The promotion of small and medium enterprises (SME) is one of the prime strategies for any country’s development vision and that this is an integral approach to achieve economic expansion on a national level, to accelerate the commitments made to alleviate poverty, to broad-base economic participation, to generate employment opportunities right up to the grass roots level, to increase the country’s industrialization activities, and to initiate a fundamental and positive attainment of socio-economic as well as political objectives.
The development of SME has taken on an increased importance in Asia. Successive governments have embraced the idea that SME do contribute to the national development and that the hitherto characterizations of SME as too narrowly based, with limited contributory benefit to the national economy, maintaining an unorganized and scattered placement, having rudimentary production processes, and adhering to a distracting attitude from the established industrial and service activities, have been dispersed with.
The new thinking that has accepted the fact that SME can and do play a significant role in job creation, particularly and with added emphasis on self-employment, and that SME are vital in providing such essential services such as transportation, catering, consultancy, information technology, repairs and maintenance, construction, etc, or that SME could be major contributors in such industries as apparel, knitting, arts and crafts, food products, spare parts manufacturing, bricks, packaging material, etc, are now accepted very prominently.
This positive approach is a manifestation of the importance given to SME as channels of financial benefits for families that are under or close to the poverty line and that the proliferation of SME does contribute to equal opportunities for economic growth and for enhancement in the mobilization of savings of people all across the country. More importantly, the process of SME development could be the harbinger of substantial contribution towards the spread of a formidable network of SME all over the country.
THE ASIAN FIGURES:
Small and medium enterprises have blossomed in many Asian countries. Today, the number of SME in Indonesia have exceeded 37 million units and account for 99.9% of total businesses, absorbing 65 million people and contributing 58% to the GDP. In Sri Lanka, the category of self-employed and unpaid family workers who are engaged in small scale business activities account for 41% of the total economic active population of 6.7 million. In Cambodia, although 78% of the labor force of some five million persons is engaged in a primary occupation in the agriculture, fishery, or forest sector, and only 5% in industry and 17% in services and trade, the fact is that 90% of all these were also involved in a secondary occupation, working on their own account or in household enterprises. A significant 12% of the total labor force is operating on their own account in small enterprises in manufacturing, trade and services. The six most common activities in household and small enterprises in Cambodia consist of 185,000 households with 32% involved in textile manufacture and apparel.
The position in Vietnam is that the share of the household enterprises and private SME (excluding foreign investors) in total GDP is 41% and provide 64% of the total employment. Out of the total social labor force of 41 million, nearly 97% work in SME or cooperatives. In Philippines, there are nearly 250,000 business establishments both in the manufacturing as well as the service sectors. SME accounted for 99% of the figures and generated 67% of all jobs, totaling more than two million. Malaysia has 19,000 SME employing more than half a million workers. Moreover, there are 4,155 cooperatives with over 4.50 million members who are either directly self-employed or are in the form of indirect self-employment. In Thailand, the share of self-employment in the employment figures has now risen to nearly 55%. The total national labor force is 33 million or 53% of the population.
The SME sector in Bangladesh currently provides employment to roughly 5 million who account for nearly 80% of the total industrial workforce. The contribution of SME to the GDP is 5.5% and their growth rate was over 4% during the last decade. The cooperatives are a very influential force in India. The Indian Cooperative Movement is the largest in the world with more than half a million cooperatives having membership of 228 million people. Almost 100% villages and 67% of all rural households are covered by such cooperatives as credit and banking, dairy, housing, fisheries, handlooms and handicraft, fertilizer production, etc. The construction activity absorbs 37% of the country’s population primarily within an unorganized structure.
In Pakistan, out of the total employed labor force of 34.13 million, the non-agricultural sectors combined together provide employment to more than 19 million individuals. The total employment in the manufacturing sector is estimated to be around 3.8 million, out of which the share of the formal manufacturing is 0.6 million and the rest is generated by small and micro-sized manufacturing enterprises in the informal sector, accounting for 84% of the total employment in the manufacture sector. According to SMEDA, the SME are the “unsung heroes” who are silently contributing to the nation’s progress. Their contribution to GDP is $20 billion or 40%, and to the export regime it is $4.8 billion or 26% of all exports. SMEDA reckons that $75,000 investment is required to create one job in a large-scale enterprise while an investment of only $800 creates one employment opportunity in a SME in Pakistan.
