Student ID 7715980

Poverty and Development MSc

Word count: 3200

IDPM 60141 POVERTY AND DEVELOPMENT: CONCEPTS, ANALYSIS AND THE

INTERNATIONAL POVERTY AGENDA

Essay 1 - Identify a specific policy that is currently popular within the international poverty
reduction agenda, including one or more projects or programmes reflecting this policy
where relevant. Briefly describe and then critically evaluate this policy. In your response
you must examine the links between policy content and the underlying assumptions about
the nature and cause/s of poverty. In terms of choosing a policy, you may wish to focus
specifically on policies identified within poverty reduction strategy papers, such as
initiatives to stimulate pro-poor growth or social protection interventions.

Introduction

Microenterprise development (MD) has been embraced with enthusiasm by development

actors, even called by some a “premier development solution” (Karides 2010, 199). Hilary
Clinton is recorded as saying that “microenterprise programmes work – they lift women and
families out of poverty” (Ehlers and Main 1998, 425). This essay briefly describes the policy
and its close connection with microfinance, and provides two examples of microenterprise
development programmes operating in Bolivia. It then critically evaluates this policy as a
poverty alleviation tool, utilising recent critiques provided by a number of authors and the
case studies, investigating the links which may be found with differing conceptions of poverty
and its causes.

The Rise of Microenterprise Development

The history of MD as a policy can be traced to the 1970s, when it was recognised in an
International Labour Office report in 1972 that many people carried out small scale

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productive activities in the “informal” sector, beyond the scope of regulation and
government records (Jurik 2005). The idea evolved that providing credit, training and
technical assistance to these “microenterprises” may have some positive economic and
redistributive effects (ibid, Ehlers and Main 1998, 426). USAID defined microenterprises as
very small income generating businesses, involving up to ten employees, including unpaid
family members (USAID 2006). USAID established programmes in the 1970s and 1980s, and
others including the World Bank and a range of nongovernmental organisations (NGOs)
adopted the approach of supporting the microenterprises as a route out of poverty.

MD has since become a favoured policy option for reducing poverty and unemployment,
seen by some as a “panacea” (Karides 2010, 210), which often incorporates financial
mediation services as part of a range of supporting activities in creating and developing
microenterprises. Microfinance and MD are to an extent intertwined and perhaps can
become coterminous, in that it is thought by some that the only barrier for poor people to
set up and operate successful microenterprises is lack of finance. As mentioned in a
promotional video for Acción, “… poor people … have enough imagination to develop
survival mechanisms and start a small business as long they’ve got access to credit” (Muller
n.d.). The “second wave” of commercially-oriented microfinance institutions (MFIs) has
been subject to criticism, in respect of the coercive collection methods (e.g. Kazmin 2010)
and whether microfinance “success” relates principally to the commercial success of the
MFIs themselves (Matin, unpublished), with the evidence of their success in alleviating
poverty more questionable (Bateman and Chang 2009, 2). This essay will concentrate on
evaluating whether creating and developing microenterprises per se is a suitable policy
choice to reduce poverty in the longer term, rather than undertake a critique of
microfinance, which is taken to be one of several important inputs to MD.

Two Microenterprise Development Programmes from Bolivia

In order to provide a context for evaluating the policy, two recent and inter-related
microenterprise development programmes will be used. They are both located in Bolivia,
funded respectively by the United States Department of Agriculture (USDA 2007) and the

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Inter-American Development Bank (IADB n.d.), and delivered by an NGO, Food for the
Hungry International (FHI), which has worked in Bolivia since 1971. The USDA programme
commenced in 2008 for three years with an operating budget of approximately $5.7m. It
was expected to benefit up to 2,500 farmers through establishing supply chains for non-
traditional (including indigenous) crops, developing 430 producer associations and
microenterprises, investing in post-harvest infrastructure, improving access to finance, and
creating strategic alliances with public and private sector organisations. Targets included
output measures of numbers of beneficiaries and production levels, percentage increase in
farmer incomes, percentage of farmers adopting new technologies, percentage of production
exported, seasonal employment, and take up of financial services offered alongside the
technical assistance but through a separate microfinance institution.

The IADB programme has a budget of approximately $1.2m over four years, and commenced
in 2009. It was established to strengthen the rural microenterprise service provider sector, in
order to help rural dwellers to diversify activities beyond agricultural production.
Interventions include: training, improved access to finance, as well as the promotion of
territorial and commercial supply chains, develop local government partnerships and
capacity in economic development and contracting, and disseminate findings with materials
and events. It is expected to create 500 jobs in services such as road and irrigation system
maintenance, tourism, and storage and processing of agricultural produce. Targets included
a survival rate of 80% for microbusinesses after two years, number of jobs created, number
of contracts and partnerships between microbusinesses and municipalities, percentage of
microbusinesses formalised, upgraded, and utilising credit.

