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MICROENTERPRISE AS A SOURCE OF EMPLOYMENT September 13, 1996 CONTENTS Introduction Improvement of the circumstances in which microentrepreneurs operate is an essential requirement for the sustainable and equitable development of the countries of the Americas. Productivity increases in the microenterprise sector will provide for better protection of the environment and will cause a flourishing of creativity that will improve the human condition and the participation of poor people, among whom are large numbers of women and indigenous groups, in the fruits of growth. Temporary programs to relieve poverty do not, however, constitute permanent solutions to problems of low productivity, nor are they sustainable, given the high cost and requirements of fiscal support. Productivity increases depend to a larger extent on greater access to productive assets, including human capital, as information, markets, and appropriate technologies. Governments can contribute to this increase by facilitating access to financial services (deposits and loans), training, infrastructure, and institutions. There are priorities for action in three fields that will require coordinated efforts to improve the rendering of financial and non-financial services. First, in the case of financial services, the transformation of microfinancial organizations into established intermediaries and the improvement of microentrepreneurs' access to savings and credit services are both important. This can be accomplished by revising the regulatory framework, strengthening microfinancial organizations, and providing for exchanges of information through a system coordinated by the multilateral organizations involved in this area (e.g., The Inter-American Development Bank (IDB), The Andean Development Corporation (CAF), The Caribbean Development Bank (CDB), and The Central American Bank for Economic Intergration (CABEI)). Second, greater institutional efficiency of non-financial services must be achieved. Programs of nonfinancial supporting services for the microenterprise sector must be transformed by strengthening both governmental and nongovernmental organizations and providing for the exchange of information. Third, it is important to have a regulatory framework that will foster equality of market conditions and the adoption of environmentally sound technologies. For the operation of microenterprises, an enabling environment must be created that will lead to environmentally responsible decision-making. Background According to the Action Plan adopted at the Summit of the Americas, held in Miami in 1994, the governments granted priority status to the development of small-scale businesses and microenterprises and undertook to carry out deregulation and administrative simplification programs, along with dissemination of information on markets, management systems and appropriate and environmentally sound technology. They further undertook to strengthen the financial system that serves the microenterprise sector, to provide training and technical assistance programs, and to coordinate supporting activities. The governments have taken numerous actions to meet these commitments, but progress has not been uniform in all areas and countries. The actions of governments, multilateral and bilateral organizations, and nongovernmental organizations have not yielded uniform results. Organizations that furnish microfinancial services have made greater advances in some countries by adopting low-cost methodologies suited to the requirements of their customers and carried out through policies and procedures that enable them to cover the cost of lending and to obtain repayment. This has been essential to achieve broad coverage of the sector, a capacity for institutional permanence, and sustainability in the rendering of financial services. Although financial services are important for taking advantage of productive opportunities, loans do not constitute an appropriate medium of support in the absence of such opportunities. Instead, access to markets, human capital formation, the collection of information, and the transfer of technology are essential for the creation of new opportunities. However, organizations that support microenterprise with nonfinancial services have not made as much progress as the microfinancial organizations. Their mission and strategy are not clearly defined, technologies for rendering services at reasonable cost have not been developed, and the need for and means of achieving institutional sustainability have not been established. Hence it is essential that efforts be made to transform nonfinancial services for microenterprises. But must be achieved without disregarding the elements of support that are essential to the sustainability of the financial services. Action is required to consolidate and complement the nonfinancial services and expand their coverage, and include innovations to facilitate the financing of enterprises that will protect biodiversity and assure the sustainability of the organizations that provide those services. Initiatives Professor Claudio Gonz�lez-Vega, of Ohio State University was contracted by the CAF to develop initiatives in this field. After consulting with multilateral, bilateral, governmental and non-governmental organizations associated with the subject of microenterprises, he has developed the following initiatives: 1. Improvement of Financial Services. To achieve all this, the Governments of the Americas support the efforts of the IDB, the CAF, the CDB, and the CABEI to afford microentrepreneurs access to efficient and sustainable financial intermediation. In order to enhance and coordinate these efforts, the creation of a support system for microfinancial organizations, operating under the leadership of these three agencies is proposed, to promote policy changes and technological innovation. The system would assist the governments in the conduct of national actions to enhance sustainable financial intermediation for the microenterprise sector. This coordination would make it possible to revise the terms and conditions of lending operations so that transactions with customers took place on market terms and conditions and disbursements did not discourage the mobilization of national savings. Furthermore, the system would promote the transfer of appropriate financial technologies for microenterprises and sustainable organizational designs for the institutions that render the services. These activities should include workshops and seminars, traineeships for officials, consultations that draw on the experience of professionals associated with advanced programs, observation visits, and the dissemination of the successes of some outstanding microfinancial programs in the Americas. 