Missing Middle of Economies
Cited in the 2015 award-winning documentary “Poverty, Inc.,” the “missing middle of economies” refers to the theory that a gap of “small and medium enterprises” in developing nations prevents economic prosperity.

The Harvard Kennedy School’s Center for International Development is studying this issue to develop solutions that could lead these countries out of foreign aid dependency and into an environment that encourages local entrepreneurship and development.

World Bank Group databases suggest that small and medium enterprises (SMEs) “are responsible for 50 percent of GDP and over 60 percent of employment” in higher-income nations. Rates are “less than half of that” in developing, low-income countries, a fact that indicates major hurdles to economic autonomy and prosperity.

While small and large businesses may profit in low-income countries, the missing middle of economies produces roadblocks to development that keep countries dependent on foreign aid.

In a 2006 study published in Elsevier’s Journal of Financial Economics, researchers highlighted the challenges local entrepreneurs face with “entry costs” or “entry regulation.” They concluded that “entry regulations hamper entry,” an effect that is heightened in developing countries.

Harvard Kennedy School’s Asim Kwaja is a professor of public policy and principle investor in the Entrepreneurial Finance Lab Research Initiative, a pilot program designed to open entrepreneurial opportunities in developing African markets. Kwaja mentioned a “frustration” he has experienced throughout his career.

“There is a perceived massive cost, a political cost,” Kwaja said, for developing nations’ governments to set policy for local entrepreneurship. Tax codes and permit requirements, among other regulations, ultimately stymie development.

The Entrepreneurial Finance Lab Research Initiative investors have tested their model in seven countries, trying its ability “to stimulate entrepreneurship, access to finance and economic growth across the developing world.” Kwaja looks to change the “little perception of any returns” by encouraging policy reforms to stimulate the growth of SMEs.

On top of regulatory obstacles, local entrepreneurs face competition from low-cost (or no-cost) foreign aid suppliers like NGOs and non-profits.

Michael Matheson Miller, director-producer of “Poverty, Inc.,” holds graduate degrees in international development, philosophy and international business. He is a fellow at the Action Institute, a non-profit organization that aims to promote “a free and virtuous society.”

“Poor people are not poor primary because they lack stuff,” Miller said in a radio interview in May 2016. He asserted that the world’s poor lack the political liberties and economic opportunities they need to prosper.

“Poverty, Inc.” highlights the way unpredictable influxes of foreign aid mire economic opportunism. While most charitable giving is motivated by altruistic intentions, Miller stated that non-profits, NGOs and even foreign governments treat the poor as “objects” rather than “subjects and the protagonists of their own story of development.”

The missing middle of economies engenders a need for more strategic coordination to help developing countries gain a chance at economic prosperity.

Tim Devine

Photo: Flickr