USAID INVEST
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USAID INVEST

Generating Prosperity through Development of Small and Growing Businesses in the Northern Triangle

Through INVEST, USAID is working with Pomona Impact and Dalberg to increase private investment in agriculture, nutrition, and WASH enterprises in Central America. In this blog, Dalberg staff discuss ways to mobilize private investment even in high-risk contexts, as well as the potential private investment holds to help create jobs and address the root causes of high migration rates from Guatemala, Honduras, and El Salvador.

This post originally appeared on Agrilinks. Read the original piece here.

Orley cuts cacao pods from the tree. Photo credit: Dalberg

By Leni Martinez del Campo, Fabiola Salman, Marcos Paya (Dalberg)

Supporting small and growing businesses (SGBs) with a high potential to create employment is key to addressing the persistent challenges of poverty and instability that spur migration in Central America’s Northern Triangle (Guatemala, Honduras and El Salvador). Within the SGB segment, social enterprises that are actively seeking to have a social and environmental impact, in addition to generating jobs, are of particular interest to investors seeking broad development impact. Supporting these businesses through investment and technical assistance has proven effective in enhancing SGB growth.

Over the past couple decades, the countries in the Northern Triangle have faced high levels of economic instability, corruption and violence. Additionally, the region has been struck by multiple climate events that have further exacerbated the economic situation, causing loss of livelihoods and displacement. In 2020, the COVID-19 pandemic and two back-to-back hurricanes, Eta and Iota, aggravated the already fragile situation.

As a result, since 2014, more than two million men, women and children — roughly 6% of the region’s population — have left their home countries of Guatemala, Honduras and El Salvador searching for asylum or economic opportunities.[i] As of 2017, 9% of the total population of El Salvador, Guatemala and Honduras lives in the United States.[ii] This percentage is likely to increase, with an estimated 300,000 migrants continuing to cross the U.S. border each year.[iii]

Entrepreneurship and enterprise development in the agriculture, nutrition and the water, sanitation and hygiene (WASH) sectors represent a crucial avenue to curbing migration in the region by creating jobs. Companies like Tunart and Cacao Verapaz are offering local fishers and farmers the opportunity to make a decent living in their home countries. For example, Cacao Verapaz and its parent company, Uncommon Cacao, are the first transparent trade cacao supply chain companies that pay their producers above-market wages. Additionally, they seek to shift the power dynamic by equipping local farmers with the information necessary to negotiate better prices.

However, these companies face difficulties in scaling their operations in the region and beyond. While obtaining investments can be a challenge for many SGBs, the situation in the Northern Triangle is particularly complicated because most investment funds do not see the region as an attractive opportunity, viewing it as higher risk and more volatile when compared to other markets.[iv] Beyond accessing investment funds, SGB leaders need to develop and strengthen skills that will enable their businesses and teams to prosper and grow, in addition to improving their sales and day-to-day operations.

To address these challenges and leverage USAID resources to catalyze commercial investment across priority sectors, USAID’s INVEST initiative partnered with Pomona Impact, the first impact investment fund with a strategic focus in Central America, and Dalberg, a global group working to build a more inclusive and sustainable world. This partnership sought to enhance Pomona’s investments in agriculture, nutrition and WASH enterprises in Central America, with a focus on Guatemala, by further embedding the migration lens into its pipeline selection approach and reinforcing critical soft and technical skills among a select group of social enterprises in its pipeline.

The first intervention consisted of understanding Pomona’s selection process to enhance how they assess companies’ affect and further align it with the strategic goals of USAID Missions in the region. The second intervention included defining the technical assistance training sessions’ topics and designing and delivering the information to participants. The topics were selected based on an assessment to identify the companies’ needs and skills to improve as they mature and become ready for investment. The training sessions covered three topics: (1) leadership and team management; (2) integrating environmental, social and governance (ESG) criteria; and (3) impact management and measurement (IMM). The sessions were designed and delivered by Dalberg with input from Pomona. Organizations received three, two-hour sessions as a group to promote peer-to-peer learning. The group training sessions were followed by individual sessions for one-on-one support.

Through these two interventions, the project helped strengthen the local impact investment and entrepreneurship ecosystem by providing the guidelines, tools and skills needed to direct financing toward enterprises in the agriculture, nutrition and WASH sectors that have the potential to grow and generate well-paying jobs.

The work to enhance Pomona’s selection process resulted in screening criteria that allow Pomona to more easily identify investments that generate decent jobs, promote economic growth and reduce irregular migration. Additionally, given Pomona’s position as one of the few funds focused on Central America, it is possible that its adoption of these enhanced criteria can influence the impact investment ecosystem, resulting in changes beyond the organization.

Through the training sessions, particularly on ESG and IMM, companies were able to reflect on their business models and current operations and identify areas for improvement to have a more significant social and environmental effect. For example, during the ESG training, companies conducted a quick diagnosis of how their operations and policies align with existing social and environmental standards. The discussion during the activities led one of the companies to realize that, although their products were considered to have a low environmental footprint, they could reduce the number of resources used to produce them. The sessions prompted participating organizations to challenge their status quo and think about how to increase their impact. After the sessions, participants received a toolkit with additional resources to continue applying the learnings from the sessions into their operations.

The Northern Triangle has great potential to become a hub to incubate and scale impact-generating enterprises. However, work is still needed to unlock the capital and build the skills necessary to drive the growth of these companies. By partnering with impact investment funds, such as Pomona Impact and the companies in its pipeline and portfolio, and with the support of global development experts, such as Dalberg, USAID is taking further steps to reach its strategic goal of reducing migration by promoting economic prosperity in the region through the creation of formal and decent jobs and promotion of entrepreneurship.

References:

[i] Cheatham, Amelia. “Central America’s Turbulent Northern Triangle.” Council on Foreign Relations. Last updated July 1, 2021.

[ii] Inter-American Development Bank (IDB) estimates based on data from the Bilateral Migration Matrix 2017 for the migrant population living in the United States, and the National Statistical Institutes of Guatemala, Honduras and El Salvador for 2017 population estimates. Cited in: Abuelafla, E. et al. “In the footprints of migrants: Perspectives and experiences of migrants from El Salvador, Guatemala, and Honduras in the United States.” IDB and USAID.

[iii] Abuelafia, E. 2018. “La política migratoria en los EE.UU. y su impacto en el Triángulo Norte de Centroamérica.” Country Department Central America, Mexico, Dominican Republic and Haiti. Discussion Paper IDB-DP-00593. Washington, D.C.: Inter-American Development Bank.

[iv] Jäger, U. et al. 2019. “The Impact Investment Ecosystem in Central America.” Viva Idea.

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