2. Problem and Issues
Lack of training has long been regarded - alongside financing problems - as one
of the main obstacles to the development of the small business sectors of
developing countries. Yet all attempts undertaken to date to overcome this
obstacle through development policy intervention have, to a greater or lesser
extent, failed to achieve their objective. Typically, the target group of
microentrepreneurs has shown little interest in taking advantage of the training
opportunities that have been offered, generally in combination with credit
programs. They have felt that having to pay for training courses is an
unreasonable imposition, like a form of taxation, and if they have attended such
classes at all, they have done so not in order to satisfy a real demand for training
on their part, but merely in order to qualify for a loan, reluctantly accepting the
training component as a necessary evil, an extraneous element which serves
merely to increase the opportunity costs of the loan.
However, the experience of a training voucher program for microenterprises
which is currently being implemented in Paraguay suggests that if previous
development policy measures failed to awaken the interest of
microentrepreneurs, it was because the approach they adopted was
inappropriate.
The Training Voucher Program works like this: The entrepreneurs obtain
vouchers in government offices, attend training courses of their choice, and pay
for the courses with the vouchers plus a contribution from their own pocket. The
only restriction on the entrepreneur's choice of training course is that it must be
provided by an institution which has been officially recognized by the program.
Once the training has been completed, the training institutions participating in
the program exchange the vouchers for cash.
In the first 24 months of operation, the program has enabled 15.171
microentrepreneurs to participate in a total of 1.313 training courses. Yet so far,
through the vouchers it has financed, the program has contributed a mere $
293.604 toward the cost of these courses. In other words, its costs have been
far lower than those incurred by other programs that have stimulated much less
real demand for the courses offered, courses which have obviously been less
appropriate to the microentrepreneurs’ needs. The outlook for the future is also
promising: not only are the microentrepreneurs showing a growing demand for
training, but also the training institutions are showing an increasing interest in
offering the product. An innovative product has been introduced into the market
which even holds the promise of becoming self-sustaining in the long run.
3. In view of this encouraging experience, it would seem useful to ask why the
Voucher Program is succeeding where so many other programs have failed. In
order to answer this question, let us start with a brief description of the basic
institutional characteristics of the program.
The institutional structure
The Ministry of Industry and Commerce (MIC) not only defines the main
parameters of the training products (number of hours per course, number of
participants, etc.) and selects the training institutions (Instituciones de
Capacitación - ICAPs) which take part in the program, but also distributes the
vouchers among the target-group enterprises and is in charge of organizing
quality control of the training courses by means of unannounced inspections
while classes are in progress and via surveys of the beneficiaries. Moreover,
when microentrepreneurs come to collect their vouchers, the Ministry provides
them with information on the courses available and a list of the participating
ICAPs together with some basic quality indicators such as the number of course
participants per ICAP and the number of "repeat customers" at each ICAP.
The MIC has set up a register of training institutions listing those ICAPs that are
interested in joining the program. This register remains open for new entries, and
announcements are regularly published inviting hitherto unlisted providers of
training services to apply for inclusion. This register is the first report ever to have
been compiled on the ICAPs of Paraguay. It contains information on 90
institutions, including a summary of the origins of the institutions and the
qualifications of their staff. There are no restrictions on access: any individual or
institution may consult it, either in the form of a printed copy or via electronic
media.
Selection of ICAPs for participation in the program is based on the extent of their
experience in the provision of small and microenterprise training - not less than
one year - and on the presentation of a provisional program outlining course
contents, methodologies and schedules tailored to the requirements of micro
enterprises, as well the credentials of the staff who will execute the program.
Selected ICAPs sign a participation agreement with the MIC which lays down
certain parameters for the training courses. Thus, for example, the courses
should cover business management skills or production-related aspects, should
consist of at least 15 hours of instruction and should involve classes of no more
than 25 participants.
