Recently, my book club discussed Peace through Entrepreneurship: Investing in a Startup Culture for Security and Development by Steven R. Koltai with Matthew Muspratt.* In the book, Koltai describes his career as a businessperson and entrepreneur before becoming a Nonresident Senior Fellow at the Brookings Institution and running his own consulting firm. In between his time as an entrepreneur and as a consultant, he spent two years as a Franklin Fellow at the U.S. Department of State, where he launched the Global Entrepreneurship Program. In this book, he puts forward his thesis for how to effectively address threats to U.S. national security, reflects on his experience working for the government, and presents his own Six + Six Model for building an entrepreneurship ecosystem. In this post I briefly summarize his thesis and then mention a few useful points in the book before offering several critiques.

Koltai’s main arguments

Koltai’s thesis is straightforward: terrorism and instability (especially in the Middle East and North Africa – MENA) are caused by unemployment; entrepreneurship creates many jobs; thus, promoting entrepreneurship will decrease terrorism and improve stability. The second part of Koltai’s thesis is that the United States has a “unique relationship” with entrepreneurship; that the U.S. government needs to be involved in entrepreneurship development overseas; and that the U.S. government is failing in this regard due to lack of funding, bad people and bad procurement. He makes recommendations for how to fix the government and then presents his Six + Six Model as the one that should be used to support the development of entrepreneurship ecosystems.

Useful contributions

I really appreciate the distinction Koltai makes between micro-enterprises and self-employment on the one hand and entrepreneurship on the other. He recognizes that the solution to excessive unemployment is not for everyone to become a microentrepreneur. To reduce unemployment, we need people to be hired into jobs. And he understands that to hire more people into jobs we need to increase labor demand (i.e., create new jobs) and not just improve labor supply (i.e., give people more skills). Koltai understands that employee training approaches alone are not going to bring the necessary increases in employment.

In a similar vein, Koltai makes the distinction between entrepreneurial startups and non-entrepreneurial small businesses. He gives the example of neighborhood restaurants opened and managed by a local owner. These are not entrepreneurial startups because they are not producing something new and they are not expected to grow into large companies that employ thousands or hundreds or even just dozens of employees. Koltai’s focus is not on people who start and run small businesses but rather people who invent and innovate to start new companies with high growth potential. This distinction is important for job creation. In the U.S., for example, the share of employment in firms with 1 to 249 employees has fallen from 1993 to 2015 (U.S. Bureau of Labor Statistics, 2016).

Second, the most useful information in the book from my perspective is the names of various organizations that are currently succeeding at promoting entrepreneurship in various countries and the descriptions of their activities. Examples include the Meltwater Entrepreneurial School of Technology, Start-Up Chile, the Yozma program, Flat6Labs, Endeavor, the Artha Venture Challenge, the Demeter Network and others. I would love to see more complete case studies of each of these interesting programs and organizations.

Third, Koltai is absolutely right that it is difficult to attract successful entrepreneurs and businesspeople to work in international development. The reason is not surprising. Government work, whether as a government employee or through a government contractor, does not pay the same as people, especially successful entrepreneurs, can earn in the private sector. I’ve spent many hours trying to recruit people with good private sector experience to do private sector development technical assistance work, and it is not easy.

Nevertheless, Koltai overstates his claim about the absence of private sector experience. There are in fact many people working in the development industry with private sector experience. Even just among the seven book club members who attended this meeting, past jobs include real estate attorney, civil engineer, and Vice President of a Fortune 500 company, and we could each name several people we know who came to development from the private sector. We also all agreed that we’d like to see more such folks in government, as he advocates in the book. Unfortunately, Koltai does not offer any solutions for how the salary-capped government and government contracts can compete for entrepreneurs in the private sector labor market.

Critiques

As I explain here, my book club is comprised of female senior professionals in the development industry. Those present at this meeting have more than 150 years combined experience in international development across multilateral and bilateral donors and implementers small and large, as well as dozens of years of “real-world” experience before and in some cases after our careers in international development. There are many aspects of this book that concerned my fellow, or more correctly, my “gal” book club members and me.

The relationship between unemployment and instability

Koltai argues that unemployment is a causal factor for terrorism and instability. He states, “When there aren’t enough jobs, the consequences are serious, from civil strife to international conflict and terror” (p. 33). The evidence he provides for this statement (in addition to the rise of Nazism) is the Tunisian street vendor who set himself on fire in 2010 because of “economic frustrations”. Koltai here and several times throughout the book recalls this event as evidence for his thesis that unemployment leads to terrorism. I have problems with both assertions – that death from suicide can be attributed solely to “economic frustrations” as Koltai suggests and that death from suicide is the same as terrorism.

