Missing middle

James Surowiecki sounds a contrary note in the chorus of appreciation for microfinance:

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.

He cites a paper by Karol Boudreaux and Tyler Cowen, “The Micromagic of Microcredit.” Boudreaux and Cowen speak more highly of microcredit, but still their praise is muted. They point out that microcredit benefits more women than men (3:1, according to one U.N. statistic) and that often the loans go for a blend of consumption and investment, like school fees for a child. Perhaps paradoxically, livestock can be a better store of wealth for poor people than cash. Whatever its weaknesses, institutional microcredit is a better deal for the world’s poor than the alternative, freelancing moneylenders (what we call “loan sharks” in this country).

Microcredit is making people’s lives better around the world. But for the most part, it is not pulling them out of poverty. It is hard to find entrepreneurs who start with these tiny loans and graduate to run commercial empires…. The more modest truth is that microcredit may help some people, perhaps earning $2 a day, to earn something like $2.50 a day. That may not sound dramatic, but when you are earning $2 a day it is a big step forward.

So my hundred bucks a year to FINCA isn’t going to solve all the problems of the world, hunh? Not surprising.