Both programmes have the same area of coverage: eight impoverished municipal areas
across three departments. Seven of the eight municipalities are in the lowest quartile for on
the Human Development Index, and four of them have a poverty incidence of 98% (IADB
n.d., 1). There is the explicit intention within the IADB project that it will interact with the
USDA project, through developing non-agricultural services which can support the
agricultural supply chains being introduced and developed through the latter.

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There appears to be a reasonable fit therefore with Bolivia’s National Development Plan,
whose objective is the eradication of poverty and inequality. The Plan “favours” smaller and
microbusinesses for access to credit, upgrading and building capacity and productivity,
supplying government, grouping to form associations, and in particular sectors, such as road
building and maintenance, housing, tourism and indigenous products (MDP 2006, 96-162).

Critique of Microenterprise Development and analysis against the example programmes

Definition of poverty

MD programmes are said to assist poor people out of poverty, and there are numerous
anecdotes which offer heartening individual success stories (Humphrey and Navas-Alemán
2010). A primary factor in these examples, and also in the case study programmes, is that
relieving poverty is primarily a matter of increasing incomes. In addition, the programmes
are targeted to some of the poorest municipal areas in terms of the local poverty line
(although the human development index is mentioned). This would therefore imply a notion
of poverty as primarily income-based. However, Sen (1999), called for an understanding of
poverty as relating to freedoms and capability, experienced as a multidimensional
phenomenon. A multidimensional view of poverty requires households’ health, education
and economic and physical circumstances to be taken into account. This has been measured
by the human development index, and recent refinements such as the MPI (Alkire and
Santos 2010).

As the concept of poverty is not explicit in the programmes, and there is no other measure
apart from “employment”, income levels and business survival, it is not possible, nor perhaps
within the scope of the projects to identify whether they are really poverty reducing or not
beyond the income measure. This could be seen as a weakness of the programmes, in that
the “indicators” are largely output- rather than impact-based, ie. they do not generally
measure longitudinal changes in livelihoods and “poverty” dimensions of individuals,
households or communities. It is likely that better off individuals, in terms of income and
human capital, participate, because those who are poorer tend to be more remote, and have
less capability to become linked to value chains (Shepherd 2007, 38). There is no mention

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of other poverty dimensions within the projects, such as ethnic or gender discrimination
which may preclude rural dwellers from participation in business relationships, an important
prerequisite for the success of these programmes.

Poor people as “resilient and creative entrepreneurs”

Whilst the definition of poverty may be insufficient, the identification by microenterprise and
microfinance programmes of poor individuals as actual or potential “entrepreneurs” has a
number of implications. Certainly, “resilient and creative entrepreneurs” (Karnani 2009, 76)
is perhaps an improvement on previous paternalistic or dismissive conceptualisations such as
“informal workers”, “subsistence labour” and “petty traders” or even the “dregs of society”
(Karides 2010, 198), beyond the scope of the business of economic development, which
under modernisation equated to industrialisation via profitable firms (ibid, 196).

The notion of poor people as aspiring entrepreneurs sits particularly comfortably as a neo-
liberal solution to poverty, which extols individualism and private sector endeavour, and self-
sufficiency which capitalises on the ingenuity and energy of poor people (Karides 2010). In
addition, it frames the market as the “creator and distributor of resources” (Eversole 2008).
MD has been described as a “vehicle for neoliberalism” (Bateman and Chang 2009, 23) in
that it elevates commercial self-sufficiency and effectively “discredits the notion of public
support” (ibid, 25).

Many poor people undertake petty trading and subsistence activities as a survival strategy,
possibility as a result of losing employment or because of few other options, rather than a
deliberate choice to enter entrepreneurial activity, although the evidence may be unclear as
to which predominates (Orlando and Pollack 2000). Some have suggested that most people
are not willing or able entrepreneurs in the Schumpeterian sense of being persons of drive to
create and innovate (Dichter 2007, 3, Karnani 2009, 81). Recasting people in poverty as
entrepreneurs may therefore be “romanticising” their capacity, and privatizing the process of
poverty reduction (ibid).

