Currently 2 million Guatemalans - 25% of the adult population - generate income through having a business according to the GEM Guatemala National Team report released in September 2019. Despite the high levels of entrepreneurial activity, the businesses have none or little scale. More than half of the businesses (55.6%) were started with an initial investment of less than US $1,300 and generate an average of two jobs. Almost 7 out of 10 businesses are involved in consumption-oriented activities and a similar proportion serve clients that are in the community or municipality where the entrepreneur lives.
The GEM National Team, led by Mónica de Zelaya, Dean of the School of Economics at the Universidad Francisco Marroquín, answered some questions about the key findings from the report and the implications for different stakeholders.
What are some of the key findings from the report?
The entrepreneur profile in Guatemala has been similar since 2009, the year in which we began doing research. Some conditions in the country could be limiting businesses from increasing their scale over time:
- . Almost 60% of entrepreneurs have not registered their business because they do not see benefits (53%) and because they do not know how to do it (23%). This constrains a business from scaling as it can’t access the formal financial market and export products and services abroad.
- . More than 65% of entrepreneurs' clients are in their community, town or village. Only 4% have clients in other Guatemalan states. The limited connectivity that entrepreneurs have between villages, municipalities and departments reduces the size of their market. According to the National Survey of Experts (NES), 97% of those who start or run a business in Guatemala consider that the physical infrastructure is inadequate to promote the development of new businesses and the growth of the established ones.
- . Bank borrowing (33%) and informal investors (27%) were perceived as the most accessible funding sources, according to the NES. Funding sources such as angel investors (9%), crowdfunding (3%) and the Stock Exchange (3%) are perceived as inaccessible to support new and growing businesses. Guatemala is the third worst country out of 54 in this financial category.
- . An entrepreneur is assaulted 1.4 times more than a non-entrepreneur. In the past year, 24.1% of entrepreneurs reported having been victims of a crime (60% reported robbery or assault and 12.4% reported extortion). The most visible companies are most exposed to theft, assault and extortion, thus discouraging them from widely marketing their companies.
Guatemala has the second highest early entrepreneurship rate in the world. Why is that?
Guatemala faces a contrast between a small number (2.1%) of very high impact and productive entrepreneurs and a huge number of small-scale lifestyle type entrepreneurs.
The high impact, productive entrepreneurs are well educated, have high initial investments and normally develop businesses that have growth potential in scale. As Guatemala has a demographic bonus (until 2069 more than half of its population will be under 29 years old), a growing amount of people will be looking for opportunities to generate income. However, the economy is not growing and generating income opportunities in the midst of this demographic bonus. Hence, entrepreneurship is an answer for the majority who do not find income opportunities within established Guatemalan companies or by migrating to the United States.
There are limited formal employment opportunities, so entrepreneurship has become an alternative to generate income for those who do not find opportunities in the formal labor market and do not take the risk to illegally migrate to the United States. Therefore, starting a business is not a long-term commitment, but a strategy to generate income while “something better comes out”. In 2018, of 4.3 million people participated in the Guatemalan labor market working or looking for a job as employees, only 1.3 million had a formal job (dependency relationship where all the labor benefits established by law are recognized).
What did you learn about how entrepreneurs are perceived within Guatemala?
Entrepreneurs are admired in Guatemala because they run their small business in an adverse environment. Our goal at the Kirzner Entrepreneurship Center is to enhance the role of the entrepreneur in society as “engines of growth” (as economist Ludwig von Mises said in 1949) and also work hard to change the perception that high-scale entrepreneurs could be “evil” who take advantage of others.
What are the key relevant things that other countries can learn from Guatemala? On the contrary, what are the lessons that Guatemala can leverage from other countries?
Entrepreneurship has become a popular subject in Guatemala, even in the public sector and on NGOs’ agendas. Some good intentions to help entrepreneurs could have unintended side effects. For example, laws such as the “Ley de Fortalecimiento al Emprendimiento” and initiatives like “Ley para el Fomento y Desarrollo de la Micro, Pequeña y Mediana Empresa” try to promote entrepreneurial activity in different ways, like using public funds as a means of seed capital for entrepreneurs’ projects. The problem is this entrepreneurial activity has a high risk of failure. These laws and initiatives also establish interest rate caps to provide “low cost financing” for entrepreneurs, leading to big distortion in the financial market. Public financing of entrepreneurial activities generates incentives that are not aligned towards growth. One of the main concerns is creating corruption schemes.
We have participated in several meetings with politicians and discussed with them the main constraints related to reducing the costs, procedures and the complexity behind formally running a business. We pointed out the side effects of some initiatives and showed the main challenges faced by entrepreneurs reflected in GEM data.
Based on the findings from the report, what would be a few key recommendations you would highlight for policymakers in Guatemala?
Five key points come to mind:
1. The best way to help entrepreneurs is reducing the cost and complexity behind regulations over opening, running and closing businesses. That can increase the number of formal businesses that can then scale.
2. Insecurity is an increasing challenge for entrepreneurs. It is imperative to urgently develop a more secure environment, respond rapidly to extortion complaints and develop geographic-oriented strategies to fight the crime.
3. Instead of developing specific laws and programs to promote entrepreneurship, policymakers need to improve regulations to simplify the formal operation of any business in Guatemala.
4. Develop productive infrastructure - prioritizing critical routes - to facilitate trade and commerce beside local community markets.
5. Improve the country's image to attract foreign and local investment by enforcing the respect of private property and contracts.