The MIC is also responsible for monitoring whether the program resources
actually reach the target group. Its monitoring activities consist of regular visits
4. to the beneficiaries' enterprises. To date, one year after the launch of the
program, almost no irregularities have come to light, and those cases that have
been uncovered have served to improve the efficiency of the voucher distribution
system.
The training vouchers are obtained at the central and regional offices of the MIC.
The particulars of the entrepreneur and his or her enterprise are recorded in a
file which is stored in the training voucher register. The file has the status of a
legally binding declaration, and is signed by the entrepreneur.
ICAPs which have admitted beneficiaries of the program to their training courses
present the vouchers to the Ministry, which exchanges them for an equivalent
amount of money. The program exchanges vouchers only after the course is
over and only in those cases where the participants attended more than 75% of
the classes. Needless to say, vouchers are not exchanged unless used at one
of the institutions participating in the program to pay for a course that was
previously approved by the MIC.
The Specific Features of the Market for Micro Entrepreneurial Training
The key to understanding the success of the Voucher Program lies in the special
features of the market for training directed at small and microentrepreneurs,
features which were taken into account when designing the Voucher Program
but which earlier programs failed to consider.
External effects and the need for subsidies
The market for microentrepreneurial training is a segment of the overall market
for training. For a long time now, economic theory has argued that in order to
achieve a socially optimal supply of training to the population, it is not sufficient
to rely on market forces to act like some invisible hand, coordinating the
distribution of this good.
The main argument put forward by economic theory to demonstrate the failure
of the training market runs as follows: Training is a good with positive external
effects. The training of an individual has positive effects not only for the individual
himself, e.g. in the form of opportunities to increase his future income, but also
for the population as a whole, given that the general level of training is one of the
most important factors determining the economic and social development of a
country. The individual "purchaser" of training will be willing to invest only as
much in his training as would seem justifiable in terms of the return to him
personally. Therefore, if it is left to the free play of market forces to determine the
level of investment in training, there is likely to be underinvestment in training.
5. Thus, in order to prevent a training deficit, the state must intervene in the training
sector. State subsidization of training is necessary, and indeed is provided in
almost every country in the world to a greater or lesser extent. State subsidies in
training become all the more important, the greater its positive external effects,
or social benefits, are by comparison with the private benefits to the trainee.
However, the "external effects" argument is doubtless not sufficient in itself to
adequately describe the specific nature of the market for microenterprise training
and to evaluate the design of programs aimed at promoting such training. After
all, both the voucher program currently being executed and the program designs
that used to be in favor contain a subsidy component. In other words, the crucial
point would seem to be not whether training is subsidized, but rather how it is
subsidized. One therefore needs to take a second look at the market for
microentrepreneurial training in order to identify the reason for the success of the
Voucher Program.
Quality problems, adverse selection and the control mechanisms of the
market
In addition to the "external effects" argument, recent economic theory has
highlighted a further problem which explains the functional weaknesses of the
training market: A potential purchaser of the commodity "training" finds it
extremely difficult to gauge its quality in advance. Training is an "experience
good", whose merits do not become apparent to the trainee until after he or she
has consumed the good and is able to apply the newly acquired knowledge in a
successful manner. Glossy brochures proclaiming the benefits of this or that
training program cannot therefore entirely overcome the informational deficit of
the consumer: after all, anyone can make promises they will not necessarily be
able or willing to keep. In the free market, however, no provider of training would
be willing to allow a customer to delay payment of his course fees until after the
course has been completed to his satisfaction. In that case, what would force the
trainee to fulfill his promise of payment? After all, he has already received what
he wanted to acquire, and therefore has a strong incentive to refuse payment on
the grounds of dissatisfaction, regardless of how satisfied he really was with the
service provided. Therefore, the only workable system is to charge fees up front.
