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Banking on Growth

by Gayle Tzemach Lemmon
December 19, 2013

A seller sits near a stand of bananas in Lima, Peru, June 2010 (Courtesy Reuters/Mariana Bazo). A seller sits near a stand of bananas in Lima, Peru, June 2010 (Courtesy Reuters/Mariana Bazo).

I recently wrote a memo titled “Banking on Growth: U.S. Support for Small and Medium Sized Enterprises in Least-Developed Countries,” which argues that it is in the United States’ interest to invest in small and medium enterprises (SMEs) in the world’s toughest and poorest economies. Investing in such businesses has diplomatic and financial dividends: it would spur economic development, accelerate progress towards international health and education development goals, and boost stability in fragile economies — all of which furthers U.S. foreign policy goals.

According to the International Finance Corporation (IFC), small and growing businesses account for about 90 percent of businesses worldwide and contribute nearly 30  percent of formal GDP in lower-income countries. Accounting for more than 50 percent of employment globally, these enterprises are key drivers of job creation and market innovation, both of which strengthen economies in societies vulnerable to political and social instability.

Yet despite growing evidence that SME investment yields positive economic, development, and security benefits, the United States currently lacks the ability to deploy the full weight of its entrepreneurial knowhow on behalf of entrepreneurs and SME-owners. The Overseas Private Investment Corporation (OPIC) comes the closest to filling this role, but OPIC’s efforts are constrained: it has to work with a U.S. bank when investing in the private sector and cannot offer technical assistance or equity investments. An American development bank that expands and builds upon OPIC’s efforts would give the United States the flexibility to invest in SMEs abroad with fewer restrictions. And it could be done at no cost to taxpayers: for each of the last 36 years, OPIC has actually returned money to the government – most recently $426 million. Some of this money could be deployed to expand OPIC’s capabilities and scope.

In the memo, I suggest that the U.S. government do three things in order to effectively invest in SMEs and women entrepreneurs:

1. Invest in and create a new American development bank that would build on OPIC’s framework and provide a “one-stop shop” solution for entrepreneurs in lower-income countries.

2. Encourage the American development bank to invest in locally owned small businesses in order to demonstrate that the SME sector – which investors often view as high-risk – is vital to economic growth and stability. Women entrepreneurs would be a focus of such a development bank given the development benefits of investing in women.

3. Collaborate with others already supporting SMEs, including governments, civil society organizations, private sector entities, UN agencies, international NGOs, and other development finance institutions.

Women entrepreneurs would be a critical focus of the American development bank. There are around 8 to 10 million women-owned SMEs in the formal economies of emerging market countries, and millions more in the informal sector. Women face all the challenges of growing businesses in risky environments that men face, and more. Seen as high-risk clients, investors are usually reluctant provide women with access to the capital, networks, and support they need to build and expand their businesses. By serving women, an American development bank would help female entrepreneurs contribute more to local economies, and in the process help create more prosperous and financially secure communities.

The U.S. government stands to reap substantial gains from launching an American development bank that could invest directly in entrepreneurs in lower-income countries. Doing so would help the United States get far more from its aid dollars and address important national security risks associated with weak economies and unstable societies.

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