More generally, my concern is that Koltai is loose with his use of evidence and ignores the complexity of the issues he claims to solve. Later in the same discussion, he states, “Among young people who join rebel movements, one in every two do so because they cannot find a job”. For this statistic, he cites this Brookings report, which in turn cites this Human Right Watch (HRW) report for the statistic. The HRW report presents findings from interviews with 60 ex-combatants across West Africa. Human Rights Watch finds, “the majority of these regional warriors began their fighting careers after being forcibly recruited by [rebel groups], usually when they were still children” (p. 3). The HRW interviews also reveal that these fighters’ economic situations influenced their subsequent recruitments.

My point here is that Koltai’s blanket statistic comes from a sample of 60 respondents from one region in the world, and the evidence shows that the causal influences for these 60 ex-combatants are more complex than just unemployment. No one doubts that the youth bulge combined with slow economic growth in MENA is an important challenge, and studies do show that economic hardships and financial concerns play a role in violence and wars. For a careful empirical analysis of the relationship between population growth and conflict, see Acemoglu, Fergusson and Johnson (2020) summarized here. However, it is dangerous (to use the word of one book club member) to view the challenges to security and development through Koltai’s simple lens that “employment = jobs = growth = stability” (p. 28).

The relationship between entrepreneurship and job creation

Koltai glosses over the complicated relationship between entrepreneurial startups and job creation. New enterprises are indeed an important source of job creation. In a healthy economy, there are many establishment births (to use the U.S. Bureau of Labor Statistics (BLS) terminology) in any given year and these new establishments hire people. The rub is that most startups die. In the U.S., from 1994 through 2015, the share of new establishments surviving past five years is only roughly 50%. At ten years, that share drops to 35%. And only 20% make it past 20 years (U.S. BLS, 2016). That means that startups account for a large share of job creation and a large share of job destruction. In the U.S., when the number of employment gains due to establishment births increases, the number of employment losses due to establishment deaths also generally increases (U.S. BLS, 2016).

Koltai acknowledges that only “a tiny but hugely important few” startups end up creating a large number of jobs (p. 31). He is correct that the startups that survive and grow become important sources of economic growth and jobs in the long run. What he doesn’t address is what it means for the labor market or for his larger thesis about unemployment and instability when most startup jobs disappear after a short period of time. And he does not examine the role that governments play, such as through social protection programs, in alleviating economic hardship from job transitions. For discussion and analysis of governments’ roles in diverse and unstable labor markets, you can check out this World Bank report.

The role of government

One example of how Koltai underplays the role of government is mentioned above – he ignores government programs that benefit workers and thus facilitate the functioning of the labor market. Another example is his treatment of the role of government in invention and innovation. In his chapter titled “American Made”, Koltai applauds entrepreneurship as the source of the innovation that has fueled America’s economic growth throughout its history. When I was in the middle of reading this chapter, I happened to run across a summary of Mariana Mazzucato’s book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths. I thought, “wow, Koltai needs to read this.” Then I finished the chapter and learned that Koltai did read Mazzucato’s book! He even cites some of Mazzucato’s examples of notable innovations that fueled fast-growing U.S. firms that originated from the National Institutes of Health, the Defense Advanced Research Projects Agency and other large government agencies instead of from private entrepreneurs. But he doesn’t explain how this evidence fits (or not) with his arguments about entrepreneurship.

Later in the book, he nods at this government role again, although coopts it by calling it “investment in entrepreneurship” instead of investment in research and development (R&D). Regardless, none of his recommendations touches on whether or how to build this role in the governments of MENA countries. Instead when he talks about government as one of the six actors in his Six +Six Model, he talks about its role in making regulatory changes and seed grants and serving as champions. Put simply, in the first half of the book, Koltai advocates for exporting the American model of entrepreneurship to fuel fast-growing growing firms with jobs growth, but in the second half, he conveniently ignores government investment in R&D as a critical element of the American model. On the other hand, his model of the entrepreneurship ecosystem includes NGOs and foundations as necessary actors. While these actors play a big role in international development work, he does not explain whether or how these actors fit in the “American Made” historical model of entrepreneurship.

Why the U.S. government is failing at promoting entrepreneurship

Koltai criticizes U.S. government employees for how they conduct their work. Here’s one example, “At that moment, I understood something. I realized that in the mind of a career government worker, when you hit an obstacle, you stop. You do not figure out how to go over it, under it, or around it. You just stop. This turned out to be a big lesson in the difference between the way America works and the way the U.S. government works” (p. 66). He also likens the State Department to Soviet Russia (p. 86). As an aside, I found his disdain for government employees to be in stark contrast to Adam Boehler, the new CEO for the U.S. Development Finance Corporation, who remarked at a recent Devex event that he was surprised at the high quality of people in the U.S. government and at the faster-than-expected pace.

