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Where do Jobs come from?

James Surowiecki has an excellent article on “What Microloans Miss” in the New Yorker that not only sheds light on the limits of microloans in aiding impoverished nations, but also targets the primary catalyst for job growth, “small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation.”

Surowieki continues:

In high-income countries, these companies create more than sixty per cent of all jobs, but in the developing world they’re relatively rare, thanks to a lack of institutions able to provide them with the capital they need.”

It’s easy for really big companies in poor countries to tap the markets for funding, and now, because of microfinance, it’s possible for really small enterprises to get money, too. But the companies in between find it hard. It’s a phenomenon that has been dubbed the “missing middle.”

The problem is a dearth not just of lenders but also of people willing to buy an ownership stake in companies, like the angel investors and venture capitalists that American entrepreneurs often rely on.

Supplying the missing middle will require backers who want to invest in companies rather than just lend to them.

Surowieki isn’t critical of microfinance and it’s ability to do a great deal of economic and social good on the microlevel, “but the overselling of their promise has made us neglect the enterprises that could be real engines of macromagic.”

Nobel Prize winner and father of microfinance Muhammad Yunus once stated, “All people are entrepreneurs.”

But thinking that everyone is, and should be, an entrepreneur leads us to underrate the virtues of larger businesses and of the income that a steady job can provide. To be sure, for some people the best route out of poverty will be a bank loan. But for most it’s going to be something much simpler: a regular paycheck.

Development on the macrolevel will demand more than microloans, it will demand actual investment in small and middle-sized business. A lesson for job creation both abroad and at home.

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Filed under: Economic Policy

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