*First published in Oct. 2015
The World Bank may have some new advice for developing countries: Give away millions of dollars to random entrepreneurs. That’s the implication of a study on development grants produced by the international bank’s research group, led by economist David McKenzie.
In 2011, then-Nigerian finance minister Ngozi Okonjo-Iweala launched a business plan competition in cooperation with the bank that would award $58 million in grants to 1,200 entrepreneurs, who could use the money to start a new business or expand an existing one.
The new study of this program led Columbia University political scientist Chris Blattman, who has studied micro-finance and individual grants, to wonder if this scheme was “the most effective development program in history.”
Out of 24,000 applicants, the top 480 plans in the contest were awarded $50,000 grants. Then, 720 winners were randomly selected from a group of 1,200 semi-finalists to receive grants. This allowed the World Bank researchers to measure the effect of the grant against a control group of similar entrepreneurs for the next three years. The companies ranged across sectors, including IT supports, large-format printing, early childhood education, and agricultural processing.
The start-ups who received the grants were 37 percentage points more likely to survive the next three years. And more importantly, they were 22.9 percentage points more likely to grow to more than 10 workers. Similar effects were reported on existing firms, and 7,027 jobs were generated as a result of the program, at an adjusted cost per job of some $28,136 less than government spending programs in the US.
The increase in the number of workers is particularly exciting because in developing countries, most companies have just one employee: the owner. Creating larger firms should create more jobs, as well as boosting efficiency.
You might be thinking, of course any business with $50,000 extra will have an advantage over one that doesn’t. But that doesn’t quite get at what these findings imply. If you did the same experiment in the US or another advanced economy, McKenzie tells Quartz, you wouldn’t detect a big difference between those entrepreneurs who received the grant and those who didn’t—reasonably well functioning capital markets suggest that if you have a good business idea, you should be able to fund it.
In Nigeria and other developing economies, however, there is still a dearth of investment for new businesses. “This [research] says hey, there are people out there you can identify through these competitions, and when you have given them money, it has a massive impact on a firm of that size,” McKenzie said.
McKenzie doesn’t go as far as Blattman in saying this is the most effective development program in history, but he does say that “in terms of actual rigorous impact evaluation of active government programs to create employment, I couldn’t find anything that was better.”
This article was first published by the World Economic Forum in collaboration with Quartz Africa. Publication does not imply endorsement of views by the World Economic Forum. It also does not necessarily represent the views of Sawubona Advisory Services Limited, its affiliates or agents.
Author: Tim Fernholz covers state, business and society for Quartz.
Pictured is Nigeria’s President, Muhammadu Buhari GCFR, who is in the process of unveiling his plans to jump-start the ailing Nigerian economy.