02 June 2010

The “missing middle”

The failure of microfinance to have a large impact on firm creation and firm growth (Banerjee et al. 2009; Karlan and Zinman 2009; a summary by FT) may be due to its targeting of poor people and small-scale firms. It is medium to large scaled firms that are missing in less developed countries (LDCs) if the firm size distribution is compared to the one from developed countries (Hsieh and Klenow 2009), and that type of firms is probably the driver of economic growth. Governments in LDCs and development assistance agencies, however, have ignored these medium and large scaled firms.

That is Abhijit Banerjee talking at the Annual Bank Conference on Development Economics.

I suppose medium scaled firms just aren’t as sexy as a single female entrepreneur. Perhaps we need a catchy name for support to mid-sized firms. “Middle-finance”? “Medium-finance?” “Meso-finance?” Melody Atil is trying to plug this gap in Southern Sudan by recruiting investors for slightly larger firms.

Then again financing might not even be the main constraint to firm growth…


Ranil Dissanayake said...

yeah, and it's a similar thing with smallholders. Where in the world are they the backbone of an economy? ireland maybe, but where else? The World Bank does do work for business environment strengthening that doesn't focus on the two men and a printing press businesses, but most bilaterals won't touch anything that makes people rich - they only want interventions that make people less poor.

Robert Tulip said...

The lack of engagement with medium sized firms by aid donors should be a matter for development policy debate. IFC has raised it in The Next Four Billion. Adam Smith's description of the economies of scale in the pin factory in Wealth of Nations presents a strong argument that microfinance is an inefficient method to reduce poverty. Paul Collier and Stefan Dercon argued in their paper to the FAO food security conference last September, African Agriculture in 50 years, that commercial agriculture in large farms should be prioritised over aid to smallholders. It seems to me that many aid donors are transfixed by the ideology that they should work directly with the poor, even though the evidence indicates that indirect methods achieve more to reduce poverty through overall economic growth.

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