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Testimony Ben Powell
Agora Partnerships
House Committee on Foreign Affairs
Subcommittee on the Western Hemisphere
Hearing on Poverty and Inequality in the Americas: The Unaddressed Problem
March 28, 2007

Introduction

My name is Ben Powell and I am the co-founder and Managing Partner of Agora Partnerships, a US non-profit dedicated to helping entrepreneurs create jobs in Central America - specifically in Nicaragua, where we have been operating for nearly two years.

I have BA from Haverford College, a Masters in International Affairs from Georgetown University and an MBA from Columbia Business School. I started a successful small business in Puebla, Mexico that helped me understand the importance of entrepreneurship as an effective weapon to reduce poverty and inspired me to co-found Agora.

My co-founder is a Nicaraguan entrepreneur, also educated at Georgetown, who established, among other things, the Nicaraguan Association of Young Entrepreneurs. Together with our staff in Managua, we have worked with 27 start-up businesses in Nicaragua to understand, from a very practical and hands-on perspective, how to help entrepreneurs create successful companies.

Summary of main points

My remarks today will focus on the role of entrepreneurship in addressing poverty and inequality in the Americas. I speak from our experience in Nicaragua, but I believe many of the problems entrepreneurs face there exist across the region. With that in mind, there are three major points I'd like to discuss with you today.

The first point is that small business entrepreneurs, those with between a few to a hundred employees, play a key role in reducing poverty and creating wealth in poor countries. These entrepreneurs run the businesses that drive broad-based growth and help their countries compete in a globalized world. They create the jobs that help sustain a middle class that values democracy and fights for the education of their children. Understanding how to help the individual, small-scale entrepreneur play a larger role in his or her community is the first step toward fighting poverty and reducing inequality.

The second point is that these same entrepreneurs encounter almost insurmountable barriers to success. Understanding, and more importantly, addressing these economic, cultural, and psychological barriers is critical for entrepreneurship to flourish. This is our mission at Agora Partnerships.

The third point is that we live at a time of unprecedented activity and innovation in the development field. There are many organizations with fresh approaches working to help entrepreneurs overcome the odds. I believe policymakers should strive to understand and support these efforts.

Entrepreneurship and Development

The roots of poverty are extremely complex. In most cases, however, it can be boiled down to this: poor countries do not generate enough jobs to create wealth. Unequal access to education and healthcare compounds the problem. In Nicaragua, the second poorest country in the hemisphere, nearly half the country is unemployed or underemployed and 70% of its people are under the age of 30. The country has the highest Gini coefficient -- a measure of income inequality - in Latin America and needs to generate 60,000 jobs a year just to maintain current employment levels. So how will Nicaragua and countries like it create those jobs and the millions more needed to alleviate poverty?

The success stories of the last 50 years - Taiwan, Singapore, Chile -- all have a few things in common. They invested in education. They also supported businesses that leveraged their competitive or comparative advantage. With a more highly educated labor force, they soon created businesses higher and higher on the value chain, capturing increasingly more of the economic value they generated. In short, these countries found a way to unleash the potential of their most powerful natural resource - their people.

Business drives development, but people drive businesses. Let me define exactly the sort of entrepreneur I believe we need to support in very poor countries. It is someone who is passionate about his or her business and who understands the transformative role that business can play in a community. It is someone with the managerial and leadership potential to lead a team, adapt as necessary to the demands of a competitive global marketplace, or provide a needed product to an underserved local market. Most importantly, it is someone who has vision - and the potential and the will to realize that vision. These entrepreneurs exist - they are all across Latin America. They have the power to change their countries. I'll give you three examples.

• Santos Reyes fled to Honduras during the Nicaraguan civil war, taught himself to read by candlelight, and started in business as a shoe shiner. Today he owns a small shoemaking company employing 15 people. A widower with two children, he uses all of his profits to pay for private school for his daughters, one of whom dreams of going to Harvard Medical School. Santos wants to make better quality, more profitable shoes. He has the potential to employ 100 people and serve as a role model.
• Meylin Ortiz and Olga Lumbi process fresh fruit into all-natural baby food, a product that is not locally produced in Nicaragua. They are currently selling small quantities but want to sell to local orphanages that are not always able to provide a nutritious meal to the children. They have poured all their savings into the business, including money they won in a local business plan competition.
• Carlos Fernando Solórzano, all of 24 years old, takes fruits and vegetables, cleans, cuts, and packages them and sells them to hotels and restaurants. His company buys the vegetables from local women farmers whose families rely on him for their income. If he is successful, he can export throughout all Central America, and maybe even to the US, creating desperately needed jobs in the agricultural sector. Like Olga and Meylin, Carlos is adding-value in the country rather than simply exporting raw materials.

These entrepreneurs have two things in common. First, they have the capacity to add social and economic value to their communities. By social value, I mean things like sustainable employment creation, developing products and services that help the poor, and helping to create a desperately needed entrepreneurial middle class. History has shown that such a middle class is the glue of democratic capitalism. By economic value I mean paying taxes, generating exports or substituting imports, and returning capital to investors with a profit, thereby mobilizing additional investment. These entrepreneurs will do more than take the edge off of extreme poverty. They will create wealth.

The second thing these entrepreneurs have in common is that despite being on the front lines in the battle against poverty, there are few resources today to help them. The barriers against their success are so high that most of these entrepreneurs, without the right kind of support and financing, will fail.

