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.
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).
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.
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
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 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
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
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 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.
*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.