Here here to James Surowiecki for his recent piece in the New Yorker on what microfinance can and can’t deliver. It’s not a piece meant ot bash microfinance, but rather to remind us that the real lever to remove mass numbers of folks from poverty is economic growth, and in particular, the small and medium-sized enterprises that tend to arise and grow as a result of economic growth.
What poor countries need most, then, is not more microbusinesses. They need more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation. In high-income countries, these companies create more than sixty per cent of all jobs, but in the developing world they’re relatively rare, thanks to a lack of institutions able to provide them with the capital they need. It’s easy for really big companies in poor countries to tap the markets for funding, and now, because of microfinance, it’s possible for really small enterprises to get money, too. But the companies in between find it hard. It’s a phenomenon that has been dubbed the “missing middle.”
I couldn’t agree more. Finding a way to finance those companies in the “missing middle” is, I believe, one of the greatest remaining challenges in the poverty fighting game. Ultimately, this means more than $500 loans repayable in 6 months.
The problem is a dearth not just of lenders but also of people willing to buy an ownership stake in companies, like the angel investors and venture capitalists that American entrepreneurs often rely on. Microfinance has led us to focus on lending, but it can be hard for young companies to get big purely on bank loans, which consume cash flow that could be reinvested in the business. Supplying the missing middle will require backers who want to invest in companies rather than just lend to them.
Thanks, Reuben.
March 17, 2008 at 7:00 am |
Very interesting article and there is certainly a need to address this “missing middle” as Reuben has with his latest fund. As you mentioned though, I think it’s also important to note that this should not be viewed as a “downside” to microfinance. In fact, I doubt we would even be having this debate had microfinance not shown that you can indeed lend to those least able to provide collateral. Furthermore, even if microfinance does not boost GDP or create jobs, it does improve people’s lives and standards of living which is a worthy goal in its own right. So, I remain a supporter of both microfinance as it has been practiced AND the push to do more in the small business space as Reuben et al. are now doing. I think that’s what you were saying anyway, Matt, but I thought I’d add my two cents.