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The “Entrepreneur Myth” Myth

by Josh Weinstein | Original Article at http://joshweinstein.wordpress.com

Muhammad Yunus, the godfather of microfinance, contends that everyone is an entrepreneur.  And microfinance is about individual economic empowerment, built on the premise that credit is both a human right and a path to economic freedom.  This reading has been distorted by those who talk about the “entrepreneur myth,” which says that microfinance romanticizes the poor by pushing a false by-your-bootstraps narrative.  This narrative, in turn, undermines development by giving the poor something they don’t want – credit for a business – instead of something they need, which is steady employment.  This argument isn’t necessarily untrue, but it is irresponsibly oversimplified and demonstrates a lack of grounding in reality.   I want to discuss two articles that address this issue and use them to explain why this reading of microfinance is not only flawed, but is counterproductive in serving the poor.

Rational actors in the U.S.

The first one, titled “Romanticizing the Poor” from the Stanford Social Innovation Review, is a bit more difficult to refute, in part because I agree with the premise but not the logic, and also because I am intimidated by the fact that the author, Aneel Karnani, is an economics professor of South Asian descent and, I would have to assume, intellectually superior to me.  But I’ll try.  The article is less a refutation of microfinance as a poverty alleviation strategy as it is a caution against the merits of market-based solutions in general.  According to Mr. Karnani, the poor are not rational actors when it comes to economic decision-making.  Therefore, the argument goes, it is misguided and potentially harmful to try to apply free-market strategies – like microfinance – when the spending behavior of the poor is irrational.  He highlights the fact that the poor spend a disproportionate amount of money on booze and cigarettes at the expense of healthcare and education (Nicholas Kristof’s most recent articlediscusses the same issue).  The poor are more prone to impulse buying, so introducing more money and more material product choices will just drive them deeper into debt:

Many advocates of market-based solutions to poverty view poor people as rational consumers who, if given more options, would make better choices—that is, choices that would increase their economic welfare. They see no problem with encouraging the poor to spend their already meager incomes on low-priority products and services. They further argue that the poor have the right to determine how to spend their limited income and are in fact the best judges of what is in their best interests.

I don’t dispute the truth of these statements, mostly because I haven’t read the research.  I would say it’s not unreasonable to say that adults should be treated like adults when it comes to making decisions about how they spend their money.  Either way, they are irrelevant to an argument against microfinance.  He explains the problem as he sees it:

The problem with microfinance is that it romanticizes poor people as creative entrepreneurs. Most microcredit clients are not entrepreneurs by choice; they would gladly take a job at reasonable wages if one were available. This should not be too surprising. Most people do not have the skills, vision, creativity, and persistence to be an entrepreneur. Even in developed countries with high levels of education and access to financial services, about 90 percent of the labor force is employees, not entrepreneurs. Meanwhile, as borrowers struggle to repay loans that are unlikely to lift them out of poverty, some microfinance institutions earn handsome returns—such as the 100 percent compounded annual rate of return that investors in Banco Compartamos received.

He is using two unrelated definitions of “romanticizing the poor” – that the poor are rational when it comes to their finances and that they are creative entrepreneurs – and using one to discredit the other.  For one thing, the fact that the poor spend on things they might not need isn’t a justification for not providing these financial services.  The fact that microfinance might be a poor poverty alleviation strategy – something I disagree with – is a fair argument, but that is not what he is saying.  He mentions it in the last sentence, but it is thrown in almost as an afterthought and is more a statement of bias rather than a component of the larger argument.  According to Mr. Karnani’s logic, market-based solutions require rational actors, which the poor are not, and microfinance is a market-based solution.  Therefore, if A equals B, and B equals C, then microfinance does not serve the poor.  A more reasoned suggestion would be to push for more financial education, public health programs, and education assistance to complement microfinance and teach people to spend their money more wisely.  But to say that because people don’t spend their money wisely we should not give them credit, which could be misused, is wrong.

As for the entrepreneur myth, microfinance clients are, by definition, entrepreneurs.  If they are not employed but are making money, even if it is less than a dollar a day, then they must necessarily be self-employed.   Most people who argue its validity equate the concept of entrepreneurship in the developing world with start-ups in Silicon Valley.  After all, running a convenient store out of your house and creating Twitter are both examples of entrepreneurship, but no one would consider them equivalents.  This brings me to the second article, which is much easier to refute.

