One of the singular differences between textbook market conditions and the myriad of market imperfections which plague the poor is a chronic lack of financial capital. For Americans still reeling from the 2009 credit crunch, this observation will feel empathetically real.
In functioning markets, capital flows to its highest and best use. Risk and reward is measured to the single basis point. But where the poor live, capital is rare and expensive.
Overseas, the much-heralded microfinance movement was invented because mainstream banks -- historically and enthusiastically -- had ignored the poor. Domestically, it took federal legislation (the Community Reinvestment Act) to get bankers to pay minimal, if grudging, attention to the ghettos and barrios of America.
Enter Root Capital. Founded in Cambridge, Massachusetts by William "Willy" Foote, Root Capital is, well, think about a Small Business Administration (SBA) for the global economy. Oh wait, add that it is run with values and intelligence and, oh yes, efficiently.
Root Capital provides loans ranging from $25,000 to $1,000,000 to cooperatives and for-profit companies operating in developing countries throughout the world. Twenty-seven countries in Latin America, Africa and Southeast Asia have Root Capital-financed businesses.
Since its inception in 2002, Root Capital has lent over $100 million to some 200 overseas grassroots ventures, all of which are both "beneficial to the environment as well as to the working conditions and incomes of those who participate in the production process." Repayment rates are 99%, besting the repayment rates for every loan category in the U.S.
(Sidebar to the Obama Administration: Mr. Foote to head the SBA? You can interview him in person at this year's Opportunity Collaboration where he is a featured Delegate.)
A lesson learned from Root Capital is that the all-too facile and often preachy rhetoric about free markets and globalization overlooks the thorny, on-the-ground work that is needed to actually make markets work. Imaginary markets have failed the poor. Imaginary solutions will fail them too.
Linking local farmers with global markets is a Root Capital specialty. Coffee and cocoa from Latin America, nuts from Africa, cotton from India are current examples.
Hard details matter because they are the stuff of social entrepreneurship: Supply chains need seamless infrastructure financing; lines of credit based on future sales must be negotiated; illiterate -- yet productive -- farmers need financial literacy training; warehouses require capital; and so on.
In my experience, good hearted people want to end global poverty, but they want to do so effectively and potently, to be certain that their time and money is well utilized. While some programs or social investments have high administrative overhead, lack basic sustainable models or are insensitive to local conditions and needs, Root Capital creates profitable businesses for the poor.
Entrepreneurial capitalists and compassionate change agents alike can relate to the Root Capital social business model. Both should certainly support it.
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