Micro-credit in the XXI Century: New Paths for Small and Micro Producers

Micro-credit and micro-finances channel financial resources and knowledge into millions of poor families worldwide. A lot has been achieved on various fronts, but there is still much more to do. Meanwhile, the circumstances that define the small and micro-producers’ context keep changing: globalization and local development itself generate new combinations of problems and opportunities. Diverse options and paths open up for XXI Century micro-credit. Which ones to choose? What way to go?Micro-credit as a Necessary but not Sufficient Condition

The problems of poverty and underdevelopment have their origin in complex processes; there is neither one single cause nor a simple solution to overcome them. To effectively face a challenge of this nature and magnitude a diversity of complementary actions will have to be considered. This without ignoring what has already been done in micro-credit; those very experiences are the ones that enable us to consider a new generation of efforts.

The role micro-credit plays remains critical wherever there is poverty. Micro-credits mobilize the productive capacity of the poor, develop their trust and strengthen their self-esteem while promoting a work culture; they contribute to the subsistence of millions of families and irrigate the base of the productive apparatus, although by themselves they cannot abate poverty, inequality and give way to sustainable development.

What does current micro-credit practice require that be added? Let us begin by acknowledging that modern economy is drifting away from closed subsistence systems. Small and micro-producers are more and more a part, whether better or worse positioned, of productive networks that are integrated into the local economic system. This articulation of small and micro-producers with other economic players expresses itself in the purchase of supplies and basic equipments, in the acquisition and consumption of goods and services for their subsistence, in the sale of what they produce either directly to the local market or to diverse intermediation instances. These economic relations are influenced by the buying and selling prices each producer faces; that is, by the terms of trade he manages to establish with the actors he relates to. The results he obtains are thus conditioned by his positioning in a certain productive network and the terms of trade he manages to establish on the basis of contacts, productive capacity, financial vulnerability, and the knowledge and information the small producer handles.

If the small producer integrated a productive network positioned in a promising value chain and if his articulation with other players was based on favorable terms of trade, then it would be possible for that small producer to grow step by step, capitalizing his endeavor and ensuring better standards of living. If by contrast, as it happens in many cases, small and micro-producers held marginal positions in productive networks inserted in little promising sectors and if, besides, due to their scarce individual negotiation power they were subject to very unfavorable terms of trade, then their situation would be very adverse, with few possibilities of improving conditions of living and of production.

Micro-credit can remain halfway through if it were not capable of transforming the life conditions of those who receive it or if progress were so slow and marginal that it did not cope with the social and political times of those who keep living in poverty. Its efficacy would increase if it were complemented by other initiatives in order to improve the articulation of small and micro-producers with the rest of the local economic system. This would facilitate their access to sustainable development paths.

Building Sustainable Development Paths

So how to create a favorable milieu for small and micro producers and improve their articulation with the economic system they are a part of? Which are the factors that condition the success or failure of this purpose?

The conditioning factors are multiple as are diverse the circumstances that determine the uniqueness of each situation. Critical factors include accessing the necessary knowledge to operate well in contemporary world, counting on information about good opportunities, having the capacity to take advantage of them, and working in a favorable economic and social setting.

Economies are nowadays more and more knowledge-based. Market opportunities that are not possible to access without the necessary knowledge open up constantly. A critical issue is that, with time, the knowledge gap that already exists between the central economies and most of the countries of the Southern Hemisphere increases considerably, as well as the gap that also occurs inside our countries among different social sectors. The neediest are thus left even more behind due to their limited access to knowledge, which aggravates the already explosive situation. Paradoxically, modern information and communications technology can democratize the access to knowledge but that access needs to be strongly encouraged and fostered in order to really materialize. The idea is that small and micro-producers access knowledge of excellence adapted to the local conditions, not only residual or ruled out knowledge. Hence, the need to work in coordination with the formal and informal education system, as well as with those who lead productive chains, and the country’s whole scientific and technological community. It is on this work front where a good deal of the future of our peoples will be defined.

Although there are plenty of sources and ways to learn about economic opportunities, having that information at one’s disposal is not simple. But accessing information is a first step and being able to take advantage of opportunities is a different and more complex matter. To make it possible it is necessary to adopt measures on various levels, the following among them: (i) macroeconomic policies that favor low income sectors and especially small producers, (ii) mesoeconomic initiatives that facilitate a better articulation of small producers with promising value chains, (iii) direct promotional actions for small and micro producers.