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The view of people as entrepreneurs who, once their lack of skills and inputs is addressed,
can successfully “join in” to economic development and the globalisation project contains
within it the notion of poverty as “residual” (Kaplinsky 2005, 50). Evidence of this is implied
in the case study programmes: the objective is that the farmers and rural service providers
are offered the wherewithal so they can participate in microenterprise activities and will by
so doing be lifted out of poverty. By locating the cause and the resolution of poverty in the
poor themselves, the microenterprise focus on the individual creates a risk of ignoring
strategic economic development approaches by overstating the agency of individuals at the
expense of structural constraints and forces. Ehlers and Main (1998) in an earlier US-based
study questioned the value of MD programmes which tended to exaggerate what was
possible for participants to achieve in microenterprise to “fantasy” proportions, in relation to
participants’ actual capabilities and constraints of gender and culture and market conditions.
This resulted in “dead-end contingent and unstable businesses” reflecting the participants’
“subordinated role and marginal business status” (ibid, 430-2).

In terms of the case studies, the USDA project, whilst targeting regions experiencing high
levels of poverty, sets a number of criteria for selection of beneficiaries, including those who
have the “capacity through labour or access to capital to implement improved farming
practices” and are not indebted (USDA 2007, 3). It offers scant analysis of why farmers may
be poor, although it may be assumed that the ones who are poorer lack access to supply
chains, financial services, investment and alliances with other organizations – a residualist
understanding of poverty. As “the central problem” the IADB project offers is “the lack of
development of the rural services market”, and presents a number of potential market
opportunities for new services, although these are characterised more by “need” (i.e. roads
need maintaining) rather than unfulfilled market demand (IADB n.d., 2). Both programmes
appear to imply that incipient microenterprises and individuals have been “left behind”,
because of the inability to participate – through lack of training, credit, involvement in supply
chains.

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Microenterprise Development and a Relational Understanding of Poverty

Some of the most powerful criticism of microenterprise identifies that it is not so much poor
people’s non-participation but their participation in markets which is more likely to cause
poverty, i.e. a “relational” understanding of the causes of poverty (Mosse 2010, Kaplinsky
2005, and Harriss-White 2005). It is argued that it is the unfettered and uncoordinated neo-
liberal, capitalist mode of production and accumulation leads to “pauperising [petty]
production in tiny firms” which rather than alleviating poverty, creates it (ibid, 4). This arises
due to several systemic factors expounded below.

Firstly, very small firms are unable to accumulate enough capital or develop scale economies
and remain inherently uncompetitive, inefficient, and unable to organise themselves
(Bateman and Chang 2009, Shepherd 2007). Mead (1998, 64) identified that one person
firms were a great deal less efficient than firms of two to five employees, and those of six to
nine employees were yet more efficient. Microenterprises will struggle to compete with
larger, better resourced and more capable national and international corporations. NGO
interventions in MD programmes may mask this poor competitiveness by subsidising the
operating costs of these firms through offering a ready market for their products, and
providing free inputs and transport for example, which damages their longer term
sustainability (Shepherd 2007, 39). One recent IADB study asserts that the poor productivity
in Latin America is a result of the high proportion of microenterprises and own account
workers in the region who are unable to invest or innovate (Pagés 2010, 7-8).

Secondly, based on the “fallacy of composition” which ignores the interaction between firms,
the encouragement by MD and microfinance programmes of the proliferation of atomised,
small and unproductive firms in the same sectors creates a “hyper-competitive” environment
(Bateman and Chang 2009, 11). This has the effect of reducing returns and survival rates not
only of the “beneficiary” microenterprises, but also existing firms through displacement
effects. Given that “most” microenterprises fail (Bateman and Chang 2009, 12) the impact
on individuals engaged in microenterprise is likely to be severe as they could be forced into
deeper debt. The “success” of microfinance institutions obtaining high repayment rates may

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be obscuring this as the economic and social pressure applied by these institutions may
cause failed microentrepreneurs to sell assets or borrow from other sources (ibid).

Thirdly, MD actively supports microenterprises starting and operating in the “informal”

sector, rather than in the formal sector. Informal businesses are associated with increased
vulnerability (Harriss-White 2005). Households may find themselves in the situation of
“super-exploitation”, particularly with unwaged household members, including women and
children, beyond any state protections regarding health, safety, child labour regulation, and
wage minima (ibid).

Finally, it is argued that microenterprise experiences “adverse incorporation” (Hickey and du

Toit 2007) which is in the state and capital’s interest, whose costs and risks will be reduced
(Harriss-White 2005). A large number of subsistence own account workers, at least in the
rural area, helps to reduce competition for large farms and maintain a ready supply of cheap
labour (Kay 2006). Harriss-White argues that only will sufficient coordination by
developmental state institutions can some of the more damaging effects of capitalism be
moderated (Harriss-White 2005). In addition, other relational and institutional factors and
norms, such as partiality and harassment by bureaucrats and the “buying privileges of the
well-connected”, excessive regulation, and inadequate land tenure rights will conspire to
make microenterprise success difficult (World Bank 2001).

