It is an undisputed fact that small businesses are widely considered to be important contributors to economic activity.  In fact, in the United States they account for almost 52 percent of economic output.
So, why are they not adequately supported by public and private institutions in The Bahamas?  We are not aware of any specific studies that have been conducted locally which seek to determine their contribution to economic activity, both actual and potential, and their future especially in light of the current challenging economic environment.
It is readily conceded that the engine of economic growth in most countries is the small business sector.  In The Bahamas, most small businesses find it difficult to operate for any number of reasons, including but not limited to: Government red tape; a lack of adequate funding; lack of proper planning; lack of expertise; poor record keeping; and a simple lack of fiscal discipline.
First, let us consider some of the core issues confronted by the small businessman or entrepreneur.  For this we cite Henderson and Quandt's Microeconomic Theory: A Mathematical Approach: "[A firm's] entrepreneur (owner and manager) decides how much of and how one or more commodities will be produced and gains the profit or bears the loss which results from his decision.  An entrepreneur transforms inputs into outputs, subject to the technical rules specified by his production function.
"The difference between his revenue from the sale of outputs and the cost of his inputs is his profit, if positive, or his loss, if negative.  The entrepreneur's production function gives mathematical expression to the relationship between the quantities of inputs he employs and the quantities of outputs he produces.  An entrepreneur normally will use many different inputs for the production of output.  [The firm's] costs are incurred by the entrepreneur regardless of his short-run maximizing decisions.  The entrepreneur purchases inputs with which he produces commodities."
Unfortunately, most of us have little understanding of the way in which the entrepreneur truly functions, how his economic environment influences his actions, and how various sorts of risk and uncertainty come into play in his decision-making.
In a paper in the Journal of Economic Perspectives, McMillan and Woodruff write that not only are entrepreneurs worthy of study, but they are central to the transition process.  Writing of China early in its reform process, the authors observe: "These startup firms drove China's reform momentum; they were arguably the single main source of China's growth.  They strengthened the budding market economy by creating jobs, supplying consumer goods, mobilizing savings and ending the state firms' monopoly."
As the authors rightly point out, the International Monetary Fund (IMF) and other advisers were intently focused on privatizing existing enterprises but nearly completely ignored the other route to the private sector - the creation of new firms.  This is what entrepreneurs do, and did, in the transition process in Europe, China and elsewhere, yet economists nearly always neglect it because the theory upon which they rely is silent on the subject.
Reformers in nearly all transition economies did not foresee the rapid emergence of small enterprises from the ashes of the old Communist system.  While this lack of recognition of the role of entrepreneurs or small businesses is not surprising for those entrenched in the command economies of Europe, it stands as a substantial failure on the part of Western economic advisers, as few of them predicted the important role entrepreneurs would play in the transition.
It would seem that advisors and transition policymakers perhaps should have paid more attention to the Austrian economists such as Mises, Hayek, Rothbard, Kirzner, and others.  These scholars correctly argued that the entrepreneur is critical to economic growth - a theory that has been borne out by the experience of the transition economies.
Decades ago, Mises wrote: "The driving force of the market process is provided neither by the consumers nor by the owners of the means of production - land, capital goods, and labor - but by the promoting and speculating entrepreneurs.  Profit-seeking speculation is the driving force of the market as it is the driving force of production."
Kirzner continued this line of thought.  In the Kirznerian view of entrepreneurship, "A market consisting exclusively of economizing, maximizing individuals does not generate the market process we seek to understand.  For the market process to emerge, we require in addition an element which is itself not comprehensible within the narrow conceptual limits of economizing behavior.  This element in the market is best identified as entrepreneurship."
Unfortunately, actual policies in actual economies affecting actual human beings have been crafted by economists who have, for the most part, largely ignored entrepreneurial activity.  That activity is even more important in emerging markets and transition economies such as The Bahamas and building a theory that accommodates that role is an important missing piece in the structure of modern economic theory.  Perhaps the Austrian emphasis on the role of the entrepreneur will be pulled into the mainstream theory now that the transition policy failures are shedding light on this important issue.
We believe that as a nation celebrating its 39th anniversary of independence this year, it is imperative that we move with great urgency to put in place the necessary mechanisms, which will encourage entrepreneurial activities and ensure that the necessary support mechanisms are in place to provide entrepreneurs a basic opportunity to succeed.  We are not talking about handouts, but rather the development of an infrastructure that would allow them the opportunity to achieve success.
How can we accomplish this?  First we need to create a small business authority/economic planning unit which will assist aspiring entrepreneurs with information about potential business opportunities, provide economic statistics for planning purposes, provide avenues for funding, provide education opportunities, access to advisors, etcetera.
Second we need to establish a national venture capital fund that is adequately funded with a minimum of $25 million to be managed by professionals to assist small business with excellent opportunities but which lack the necessary funding.  This should be funded by private investors, financial institutions and the National Insurance Board.  This venture capital fund would also provide consultancy and expertise to small businesses with respect to operations, marketing, distribution, accounting and other technical areas.  This would assist in affording the small business person the opportunity to focus on producing quality service or products.
As we have written before, it is time for us to look within and we submit the time is now.
 
CFAL is a sister company of The Nassau Guardian under the AF Holdings Ltd. umbrella.  CFAL provides investment management, research, brokerage and pension services.  For comments, please contact CFAL at: column@cfal.com.

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