DEVELOPMENT OF PAKISTANY SME:
Notwithstanding the importance given to SME development, it is meaningful to note that these enterprises may have a difficult time in flourishing positively if they are victims of myopic governmental policies, lack access to affordable financial resources, and are deprived of crucial basic infrastructure and other facilities. These concerns are principal reasons that have and could retard SME development. These need to be focused since the dice is generally loaded against SME.
There are three major areas of strategic intervention that are imperative for the development of small and medium enterprises. The acceptance and implementation of these interventions is instrumental in bringing the SME into the mainstream inspite of the casualization mode of most of these SME. Furthermore, the knowledge that the role of SME is paramount as the means to achieve higher and sustained economic growth and employment, to reduce endemic poverty, and to meet social objectives, should and must induce the policymakers as well as the private sector to introduce acceptable products leading to pragmatic interventions. The three strategic interventions are:
Enabling and Conducive Environment.
Business Development Services.
ENABLING AND CONDUCIVE ENVIRONMENT:
The acceptance of SME as vital to the national development should influence the government to ensure that a major rethinking is required to discourage undue interference by governmental regulators. The procedures of licensing, the issuance of permits, and the reliance on draconian and antiquated laws prevalent in the statute books have to be relaxed, amended, or eliminated. The SME owners are not attuned to the concepts of dealing extensively with personnel of government agencies, even those at the lower hierarchy. Moreover, there is an imperative need to bring about a culture of one-window operation for collection of various government levies and taxes. The attitudinal disdain demonstrated by government officers against any steps for deregulation has impeded practical progress on the desire of all to reduce bureaucratic red tape. The continued dependence on multifarious taxes and collection agencies has incubated widespread corrupt practices.
The policy adopted by the government to introduce the General Sales Tax across the board, although a sensible approach, has failed to click because of the resistance of vested interests and the intimidating and harassing attitude of the tax collectors and auditors. The dichotomy between the vision of the policymakers and the perspective of the implementers in executing governmental policies is so sinister that nearly all pro-active measures get waylaid, resentment against the government fires up, and the enterprising spirit of the private sector is vitiated. The SME owners are hard-pressed when they enter the maze of government rules and regulations.
The success of building a countrywide SME network requires a concerted effort to instill confidence and trust in the government. More than five decades of the same rut has throttled the gushing of entrepreneurial enthusiasm. The strategy should focus on a workable and effective fiscal policy for achieving documentation of the economy, for amalgamation of various taxes and levies, for simplification of laws and rules, for implementing the concept of self-assessment of income tax and other such taxes, for removal of punitive measures that hinder assimilation into the ranks of the organized sector, and for adhering strictly to the objectives of eliminating bottle-necks in the smooth functioning of SME.
The fiscal policy should also address the issue of sufficient budget allocation for SME development. The eagerness of the government would become evident if the bias against SME were alleviated. The provision of infrastructure to SME is imperative for their sustainability but the nonchalant concern adopted by sanctioning authorities compel SME owners to run from pillar-to-post to get electric, gas, water, and telephone connections. Furthermore the absence of a pliable road network also leaves much to be desired. The usual trend is to develop major arteries while links to tertiary areas are overlooked or become victims of the standard excuse of “lack of funds”. The fiscal policy must also make apportionment for social infrastructure especially in areas that are rural or less developed. There should be a stress on providing basic health facilities, on increasing universal education programs leading to a massive increase in the illiteracy rate, and establishment of markets and bazaars for the convenience of the citizens.
The policy makers can stimulate the development of SME by providing tax deduction to large scale enterprises if they provide business development services to the SME. This method can create a bond between the LSE and SME and would result in bringing the SME into the mainstream web. The fiscal policy should also offer incentives to SME thru tax holidays and outline tax breaks for SME start-ups. There is also a need to earmark designated areas as focal points for setting up of SME as these would envelop a host of enterprises in one cluster and help them in operating functionally.
