This blog series has traced the history of the idea that promoting entrepreneurship and innovation is the key to unlocking economic growth and reducing poverty. As we have seen, it is distinctly American in its conceptualisation: forged in an economic context of the first advanced economy to experience de-industrialisation, in a social context in which the one true point of agreement is on individualism, and in a political context in which those who had achieved economic security felt they no longer needed the institutions of social democracy that had gotten them there and did not support similar approaches to help those who had been left behind.
The politics matters because these ideas would not have seen the light of day if they had not first won a victory in the political arena. This policy program was designed specifically to appeal to the better-off middle class (small business owners, educated professionals, and suburban homeowners––the non-elite property owners in American society). This group had begun to reject the Democratic party’s support for unions and redistributive policies, both of which reduced their ability to consume. Helping people help themselves through market-based solutions, including bootstrap entrepreneurialism, offered a way to demonstrate concern for the poor without sacrificing anything tangible: to be “socially liberal but fiscally conservative”. It was also particularly American in its belief that anyone can get ahead if they just work harder, rather than by cooperating with others.
By aiming to rejuvenate the economy around high technology, many were also convinced that these policies were an appropriate response to Japanese and German industrial policy. In fact, the context in those countries was entirely different: advanced industrial economies playing catch-up rather than de-industrialising, societies that did not celebrate individualism, and where the politics around social democracy were not riven with class and racial divisions. Their policies were implemented through tripartite arrangements between government, established businesses, and organised labor––the same institutions the new left had criticised. Although there were many notable Japanese and German entrepreneurs, and exporting companies in both countries relied heavily on the independent small businesses that supplied them, catch-up industrial policy was not centered on promoting entrepreneurialism.
This approach also dovetailed with ideas that had been circulating in the development sector since the 1970s favoring bottom-up rather than state-directed development and poverty reduction programs. Hence, they were also applied in the countries of the Global South with entirely different economic, social, and political conditions: pre-industrial, completely non-individualistic, and lacking any tradition of strong governance or government-provided social welfare.
No new idea embodied this approach to development better than microcredit. Started by international agencies and NGOs to enable the poor to participate in their broader development programs, by the early 1990s microcredit lenders had begun taking on a life of their own, transforming into commercial institutions––market-driven, innovating to compete, and profitable enough to attract investments and loans for expansion. Microcredit’s rise to prominence culminated with the 1997 Microcredit Summit in Washington, DC, which included a speech by First Lady Hillary Clinton:
Whether we are talking about a rural area in South Asia or an inner-city in the United States, microcredit is an invaluable tool in alleviating poverty, promoting self-sufficiency and stimulating economic activity in some of the world’s most destitute and disadvantaged communities. …. It is the individual human being willing to work hard who will be given the opportunity if that person takes responsibility to seek and find a better life for themselves.
In other words, getting out of poverty is one’s own responsibility. This logic is based on two assumptions. First, people can succeed in their own efforts if given the right tools (e.g., teach a man to fish…). Second, there are no structural barriers to economic success.
When taken together, these two assumptions imply that when someone remains poor, it is their own fault. This is the deeper meaning behind the privatization of poverty: not only that tools and methods of poverty reduction are turned over to for-profit activities (micro-enterprises and the microfinance institutions who lend to them, as well as social enterprises and investors) but also that the responsibility for poverty is one’s own, not a social problem or one requiring a direct policy response.
To make this approach sound feasible, petty producers and traders and smallholder farmers were transformed into Charles Peters’s risk-taking entrepreneurs who create new jobs and better products. The reality is often the opposite: they are risk averse and rarely innovate because it is difficult to differentiate or grow a business when operating in conditions of perfect competition and serving a customer base that lives barely above subsistence level. There is a considerable body of evidence showing that the link between credit and income growth is weak at best.
Many, if not most, of these livelihood and enterprise owners long for stability, especially the predictability of a steady paycheck. That is why many of them or their children migrate––even when the income differential is not that great, the regularity of income from employment is the draw.
Another flaw in this approach is that it offers little to people who do not have the passion, drive, skills, or appetite for risk to be an entrepreneur. Theoretically, they could become employees of the more entrepreneurial members of their communities. The reality, however, is that few micro-enterprises ever grow large enough to provide employment outside the family. Democratizing access to the market is not the same as democratizing economic security.
In the face of this evidence, the rationale for financial inclusion has changed. The Consultative Group to Assist the Poor (CGAP), the hub organization for international development agencies’ support for financial inclusion, issued a new five-year strategy in 2023 that focuses on mobilizing finance for:
- Climate adaptation, mitigation and a just transition
- Resilience to shocks and risk management
- Empowerment of women and growth of micro and small enterprises
The shift in emphasis from income generation to resilience is actually a different way of addressing the same issue. The root cause of the problem is that income from micro and small enterprises and small farms is both low and unpredictable, creating mismatches with the amount and timing of expenses. The result of these mismatches is an inability to save and invest––i.e., a lack of resilience. Rather than promoting financial inclusion as a way to increase income and thus resilience, the new focus is on using financial services to directly improve resilience itself.
Yet as long as the root cause––low and unpredictable income––persists, the ability of the poor to manage their lives using saving, borrowing, and insurance alone will reach its limits, especially in the face of climate change. It may be realistic to expect that households will be able to save enough and that financial institutions will lend enough, to enable households to recover from one calamity, but less realistic when such calamities start happening more often.
On top of this question about feasibility is an even more important ethical question: should the world’s poorest and most vulnerable people pay full price––plus interest––to mitigate and adapt to climate change when they contributed the least to the problem?