In these and Koltai’s other criticisms of the U.S. government, based on his two years as a fellow, he makes no attempt to diagnose or understand the problems he sees. He recognizes that these are symptoms of bureaucracy, but beyond that, he does not explore reasons behind what he observes – reasons that might help him understand the many challenges his former State Department colleagues and other government employees face, and reasons that need to inform any recommendations for how to change.

Koltai’s criticism of the U.S. government, however, is nothing compared to his contempt for government contractors. For example, he describes a meeting he had with the chief of party of a USAID-funded program in Egypt, “I (as program designer and representative of the contract-awarding government) was the client and Chemonics was the vendor, yet I was treated with none of the respect and customer service mentality that such a relationship would normally imply. I learned then and there that, through manipulation of the contracting and procurement system, large government contractors more often than not call the shots” (p. 78). Koltai clearly did not then, and apparently still does not, understand the role of USAID implementing partners and their relationships with the many stakeholders surrounding their projects. In full disclosure, I was slated to be the home office director of that project, which was awarded right before I moved to a different job. The environment for development assistance in Egypt is complex at best, and that chief of party was expected to balance the needs of USAID, the Embassy, the Government of Egypt, and multiple Egyptian private sector entities in the day-to-day operation of the project, which was what USAID hired Chemonics to do. It is stunning that Koltai as a State Department fellow expected to walk into a meeting and be treated like the boss.

Koltai also suggests that the development industry is highly concentrated and decries people in the development industry for being very rich. His evidence for industry concentration, which he claims allows “the big guys” to call the shots, is that “just three firms…accounted for over 30 percent of the total haul” (p. 91). In fact, using his data source, I calculate that the four-firm concentration ratio for fiscal year 2012 was 37%, the five-firm ratio was 40% and the eight-firm ratio was 51%. Concentration ratios are commonly used simple metrics to understand the competitiveness of industries. The five-firm concentration ratio, for example, is the share of the total market accounted for by the five largest firms. As a benchmark, a common definition of oligopoly (an industry dominated by a small number of firms) is a five-firm concentration ratio greater than 50%. Koltai’s data show that the development industry is clearly not an oligopoly.

Koltai is not alone in his misplaced alarmism about concentration in the U.S. development industry. As I was writing this post, Devex released updated analysis of the distribution of USAID’s spending. According to their analysis, from fiscal year 2015 through 2019 “almost 40% of USAID spending went to just 12 organizations [and] more than half its spending – just under 55% – went to 25 organizations.” From an economics standpoint, that’s a competitive industry. And anyone who has ever worked on proposals for any of “the big guys” can tell you that competition is fierce.

As for all of us being very rich, Koltai’s evidence is the “searing-hot” Washington, D.C. real estate market (p. 92). If he thinks the incomes of development industry jobs are driving that market, he somehow managed to go from Foggy Bottom to Dupont Circle without crossing K Street.**

In his criticism of the government’s work, Koltai examines a miniscule set of U.S.-government-funded private sector development programs, essentially just those that he witnessed from his fellowship at State over two years. USAID has been assisting private sector development using a wide variety of tools around the world for decades. Not all those efforts have been successful, but there are many successes as well as important lessons learned from those that did not succeed. Koltai largely ignores or dismisses this wealth of experience and lessons.

Conclusion

To anyone who has made it this far, I’ll be the first to acknowledge that this post is too long. It should be clear that my book club friends and I were frustrated, to say the least, by this book, and I struggled to write this post. My friends and I fully agree that healthy economies and good jobs will be critical to security and stability and that private sector development, including entrepreneurship, are central to building healthy economies. However, Koltai’s loose use of evidence and oversimplification of complex social environments and economic relationships hurts his cause more than helps it. And his rants against government employees and government contractors call into question his real motivation in writing the book.


*The book is written in the first person singular, so I refer to Koltai alone as the author.

**For those unfamiliar with Washington, D.C. geography, the U.S. State Department is located in a neighborhood called Foggy Bottom, and the Brookings Institution is located in a neighborhood called Dupont Circle. K Street falls between these neighborhoods and is colloquially used to refer to lawyers and lobbyists, due to the large number of such firms on and near K Street.

Photo credits: Mockup psd created by Ydlabs – Freepik.com, Background image created by Creativeart – Freepik.com, Basic Books

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