The business policy framework should ensure that the SME become essential players in building up the export regime. They could be direct exporters or could become vendors or have linkages with those organizations involved in the export sector. The assistance of Export Promotion Bureau for enhancing SME’s access to international markets could be instrumental in making these enterprises viable and progressive. SMEDA can organize measures that create effective demand for SME products and services and help them in entering domestic markets. Moreover, it can devise support programs that could assist SME in marketing their products and services to the government departments and armed forces. Furthermore, it is incumbent upon SMEDA to also assist SME owners in sourcing inputs at competitive prices so that viability of the enterprise is improved.
There must be a functional labor policy and the emphasis on labor legislation must take into consideration the informal culture of SME and the insouciant outlook of the owners. It has been observed that the SME owners have faced immense difficulties due to the strong-arm tactics of personnel associated with the worker’s welfare organizations and also the labor inspectors. The government must introduce a labor policy that provides an alternative mechanism than the one prevalent at present so that the concept of regulation for the sake of regulation is removed.
Notwithstanding the fact that fiscal and business policies are paramount to the nourishment diet of SME, it is imperative that there should be peace and stability all around and that the law and order scenario should be safe and secure so that the overall concentration is on product, job, and income generation that is so vital for the nation’s prosperity. Moreover, SME development is also very much affected by the overall macro-economic and sector-specific policies. The inconsistencies in policies have been normal instruments of indecision and expediency in the corridors of power. The process of SME development would suffer immensely if, as usual, incongruous influences pervade the SME network.
The development of SME depends on the ability of SME owners to infuse capital to make the project viable and sustainable. A major deterrent in the development process is the widespread complaint about affordable access to financial resources. It should be understood that most of the SME operate in a low cash flow scenario and this puts a strain on their commitments to meet customers’ delivery requirements. The generally available financial facilities carry a higher capital cost, especially for those who have zero collateral or those who can only manage meager securities or passable guarantees. Moreover, the absence of financial liberalization policies has also seriously affected the progress of SME.
Keeping in view this concern, the monetary policy of the government must be progressive and reform-based so that the old-established lending concepts are dislodged from the corridors of banks and financial institutions. The policy must ensure capacity building for the lending organizations so that a cohesive, transparent, and refreshing lending policy is evolved. The time is right for introducing venture capitalism for SME development and this should be given due weightage by the policy framers. There are undoubtedly many people who have the ideas and knowledge to develop new products, processes, and inventions. These geniuses have the skills but lack financial wherewithal. A SME promotion program funded by commercial banks with matching funds from multi-lateral agencies and guaranteed by the government can provide these skilled craftsmen with the financial backing at an affordable rate.
The government has initiated popular programs that not only provide credit facilities but are also channels to attain the objective of poverty alleviation. The formulation of the Microfinance Sector Development Programme with $150 million assistance from Asian Development Bank has led to the idea of Khushhali Bank, a statutory entity established under the Khushhali Bank Ordinance 2000. Another positive move is the Pakistan Export Finance Guarantee Agency Limited, a credit agency sponsored by thirteen commercial and private sector banks in Pakistan together with ADB with a mandate to issue guarantees on behalf of small scale exporters to Pakistany banks that are providing trade finance. ADB has also provided another $150 million for a project to enhance Pakistan’s export figures thru financing for SME with a partial risk guarantee associated with letters of credit issued by domestic banks to import goods required for export production. The Small and Medium size Enterprises Trade Enhancement Finance Project caters to those who have difficulty in obtaining bank financing due to lack of collateral or other security.
The NGOs could also play a prominent role in arranging finances or guarantees for the development of small businesses. A Micro-credit Summit held some years back in Washington, D.C. declared in its draft that “the time has come to recognize micro-credit as a powerful tool in the struggle to end poverty and economic dependence”. The oft-quoted example of a successful micro-credit program is the Grameen Bank of Bangladesh. In Pakistan, the Orangi Pilot Project set up in 1987 by the late Dr. Akhter Hameed Khan is Pakistan’s proud achievement in this respect.
In many parts of the world, the savings and loan cooperatives are important avenues of financing for SME. However, the shenanigans of, and misappropriations by politically inspired managers of cooperative banks resulted in closure of these institutions and billions of rupees invested by people went up in smoke. This scandal has made cooperative banks a pariah in the country, and a useful method of financing is forever lost. Unfortunately, the after-effects of the cooperative bank fiasco have also led to resentment against the very nomenclature “cooperatives”.