In an article titled “No, Not All Poor People Are Entrepreneurs” on the Social Entrepreneurship blog of Change.org, David Henderson writes that there is a “troubling trend” toward pushing the entrepreneur myth.  He begins his article by laying out the argument:

There is a troubling trend among social enterprises to romanticize the poor as entrepreneurs. Call it the entrepreneur myth. While it’s an attractive one, this kind of doublespeak not only masks the reality of the social constraints and challenges the poor face — it also hampers our ability to innovate high-impact poverty interventions.

The unifying trait of the poor is not entrepreneurial spirit. It is the absence of wealth and opportunity. Some people are entrepreneurial — poor or otherwise — but most people are not. Our obsession with the poor as entrepreneurs has less to do with a poverty alleviation model that works than it does with a Western idealization of entrepreneurialism. We celebrate the entrepreneur as a vicarious escape from the cubicle confines of a steady paycheck. But what the poor desire isn’t the risk and excitement of entrepreneurship –it’s the economic security of stable employment.

Mr. Henderson’s entrepreneurs.

Here is why he is wrong.  Microfinance is sometimes marketed as giving capital to help people start a business.  But most microfinance clients are already running some kind of business and just don’t have the capital to get it to any reasonable scale.  There is an apocryphal story about Muhammad Yunus founding Grameen Bank in which the good doctor visits a group of women that manufacture bamboo furniture, but cannot turn a profit because they are paying exorbitant rates to moneylenders for materials.  He gives 42 women $27 out of his own pocket, reducing their interest expenses and allowing them to make two cents per chair.  These women were already entrepreneurs – they already had their own business.  The “entrepreneurial spirit” is irrelevant because they are doing it out of necessity.  Of course they would prefer gainful employment with a steady paycheck, but when it doesn’t exist, they do it what it takes to put food on the table.

He suggests we need larger social enterprises that employ the poor, rather than more of these small businesses.  No one denies that, but until Mr. Henderson or anyone else can figure out a way to do that, people will still toil – as entrepreneurs – to make ends meet.  Mr. Henderson seems to think that entrepreneurs necessarily create jobs.  But most of the entrepreneurs in the world are employing one person: themselves.  Like Mr. Karnani, he suggests that “romanticizing of the poor” ignores the reality of the challenges faced by impoverished people, but fails to offer real solutions beyond criticism of microfinance.

He closes his piece with a statement about social entrepreneurship:

Social entrepreneurship is about addressing important social issues in innovative, high-impact ways. The promise of social enterprise is to develop interventions grounded in fact and built for scalability. Do social entrepreneurs want to help lift people out of poverty? If so, we have to make sure our interventions are designed to engage people as they are — rather than what we wish they were — so we can help them become what they want to be.

Mr. Yunus’ entrepreneurs.

This last sentence is so off-the-mark that it makes my head explode.  I have never seen a closing statement so thoroughly undermine an argument as this one.  Microfinance does engage the poor as they are.  Mr. Henderson, on the other hand, has clearly read the literature about the failings of microfinance and misunderstood it to mean that, in the absence of a perfect solution, nothing is better than something.  But we cannot blame people like Mr. Henderson for arguing this way.  Microfinance has a marketing problem , which is consequently the reason it is so successful.  The entrepreneur narrative is appealing to donors, individuals, the media, everyone.  Kiva would not be the success that it is if people didn’t think they were helping someone shape their destiny for only $25, nor would Save the Children attract any sponsors if they didn’t think it was directly putting food on the table of a child in a poor country.  But, while these perceptions are not false, they are an idealized version of the truth.  Microfinance acknowledges the reality of the way poor people live and offers a way to marginally improve their condition, but this isn’t how most people understand it.  Should the microfinance community do a better job to educate people about what function they serve?  Probably.  But then it would risk losing its appeal and, consequently, its funding.  The “western idealization of entrepreneurship” sounds a lot cooler than smoothing consumption for a woman with two pigs and a vegetable farm.

The patronizing and asinine picture in Mr. Henderson’s article.

Still, Mr. Karnani’s criticism is misplaced and Mr. Henderson’s argument is flat-out wrong.  Perhaps this wouldn’t be such a bad thing, since people are wrong all the time.   But to suggest, as Mr. Henderson does, that “it hampers our ability to innovate high-impact poverty innovations” is troubling and destructive.  All that said, I will end on a high note.  It appears that Mr. Henderson has realized the errors of his ways and corrected himself in a comment on another blog:

Poverty interventions ought be designed to lift people out of poverty in the most efficient way possible. Indeed in the absence of stable employment, microfinance is a realistic intervention that has short-run, if not low ceiling, scalability.  Poverty alleviation is a multifaceted effort of which microfinance is undoubtedly an important part. My intent is not to argue for its exclusion, rather, we should accept it for its strengths and limitations.

Nice recovery, Dave.

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