Small Business Fights Poverty?

February 27th, 2014

There is very little argument these days about whether businesses are critical in development processes. Not surprising when you consider that their combined activity eclipses both aid and government spending. But there seems to be less consensus on what approaches with business will achieve poverty outcomes. How should we shape policy and practice to ensure that when things are better for business they are better for those living in poverty? Bond’s private sector group has been looking at this question and suggests that the focus should be on the processes of change that engages and empowers small-scale business and farmers, especially women, and builds market systems to achieve lasting poverty reduction.

The problem with this suggestion is that it could reinforce the perception that NGOs are fixated on the small and the local, unable or unwilling to see the bigger picture. And it is not unreasonable to challenge whether this focus will achieve the much-needed increase in jobs and opportunities for those in poverty. Will it deliver the economic development that donors and governments want to see?

To start this blog series we offer some thoughts on three areas we think are important if we want to achieve more ‘inclusive growth’.

Firstly the actual situation of the enterprises in sectors that are important to those in poverty, like agriculture, energy, water and sanitation, should be taken into account.   In these sectors there are networks of numerous micro and small enterprises operating at the so called ‘Base of the Pyramid’.  Whether it’s food for rapidly urbanising populations or energy solutions  for 1.3 bn people without electricity there are small businesses responding with goods and services. Often they operate at the margins, informal ‘start ups’ looking for opportunities, with the benefit of flexibility, local knowledge and connections.   Creating better enabling business environments so these small players can more effectively and efficiently fulfil their roles could make the difference between the type of growth which helps people to step up and out of poverty and growth that leaves people behind.

Secondly we need approaches that can encompass the complexity of big, small and everything in between.  Either/or is unhelpful. It should be both/and. A good understanding of the specific systems that are important to the poor helps in better policy and programming.  Some of the challenges may be common across systems but outcomes are highly variable. Instead what is needed is investment in processes that enable key private and public actors, large, medium, small and micro, powerful and marginalised, to identify and address blockages and work together to exploit opportunities. Market system development approaches need specific attention on building the capacities of smaller players to engage as suppliers, service providers or consumers. Empowerment is important not just because of their role as economic actors but also because of the role MSEs can play in helping people in poverty build resilience and cope with shocks.

Thirdly small enterprises need targeted policies and interventions. This attention is justified if we consider their significant contribution to jobs and GDP, up to 60% in some developing countries like Tanzania. Economies like the UK realise this too. The UK’s Federation of Small Businesses, sees that generic policies do not work for small businesses and governments can stimulate growth by enabling the smallest firms to flourish  which means more than cutting red tape.  Getting that environment right for the millions of mini ‘power houses’ of growth, innovation and jobs is vital yet complex which is why it needs to move right up political and development agendas. Unfortunately this tends not to be the case. The Investing in the Business of Development report last year argued that most bilateral donor approaches were concerned with macro and meso levels but left out the micro-level which “may have a much larger redistributive impact for poor and marginalised populations”.

One reason for this lack of appropriate investment could be that in spite of decades of trying to find what works with small business it’s still a difficult one to crack. We want sustainable development solutions that reach more people but many efforts with micro and small business in the past have done neither particularly well.  We know ‘one-size-fits-all’ approaches are rare when it comes to the complex, dynamic systems people in poverty rely on.

It’s generally accepted that leaving economic development processes to take their own course will not result in growth that is good for those in poverty. This, as the IMF’s Christine Lagarde said at LSE recently, is a ‘big ticket item’. The Bond’s Private Sector group want to explore with others what a more equal, ‘inclusive’ growth looks like. We think it may need a better balance, towards the small. Do you?

*This blog first appeared on the Business Fights Poverty website.

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