Microfinance and entrepreneurship

Another dimension on the debate about micro-credit.

The almost unqualified acceptance of micro-credit as a poverty fighting strategy has led to a misplaced belief that once the poor have mechanisms that enable them to access credit, they are well placed to take (and implement) optimal investment and livelihood decisions. This belief comes from the simplistic assumption that poverty can be eradicated if we are able to unshackle the hitherto suppressed entrepreneur within each poor person, besides provisioning for property and contract rights and rule of law. This market-led approach is gaining strong acceptance in the policy making circles, and micro-credit forms a vital cog in this strategy. Accordingly, in atleast a few states, self help groups and micro-credit have already assumed the status of a "magic pill" that can catapult people out of their poverty.

This issue is related to the larger question of whether governments have a role in preparing the poor to compete in the market place, as against the increasingly dominant view (a result, partially, of the legacy of government incompetence in effectively addressing the poverty challenge) that the poor know how, where and what to invest their resources in. One of the strongest reasons for support for Conditional Cash Transfer (CCT) schemes comes from this premise.

However, the reality points to the contrary. As Abhijit Banerjee writes, "the poor neither have the skills, nor the knowledge of markets, nor the understanding of technology, to compete effectively in the marketplace". Neither can they rely on the informal social network linkages nor are in any position to take advantage of market economies of scale to exploit the opportunities available in the market. In other words, the marketplace lacks the social and economic institutional framework that can assist the poor make appropriate and optimal decisions. If anything, the exisiting institutional architecture militates and works against the flowering of the enetrepreneurial spirit of the poor person.

In the circumstances, merely providing micro-credit, in the hope of stoking his entrepreneurial drive, will only drive the poor person into sub-optimal investments in crowded occupations without deploying the most appropriate and efficient technologies. Most often such entrepreneurial investments, especially those catalyzed by micro-credit, are driven more by herd mentality - neighbour (or peer group) has a sewing machine or kirana shop, so I should emulate him - than any sound cost-benefit analysis (most often, this is a legacy of earlier government schemes that have indiscriminately doled out say, sewing machines, to the poor of the area). Further, it is much easier for for the government department concerned to administer a program or strategy that delivers or facilitates delivery of 10 sewing machines instead of 2 kirana, 2 sewing machines, 3 mobile carts, and 3 auto rickshaws, and that too to 10 different individuals! The economic returns from such investments are marginal and the risks and vulnerabilities considerable.

It is in this context that issues like skill development and vocational training activities, robust communication and information flow channels and infrastructure, upstream and downstream linkages with financial and other markets assume significance in developing and sustaining the institutional architecture that can enable the poor make full use of micro loans and pull themselves up by their bootstraps. The Government will continue to have to play the dominant role in facilitating the development of the enabling framework for small entrepreneurs to benefit from the marketplace. It can also enlist the services of non-profit actors like NGOs and the corporate sector in this endeavour.

And even after this enabling framework has been put in place, as I have argued earlier, the poor may still need the guiding hand of the government in overcoming the "first mover disadvantage" and breaking open the market.