Transforming by Catalyzing Microcredit

Micro or small producers viability cannot be achieved by simply working out their access to credit and other financial services: this is a necessary, yet not sufficient, condition. How should the effort of microcredit and microfinance service providers be complemented? What other aspects need to be considered? Where should we start? An initiative meant to address these critical questions is presented.Microcredit and micro finance are essential elements in any serious strategy seeking to bring down inequality and poverty. There should be no doubt left about the validity of these instruments notwithstanding the fact that, as with everything else in this world, they can always be improved and failures may occur in ill-designed or poorly managed programs. Microfinance irrigates with credit and other financial services the bottom of the social pyramid. They can do a lot and, in fact, they do it. It is worth acknowledging, however, what they cannot achieve per se, what limitations it is worth working on in order to leverage those efforts.

What is essential is to recognize that micro or small producers viability cannot be achieved by simply working out their access to credit and other financial services. As we debated in previous issues of Opinión Sur, this element is so critical that we deem it a necessary condition to enable small and micro production; it does not constitute, however, a sufficient condition. Micro-producers should, in addition, have various other factors available, such as access to knowledge of excellence, commercial information, contacts, state-of-the-art business engineering, a better articulation with other economic players within promising production networks. Besides, it is of the essence to align macroeconomic policy with the interests of those at the base of the social pyramid (public spending, fiscal policy, monetary policy).

Opinión Sur develops strategic thinking, specific contents for public policies and private initiatives, looking to bring down inequality and poverty within a context of sustainable development. Along that road, we have gathered some experience as to how to complement and catalyze support programs for the bottom of the social pyramid, small and micro-producers, backward communities, the marginalized, including the actions of microcredit lenders and microfinancial entities. We are convinced of their value and that the impact may be enhanced significantly if we add some catalytic elements to that mix. We have thus designed some Working Sessions oriented toward strengthening microcredit programs through new initiatives and complementary instruments.

A typical Session would approximately consist in:

Work Session: 21st Century Microcredit

Catalyzing interventions to enhance the impact of microcredit programs

Microcredit and microfinance channel financial resources and knowledge to millions of poor families around the world. Progress has been achieved on many fronts, yet much more remains to be done. Meanwhile, globalization and local development generate new combinations of problems and opportunities. Different alternatives and paths open up for 21st century microcredit. Which ones should be chosen? What course should be taken?

This Working Session on 21st Century Microcredit proposes to (i) offer an insight into the context where microproducers’ viability is at stake, (ii) understand the type of comprehensive action that is necessary to undertake, (iii) recognize the role of microcredit and other complementary actions required to ensure microproducer viability, (iv) define ways in which synergies with other entities can be established without compromising the focus and specialization each one of them needs to preserve, and (v) explore ways to improve the articulation of micro and small producers with promising production networks and specific actions to materialize the same.

The working session is intended for public sector, private sector and civil society participants who (i) run microcredit and other types of programs for the bottom of the social pyramid; (ii) entrepreneurs who are interested in developing their mesoeconomic responsibility; (iii) journalists and the media; (iv) university and technical college professors and advanced students; (v) NGO and city officers as well as general public who are interested in this matter.

First module: Microcredit as a necessary, yet not sufficient, condition

Problems of poverty and underdevelopment are rooted in complex processes; there is not a single cause that explains them or a simple solution to overcome them. To face a challenge of such a nature and magnitude, it will be necessary to consider an array of complementary actions without ignoring what has already been done. What must be added to the current microcredit practice?

_ – Small and micro-producers are an integral part—with better or worst linkages—of production networks embedded in the local economic system.
_ – How that articulation with other economic players is expressed.
_ – The prevailing terms of trade.
_ – Positive (capital formation and improved consumption) or negative (they remain at subsistence level) results.
_ – Social and political timing in the fight against poverty.
_ – The need to complement microcredit with other catalytic actions.

Second module: Building new paths for microcredit

How, then, can a favorable environment be created for small and micro-producers, and how can their articulation with the economic system they are a part of be improved? What factors condition the success or failure of this purpose?

_ – Access to the knowledge needed to operate in today’s world
_ – Availability of information about good opportunities
_ – Having the capacity to take advantage of them
_ – Operating in a favorable economic and social environment
_ – Appropriate support systems

Today economies are increasingly knowledge-dependent. It is not possible to access opportunities without the needed knowledge. The knowledge gap between and within countries is magnified as time goes by.

Modern information and communication technology may democratise access to knowledge, but such access needs to be strongly encouraged and promoted in order to materialize.

Having information on economic opportunities is a first step, yet taking advantage of them is a more complex matter.

Third module: Comprehensive support to the base of the socio-economic pyramid

The fight against poverty cannot be limited to the establishment of a specific “program” to bring it down: it is necessary to commit public policies, as well as private sector and civil society initiatives.

_ – Macroeconomic policies that are capable of mobilizing the base of the social and economic pyramid: public spending policy, fiscal policy, monetary policy.
_ – Mesoeconomic responsibility of leading firms in production chains; small supplier and distributor programs.
_ – Improved terms of trade for small units: adding knowledge, productivity increases and capital formation, better prices and technological assistance, articulation with medium-sized locomotive businesses.
_ – Support and accompaniment roles by civil society development organizations.

The question of terms of trade is a complex one as it combines conditions of competition between economic networks, and other circumstances associated with the will of players. If improvements in terms of trade of small and micro-producers disrupt corporate prices, qualities or timing, it would be difficult to materialize them. However, most of the times these improvements do not affect value chain viability because, if properly implemented, they translate into productivity increases for small producers and the expansion of the domestic market, which end up generating better results for all. This is the relatively little-explored field of the mesoeconomy.

Fourth module: New institutions to support the change of course

To enable new development paths for micro producers, a support system that is similar, but not identical, to the one existing in affluent countries is required; a system that encourages and accompanies the whole development of the entrepreneurial effort. It is about giving way to a new breed of institutions capable of complementing micro credit with initiatives that may orient small producers toward promising sectors and enable their access to capital and markets.

_ – Local business developers in support of the bottom of the social pyramid
_ – Socially and environmentally responsible angel investor networks
_ – Local funds to support productive investments

This is a battery of local, complementary instruments to promote entrepreneurship: they can operate in contemporary markets, yet within an explicit mandate to support endeavours that ultimately assist the bottom of the social and economic pyramid.

Thus far the description of the Working Session; we hope these ideas may be useful for those who are advocating a more sustainable development in the Southern Hemisphere countries. For more information, contact us at [[email protected]>mailto:[email protected]]

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