If you have watched the PovertyCure DVD series or followed our blog for long, you have likely encountered an important issue called the “Missing Middle.” In his new book, Three Jobs: Bridging the Finance Gap for the Missing Middle, Chad Jordan reminds us of why small to medium enterprises (SMEs) are so key in leading developing countries out of poverty:
“SMEs are the universal building blocks of any economy. The United States is a prime example. Business Insider reports that 60-80% of new jobs in the U.S. come from small businesses [SMEs], and that 57% of the United States’ workforce is employed by small business with less than 500 employees. The biggest economy in the world is propped up by small business. Even further, research states that more than 51% [or higher] of the GDPs of so called “developed” countries are composed of SMEs, while only 16% of the GDPs of emerging nations are composed of SMEs.”
In other words, small to medium businesses are absolutely essential to creating robust employment levels in both developed and developing countries alike. The problem is that developing countries simply do not have enough SMEs to provide widespread employment and prosperity.
Why The Missing Middle Exists
After establishing why SMEs are so crucial to true economic development, Jordan explains why these same businesses cannot get access to the capital they need to scale and grow their enterprise. One big causation of the missing middle is the overemphasis on microfinance and the disregard for SME finance. Jordan states:
“What hasn’t received as much attention, however, is SME finance – it’s that sector wedged in between microfinance and full commercial access, i.e., the missing middle. As such, the sector’s banking capacity isn’t very developed – rates and collateral requirements are high while trust is low. Very few entrepreneurs in this missing middle finance gap can gain appropriate access to the growth capital they need, leaving them few options to scale.”
“That is why the missing middle is such a big problem. If an entire nation’s small businesses can’t access growth capital, the economy of that nation can never reach its potential, leaving the unemployment rates high, GDPs low, and small business stuck on a plateau.”
Arrow Global Capital’s Solution
With the problem firmly established, Jordan goes on in Three Jobs to describe how his organization, Arrow Global Capital, will seek to provide financing for the very companies who have the potential to produce the number of jobs that are desperately needed in the developing world. At risk of oversimplifying its promising model, Arrow acts as the bridge between philanthropic investors that possess capital, banks within developing nations, and “local accelerators” that train and identify the local entrepreneurs who are ready to scale. Jordan hopes that with access to previously unavailable capital, these enterprises will end up employing hundreds of people, not just a few as microloans commonly do.
Asking The Right Question
By targeting a key root of global poverty, lack of stable employment, Arrow is answering the question that should always be asked in the first place: How do we enable the material poor to create wealth for themselves, their families, and their communities? Arrow’s answer: Attack the problem of the missing middle by providing the previously inaccessible capital that will enable small to medium enterprises in developing nations that are primed and ready to grow and create the jobs the poor need and want. Solutions like these that recognize the creative capacities of people, are free of paternalism, rely on local partners for knowledge, and focus on employment, are the solutions that will truly transform the world.
Andrew Vanderput is the Strategy and Engagement Manager at PovertyCure, an initiative of the Acton Institute. Andrew comes from a diverse background in public policy, non-profits focused on international poverty, marketing, and consulting. He has long held a passion for promoting entrepreneurial solutions to poverty. He lives with his wife and two children in Grand Rapids, MI.