Apart from the avenues of direct financial support, other channels to conserve capital are the systematic reduction in import duties of raw material, assistance in upgradation of production processes, help in preparation of workable feasibility reports, and bringing about basic financial reforms that would, in the future, provide a level-playing field to owners of SME.
BUSINESS DEVELOPMENT SERVICES:
The development of SME and the processes thru which their proliferation is achieved should not be taken for granted nor should this be considered as the attainment of objectives, such as creation of additional employment, alleviation of poverty to a certain extent, improvement in the economic indicators, or increase in quality of life, etc. The real development is accentuated if the ramifications of the policy framework creates catalytic conditions that intensify and strengthen the human potential thru training and skill development, that creates a synergy among universal technological advances and its adaptation within the SME network, and that creates facilities to enter unexplored markets thru linkages, thru procurement of orders, and thru sub-contracting.
The human resources of any organization are its prime assets. The ranks of the educated labor force and also that of those who have been marginalized due to the “rightsizing” drive being conducted in public sector organizations is burgeoning in Pakistan. They are a potent group that could be motivated thru extensive entrepreneurial training programs or thru induction into re-training programs so that a new breed is incubated. The government could initiate programs directly or could encourage NGOs to promote this program. One such program that could be introduced is the Young Professional Entrepreneur Development project that has been successfully implemented in Indonesia. This is a two-fold initiative that starts from the formation of the YPED at the college or university level and then assigning the young professional into a productive economy unit. Thus this program creates employment for the jobless as well as helps in the start-up of a new business.
There are many retired professionals who just wilt away their time in unproductive endeavors. They could be mobilized to provide consultancy as well as act in voluntary advisory capacity for the SME. The remuneration for their services could be arranged thru the Export Development Fund, thru government grants, thru assistance from foreign agencies such as Canada’s CIDA, Japan’s ODA, or even thru ADB or World Bank funding. These foreign agencies could also sponsor retired or active foreign professionals to come to Pakistan and offer their expertise for the benefit of SME development. Moreover, the capabilities and services of Skill Development Councils, a tri-partite venture of the three social partners, could be harnessed too. The SDCs have provided yeoman service to the young people and have been instrumental in developing their skills and placing them in profitable employment.
The SME usually suffer from poor productivity, information deficiency, administrative experience, and quality control. SMEDA, EPB, as well as private sector organizations, such as Chambers and Trade Associations, could assist in the development of SME by setting up business consultancy cells, by establishing legal aid and advocacy centers, by organizing pragmatic courses for product designing, export promotion, productivity improvement, information technology, standards certification, and management skills, etc. Moreover, steps must be taken to assimilate these SME into the mainstream by granting them active memberships, strong voice, and effective share in the decision-making processes.
The private sector alongwith the government should also provide such business development services to SME as providing opportunities thru subsidies and technical support to participate in domestic as well as international exhibitions. They can also become liaisons for matching the SME with potential buyers as well as suppliers of raw material and other inputs. They can also play a pivotal role in finding buyers for them within the various government agencies and corporations as well as the armed forces. One very indispensable service that could be arranged is the translation of manuals and technical information into the Urdu language. One philanthropic example is the translation of the sewing and tailoring manual undertaken under the aegis of Commecs (the Association of former students of Government College of Commerce and Economics, Karachi) thru a substantial endowment created thru donations by the Gatron Foundation of Gani & Tayub Group.
It is important to note that governments who are signatories to the ILO Recommendation No. 189 should adhere to “recognizing the need for the pursuit of the economic, social, and spiritual well-being and development of the individuals, families, communities, and nations”. Now that globalization of the economy, discerning purchasing power of the consumer, elimination of child labor and forced labor, adherence to international quality, social, and environmental standards, and applying the concept of ‘decent work’ as visualized by Mr. Juan Somavia, Director General of ILO, are all realities and essential ingredients in world trade, it is incumbent upon all social partners, to make the contents of Recommendation No. 189 a common feature of Pakistan’s SME development as well as for other economic development activities.
Pakistan’s salvation lies in the development of SME and that this process of industrialization could be the panacea for the malaise and confusion in the economic scene. The roadmap to economic prosperity depends on the successful implementation of the policies to develop SME. As A. de Saint-Exupery stated:
“If you want to build a ship, don’t round up people, to gather wood and dish out work. But teach them desire for the wide, endless ocean.”
JUNE 09, 2001