2. Transformation of Nonfinancial services. To achieve all this, the Governments of the Americas should seek to coordinate efforts and foster the exchange of information and experience. At least at the outset, it is proposed that the responsibility for coordinating these actions be vested in the Support System for Microfinancial Organizations to be created. These efforts would seek to raise the levels of efficiency and sustainability of programs of nonfinancial services for the microenterprise sector through workshops and seminars to discuss strategies and designs; intensive interaction with representatives of the more advanced financial programs; experimentation with new models of service delivery and widespread dissemination of the experiences of more successful programs so as to create a favorable climate of opinion about the feasibility of these efforts. 3. Development of an Enabling Environment. Improvement of the circumstances in which microentrepreneurs operate is an essential requirement for sustainable and equitable development of the countries of the Americas. Without increases in productivity and improvement of the living conditions of the broad segments of the population whose employment and income depend on microenterpreneurial activities, the prospects for protecting biodiversity, ecosystems, and the environment will be severely diminished. Without greater participation by microentrepreneurs, among whom are large numbers of women and the poorest of the poor, in the fruits of economic growth, it will be impossible to secure the participation of larger segments of the population in processes of responsible decision-making. In the absence of actions to improve the conditions in which microentrepreneurs operate, in a framework of sounder macroeconomic policies and more competitive commercial relationships, sustainable and equitable development will not be achieved. If the microenterprise sector of the countries of the Americas contains and nourishes a substantial measure of creativity and the desire to excel -- on which the improvement of human existence depends -- then governments must set priorities and coordinate actions designed to improve the circumstances in which microentrepreneurs operate. This improvement requires, among other things, access to such financial services as loans and savings facilities that contribute to the formation of capital assets. Also required are better programs of training and technical assistance that will enhance the human capital of microenterprises; the strengthening of infrastructure and the establishment of a regulatory framework to enable greater access to markets and information; and the transfer of environmentally sound technologies that will enhance the competitive position of microenterprises. The governments of the countries of the Americas and the international agencies have shown growing interest in actions, both local and regional, to support the microenterprise sector, mainly through the provision of better financial services. Among the activities to promote sustainable and equitable development that have grown most rapidly in the last decade are programs of support for microenterprise. In part, this expansion has revealed how the governments of the countries of the Americas and the multilateral and bilateral organizations that engage in support for development have turned away from regarding microenterprise as an anomaly and are now supporting it as a productive sector that offers substantial opportunities to relieve problems of unemployment, underemployment, and poverty. This political concern is an acknowledgement of the fact that employment and income generated by microenterprises has increased considerably in many countries, particularly in the urban informal sector. This has enabled millions of poor households to earn income from market-oriented, small-scale private activities. Improvement in the conditions in which such microenterprises operate holds the potential to achieve growth with equity. The growing concern of governments with improving the conditions in which microenterprises operate was expressed in Miami by the presidents at the 1994 Summit of the Americas, and in the technical discussions of the group of microenterprise experts appointed to follop up the resolutions adopted at the Summit. Similar considerations have emerged at subregional meetings, such as the Declaration of the Presidents of Central America at the 1993 Tegucigalpa Summit and the statements made by several presidents at the Bolivar Forum on Latin American Enterprise in November 1995, sponsored by the Inter-American Development Bank (IDB). The promotion of microenterprise will require action to improve the provision of both financial and non-financial services. The provision of financial services will entail the transformation of microfinancial institutions into regulated intermediaries, and also greater attention to the sector by established intermediaries. The provision of nonfinancial services will entail the pursuit of greater institutional efficiency. A regulatory framework that provides for equal market conditions and promotes the adoption of sound environmental technologies will be required as well. It is proposed that the Governments of the Americas, in order to relieve poverty, increase competitiveness in the economy, and promote environmentally sound productive activity in the field of microenterprise, carry out the following actions through a cooperative partnership:
1. Improvement of Financial Services Background In the process of transforming the activities aimed at promoting microenterprises -- turning from welfare-type, temporary assistance and distortive, fiscally unsustainable government protectionism, to the achievement of greater competitiveness in real terms creating viable and permanent institutions by increasing productivity, competitiveness, and environmental responsibility -- it is the organizations that provide financial services to the microenterprise sector that have made the greatest progress. These institutions have started by recognizing that among the microentrepreneurs are many with attractive production opportunities and the ability to save and repay loans on market terms and conditions but without sufficient assets of their own to avail themselves fully of these opportunities, and whose access to formal financial services is limited by problems associated with information, risk, and contract enforcement. For microentrepreneurs, however, improvements in access to credit, deposit facilities, and other financial services constitute means of raising their competitive position and earnings. In some countries of the Americas, the success achieved by microfinancial organizations in rendering services to microenterprises reflects the adoption of low-cost financial technologies suited to the requirements of their clientele and carried out through policies and procedures that enable them to cover the costs of lending. This has been essential in achieving the measure of financial feasibility required for