Starved For Solutions: How Microfinance Can Smooth Consumption In A Hungry World

Last year, while headlines read of a fallen Wall Street and a crumbling Main Street, people in developing economies worldwide were being slowly pushed deeper into poverty and starvation. "Food riots" ensued as the price of staples wheat and corn spiked at three times their average price between 2002 and2004. And for the tenth year in a row, the world dipped into its grain stockpiles as global food consumption outstripped production.

According to experts, the food crisis that culminated last year and persists today has no quick fix. That is due to a web of seemingly irrevocable factors, the largest of which are population growth and global climate change. At current growth rates, we can expect the world population to soar to eight billion by 2025. That, combined with the drying out of many geographies due to rising global temperatures and drought, means that we should be prepared for a state of serious and long-lasting food shortage.

The economic effects of food scarcity and higher commodity prices is particularly acute for the world's poorest billion people, who typically spend anywhere from 50 to 70 percent of their income on food. Last year alone, an additional 75 million people slipped below the poverty threshold as a result of rising food prices. And while grain prices topped out in 2008 and have since fallen slightly, they remain higher than at any other point since 1990.

Microentrepreneurs, as both informal-sector consumers and business owners, are particularly attuned to the effects of dwindling commodity supplies and soaring prices. For the street-side vegetable vendor or the strolling Indian chai wallah, or food vendor, there are no government safety nets when prices rise and supply falls. They feel every bump and wrinkle in the local market that, for them, is completely without regulation and protection. Pura Rivera, a baker and microentrepreneur in Bolivia who is subject to the economic whims of the price of flour, struggles to both sell her products and provide for her family. "I'm worried about my children...their health, their studies, the economy. Everything is more expensive," she says.

The permanent solutions to the global food crisis - curb global warming, slow human population growth, reduce waste and use resources more efficiently - are all long term and do not provide immediate relief to those at the bottom of the economic pyramid. Microfinance, however, does help provide that relief. With access to microfinance services, low-income, informal-economy entrepreneurs, like Pura Rivera, are in a better position to absorb and manage the immediate shocks of fluctuating food prices. According to ACCION International, a nonprofit leader in the field, microfinance helps the entrepreneurial poor to build their capacity to address their economic vulnerabilities and smooth the resulting ups and downs in their businesses. Microfinance, the global movement to extend quality, affordable financial services to the world's poor, today assists anywhere from 50 to 100 million people around the world. In its most basic form, microfinance involves providing working-capital credit, or "microloans," to small-scale entrepreneurs in order to help them increase their productivity and sales, thereby increasing their household income. Increasingly, microfinance also includes a growing suite of additional financial services for the poor - including savings, insurance, housing loans and electronic banking services.

With a microloan, access to a secure savings account or even crop insurance, those who live and work at the base of the economic pyramid have a financial cushion when food prices spike. Increased financial security means that microfinance clients are less prone to spiral into a state of poverty and hunger when the price of a week's worth of food suddenly exceeds 50, 60 or even 70 percent of their income.

The core promise of microfinance - that with increased resources from microloans, the working poor can steadily build their enterprises and work their own way out of poverty - allows them to spend a smaller percentage of their weekly earnings on food, freeing more income for other essentials such as clothing, medical care and education. And increased income through a microfinance-supported enterprise can also free up other resources - often food resources - for the betterment of their families' health and well-being. This is the case with Dolores Vasquez and her son, Nicolas Vasquez, who used microloans as small as US$500 to build their estera-making (straw mat) microenterprise over the years. With increased profits from the business, Dolores and Nicolas now save for their own dinner table the food that they grow in small plots around their home in Otavalo, Ecuador. They no longer have to sell it at the local market.

In the coming decades, the world will struggle to feed its growing population and far-reaching solutions will be required from those working in natural resource management, agricultural development and macroeconomics. In the meantime, microfinance, with its millions of tiny transactions and everyday entrepreneurial accomplishments, has the capacity to help millions more of the world's people to feed their families.