive years (given the fact that our
panel only covers the period 2001-2004)
 As show in Table 2, 47.8% of individuals (53.1% of household
heads) becoming self-employed during the years 2002-2003 in BiH
quit their new entrepreneurial venture during their first year of
activity.
 It is well-known that new entrepreneurs bear the highest risk of
failure during their first few years of activity (Parker, 2004).
 Although firm and sector-specific determinants are also of vital
importance, the nature of the database only enables person-specific
analysis.
 We employ a two-stage Heckman probit model with sample
selection (van de Ven and van Praag, 1981), including optimism and
receipt of pensions in the first stage.
Results:

Men and urban area residents are more likely to survive the difficult first
year in self-employment. Education increases the probability of survival.

Prior wealth has a persistently positive effect in the survival equation,
indicating that higher potential of self-financing is an essential
component of self-employment activity and longevity in BiH.

The bank loan variable exerts a (weakly) significantly positive effect in
the survival equation. This could be attributed to the good screening
mechanisms of the financial institutions with respect to the
entrepreneurial prospects of the individuals they choose to finance.
Hence, while the decision to become an entrepreneur is not related to
financing from banks, the ability to survive is significantly increased by
an existing relationship with a bank.

Charities established to promote entrepreneurship appear to be
unsuccessful in promoting success.

Informal sector employees are more likely to become selfemployed than formal sector employees, and further more likely to
make it through their first year.

Previous self-employment experience and the existence of another selfemployed member in the household increase the likelihood of survival.
Main Conclusions
 Informal sector workers are more likely to transition to
formal self-employment and to be successful as
entrepreneurs. These results support the perception
of the informal sector as an incubator for selfemployment in the formal sector in the early years of
transition, through which individuals acquire skills that
can facilitate their future entrepreneurial activities.
 Financing constraints play an important role in the
decision to enter into self-employment and its
success; informal and formal sources of external
finance do not appear important.
 Overseas – and in some case domestic – remittances
significantly decrease the likelihood of becoming an
entrepreneur.
 Behavioral profiles matter – “optimism” is important to
entrepreneurs with employees, while “social networks”
support own account entrepreneurs.