success in the mission of attaining broad coverage of the microenterprise sector with a capacity for sustainability and institutional permanence in the provision of financial services. In spite of significant achievements in some countries, however, the microfinancial sector still needs to be strengthened by substantial public inputs, wihtout which the growth and sustainability of the sector could not be assured. Several international organizations have played and continue to play a key role in support of the financial programs of microenterprises. The IDB has exercised its regional leadership to do an innovative work in this field. For the same purpose the Inter-American Investment Corporation (IIC), has employed funds for investment and lending through national financial intermediaries. In addition, the Multilateral Investment Fund (MIF) was created to support the development of small business and microenterprise. Other subregional financial institutions have also given priority to the microenterprise sector. This year, the CAF, a leading institution in the Andean Community that has been expanding to the rest of South America, created the Microenterprise Development Management Office (GDM) in its area of current operations in order to enhance and consolidate the financial system that serves the microenterprise sector by supporting such institutions that are in the process of being chartered and regulated by the banking authorities so as to ensure permanent and sustainable savings and credit services for microentrepreneurs. The CAF channels its financial support to the financial intermediary institutions of the microenterprise sector by strengthening equity and lines of credit to expand their coverage and enlarge their lending portfolios. It also provides technical support for the institutional strengthening of these national microfinancial institutions. In the Caribbean, the Caribbean Development Bank (CDB) contributes to the development of microenterprises through its lines of credit to banks and other development institutions and through its technical cooperation programs. Similarly, the Central American Bank for Economic Integration (CABEI) exercises leadership in the Central American Community by allocating funds to the sector through the Program of Support for Micro and Small Industry (PROMIPE). Initiatives The Governments of the Americas support the efforts of the IDB, the CAF, the CDB, and CABEI to provide microentrepreneurs with access to efficient and sustainable financial intermediation. To strengthen and coordinate such efforts, the creation of a support system for microfinancial organizations is proposed. The system would operate under the leadership of the four agencies to promote policy changes and technological innovations and to assist governments in implementing national actions to strengthen sustainable financial intermediation for microenterprises. This system would coordinate efforts with the Consultative Group to Assist the Poorest (CGAP), which is based at the World Bank. The efforts are designed:
2. Transformation of Non-Financial Services Background Even though financial services are important in making it possible to take advantage of productive opportunities, if such opportunities are unavailable loans do not constitute an appropriate medium of support nor can they yield profit where none exists. Instead, access to markets, human capital formation, the collection of information, and technology transfer are essential to create these opportunities. The role of governments and international organizations in these areas is crucial. However, the organizations that employ non-financial services to support the microenterprise sector have not managed to achieve a measure of progress similar to that of the microfinancial organizations. Their mission and strategy are less clearly defined, the technologies for providing nonfinancial services at reasonable cost are less developed, the role of prices and subsidies has not yet been made clear enough, and the prospects for achieving viability and institutional sustainability, and the determining factors, have not been correctly identified. It is therefore essential to exert efforts to transform and develop nonfinancial services for the microenterprise sector. However, this should be done without overlooking the contribution of additional supporting elements, which are essential for the sustainability of the financial services being delivered. Additional innovations are needed to devise sustainable mechanisms for the financing of enterprises that protect biodiversity. In the case or nonfinancial services, experimentation and the design and transformation of the existing organizational structures are needed to bring them in line with the standards adopted by the microfinancial programs. In the case or financial services, actions to achieve consolidation and complementarity are needed to enlarge their range of coverage and assure their sustainability. Initiatives It is proposed that the Governments of the Americas coordinate efforts and foster the exchange of information and experience to facilitate the transformation of nonfinancial supporting services for the microenterprise sector so that they may achieve levels of sustainability similar to those of the microfinancial programs. It is proposed that responsibility for the coordination of these actions, be vested at least at the outset, in the support system for microfinancial organizations recommended in the preceding initiative. This system would work in coordination with other multilateral and bilateral agencies and with governmental and nongovernmental organizations to:
3. Creation of an Enabling Environment Background In addition to viable and sustainable support organizations, progress in the microenterprise sector requires an enabling regulatory environment and favorable policies that afford opportunities for growth without discriminating against small-scale activities. It is necessary in some countries to revise the systems of taxation and operating licenses. Changes are also required in pricing, labor, and public spending policies that discriminate against small business. At the same time, however, the regulatory framework must create incentives for the adoption of environmentally sound technologies. Initiatives The microenterprise sector will be unable to make progress without an enabling environment for the conduct of its activities. In particular, it is necessary to develop a neutral environment and regulatory framework that does not discriminate, as it has in the past, against small-scale activities. This environment and regulatory framework should create incentives for increases in productivity, competitiveness and environmental responsibility. For that purpose, the coordinated action of the Governments of the Americas and the international agencies should endeavor:
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