Microfinance debate
The recent investment by IFC, the Netherlands Development Finance Company and Deutsche Bank in Aasishkaar Goodwell, a private equity company supporting microfinance organizations in India, will create of almost 60 greenfield microfinance institutions to serve a potential client base in India of nearly 75 million households.
But is microfinance the right tool for development? Aneel Karnani from the University of Michigan says no:
There is no developed country that has developed on the basis of microenterprises. All developed countries have larger enterprises (which, as I have emphasised, includes small and medium sized enterprises). Scale economies play a critical role in increasing productivity, which is the foundation of economic development.
Rather than lending $200 to 500 women so that each can buy a sowing machine and set up a microenterprise manufacturing garments, it is much better to lend $100,000 to an entrepreneur with managerial capabilities and business acumen and help her to set up a garment manufacturing business employing 500 people.
We should not romanticise entrepreneurship and self-employment. Most clients of microcredit would gladly accept a job on reasonable wages if offered the choice.
The simple fact is that most people (rich or poor, in developed or developing countries) do not have the vision, skills and drive to be really entrepreneurs. We need to cater to this majority and not romanticise the poor as entrepreneurs.
Eric Thurman, co-author of "A Billion Bootstraps: Microcredit, Barefoot Banking, and the Business Solution for Ending Poverty" disagrees:
Microfinance is absolutely essential for millions of families who have no other means to advance themselves.
[…]most poor people depend on self-employment whether you call them entrepreneurs or not. The Economist reported that nearly 60 per cent of non-agricultural employment in Latin America and 67 per cent in Africa is in the informal sector. In India, nine out of 10 workers are in the informal sector, contributing 60 per cent of net domestic product and 70 per cent of income. Informal businesses are typically the only viable employment options for the poor. The one positive aspect of this type of business is that all workers can be self-employed provided they are smart enough, work hard, have inventory and a market, and keep their prices competitive. Microcredit to support them is vital!
Follow the entire debate here.
Comments (4)
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successful economic development, like successful environmental reclamation, rests on a simple principle: diversity. while mid- to large-size enterprises may provide jobs in times of growth, they also reinforce caste distinctions, delineate economic disparity, and reinforce deprivation at the lowest levels of society. mico-and small enterprises provide a cushion of self-sufficiency and demonstrate an alternative to old social stereotypes that may have been reinforced to the detriment of a society.
Posted by: spook | Jul 31, 2007 12:04:02 PM
successful economic development, like successful environmental reclamation, rests on a simple principle: diversity. while mid- to large-size enterprises may provide jobs in times of growth, they also reinforce caste distinctions, delineate economic disparity, and reinforce deprivation at the lowest levels of society. mico-and small enterprises provide a cushion of self-sufficiency and demonstrate an alternative to old social stereotypes that may have been reinforced to the detriment of a society.
Posted by: | Aug 8, 2007 7:57:36 AM
When 500 people start a business and 1/4 of them go out of business, 375 people are still productively employed. If they expand their workforce by an average of 33%, the gap is covered, and you will end up with (in the worst case) a firm of 500 employees.
If a business with 500 employees fails, you end up with an empty, useless building and 500 unemployed people.
Unless you're a perfect judge of "managerial capabilities and business acumen"--or playing with loaded dice--it may work, but it's not the Way to Bet.
Posted by: Ken Houghton | Aug 8, 2007 4:55:58 PM
It is not at all that easy. Entrepreneurship is only one factor in creating a productive enterprise. But the broader socio-economic, political and cultural conditions must be good in order to bring about success in productivity, progress and development. For that matter most known entrepreneurs did not have 100,000 when they started their business nor all started with small money. You know there is no simple formula for development. And it is not certain that even developed countries will stay developed. So do not run for quick solutions. Whatever the areas of your expertise try to contribute your best. So finally because development is the outcome of different factors, it will happen or it will not. It is very complicated.
Posted by: Esayas | May 4, 2009 12:19:25 PM