The Material Conditions for Microenterprise Programs in the United States and the Third World

This paper is a seminal review of evidence on the effects of the material conditions for microenterprise in the US and the Third World. It concludes that microenterprise for the poor is more difficult in the United States. Microenterprise does work for a few extraordinary low-income people, but wage employment, additional education, and job training are still the most common paths out of poverty.

It offers an analysis that shows that:

• U.S. Microenterprise programs face challenges unknown in the third world;
• Abundant wage jobs and a safety net decrease the push toward self-employment;
• Even small ventures are complex and must comply with regulations, pay taxes, and compete in global markets;
• Group loans do not work well in the United States, and private lenders take the best individual borrowers;
• Low-income entrepreneurs need to build human and financial capital, but the sheer width of training is costly, and microenterprise programs can do little to facilitate savings.

Full recommendations and conclusions outline:

• Incentives faced by microenterprise programs derive from the incentives faced by within government and private donors. These structures are difficult to adjust, but a first step might be to give administrators long-term contracts renewable each 10 or 15 years after a strict evaluation based on the long-term results of experiments after their 3-to-5 years of funds ran out. A second step would be to measure the output of administrators not as funds disbursed but rather as the number of microenterprises served. This reward funders who seek programs that make an effort to control costs;
• Measurement of costs and benefits creates incentives to improve outputs and decrease costs;
• The goal of community development is not more microenterprise but rather more human welfare, and microenterprise may or may not be a means to that end. Advocates for the poor must seek not more microenterprise but rather more human development, defined as greater capability of people to do and to be the things they have reason to want;
• The low-income self-employed in the United States are constrained more by lack of savings than by lack of loans. Individual deposit accounts and minimum savings are tools that underpin or underwrite new ventures;
• For low-income communities in the United States, microenterprise is not a panacea but a vitamin;
• A microenterprise program should hire former entrepreneurs and professional loan officers and teachers;
• Long-term on-call advice helps more than general, up-front classes and enterprise training;
• Class attendance or loan repayment might be good proxies for self-employment effort, and microenterprise programs may want to develop direct monitoring techniques such as having business counsellors visit clients once a week at their place of work;
• Microenterprise programs should search for ways beyond self-employment to connect people to the workforce- most of the poor will climb to the middle class just like most of the middle class did, through education and wage jobs;
• Incentives for not-for-profit programs for financial innovation are low, and banks do not learn whether their perceptions of losses in the microfinance market are true nor whether innovations could change those losses into profits.