Muhammad Yunus, the Bangladeshi economist, won the world over by his simple act of empowering women and youth in his country through microfinance and training. He did this through the much acclaimed Grameen Bank that lent to small business owners. His model has been replicated the world over as the ultimate in eliminating poverty. But does this model of entrepreneurship eliminate poverty?
In 2007, Jonathan Morduch studied over 250 cases in India, Bangladesh and South Africa to verify the narrative that this small scale entrepreneurship does eliminate poverty. He concludes that the celebrated microcredit only acts as a transfer payment to help the recipients cope with the ups and downs of poverty.
David Roodman rightly puts it that “the best estimate of the average impact of microcredit on the poverty of clients is zero”. In South Africa, research indicates that 94 per cent of the money was used for basic consumption. The businesses helped the women to meet their needs, but did not give them enough to save, invest and create wealth.
Why didn’t this model work? A limelight on some of the world’s successful entrepreneurs will give us a glimpse into what works.
Bill Gates came from a modestly rich family. He was not trying to alleviate poverty; he was doing something he loved. He didn’t have bread-and-butter problems, hence was able to spend years learning coding and developing the right codes without being distracted by his basic needs.
The Rockefellers were Jewish merchants. They were in the middle class by the time they were starting the process of wealth creation.
The patriarch strategically positioned his sons in all the major towns of Europe where he had business interests. The result was a free flow of information and goods from trusted family members.
Warren Buffet is the son of a US congressman and Steve Jobs did not come from the ghetto.
Locally, James Mwangi did not start from scratch; he took over a building society with some resources. Manu Chandaria came from a family that could afford some capital.
In essence, one needs access to some tangible opportunities before they can succeed as an entrepreneur. Coming from a wealthy family enables one to access capital and create helpful networks. Patronage and nepotism in business, politics and social access is a reality all over the world.
About 70 per cent of the American GDP is driven by small businesses. It is higher in France, Italy and many G8 countries. Additionally, growth in India is driven by small family-run businesses. Tellingly, there is empirical evidence that entrepreneurship works in development. However, it would seem that it needs the right environment to thrive.
Given that government is the biggest buyer in any economy, it must ensure equal opportunity is accorded to any business that is worth its salt. Mostly, the poor do not have resources to build attractive businesses. However, an equal opportunity policy would ensure they have something to work with, even if it means partnerships with bigger players.
Secondly, there is need to boost access to financing. African governments crowd out small businesses in their borrowing. Further, as government gets stringent in its regulatory banking policies, less people are able to access credit.
On the other hand, microfinance institutions have also become financing sharks charging exorbitant amounts of interests. This makes entrepreneurship in Africa a mission impossible.
Perhaps the most undoing of most poor people is the sole proprietorship syndrome. Twenty people can sell bananas in Marikiti for 30 years, competing against each other without one day considering the possibility of working together as a team.
Renaissance Europe was developed by individuals who brought resources together and built companies like the East India Company that shook the world with their economic power.
The winning strategy for African entrepreneurship will have to take advantage of the African communal bond and use it to overcome poverty.
Odhiambo Ramogi is the chief executive officer of Elim Capital.