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An interesting debate about the efficacy of microfinance has been going on lately, pitting development experts and economists against one another as they seek to understand the impact of microfinance on economic growth and well-being.

The whole thing started with an op-ed in the Wall Street Journal. In it, Amar Bhide and Carl Schramm argue that microenterprise, fueled by microfinance, is less good than a “transformative entrepreneurship” enabled by policy reform. Their basic point is that everyone is not cut out to be an entrepreneur, and that simple access to finance is not enough – people need jobs, and to create jobs countries need better business environments.

(My opinion on this argument is mixed. To be sure, not everyone is cut out to be an entrepreneur; many microenterprises are economic decisions of last resort. By last resort, I mean that there are no jobs or economic alternatives to selling vegetables by the side of the road, for example, even if it is a highly competitive local market with low margins and little prospect for growth. On the other hand, “policy reforms” are easier said than done, and even with the “right” policies in place, who is to say that the economy will magically transform? You still need a bottom-up, SME-driven economic development to create the kind of employment than Bhide and Schramm envision. And for SMEs to develop, you need finance…often starting with microfinance.)

Here’s where the debate gets more interesting. Following on the WSJ op-ed, Thomas Dichter (of Despite Good Intentions fame and previously featured here and here on NextBillion) recently published a new essay through the Cato Institute. A Second Look at Microfinance argues that the democratization of credit will not affect economic growth or drive business development. Based on a mix of economic history and field experience, Dichter argues that development creates jobs, “which in turn makes the working poor an attractive target for financial services.” Indeed, he seems to think that financial services are used by the poor almost exclusively for consumption smoothing and not for business investment; the poor would rather turn to informal networks to fund their enterprises.

Reaction to Dichter’s piece has been muted, but one very credible critic has posted a response: Gil Crawford, CEO of MicroVest. Gil is an economic historian and development expert in his own right; he also founded and runs a for-profit microfinance investment fund based in Bethesda, Maryland. His response is posted to the MicroVest site; in it, he accuses Dichter of focusing too closely on donor-driven microcredit and not talking about the growing world of for-profit microfinance. Crawford systematically deconstructs Dichter’s arguments over the course of a 1-page letter – worth a read.

Where do I fall in this debate? I’d say somewhere in the middle. Clearly, not enough small- and medium-sized enterprises are being created, and there is a definite lack of financing mechanisms to enable those stuck in the “missing middle” or “mesofinance gap” between microfinance and formal finance. Investments between $10,000 and $1,000,000 are needed, but MFIs have not shown much willingness to make them (as yet) and commercial financiers can’t make the kind of returns they need to justify the risk and diligence costs. That’s why the Acumen Fund and New Ventures and Endeavor and Technoserve and Aavishkaar are around – to try and fill the gap.

But why not enable MFIs to do it themselves? If, as Crawford argues, MFIs are making profitable small business loans as part of their portfolios, why aren’t there more good jobs being created? Going back to the original WSJ article, where is the creative destruction? It could be too early – microfinance is just now making the transition away from donor-funded models to commercially-financed work, which gives MFIs better incentives to seek out, mentor, and invest in promising entrepreneurs from within their own portfolios. It’s still not happening…and until it does, the debate will go on.