However, the potential consumer of training will only agree to pay if the risk of
buying a "pig in a poke" is offset by a sufficiently low price. The need to keep
prices low, however, forces the providers of training to minimize their costs. Thus
the programs they compile are indeed of poor quality, taught by insufficiently
qualified and ill-prepared staff, using inadequate teaching materials, etc., and
therefore merely serve to confirm the consumer's preconception. In other words,
the informational problems which characterize the training market render an
adverse selection process likely, and in extreme cases this can lead to the total
breakdown of the training market. Therefore - like the external effects problem -
the informational problem, namely that neither can the providers of training
6. credibly demonstrate the quality of their services in advance, nor can the trainee
credibly demonstrate his willingness to pay a fair price for those services after
having received them, also leads to underinvestment in training. This is the
problem which the state is compelled to address.
However, subsidies are not necessarily a panacea for market failure due to
informational problems. To be sure, subsidies can induce a provider to offer a
training program even though customers exhibit insufficient willingness to pay for
it. But what is to prevent a subsidized provider from offering poor quality for good
money? After all, if he knows that his remuneration will stay the same, he also
knows that keeping costs down to a minimum will maximize his profit. This is why
the quality control that must accompany a program of subsidies has such a
crucial role to play in making it work. And it is precisely in its use of superior
control mechanisms that the current Voucher Program distinguishes itself from
traditional programs.
For one thing, only those institutions are permitted to participate - i.e. to accept
vouchers in payment for training - which have received a "seal of quality" from
the operator of the program. Granted, traditional training programs could also
claim to apply this kind of quality control, and indeed many of them provided the
training themselves. Yet what was missing in those cases was quality control via
the market, which the Voucher Program activates in a twofold sense:
- First, the institutions are not entitled to submit the vouchers to the
program for exchange into cash until the customer has completely finished the
course. Yet the trainee will only continue to attend the course if he or she is
satisfied with the service provided. Instead of the principle of compulsory
attendance, which traditional programs usually enforced by making participation
in the training scheme a precondition for access to loans, the Voucher Program
operates on the basis of voluntary decisions by the consumers. This in turn
compels the providers of training to be responsive to the needs of their clients
and to satisfy those needs, otherwise they run the risk that their course
participants may drop out, in which case they would forfeit the value of the
vouchers. Whereas the providers of training would incur a "default risk" if
individual consumers were to promise to pay after receipt of services, no such
risk exists within the voucher system because the Program itself guarantees that
the voucher will be exchanged for cash, conditional only on the actual provision
of the service. Thus, the design of the Voucher Program succeeds in providing
support at precisely the points where the market needs help in order to function
properly. The control mechanism of ex post payment can be introduced without
imposing an intolerable burden on the providers because payment is covered by
a government guarantee. Yet at the same time, control is largely exercised by
those who are best able to do so, namely those who attend the courses, the
consumers themselves. It would be very difficult for such broad based and
7. "expert" control to be achieved by a centralized watchdog, which would at best
be able to conduct spot checks.
- Second, the Voucher Program - again, as distinct from traditional
programs - uses competition between providers in the training market as a
control mechanism. The potential consumers of training are free to decide for
themselves which of the authorized training institutions to enroll at, and which
courses to use their vouchers to pay for. Therefore, each training institution has
an incentive to distinguish itself from its competitors in order to attract as many
customers as possible. Providers will do their best not to make empty promises,
not only because their clients would drop out midway through the course if they
did, but also because they hope that recommendations from satisfied customers
will bring them future business. In other words, the Voucher Program is more
than mere subsidization in the narrow sense of the term; rather, its function is to
"prime the pump" for the creation of a market based on selection through
competition.
The design of traditional programs tended to undermine rather than activate
these decentralized, market-based mechanisms for control and regulation, and
this in turn had disastrous consequences, not least because of one further
characteristic of small enterprise training.
Problems of standardizing microenterprise training curricula, and the role of
demand as a means of controlling supply
Inadequate know-how has frequently been cited as an obstacle to the
development of microenterprises. However, there is scant information on
precisely what kind of additional knowledge small entrepreneurs require in order
to operate more successfully.
