Last night I read a good piece in the interesting Aguanomics blog. It comes from a recent article related to "The Persistence of Poverty: Why the Economics of the Well-Off Can't Help the Poor" a book by Charles H. Karelis.

I found it thought-provoking and worth sharing with the NextBillion community: 

"When we're poor, Karelis argues, our economic worldview is shaped by deprivation, and we see the world around us not in terms of goods to be consumed but as problems to be alleviated. This is where the bee stings come in: A person with one bee sting is highly motivated to get it treated. But a person with multiple bee stings does not have much incentive to get one sting treated, because the others will still throb. The more of a painful or undesirable thing one has (i.e. the poorer one is) the less likely one is to do anything about any one problem. Poverty is less a matter of having few goods than having lots of problems."

"Poverty and wealth, by this logic, don't just fall along a continuum the way hot and cold or short and tall do. They are instead fundamentally different experiences, each working on the human psyche in its own way. At some point between the two, people stop thinking in terms of goods and start thinking in terms of problems, and that shift has enormous consequences. Perhaps because economists, by and large, are well-off, he suggests, they've failed to see the shift at all."

On my way to work I was thinking about the market-based approach to poverty alleviation discussed here in NextBillion, and whether or not it aims in the right direction when confronted with Karelis' "bee stings" metaphor.

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"What poor countries need most is not more microbusinesses. They need more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation."

These were the words of James Surowiecki last month in his New Yorker piece What Microloans Miss. Now another mass media hit for the SME cause - the Miami Herald interviewed Root Capital founder Willy Foote this week about the basics of his enterprise development organization.

Root Capital identifies and supports SMEs in countries where the private sector is dominated by micro-enterprises and large corporations. This structure represents a dearth of businesses in the investment range of roughly $100,000 - $3 million - the infamous "missing middle"

Willy, a key player in this space, believes that providing success stories of SME finance can help set off a rising tide of investment in this sector - very similar to the New Ventures approach. In his words: "...we can really do what microfinance did. That is, show local financial institutions that this is an asset class they can penetrate profitably."

Reading this, it occurred to me that this is already happening - take the case of Brazil, where in the past several years, a number of funds have sprung up focusing on SMEs in environmental sectors, including Axial Par, the Stratus VCIII fund, Rio Bravo Investimentos and a new fund to be launched soon by Rio Bravo veteran Luiz Maia.

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