Challenges for Microenterprise: The Informal Economy

By Tavis Hester on January 25, 2018 | Print

Chances are, no matter where you are, you are very close to some form of microenterprise.

In the U.S., microenterprises are home based businesses and services. Millions of people support their families or supplement their income operating these types of businesses. In countries around the globe, microenterprises operate from vibrant booths in street markets,  from windows in homes and stalls beside highways. Microenterprises operate in rich urban areas, rural village settings, sprawling slums and even along the paths that masses of refugees travel each day. Microenterprises produce, distribute, transport and maintain goods and provide services that we all benefit from, but few think about much.

Most of us would agree that operating a small business in the U.S. or other developed country is a difficult challenge and requires a good idea, capital, diligence, intelligence, critical thinking, solid decision making and some really good timing. In an underdeveloped country, we need one more item added to our list of requirements… a miracle.

In the following article, I will outline some of the challenges that microenterprises face. These challenges become root causes of underdevelopment, unemployment, poverty and ongoing cycles of intense struggle.

Over the years I’ve met many people interested in helping microenterprises. When I ask these people about their goals, the response typically sounds something like, “I want to help others make more money.”  The intention is always meant to be helpful and caring but unfortunately the situation is often much more complicated.

I have always taken for granted that I was born and exist in a very formal economic system. I have a financial history tied to my social security number, the ability to open and close bank accounts easily, and, with a little effort, I can register and hold title on property. I am protected by rule of law, and in the great state of Texas (where I live) our government favors business through beneficial tax structures. To legally start a business in Texas, it only takes hours: schedule an appointment with a lawyer, fill out some paperwork, and with the push of a button, voila, a new company is born.

Most microenterprises in underdeveloped countries exist in an informal economy. Simply meaning, as far as the government is concerned, they don’t exist at all. The simple process I describe above doesn’t exist either. Rather, the process is long and expensive. For many microentrepreneurs the trip to register the business alone is difficult; it requires traveling to the capital, waiting in line, and doing so again and again to complete multiple steps, meaning multiple trips. Companies that exist only informally can’t bank, operate lines of credit, or own property. Everything has to simply work on a day to day basis. Long term planning becomes nothing more than a far fetched dream, leaving microenterprises at risk of being wrecked by simple problems. A common cold, a funeral, a wedding, or any number of disruptive events can have major implications for the microentrepreneur in an underdeveloped economy.  

A common cold, a funeral, a wedding, or any number of disruptive events can have major implications for the microentrepreneur in an underdeveloped economy. Click To Tweet

When microbusinesses do begin to succeed and profits start coming in, isolation from banking services often force the entrepreneur to make difficult decisions regarding what to do with their hard earned money.

Many times, I have seen microbusiness operators conclude the best apparent route is to invest in some type of hard good or asset that could be liquidated at a future date if needed. Unfortunately, these assets depreciate quickly and the value the asset is meant to hold is quickly lost. An immediate need will present itself, and a desperate need for cash will cause the entrepreneur to sell the asset fast at a price much lower than the actual value of the good. Thus, the original value created by the microbusiness is devoured by a life event that could have easily been navigated with access to a simple savings account.

When we begin to peel back the layers of challenges that microenterprises face in underdeveloped economies, we can begin to see that our noble intention “to help them make more money” is often insufficient to address the root systemic causes of economic poverty.  In the next article we will consider a few more of the difficulties facing those working to rise from poverty and how we can come along side and turn our good intentions into helpful behaviors.

 

Travis Hester serves as Microenterprise and Microfinance Consultant for Baptist Global Response. Travis’s work seeks to encourage entrepreneurship and trade as a means of poverty alleviation and economic development.

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