How do these criticisms fare in relation to the case study projects? Firstly, both programmes
aim to upgrade capable existing actors, and link them with other private and public sector
organisations, with a view to renegotiating the terms of engagement. This may result in
more efficient and larger enterprises, improved economies of scale and more technologically
sophisticated enterprises, rather than a proliferation of struggling microbusinesses. Second,
the targets of numbers of associations formed and contracts created will perhaps work
against the temptation to simply form more businesses, and thus fall into the “fallacy of
composition”, and by focusing on value chains may help to identify bottlenecks and real
market demand. In this respect some of the criticism would be less likely to be valid for
these examples. The terms “clustering” and “enterprise hubs” (Bateman and Chang 2009)
are not used in the proposals, but might result from the supply chain approach.

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Thirdly, the question of moving firms into the formal, regulated sector is addressed at least in
the IADB proposal (IADB n.d., 10), but it does not refer to the slow and onerous process
involved within the Bolivia registration system (World Bank 2009, Pagés 2010). 77% of
Bolivians in employment work in the “informal” economy, which is very high even by Latin
American standards, where approximately 60% are informally employed (World Bank 2009).
This would appear to represent a significant barrier to achievement of this 70% target for
formalising service microenterprises. In terms of other relational factors, the USDA project
will invest in infrastructure, a critical requirement without which access to markets will be
very unlikely (Murdoch and Haley 2002, 29). Institutional weaknesses at municipal level are
to be addressed, and coordination is implied in the form of the NGO’s role in mediating and
negotiating with other private and public sector operators to improve the terms of trade.
This does omit broader structural reasons that those particular regions may be in poverty,
such as powerful state and private sector actors who may favour their own interests, and the
“deeply embedded” corruption in Bolivia (Kohl 2010) which may cause difficulties in fair
market functioning at local and regional levels. Other relational factors, such as gender,
racial and ethnic discrimination are not referred to in any detail, perhaps due to the
perceived scope of the project, but may present significant obstacles to implementation.

Conclusion: will these programmes reduce poverty?

Given the criticisms of MD, are the two case study programmes likely to have poverty
reducing impacts? There are several factors within the programme design which address
residual and at least some relational factors. The use of a value chain approaches, selection
of markets with demand potential, focus on existing and nascent enterprises, intentions to
assist enterprises to formalise, access to finance, and the deliberate involvement of the local
municipality to address weakness in commercial relationships with the private sector are all
likely to mean a better chance of success in terms of the project objectives than an
uncoordinated dispersal of microfinancial services in the hope of developing successful
microenterprises.

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However, although they are to operate in municipal areas affected by poverty, it is hard to
tell how they will actually identify and reach poor people. There do not seem to be sufficient
measures within the project proposals to identify the likely level of poverty reduction taking
place aside of income levels. MD programmes have been criticised for not adequately
tailoring their services to poor people (SEEP Network 2008) and this seems evident in this
case. In fact, increased incomes of individual entrepreneurs may have neutral or negative
intra-household effects on the poverty. As a representative of another NGO in Bolivia has
commented “… [some] campesinos have made lots of money, but turned around and bought
a truck rather than put some of it aside to educate their children….” (Healy 2001, 226).
Furthermore, evidence suggests that MD programmes are not suitable for the very poorest
who lack skills, resources, and networks (Servon and Bates 1998, Shepherd 2007, 38), whose
need is likely to be a graduated approach involving “livelihood protection” measures in the
first instance followed by training and microcredit (Matin and Hulme 2003, SEEP Network
2008).

In a recent study of some 30 donor-led value chain approaches, whilst there was plenty of
anecdotal evidence suggesting the positive effects of the programmes, the vast majority did
not include an evaluation of poverty-reducing impact of the programmes (Humphrey and
Navas-Alemán 2010), so it is difficult to say conclusively whether this type of approach can
cost-effectively reduce poverty more than other approaches. A randomized control study
which can overcome practical and ethical considerations would appear to be a valid
approach in making a more thoroughgoing assessment.

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References
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Bateman, M. and Chang, H.-J. (2009) The Microfinance Illusion, [online] Available at
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Kaplinsky, R. (2005) Globalization, Poverty and Inequality: between a rock and hard place,
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Murdoch, J. and Haley, B. (2002) Analysis of the Effects of Microfinance on Poverty

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