WHEN Catalina Barajas's husband left her to raise the last three of seven children alone, she was forced onto welfare and into public housing. But to make ends meet, she knew she was going to have to find another means of income.Going out and starting a business was not the first thing she thought of - nor would it be the first thing the United States welfare system would prescribe for the former farm worker, who speaks only Spanish and has minimal business qualifications. What Mrs. Barajas didn't recognize, until the Micro Industry Credit Rural Organization (MICRO) stepped in to show her, was that the small sewing jobs she had taken in for years were a business she could develop. It's this kind of entrepreneurial seed that MICRO, a Tucson, Ariz., nonprofit development group, cultivates through small, business loans. On collateral as small as a wedding band or a color television, low-income and disadvantaged people, who would qualify quicker for welfare than a traditional bank loan, can get business loans as small as $500. Barajas's first loan of $500 three years ago allowed her to buy more fabric at a lower price than she was used to. This increased her profit on the brightly colored bedspreads she makes. Demand for her work increased, so she bought a better sewing machine with her second loan of $1,000. Having paid off her first loans, with a third loan of $2,000 she was to travel to Los Angeles from this remote area to buy cheaper fabric and supplies. "I never thought someone would lend me the money," says Barajas. "This has motivated me to work more, whereas before I had to take from my food money to invest and sometimes there just wasn't any." She would never have considered asking a bank for money after having been turned away by a local bank when she tried to open a savings account with a crisp $20 bill and was told it wasn't enough. Microenterprise development in many cases can substitute a ladder of opportunity for the dependency fostered by the welfare safety net, says Robert Friedman, founder and chairman of the board of the Corporation for Enterprise Development, a Washington policy advocacy group that also sponsors demonstration microenterprise projects. "Microenterpise [development] crosses both liberal and conservative lines," he says. For conservatives, he adds, "it's quid pro quo. It's not a handout. And for that part of the liberal establishment that simply looks at income redistribution, it works." Microenterprise, which is free enterprise in its most basic and spontaneous form, is a sort of business counterpart to subsistence farming: It exists in pockets of poverty all over the world where the unemployed must use their wits to survive. The informal sector - that market in which microenterprise exists off the books, outside taxes and government regulation - is believed to constitute 30 to 50 percent of the economies of developing nations. In Latin America, for example, Peruvian economist Hernando de Soto's studies of the informal sector (documenting the capitalistic nature of upward mobility among squatter settlements in Lima) became the inspiration for a whole school of international development that has grown up around microenterprise. The Grameen Bank in Bangladesh, on the other hand, has been the international model for how to loan to the poor. It pioneered the idea of giving credit - in amounts as little as $50 - to the poor when it began offering loans in 1975 to peasant women who made bamboo furniture. Today, reaching perhaps 500,000 people, the bank offers loans to small groups of people who are trained together in basic business procedures, divide the money among themselves for their own businesses, and are responsible for the c ollection and reinvestment of the money. The incentive of future loans maintains discipline within the groups, which have a repayment rate of 98 percent. The United States has dedicated an increasing amount of foreign aid to microenterprise development in which all kinds of businesses - from pushcart peddlers to small factories - are offered credit contingent on completing basic business courses. Microenterprise spending overseas by the US Agency for International Development has grown from $85 million in 1990 to an expected $137 million next year. 'IT'S funny that we have to learn from third-world countries about microenterprise," says US Rep. Tony P. Hall (D) of Ohio, chairman of the House Select Committee on Hunger. "Over the years we've really pushed it in aid projects overseas, but our own people have not even heard of it." Convinced that microenterprise "is part of the answer" to changing welfare dependency to economic self-sufficiency, the congressman has introduced microenterprise provisions to the Job Training Partnership Act. The proposed legislation adds self-employment training to courses the states are required to offer in federally funded job training programs. Further, the legislation would fund 10 micro-lending demonstration projects of $500,000 each. Representative Hall is also pushing to win microentrepreneurs exemptions to rules that limit assets and income of recipients of federally funded housing, medical care, and welfare. "We penalize people [for] being independent from poverty," Hall says. For example, recipients of Aid to Families with Dependent Children are limited to income of 185 percent of the state-defined level of need, and assets are limited to $1,000. Those rules effectively prevent small-business growth because assets cannot be built to improve a business, he says. Most of the private nonprofit programs already lending to American microentrepreneurs teach clients how to get licensed and pay business taxes. But many borrowers, like Mrs. Barajas in the MICRO program, continue to operate informally - unlicensed and not paying taxes. Barajas estimates that in the best of months she clears $400 with her business. That amount could be enough to disqualify her from public assistance, yet alone it wouldn't be enough for economic self-sufficiency. Just how widespread or successful micro development can be in the inner city or rural areas is uncertain, say economists. The image of "the Lone Ranger in economic development" may fit the free enterprise theme Americans would like to inject in poverty programs, says Michael Piore, professor of economics at the Massachusetts Institute of Technology in Cambridge, Mass. "But it's crazy to think somebody sitting in a neighborhood is going to be profitable if there's no one around them [like a supporting network of other profitable businesses and lending institutions]." Also, few of the 100 micro lending operations that have sprouted around the US in the past five years actually are breaking even because of the high cost of the training that goes along with lending, explains Mr. Friedman of the CED. While micro lending - so far funded by private charities and grants in the US - may never generate a profit, he suggests that it is an investment with social payoffs, including getting low-income people off public assistance and creating business role models in poor communit ies. The five-year experience of MICRO in its operations in Arizona and California convinces executive director and founder Frank Ballesteros that "this microenterprise philosophy would work anywhere. "You'll find five to seven home-based businesses in any block [of an urban area], people earning second incomes out of their homes by selling dresses, taking care of a child for someone else, fixing hair...," Mr. Ballesteros says. While MICRO has yet to break even, he says, the benefits of the $1 million loaned to 300 businesses in the past five years include the creation of over 400 jobs. Loan defaults are about 2.5 percent and more than 85 percent of the borrowers are still in business, generating savings and employment.