Microenterprises have much to offer to the poor in this country, but only if they take root in a natural way and are not imposed on the poor like other poverty reduction programs. Microenterprise is very different from the usual government-led poverty reduction programs and can only thrive in a deregulated and decentralized economic environment.
Word count: 895
Microenterprise is the latest “poverty alleviation and development” label that politicians of all stripes are wearing on their backpacks. This ground-up policy solution from the developing world merged with the asset-building movement in the United States, creating a sense of euphoria in some circles that has yet to be justified. A lot of ground still needs to be covered before microenterprise can really be used as a successful poverty alleviation instrument in this country. House Bill 3027 in the 2007 Oregon legislature is one attempt to get government directly involved in this movement. However, microentrepreneurs would be better served if the legislature instead concentrated on removing the tax and regulatory barriers that hinder their road to success.
A microenterprise is generally defined as a business with five or fewer employees with capitalization needs under $35,000. Microenterprises have much to offer the poor in this country, but only if they take root in a natural way and are not imposed on the poor like other poverty reduction programs. Microenterprise is very different from the usual government-led poverty reduction programs for three main reasons.
First, microenterprise calls for genuine aptitude and motivation on the part of participants. Individuals should ready themselves for participation in microenterprise activities without the direct help of government. Microenterprise programs in the United States try to do too much for their clients and in that process choke clients’ entrepreneurial energy. In a way they run like entitlement programs, with too much focus on unnecessary protection of the microentrepreneurs. Yet, there is a complete lack of effort on the part of legislators in changing the regulations that could play an important role in sustaining micro-businesses.
90% of U.S. microenterprise programs combine loan programs with financial education. The earliest third-world programs started with training, but now focus on loans. In contrast, the earliest first-world programs started with loans, but now focus mostly on training. The record from the developing countries suggests that loans and training do not mix well. The World Bank once tried without much success to use subsidized loans to attract subsistence farmers to adopt new technologies.
Financial education and training need the expertise that might not be available in a microloan program, and microlenders need skills that might not be accessible in a financial training program. Therefore, it is important to separate the training from the loan program. Community colleges already offer basic finance and business classes. Several private service providers also supply similar curricula. There is room for a lot of innovation here. For example, Paraguay offers entrepreneurs vouchers for part of the price of self-employment training. Similar incentives should be offered to microentrepreneurs in this country.
Secondly, microenterprises are harmed by direct government involvement. International experience in developing countries has shown how government participation in direct microcredit services in the 1970s and ’80s in rural areas undermined and displaced private financial institutions and turned out to be totally unsustainable. Loans available under public loan programs were expensive to administer and included subsidized interest rates. Furthermore, for political interests governments often treated the loans as grants, resulting in a culture of nonpayment. India’s government-appointed Agricultural Credit Review Committee reported in 1989 that political factors are often responsible for widespread defaults. As a result of the subsidized government loans, offered on soft terms, any private sector activity that might have been taking place in the area was driven out. In the long run governments could not sustain these programs, and the rural areas were left with even less access to credit.
Thirdly, microenterprises can only thrive in a deregulated and decentralized economic environment. But microentrepreneurs in this country face several barriers. Veronique De Rugy in a recent commentary in The Wall Street Journal points out that the high tax rate on capital is reducing investment. Regulatory burdens are inflicted by the government on small businesses at every level.
In Oregon specifically, the high taxes include the Self-Employment Social Security tax, excise taxes and several local taxes, like the TriMet Self-Employment tax. The registration and certification process is expensive. The income tax rates are also rather steep in our state. Oregon is one of 19 states in the country that levy income tax on two-parent families of four living in poverty and one of 15 states that levy income tax on single-parent families of three with income at the poverty level.
In addition, the usury laws in the U.S. further decrease access to formal loans for microenterprises. First, these laws do not allow lenders to recover the costs of small and short-term loans to high-risk borrowers without traditional collateral. Second, usury laws give high interest lenders a bad name. Even if lenders could raise rates enough to make a profit on microenterprise loans, they might choose not to do so for fear of being called “usurers,” as most payday lenders are accused of being.
The sponsors of House Bill 3027, introduced in the Oregon legislature this session, clearly do not understand the hazards of involving the government directly in the development of microenterprise. No wonder the bill includes an appropriation of $1 million for services supporting microenterprises, which unjustly places microenterprises in the pork-barreled category, along with other poverty reduction programs. It also proposes the establishment of a task force to coordinate the development of targeted small businesses and microenterprises in Oregon, whereas government coordination is not desirable in this field at all.
Attention editors and producers:
Cascade Commentaries are provided for reprint in newspapers and other publications, with credit given to author(s) and Cascade. Contact Cascade to arrange print or broadcast interviews on this commentary topic.
Electronic text files are available online at www.cascadepolicy.org.
Cascade Policy Institute
4850 SW Scholls Ferry Rd.
Portland, Oregon 97225
Phone: (503) 242-0900
Fax: (503) 242-3822
Cascade Policy Institute is a tax-exempt educational organization as defined under IRS code 501(c)(3). Nothing appearing in this Cascade Commentary is to be construed as necessarily representing the views of Cascade or its donors, or as an attempt to aid or hinder the passage of any bill before any legislative body. The views expressed herein are the author’s own.