Growing Out or Growing Deep? A brief discussion on the limits of micro-lending

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Have I made a convincing enough case that giving to the poor rather than lending to them produces mostly unhealthy outcomes? I think I detect a collective sigh — “Yes, Lupton, you have strummed this same old tune for years now…we hear you!” OK then, if we can agree that lending is a higher form of charity, maybe it’s time to take a closer look at the effects that lending actually has upon the poor. Micro-lending in developing countries, once seen as innovative charity, has in recent years moved into the economic mainstream. Five years ago it was mostly non-profit relief agencies who offered small loans to peasants as a corrective to the usurious loan-sharking that kept them forever poor. Now, due to some inspiring and successful examples by non-profits, large banks and reputable investment firms view micro-finance as a socially responsible, economically viable investment opportunity. The large-scale acceptance of micro-finance has given many millions of poor families around the globe access to capital at reasonable rates ($25 billion, according to Deutsche Bank). It is an enormous blessing.

It is a blessing, I say, but move in a little closer and you will observe a surprising reality. Micro-loans do not lift people out of poverty! They free the poor from the entrapping cycle of unconscionable usury but they do not free them from poverty. Consider a typical example. A small loan of say $50 has enabled a peasant woman to build a larger clay oven on the rear of her home where she can now bake twice as many loaves of bread to sell on the roadside. The loan is at a reasonable interest rate, permitting her to repay it on schedule while at the same time make a profit to support her family. It is a blessing, to be sure. A second loan for better equipment might enable her to increase her production even more, perhaps fourfold. But there is a limit to how much bread she can make in her backyard oven and a limit to how much she can sell from her roadside stand. Small loans have given her a measure of relief from oppressive poverty but they have not enabled her to rise above a subsistence level. In order for her dreams to grow beyond the daily bread that feeds her family, she must figure out a way to mass produce her product and market it to a much larger customer base. And for a peasant woman this is a near-impossible dream.

For a bread-making micro-entrepreneur to graduate to the level of legitimate business, the growth curve is daunting. A business plan, facility, equipment, inventory, transportation, marketing, government regulations, accounting, staffing, to name but a few of the requirements — such would be absolutely overwhelming to an uneducated peasant. And yet, if she is to rise above subsistence, she must be able to produce more than her own hardworking hands can turn out. Micro-lending is important but not sufficient.

Imagine for a moment a visitor with some business background arrives one day in the village, a person with a micro-lender’s heart and a nose for business opportunity. He meets the bread-maker and is impressed with the quality of her baking. He inquires if there are other bread-makers in the village and discovers that in fact the village has several excellent bakers, each of whom has her own backyard oven. He immediately sees the opportunity. He understands economies of scale. If these women pooled their collective talents and resources, they could afford a larger commercial-size oven that would produce far more bread than they could bake individually. They would need a larger loan, and some help with planning and marketing, but together they could figure out division of labor, additional workers needed and production schedules. In time they would be discussing whether bread wrappers with their logo would enhance marketing and if selling their goods wholesale was preferable to retailing it themselves. Each step adds value to the “value chain” and their earning power continues to increase. With consultation, connections and capital, these women have the capacity to create a modest wealth-generating enterprise.

Loans by themselves can be very helpful to the poor. Blend in a personal relationship with a business-minded friend and the benefits expand exponentially. Individual loans to entrepreneurial peasants help them survive; larger loans to a collective of entrepreneurial peasants, along with a modest investment of business coaching, enable them thrive.

A business coach knows instinctively the importance of economies of scale. Productivity can be dramatically increased by the consolidation, efficiency and conservation of effort. It is precisely this practice that has enabled micro-lending organizations to spread rapidly around the globe creating cost-effective systems that provide loans to millions of poor people. And economies of scale can work just as effectively for a network of local bread-makers, as our business friend understands well. But there is a problem. It takes time to build relationships with local bread-makers, time to establish trust, time to do market research, time to organize, time to order and install equipment. It is not a very efficient process to bring bread-makers to scale. And yet it is the very process that will enable them to move from survival to prosperity. Micro-lending organizations have figured out how to efficiently deliver millions of loans to individual peasants but now the challenge is how to efficiently organize groups of peasants into successful cooperative businesses. Is there a way to bring such community economic development activities to scale, and thus enable more rapid replication?

Franchising may be one alternative. Organizing bread-makers in the next village may go much faster once the first start-up is operational. By the third or fourth village baking enterprise, economies of scale can begin to appear for marketing, material procurement, transportation, management, etc. Franchising is a definite possibility.

But not every village has the same culture or expertise or available raw materials. Some may survive off fish. Others may grow cassava. The flour for bread-making may be too scarce in some areas for a profitable franchise but fish may be in plentiful supply. A cookie-cutter approach will not work for every village. Building upon the unique assets of a local community requires imagination and ingenuity. Our business coach (call him a community economic developer) must spend enough time in the village to observe the culture and establish trust, discover what assets are there to exploit (positively), assess what market demands may exist, and determine the readiness of villagers to embark upon a cooperative venture together. And this is a time-consuming process.

Is there no way to bring to scale this pains-taking process of community economic development? Perhaps there is. Eventually. In the same way it is possible to replicate bread-baking franchises in nearby neighborhoods or towns, it make be possible as well to build cooperatives among fishermen and cassava farmers who live in proximity. Just like certain industries have historically clustered in geographic regions (computers in Silicon Valley, autos in Detroit, tires in Akron), it may be possible to stimulate the growth of “franchisable” enterprises in areas where certain natural or human resources are concentrated. A fish processing plant may stimulate the fishing industry along an entire coastal region. And a thriving fishing industry will create spontaneous economic opportunity for a whole variety of other goods and services.

It will soon become apparent, however, that the community economic developer does not have the luxury of rolling out a product and a process that will come to scale any time soon. A single-minded franchiser can do this but not a community developer. Someone must prepare the soil for development — build the relationships, discover the assets, do the due diligence, organize the partners, attract investors — the tedious work of preparing the seedbed for enterprises of various sorts to spring forth. It may be reasonable to expect that in time the community developer will cover his own costs from the proceeds of the ventures he initiates but the real profits will be made downstream by those who grow successful enterprises and all those others who benefit from an expanding economy. Once market forces take hold, the pioneering work of the community developer decreases. He moves on to new territory to be worked.

One last question: can community economic development as a profession ever come to scale? Perhaps. Over time. However, this is more a movement of the heart than a roll-out of a product. It is economic missionary work that must understand its success more in terms of gains in the common good than in number of business start-ups. But it is a very inspiring mission, a mission that can be quite appealing to young visionaries (or even the not so young!). And the power of a model can be very effective in igniting a movement. Skills can be learned, internships can be structured, courses can be taught, majors can be established. It is not at all unreasonable to believe that new generation of energetic, committed community developers could be raised up to meet this important global challenge. Admittedly, because the groundwork is slow and the emergence of enterprise unpredictable, it may be more challenging to fund the work of community developers than the clearly defined and measurable work of micro-lenders…unless and until the seedbeds being cultivated by community developers explode into hotbeds of economic growth. Then their value will be authenticated.

Bob Lupton

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