Many months ago, I was fired up about the need for microconsulting - provision of various financial and business development services to microenterprises - just as there is need for consulting within the regular business world. After a few months of exposure to existing microlending and microfinance initiatives, I am more convinced than ever that it is critical to address this need in order to maximize the impact such initiatives.
The last time I thought aloud about this idea, I wrote this blog post: Micro-consulting services for Micro-entrepreneurs.
My central argument there was that providing finances to small and micro scale start-ups was certainly difficult and required institutional innovation - it required modifying existing financial and regulatory institutions - but that sustaining the viability of these start ups in the long run was far tougher and needed to be explicitly tackled.
I can think of at least 3 reasons why small and micro scale entrepreneurship can be a great thing for both social and economic development:
(1) Income generation : The obvious, most direct and immediate benefit.
(2) Practical Training, Experience, Confidence : Almost everyone gets trained on the job, no matter what socioeconomic class you come from or what college degree you obtain. Setting up and running a business, at the micro scale or otherwise, can give you the skills and the confidence to go on to bigger and better things.
- There is a reason why many career counselors or business leaders are asking today's youth to start up an enterprise of their own even if the enterprise fails, even just as an experiment.
- Starting your own business is like a crash course in management and might allow you to develop not just technical skills but also intangibles such as leadership skills. These can allow you to progress in your career; faster, further, or both.
(3) Social benefits : Comes from benefit # 2, except at the larger, social scale. Now you have a large number of people who have developed some very complex social and economic skills, and the confidence to put those skills to use. There is social and intellectual progress in this, especially when this new set of microentrepreneurs come from underprivileged and underdeveloped classes (or regions) of a country.
All these benefits are wonderful, but the fact remains that microfinance for microenterprises is essentially being used as a strategy for increasing economic welfare (of the finance recipients). As such then, one needs to ask if the bottomline is being served - are the microfinance targets making more money, or getting better access to health and education? For example, are the Human Development Indicators for microfinanced populations on the upswing?
As I noted in my earlier blog post, we are expecting quite remarkable feats from microentrepreneurs in developing countries. We expect them to take these small financial loans, set up new businesses or scale up existing ones, and somehow break through all the barriers that had hitherto been preventing them from generating adequate income.
- In other words, our underlying assumption is that financial constraints are THE BIGGEST THING standing between small or micro business owners (or just the underprivileged demographic targeted by these financial initiatives) and their access to higher levels of welfare.
- That seems a pretty big assumption.
There can be little argument about the critical importance of financial constraints in shaping economic decisions and outcomes among these underserved, underprivileged populations. But can it be the ONLY factor?
If it is not the only factor, then shouldn't we be emphasizing solutions to address these other problems as well?
The assumption is that we all know what to do with money. Given adequate money, we will figure out a strategy to invest, spend and save in ways that allow us to profit over time.
- Does this sound accurate to you?
One of the biggest problems right now even in developed countries such as the United States, is the need for financial education of the public at large. This is an important point of discussion within the larger debate on how to best tackle the current global financial crisis.
- If financial education is such a problem even in populations that have long had access to banks, credit, loans, mortgages and so on, how can one expect microentrepreneurs in developing economies to develop financial expertise and business acumen so quickly?
Admittedly, there are a number of organizations that are training target groups in financial matters. For example, many nonprofits work at providing basic accounting skills to low income women in developing countries. Yet access to strategy and business development services is far from being widespread, and is not systematically implemented as a regular part of microfinance policies and programs.
This is a problem.
I'm calling this a last mile problem because despite microfinance growing in importance as a strategy for economic development and generating so much excitement, the payoffs (in terms of poverty alleviation or scale of access to economic welfare) are not exactly keeping pace.
- The money is there; people are willing to give small loans to enterprising individuals.
- The desire is there; people are excited about the chance to directly fund ideas and businesses rather than donating money through charities or giving money to large, bureaucratic aid agencies.
- So what is that last factor that needs to be considered to create results in keeping with all the investment?
Basic need: Financial constraints
Financial constraints are a big reason that many sections of developing countries are not able to engage in profitable economic activities. Further, financial constraints can prevent people from getting the education and degrees required to get the jobs that allow for access to increased economic (and social) welfare.
- When we facilitate entrepreneurial activity by these individuals, we allow them to bypass this educational hurdle, and allow them to enhance their income via activities that use their existing skills.
Next need : Non-financial constraints
However, once this basic constraint has been removed, we need to find ways to make such entrepreneurship sufficiently profitable in the long run. Much more is required for a business to run than access to credit. We can all agree on that. What exactly is needed depends on the specific socioeconomic conditions within which that business is operating.
What I am calling "microconsulting" is simply a set of services to identify further impediments to successful economic activity, via entrepreneurship in this case.
- If microfinancing these initiatives without providing further assistance of various kinds is not able to create initiatives that provide long term benefits, then assistance in the form of consulting services is required.
- If such assistance combined with finance is also not able to sustain viable microenterprises, then perhaps this money would be better spent on skills and vocational training for low income individuals, who can then become stronger candidates in the regular labour market rather than sustain losses in trying to start up new businesses.
- Entrepreneurship that is combined with consulting services can also be better for practical training and confidence building - benefits listed earlier. This can be understood intuitively - imagine you have a support system that gives you advice for making better business decisions or efficiently scale up your business, wouldn't that make you a more confident entrepreneur? More innovative?
Microfinance can start. Microconsulting can sustain. That is why I call it the last mile solution.
It allows for crossing the last hurdle to a point where socioeconomically underprivileged individuals can not only use their existing skills to engage in economically profitable activity, but can also become more innovative and empowered individuals in the process. We need this end point, and we need to sustain our efforts till we reach this end point. That is why I call microconsulting the last mile solution - because it is one way to get us to that end point.