Job creation and economic growth: The trouble with micro?

The premise of microfinance is that very small loans can make a big difference.  The argument is that getting capital to cash-starved “micro-entrepreneurs” will go farther than getting capital to cash-starved small business owners.  The premise is plausible, but the opposite is also plausible.  Rather than going micro, bigger businesses may be able to generate better jobs and do so more efficiently.  Those bigger businesses may be able to generate bigger impacts directly via job creation and indirectly through regional economic growth. 

Sometimes bigger might be better.   The problem is we don’t have much good evidence to go by. 

That’s going to change.  We’re already getting cautionary evidence on micro-enterprises.  The big randomized control trials of the past year yield tepid conclusions – which is helping to open the door to thinking about interventions to support bigger businesses.  In India, for example, a JPAL/IPA/FAI study finds that business owners who received microcredit did not report having more employees 12 to 18 months after receiving their loans. Karlan and Zinman (2010) take a look at microcredit in the Philippines.  They find a surprising decline in the number of paid helpers in Filipino businesses that received a microcredit loan.  The studies are described here.

Plans are getting underway to look at “small and medium enterprises” (SMEs) directly.  One current FAI project involves comparing employees of Bangladeshi microenterprises to employees of Bangladeshi SMEs (all of which are in businesses financed by parts of BRAC).  We hope to have results by August.  In the Fall, researchers will be putting their heads together to move this agenda ahead in a bigger way.

The G-20 meetings (this past week in Canada and the follow-up in Korea in the Fall) will give due time to SMEs.  I just got a note from the US Treasury with an update on the G-20 SME Finance Challenge, launched in Toronto. The word from up north is that the World Bank and all of the major regional development banks have committed to support this effort, and the competition is now open.

This is a good start.  Adding serious research components will make it even better.