David Roodman’s “Due Diligence” is probably the most compelling analysis of microfinance that I’ve read recently. I am about half way through the book,  and I am loving it, but there is a recurring argument on the role of small-scale entrepreneurship that has been bugging me: are we portraying a romantic view of microenterprises? Are we overestimating their potential to alleviate poverty, create employment and promote local development?

Roodman thinks so, and he is not the only one. There is a growing consensus among experts to move away from the enterprise-centered approach in microfinance:

Poor entrepreneurs are not the agents of creative destruction whom economist Joseph Schumpeter saw as the heroes of economic development. They undertake-to revert to the root meaning of “entrepreneur”-in order to survive.” To this extent, labeling them “microentrepreneurs” romanticizes their plight and implies too much hope for their escape.

A couple of years ago, the excellent Portfolios of the Poor took a similar stance, arguing that households, not enterprises, should become the core of microfinance programs.

The poor households in the study seek loans for a multitude of uses besides business investment: to cope with emergencies, acquire household assets, pay schooling and health fees, and, in general, to better manage complicated lives. (….)

By offering general-purpose loans, matched in value and structure to the cash flows of poor households, microfinance would open up to the biggest single market it is likely to find among the poor.

I will comment more thoroughly soon. But just a couple of points.

I agree that any kind of poverty romanticism is wrong and that microfinance has a huge potential to expand its services through households.  On the other hand, as I said a few weeks ago, economists tend to portray local informal economies as a homogeneous blend of survival activities. This is wrong. My impression from the fieldwork is that upward mobility is possible within local markets and that growth oriented businesses emerge also in the most adverse environments. Supporting them should remain the key task for microfinance institutions.