Bloomberg BusinessWeek: To Avert A New Saddam in Iraq, Encourage Startups

To Avert A New Saddam in Iraq, Encourage Startups

Entrepreneurship is the economic equivalent of participatory democracy. It’s time to shift policy to support homegrown, high-growth companies

“If we’re going to achieve political stability, people have to own the economy.” That may be the most cogent statement I’ve heard about the situation in Iraq. The speaker was Carl Schramm, president of the Ewing Marion Kauffman Foundation, explaining on Charlie Rose in late May why U.S. development policy in Iraq and other troubled countries needs to change. (Full disclosure: The Kauffman Foundation has funded and continues to fund some of my research on entrepreneurship.)

What would help these countries most is what many of their citizens want and what the U.S. itself already has: a strong entrepreneurial economy. Merely restoring Iraq’s oil industry will not be sufficient. Yes, oil is a tremendous cash cow for the nations that have it. But overreliance on any single industry is risky, as anyone from Detroit can tell you. And a nation that relies too much on the extraction of a single natural resource is courting dictatorship and corruption. It’s too easy for a governing junta or a group of oligarchs to control that resource, thereby controlling the population. We’ve seen this happen in many oil states. Wouldn’t it be a shame if all we had accomplished in Iraq was to set the table for the next Saddam?

More than diversification is needed. Entrepreneurship—people starting their own businesses, which can grow and thrive—is, as Schramm has noted, the economic equivalent of participatory democracy. It allows people not only a vote but a direct hand in shaping their futures. Iqbal Z. Quadir, a Bangladeshi entrepreneur now at MIT, wrote an essay early this year questioning the military surge in Afghanistan. His proposal was to send 10,000 fewer troops, use the billions in savings to support Afghani entrepreneurs, and let them build a society where order prevails because people have a stake in it.

The folks at the Kauffman Foundation take the prescription a step further. They’re also calling on policymakers to look beyond microfinance. Small loans that help start local craft shops or service shops have enabled many to be self-sufficient, rising at last above poverty. There’s no questioning the value of that. But if the goal is to truly “develop” an economy, lifting it to developed-world status, microenterprises won’t get you there.

mobile phones in Iraqi Kurdistan

Nations that make the big jump are more than nations of shopkeepers. They also have new ventures that grow to substantial size, delivering advanced products and services. Japan in the 20th century had Toyota (TM), Panasonic (PC), Sony (SNE), Honda (HMC), and others. India and China now have burgeoning homegrown companies in fields from IT to solar energy; Israel has bred over 100 companies listed on U.S. stock exchanges; the U.S. itself has prospered from high-growth entrepreneurship in areas from telegraphy and tractors to personal computing.

Can the same occur in Iraq? Some glimmers are evident. In Iraqi Kurdistan, Kurdish-owned mobile phone companies have been blooming. Companies such as Korek Telecom—founded in 2000 before Saddam’s ouster and still growing —exemplify what homegrown, high-growth startups can do. Along with creating jobs in their own right, they spur growth in the economy at large. They arm other entrepreneurs with a valuable service (in this case, mobile-phone and Internet connectivity), and they employ locals who will acquire cutting-edge skills. Some may then go off to start ventures of their own that are more advanced than, say, a fruit stall. In doing so, they set an example for others to follow.

The question, of course, is how to foment more of these high-growth ventures throughout Iraq.

The first step could simply be a more coherent policy focus on building indigenous entrepreneurship. Thus far, policy has often been at cross-purposes. One USAID project, in concert with the European manufacturer Case New Holland (CNH), awarded money to help start tractor-repair franchises operated by Iraqi entrepreneurs. Meanwhile, a U.S. program in Iraq supported a state-owned repair facility that was able to serve farmers at lower prices, undercutting the franchisees. Iraq’s state-owned enterprises may be valuable in the near term, but inadvertently stifling entrepreneurs has to be minimized.

Build excellent research universities

Cutting the red tape involved in starting a business could help, too. In Iraq, according to World Bank figures, the process takes about 77 days, vs. about 6 in the U.S. or Qatar. Countries that make this process slow and costly drive entrepreneurs to operate outside the law in the so-called “informal” economy. There, as Peruvian economist Hernando de Soto has noted, small businesses can’t grow beyond a limited and precarious local sphere.

Rebuilding Iraq’s universities is a must. The goal must be not mere educational competence, but research excellence. Spinout activity is strongest from universities that are world-class and world-connected —see Stanford in Silicon Valley or the Technion in Haifa—and it helps to have good laws for commercializing university research.

Last, but not least, is the issue of skilled talent. Iraq currently ranks high among the world’s nations in numbers of émigrés living elsewhere and nearly dead last in its immigration rate.That’s not a good mix. As my research has found, even in Silicon Valley more than half the startups are founded by foreign-born entrepreneurs.Immigrants bring in knowledge of global markets and valuable experience.Iraq needs to harness those émigrés.It should follow the example of diaspora networks such as the Indian-founded Indus Entrepreneurs and enlist Iraqis worldwide to help new companies start up. Second, once a genuine entrepreneurial economy begins to take hold, let Iraq act as a magnet for ambitious immigrants from nearby countries.

What Iraq needs, like other developing and developed countries, is an entrepreneurship revolution. This is a great alternative to foreign aid and war.