Traditional training programs, which were offered in conjunction with credit
programs, appeared to be based on the assumption that, above all,
microentrepreneurs lacked bookkeeping skills. This was clearly accurate in the
sense that only a small percentage of the microentrepreneurs who applied for a
loan were able to present a record of their business transactions kept in the
manner of an orderly merchant, let alone a balance sheet or a profit and loss
statement. And it is perfectly understandable that the operators of credit
programs, as the future creditors, had an interest in reducing this particular deficit
of expertise. However, the fact that the training courses met with an
unenthusiastic response from the target group gives cause to at least doubt
whether the microentrepreneurs themselves perceived this as the area in which
training was most urgently needed. From their point of view, these courses
primarily meant an additional expenditure of time; yet they felt that the creditor
was the main beneficiary of their efforts. Small wonder, then, that the
microentrepreneurs only paid a contribution toward the cost of the training
8. because they were forced to do so as part of the interest rate they paid on the
loan.
The picture was not much better in those courses which focused on imparting
technical skills, a particularly popular component of development aid programs
in the 1970s. Here too, the design of the programs seems to have been based
not so much on the desires of the potential consumers of training, but rather on
development policy-makers' dreams of rapid industrialization. As we now know,
injections of capital for the purpose of developing industry, flanked by
protectionist economic policies, failed to achieve the desired results, and in the
light of this experience it is not difficult to understand why training programs
designed with this vision in mind had little in common with the real needs of the
small entrepreneurs. Instead of offering practical training ("capacitación") in the
strict sense of the term, it would be more accurate to describe these programs
as having consisted of a broader technical education ("formación") in modular
form, the curricula of which were only suitable for persons who would later take
up positions in large-scale industry. As a consequence of the fact that the
courses were in fact excerpts from an advanced technical education, rather than
job-specific training, the examples used to transmit skills were foreign to the
everyday reality of the microentrepreneurs. Moreover, the organizational
framework of the courses took no account of the preferences of adults in full-time
occupation: for example, they were too long and were scheduled at an
inconvenient time of day. As a result, only a negligibly small number of
microentrepreneurs were able to capitalize on technical “training” in any truly
meaningful sense. The vast majority of small entrepreneurs had no profitable use
for it, and were therefore not willing to take part in such courses, especially if
they had to pay for them.
So what kind of training programs do microentrepreneurs really need in order to
improve their business results? There would seem to be no simple, uniform,
precise answer to this question - the needs of small businesspeople are probably
just as diverse as the lines of business they are engaged in. This assumption is
confirmed by recently conducted surveys of microentrepreneurs' training
requirements. The evidence from these studies covering several Latin American
countries[1] indicates that microentrepreneurs exhibit a demand profile with the
following characteristics:
a) a desire to update or enhance methods and skills acquired through
practical experience (as opposed to formal "training") by persons whose working
profiles are broad in terms of the range of different functions they perform but
relatively shallow in terms of the knowledge and skills required.
b) the type of training required will vary, and its mode of delivery needs to
take account of the time constraints faced by members of the target group and
the absence of internal training in their enterprises, as well as the low level of
9. previous training their workers have received, and the problems they encounter
in assimilating knowledge in conventional classroom-type situations. The
preferred form of training product will thus be short in duration, narrowly defined
and oriented to concrete problem-solving; it is conducted outside working hours,
and generally, off-site, although one should not rule out the possibility of a
demand for practical training of this kind in the entrepreneur's workshop.
The breakdown of course participation in the context of the Voucher Program
shows the following pattern of preferences: 45% of the courses so far attended
by voucher recipients were on topics related to catering, while 27% dealt with
accounting, management and marketing skills. A further 21% covered electrical
work and electronics, and the remaining 7% taught aspects of hairdressing,
cosmetics and associated subjects. It should be noted that all of the courses
were very narrow in scope, in that the participants were given instruction on, say,
how to prepare a particular dish, how to carry out a certain type of electrical
repair, or how to execute a specific hairstyle.
