Tags:
Journalism of Courage
Making loans and fighting poverty are normally two of the least glamorous pursuits around, but put the two together and you have an economic innovation that has become not just popular but downright chic. The innovation 8212;microfinance 8212; involves making small loans to poor entrepreneurs, usually in developing countries8230; Unfortunately, it has also translated into a flood of hype. There8217;s no doubt that microfinance does a tremendous amount of good, yet there are also real limits to what it can accomplish.
This isn8217;t because microloans don8217;t work; it8217;s because of how they work. The idealised view of microfinance is that budding entrepreneurs use the loans to start and grow businesses 8212; expanding operations, boosting inventory, and so on. The reality is more complicated. Microloans are often used to 8216;smooth consumption8217; 8212; tiding a borrower over in times of crisis. They8217;re also, as Karol Boudreaux and Tyler Cowen point out in a recent paper, often used for non-business expenses, such as a child8217;s education8230; Microfinance evangelists sometimes make it sound as if, in an ideal world, everyone would own his own business. 8220;All people are entrepreneurs,8221; Muhammad Yunus has said. But in any successful economy most people aren8217;t entrepreneurs 8212; they make a living by working for someone else. Just fourteen per cent of Americans, for instance, are running or trying to run their own business. That percentage is much higher in developing countries 8212; in Peru, it8217;s almost forty per cent. That8217;s not because Peruvians are more entrepreneurial. It8217;s because they don8217;t have other options. 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 corporation8230; It8217;s easy for really big companies in poor countries to tap the markets for funding, and now, because of microfinance, it8217;s possible for really small enterprises to get money, too. But the companies in between find it hard. It8217;s a phenomenon that has been dubbed the 8216;missing middle8217;.
Excerpted from James Surowiecki8217;s 8216;What microloans miss8217; in the latest issue of The New Yorker
