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Micro, small and medium enterprises are best antidote to poverty in Latin America and Caribbean, says IDB’s Iglesias

MILAN, Italy – The Inter-American Development Bank is expanding its efforts to support microenterprises and small and medium-size businesses in Latin America and the Caribbean as a means to foster sustainable economic growth, higher levels of employment and better living conditions, IDB President Enrique V. Iglesias said today.

“Microenterprises and small and medium-size businesses are the best antidote to poverty,” Iglesias said at the opening of a seminar on private sector development held ahead of the annual meeting of the IDB’s Board of Governors.

Small businesses contribute to poverty reduction by creating new jobs, adding value and increasing productivity in environments where economic opportunities are otherwise limited, he added at the event organized by the IDB’s Sustainable Development Department and sponsored by the Lombard government and the PROMOS agency of the Milan Chamber of Commerce.

As the leading source of multilateral lending for development in Latin America and the Caribbean, the IDB has provided more than $14 billion over the past decade to promote the development of these segments of the private sector, which account for two-thirds of all the jobs in the region and generate nearly half of its overall output.

Besides supplying loans to member countries to expand credit for micro, small and medium-size firms, the IDB is pursuing other strategies to enable these businesses to become more competitive and productive.

One of the areas in which it is working is the development of local partnerships and “clusters” that allow smaller firms to compete not only with their larger counterparts in their domestic markets but also with highly specialized and innovative competitors abroad.

Iglesias pointed out that Latin America and the Caribbean have much to learn from Italy – and particularly from the Lombard Region – on the development of networks of small and medium-size firms.

In his speech, PROMOS President Bruno Ermolli proposed the creation of a Milan-based Italian Agency for Latin America that would combine the efforts of this country’s public and private sectors in order to strengthen economic development ties with Latin America.

One of the new agency’s programs, he added, could be to provide on-the-job training for Latin American entrepreneurs and managers by placing them for short periods in small and medium-size firms in the Lombard Region.

As part of the seminar, Latin American participants on Thursday visited the nearby Brianza/Monza industrial district and see how its dynamic wood furniture cluster works to remain competitive, reduce transaction costs and gain more access to international markets.

Through its Multilateral Investment Fund, which was established in 1993 to promote private sector development in Latin America and the Caribbean, the IDB supports various business network and clusters projects in the region.

Two of those initiatives were showcased during the seminar in Milan, a cluster development project in the central Argentine province of Cordoba and an industrial districts development program in Brazil carried out by the Brazilian small and medium-size enterprise agency SEBRAE and PROMOS.

The IDB is also supporting a cluster development program in Panama and is preparing similar operations for El Salvador and the Dominican Republic.

Expanding Access to Financing

The seminar also looked at another critical issue for the development of micro, small and medium-size enterprises: providing these firms with greater access to financing, which is frequently identified as the single biggest obstacle facing Latin American and Caribbean entrepreneurs.

In his speech, Iglesias listed a series of persistent problems that prevent most countries in the region from creating the right conditions for small firms to obtain credit. Among the hurdles he mentioned the weakness of domestic financial systems, the red tape that pushes entrepreneurs into informality, the fickle enforcement of creditors’ rights by law courts and the “crowding out” effect of public sector borrowing.

The IDB is assisting member countries in their efforts to overcome many of these problems. “But perhaps the best thing we could achieve would be to persuade formal financial institutions that lending to small and medium-size firms can be good business,” Iglesias added.

A key element is the development of local capital markets to provide both savings opportunities for investors and resources for firms in need of financing. The IDB’s private sector window provides loans and guarantees to support the issuance of corporate securities that can be traded on local and international capital markets.

In Chile, for instance, the IDB recently provided a $75 million financial guarantee to back a $300 million bond denominated in Chilean pesos to finance a toll road. Besides creating deeper domestic financial systems, these activities can help mitigate the foreign exchange risk inherent in international project financing.

Support for Microenterprise

The IDB has been a leading supporter of microenterprise in Latin America and the Caribbean for nearly 25 years. Over that period this sector has matured and grown to the point where the region is at the forefront of the global movement to broaden the availability of financial and business services for the poor.

By investing in sustainable microfinance and microenterprise business services, the IDB and its many partners across the region are creating opportunities for millions of people to break out of poverty or weather the impact of economic crises.

Iglesias pointed out that microenterprise has become a stabilizing force in Latin America’s economies, making key contributions to employment, income and production, particularly during hard times.

The IDB has provided more than $800 million to microfinance and microenterprise-related projects over the years. During this decade, Iglesias said, the IDB’s main challenges will be to help raise microenterprise productivity and integration into the mainstream economy.

 

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