Improving the Milieu: Macroeconomic Policies to Support the
Base of the Socio-Economic Pyramid

The fight against poverty cannot be limited to setting up a specific “program” to abate it; in order to be effective, this effort must align in its favor public policies and compromise wills of the private sector and civil society. A first measure would be to adopt macroeconomic policies that will allow mobilizing the base of the socioeconomic pyramid. One of the most important macro policies is public spending, which includes a variety of areas, such as funding the access of the small and micro producer to the best contemporary knowledge available as well as to modern social infrastructure (education, health, security, housing) and productive infrastructure (communications, roads, energy, irrigation). National, state and municipal public spending is the instrument par excellence to fund those works and services: depending on how it is allotted, it will favor to a greater or lesser degree the social and productive setting where the sectors of the base of the socioeconomic pyramid operate.

Fiscal policy is equally important because a regressive tax structure, as the one prevailing in the majority of the countries of the Southern Hemisphere, proportionately withdraws more resources from those who have the least. The economy offers politicians and the privileged sectors subtle regressive mechanisms of income redistribution they would not dare to proclaim openly.

Regarding monetary policy, low-income sectors are the most interested in ensuring price stability and an appropriate access to institutional credit. High inflation periods end up disproportionately chastising small producers and, when they do not count on institutional credit, they are left at the mercy of informal lenders who can impose extremely harsh rates and credit conditions.

Thus, improving the economic context where low income sectors act by aligning macroeconomic policies with their needs and interests becomes a critical dimension to access a path for sustainable development.

Improving Small and Micro Producers Terms of Trade

As it was pointed out, small and micro producers tend to get inserted in productive networks and market niches from where they obtain very low income. That structural vulnerability is at the core of their poverty and backwardness. How to face it then? There are many ways as there are no prescriptions for doing so; in all of them work will need to be done regarding how (i) to quickly incorporate knowledge, (ii) to improve productivities and the capitalization of small units, (iii) to negotiate better prices and technological assistance by those who lead productive networks through suppliers and distributors programs, (iv) to integrate small producers into mid size economic organizations that are capable of accessing better opportunity thresholds (business engineering exists for that purpose, such as franchise systems, export consortia, service centrals, some agribusinesses, among other possibilities).

The subject dealing with terms of trade is complex because competition conditions among economic networks and other conditions related to the will of economic actors get mixed up. If improvements in the terms of trade with small and micro producers would affect price, quality or time-wise the companies that facilitate them, then it will be difficult to materialize those improvements. But most times better terms of trade for small producers do not upset the viability of value chains because, if well worked out, they translate into productivity increases of their small suppliers together with an expansion of the local market, which end up generating better results for all. This becomes an important part of the relatively little explored field of mesoeconomy.

Any eventual income increase among small producers will have a double destination: on the one hand, meeting basic family needs that have been repressed, and on the other, capitalizing the small units. To make the latter possible –the crucial capital formation at the base of the socio-economic pyramid- very diverse kinds of support are required, among which I dare emphasize two: the education system and the scientific and technological community that can contribute by bringing technological and process management knowledge closer, and a segment of the capital market and the financial system by providing the necessary resources to acquire equipment and reinforce the work capital.

Leading value chain firms also play a decisive role: it is up to them to exercise higher mesoeconomic responsibility, which implies considering the secondary effects their own business decisions have on small and micro producers. That is, when taking on new projects and selecting ways to implement them, it would be worthwhile to choose those options that, while allowing to reach the goals they have set, maximize the positive impact on other players that make up their productive network and their community.

New Institutions to Support a Change of Course

To facilitate the search for new development paths a support system similar -yet not equal- to the one existing in affluent societies is needed; a system that encourages and accompanies the entrepreneurial effort from beginning to end. This implies to give way to a new breed of institutions complementing the micro-credit small producers receive with initiatives orienting them to more promising sectors; that is, fostering economic endeavors that, while operating as catalysts, drag in their growth a network of small suppliers, distributors and buyers: new mid size units capable of having access to good opportunities and know how to combine operative efficiency with a just distribution of results.

This has to do with a battery of local promotional instruments complementing each other: they know how to operate in contemporary markets yet they have an explicit mandate of supporting endeavors that ultimately aid the base of the socio economic pyramid. This generation of economic institutions includes local business developers, socially and environmentally responsible angel investor networks, and local funds to support productive investment, all of which have been described in previous Opinion Sur issues.

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