Barriers to Entrepreneurship

Our experience in Nicaragua has convinced us there are four main barriers that prevent new businesses from developing. Understanding them is critical to understanding the problems of poverty and inequality.

1. Entry. Closed social and business networks and a lack of role models limit ambition and prevent many potential entrepreneurs from starting a business. Few people have an entrepreneurial mindset. Being unable to imagine success, they don't try.

2. Education: A lack of business education and management experience make it hard for entrepreneurs to identify true opportunity or to pitch their idea to potential investors.

3. Financing: High interest rates, large collateral requirements and a virtually non-existent capital market severely restrict access to financing for early stage ventures. Despite increased competition and regionalization in the banking sector, the type of long term capital needed to finance growth is largely unavailable to the small scale entrepreneur looking for anywhere between $20,000 to $500,000.

4. Execution. Most businesses fail at the level of execution. Lack of business support resources and insufficient management experience make it difficult to sustain a new venture. Lack of working capital leaves no margin for management error or a sudden downturn.

Add to these barriers negative cultural attitudes toward risk and failure, weak political institutions, and the general absence of trust among members of society and it is no surprise that so few jobs and new businesses are created in Nicaragua

New Approaches to Development

The effect of these barriers is endemic poverty, economic and social inequality, and most discouraging of all, severely limited possibilities for too many people in our hemisphere. The squandering of human potential in the developing world is a huge problem. It should not be tolerated.

So what can be done? Traditional aid has tended to focus on large infrastructure projects or on improving the regulatory and legal enabling environment - two important goals that are also often derailed by lack of political will and corruption, and that have for the most part not helped the poor. Microfinance programs have done an excellent job helping extremely poor entrepreneurs gain self-sufficiency and increasing the societal power of women -- and therefore children. But microfinance is usually not appropriate for entrepreneurs operating in the formal economy who need long term financing to grow. In fact, there are very few dollars that target the small, formal economy entrepreneur. They exist in a development blind spot. Too big for microfinance, too small for the capital markets, these entrepreneurs are already known in development circles as the missing middle. We cannot afford to have these entrepreneurs missing. They need to be helping their countries get out of poverty.

Despite the magnitude of the challenge, we live in a time of extraordinary innovation in the field of development and development finance. Today, there are a number of organizations that work directly to help new businesses succeed in poor countries. These organizations are impatient with the pace of poverty reduction and realize that at times a social problem requires a market solution. Just last month, over 25 organizations met at the Aspen Institute's Wye River Plantation in Maryland to launch the Private Sector in Development Initiative. Investors, foundations, and capacity building organizations like TechnoServe, Acumen Fund, Ashoka, Endeavor and E&Co, as well as many others, are now coming together to work on market-based solutions. I believe many of the solutions to poverty and inequality in the next 10 years will come from the innovation and risk taking among this new generation of organizations and investors. International financial institutions wield enormous resources that should be used to help seed new development models and take successful ones to scale.

The Agora Partnerships Model

To give you an example of the sort of innovation and risk taking I am talking about, let me tell you Agora Partnerships' strategy to overcome the barriers to entrepreneurship.

First, we address the barrier of entry by going through civil society institutions - universities, local business plan competitions - to find entrepreneurs with vision, integrity, and leadership potential who want to create or expand a socially responsible business.

We then match them with teams of MBA and international affairs graduate students who travel to Nicaragua to consult with them on specific business issues and to educate them about how to attract investment.

For our most promising entrepreneurs, we provide access to long term financing through debt and equity at market rates, with structuring that allows the company to grow rapidly in the first critical years. We want to prove that investing in small entrepreneurs in Nicaragua not only helps alleviate poverty, but is sustainable. Entrepreneurs are our partners in development - they need investment, not charity.

Finally, we provide strategic consulting, leadership development, and other services to entrepreneurs to help them implement their business plan. By opening our network of students and business professionals and putting it in the service of entrepreneurs, we hope to create a modern day market place - or agora -- where people from the north and south can come together to help create jobs in areas that desperately need them.

The goal is to dramatically and permanently improve the entrepreneurial climate in Nicaragua and later in other countries where a small amount of support can generate enormous long-term gains. More than simply creating jobs, we want to work with our partners to create a flourishing entrepreneurial culture and a functioning investor market where innovation can be nourished, financed and helped to succeed. This is our approach, but it is only one of many new ways to use markets and businesses to tackle poverty.

Conclusion

As you think about how to allocate US government resources to help address the topic of this hearing, ask yourself: Will the policy help the region's emerging entrepreneurs create sustainable businesses? Will it facilitate the right kind of investment in these entrepreneurs and give them the tools and education they need to compete globally? Will it help them innovate and access new markets with value-added products and services? Will it help them to show that success in business is due to hard work and a good idea, and not to corruption or power? Will it create powerful role models and success stories that inspire a younger generation of entrepreneurs? Is it scalable and capable of changing an entire system? These are the questions we should be asking and answering - even if it means taking risks and failing. These are the questions that will help make investment in the region successful at reducing poverty and inequality. The best business schools and the best leaders in Latin America are asking these questions. We should listen to them, and help them find the answers.

In our own country we believe in human potential - in giving people access to opportunity so people can realize their dreams. This insight is universal and applies equally to Latin America. Our point of view is that developing world entrepreneurs must be given the opportunity to realize their potential to become change agents in their communities. They are ready and willing to roll up their sleeves, and they are looking for partners.