The Missing Middle

Here is an interesting – and (probably) controversial – critique of microfinance by Christoph Niemann, in The New Yorker. Excerpts:

“The vast majority [of micro businesses] have only one paid employee: the owner. As the economist Jonathan Morduch has put it, microfinance “rarely generates new jobs for others.”

This matters, because businesses that can generate jobs for others are the best hope of any country trying to put a serious dent in its poverty rate. Sustained economic growth requires companies that can make big investments—building a factory, say—and that can exploit the economies of scale that make workers more productive and, ultimately, richer. Microfinance evangelists sometimes make it sound as if, in an ideal world, everyone would own his own business.

“All people are entrepreneurs,” Muhammad Yunus has said. But in any successful economy most people aren’t entrepreneurs—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—in Peru, it’s almost forty per cent. That’s not because Peruvians are more entrepreneurial. It’s because they don’t have other options.”[…]

“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.”

I find this view to be very interesting – I tend to agree with the author that microcredit shouldn’t be construed as a way for developing countries to lift themselves out of poverty. So much needs to be done in terms of building infrastructure, improving the delivery and quality of basic public goods (education, health care, etc.), and creating the conditions necessary for genuine economic development, on a micro and macro level.

Interestingly, however, is that I think this is widely recognized, even by microcredit organizations, such as In their FAQ, one of the questions is “Is microfinance the solution to poverty?”, and this is their answer: ” No. Microfinance is but one strategy battling an immense problem”. They give examples of other channels for fighting poverty in the developing world: grants, investment in infrastructure, employment programs, non-financial services and legal and institutional reforms. The New Yorker article then highlights what I believe is the more interesting point here – that these other channels mentioned above aren’t as “cool”, or “chic” – Excerpt:

“Supplying the missing middle will require backers who want to invest in companies rather than just lend to them. There’s been some progress on this front of late; three weeks ago,, the Soros Economic Development Fund, and the Omidyar Network announced that they are setting up a firm in India that will invest only in small-to-medium businesses. But there have yet to be celebrities speaking up for the missing middle.”

I’m not particularly keen celebrity advocacy, as I think it that the message they convey tends to oversimplify complex realities, and generally take away from the seriousness of the issues they support – but that is an entirely different subject. The point is that the other avenues for development that makes note of aren’t really “sexy”, and don’t yet attract a lot of donor money…

It would be interesting to see private individuals get really excited about contributing to institutional reform in developing nations, although I think we are a long, long way from there. The Google/Soros/Omidyar initiative in India sort of falls in that paradigm – I am looking forward to seeing more private sector involvement in large scale poverty reduction schemes. Maybe that will help solve the “missing middle” problem.

One thought on “The Missing Middle

  1. There are some very valuable insignts in the views expressed. It is thrilling to see that there are dreamers such as yourselves who are taking the trouble to highlight the gaps where they exist. I hope your post is widely read. Keep going…

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