Microenterprise to SME: A Thought Exercise pt. I

This is the third post of a three-part series on small- and medium enterprises.  It is a two-part post. [youtube=http://www.youtube.com/watch?v=6Z66wVo7uNw] A month ago, I attended a conference in Manila sponsored by the Microfinance Council of the Philippine Islands.  I wrote briefly about the level of cooperation among the participants, but have yet to share what I learned.  The conference – titled “Operationalizing Social Performance Monitoring (SPM)” – brought together a dozen microfinance institutions (MFIs) and lenders from across the country to discuss best practices for focusing on the social mission.  In the microfinance world, theoretical solutions to problems, like how to focus on the poor and remain financially sustainable, are often incompatible with the nuanced realities on the ground.  This gathering offered a chance for MFIs to share what has worked and what has not, so that the microfinance community at large can be more effective at addressing poverty alleviation in the Philippines. The keynote speaker, Prof. Ron Chua, functioned more as a facilitator and moderator than a lecturer.  He asked the MFIs to present a specific social goal and discuss the measures each would take to achieve it.  One nameless participant set an organizational goal of transitioning 30% of existing clients from micro-enterprises to SME (small- to medium enterprise) within five years.  They presented a laundry list of programs designed to aid in this process.  The underlying assumption behind each of these measures is that financial services (microcredit) must be complemented by the provision of non-financial services, including business development and support services and integrated community development.  Provision of financial services alone is not enough to bring people out of poverty.  This exhaustive list addresses all of the key issues in moving a client out of poverty.  I will present the first six here, and the remained six in the next post. (more…)

Development Economics

SMEs in the Philippines

This is the second post in a three-part series on SMEs. In an earlier post, I discussed another area of development – SMEs – that is both important for creating sustained growth, and has recently attracted interest from investors.  The Philippines is also placing a lot of emphasis on this area of development. The Philippines is actually in good shape regarding SMEs, as it has an abundant labor pool.  The country has 800,000 registered businesses, of which ~7% are classified as either small (10-99 employees, $60K to $300K in assets) or medium (100-199 employees, $300K to $2M in assets).  Only 0.4% of the business earn above the $2M mark.  The remaining 92% are microenterprises, which have between 1 and 9 employees and earn less than $60K in assets.  These MSMEs (including microenterprises) account for 70% of the labor force and 30% of the output of the country. (more…)

Development Economics

Another Approach: Investing in SMEs

This is the first in a three-part series about small- and medium-sized enterprises [caption id="attachment_252" align="alignright" width="270" caption="The wikipedia picture for the "Small and Medium Enterprise" entry."][/caption] In March of 2008, James Surowiecki wrote an article for the New Yorker, titled "What Microloans Miss," that suggests that the disproportionate amount of attention given to microfinance has steered funding away from other avenues for development.  A year and a half later, the Boston Globe included a piece on two recent studies on microfinance questioning its efficacy,  titled “Small Change.” Both articles revolve around the same central premise: microfinance, while effective at relieving some of the burdens of day-to-day living, does not create jobs.  It is rare that a microbusiness receiving a loan has paid employees.  In other words, microloans allow women to start a business, but more independent businesses do not help to alleviate poverty on a macro (national) scale.  Small- and medium-sized enterprises (SMEs), according to Surowiecki, are the engines of development.  Here he discusses what considers to be the problem of the cult of microfinance:

Both socially and economically, microloans do a lot of good, working what Boudreaux and Cowen call “Micromagic.” But the overselling of their promise has made us neglect the enterprises that could be real engines of macromagic. The cult of the entrepreneur that the microfinance boom has helped foster is understandably appealing. But thinking that everyone is, and should be, an entrepreneur leads us to underrate the virtues of larger businesses and of the income that a steady job can provide. To be sure, for some people the best route out of poverty will be a bank loan. But for most it’s going to be something much simpler: a regular paycheck.
The benefits of increasing support for SMEs in a country are real and quantifiable.  Consolidation into the formal sector provides more people with steady jobs and offers workers better health and wage benefits, disability, pensions, etc.  These businesses help to reduce the size of black markets and generate taxable income.  What's more, a majority of microentrepreneurs would prefer a steady paycheck with job security to their current situation.  I don’t disagree with the idea that vehicles of mass production – a factory, or a plant, or a farm – create strong upward momentum for poorer people without employment.  But every country has a different profile, and the success of the development approach depends on the different strategies of development. (more…)