The overall conclusion that emerges from all these surveys is that there is no
such thing as the ideal training program for microentrepreneurs because the
content of microentrepreneurial training is, by its very nature, extremely difficult
to standardize. For precisely this reason, the Voucher Program makes no
attempt to design a "tailor-made" training program for microentrepreneurs, which
would presumably be doomed to failure, just as so many ostensibly need-
oriented programs failed in the past. Instead, the Voucher Program leaves it up
to the free play of supply and demand in the marketplace to find an answer, or
indeed many different answers to the question of what kind of training
microentrepreneurs need. The potential consumers receive a voucher which
they can spend at the training institution that best serves their requirements. The
training institutions, for their part, have an incentive to ascertain what these
requirements might be, since they want to attract small entrepreneurs as
customers. Thus, even though the program represents a form of subsidy, it does
not undermine the power of demand to govern supply, i.e. the principle whereby
each individual feeds information into the market by his decision to buy this or
that product. This would not be possible if the supply side were directly
subsidized, as is typically the case in traditional training programs, because then
it would be the provider of subsidies that would determine which training courses
would be promoted through subsidization, and thus, by implication, would be
presuming to know what the target group requires. Not only does this approach
fail to utilize the information which is present in decentralized form, namely as
unexpressed demand on the part of potential consumers; it also ignores the fact
that, contrary to what used to be believed, small entrepreneurs are indeed able
and willing to pay a contribution toward the costs of training out of their own
funds, provided that their training requirements are actually met.
10. The Voucher Program succeeds in mobilizing at least a part of the consumers'
purchasing power. The microentrepreneurs voluntarily cover roughly 56% of the
cost of the training course of their choice. And by making their choice, they
demonstrate what their true preferences are.
Outlook
The Voucher Program is successful. Interest in it is growing, both among the
training institutions in the Paraguayan market, and among the
microentrepreneurs, despite the fact that they have to bear half of the costs
themselves. The possibility cannot be ruled out that the small entrepreneurs will
be willing to pay an even higher percentage of the costs, particularly once the
training institutions have built up a reputation based on personal
recommendations. After all, the experience of attending truly useful courses is
likely to awaken the unrecognized needs of the microentrepreneurs, and this in
turn will increase the likelihood of these needs being translated into real demand.
Thus, it may even be possible to significantly reduce the degree of subsidy in the
long run because the private benefits which the microentrepreneurs derive from
their training will be sufficient to sustain the market with little external support.
Yet regardless of whether or not this will actually occur, the Voucher Program
has already demonstrated that even if subsidized programs are necessary to
ensure an adequate supply of training, market forces should not be forgotten.
Instead of undermining market mechanisms, subsidized programs should be
designed in such a way as to activate the market forces that are present in latent
form. Enabling the target group, the consumers of training, to channel the
subsidies by means of vouchers, is a program design which satisfies this
condition. Indeed it could prove to be a path-breaking scheme, with implications
that may extend far beyond the area of microenterprise training. In other words,
it may be possible to apply the lessons learned here to other training products.
More analysis will be needed, however, before we can determine precisely to
what extent, and under which conditions, this may be so.
* Forthcoming in the special IDB edition of Small Enterprise Development on
Best Practices in Business Development Services.
** The authors are consultants of Grupo de Asesoría Multidisciplinaria
(GAMA), Uruguay, and Internationale Projekt Consult (IPC), Germany, who are
responsible for implementing the Voucher Program in Paraguay on behalf of IDB.
11. [1] These studies were conducted by IPC and GAMA consultants in the
education and training sector in Nicaragua, Guatemala, Colombia, Bolivia, Chile,
Paraguay and Uruguay.
