Daily Times

In the previous two articles of this series it was argued that Pakistan’s decade-old phenomenon of youth bulge has transitioned from a great opportunity to a full blown threat due to neglect of the previous two governments. I suggested that a federal youth development authority be mandated to reach out at district and tehsil levels with a comprehensive youth development program (YDP), as the key to turn the massive youth entering the labour market every year into a productive asset via skill development. Otherwise, in the absence of opportunities the overarching youth population has grave political, social and economic consequences for the country. But no youth development initiative per se can succeed without a parallel emphasis on economic growth that is strong enough to create a proportionate number of jobs. With their labour-intensive nature and being building blocks of the economy, as in any open market system, Pakistan’s Small and Medium Enterprises (SME’s) provide the easiest, fastest, least costly, and most inclusive way to grow the economy and, consequently, welfare and prosperity.

In this article and the next two I will highlight the present state of Pakistani SME sector and make wide-ranging practical suggestions to help achieve SME’s their true potential for economic development of Pakistan.

The State Bank of Pakistan (SBP) defines the small enterprises as the businesses with up to Rs. 150 million sales turnover and employing up to 50 workers, whereas it defines the medium enterprises as the ones with over Rs 150 and up to 800 million sales turnover and employing 50-100 workers in trading businesses and up to 250 workers in manufacturing and services establishments. Pakistan’s estimated 3.6 million SME’s comprise about 90 percent of all private business entities, while employing about 80% of non-agriculture workforce. The SME contribution to GDP is about 40 percent. SME’s typically account for 4 out of 5 jobs created.

The number of SME’s per 1000 people is a widely used indicator directly correlated with the level of economic development. According to a World Bank (WB) study, Pakistan has an estimated 20 SME’s per 1000 people, compared with 32 in India and 45 in the advanced economies. There is another entity — micro-enterprises, which is defined by SBP as a business employing up to 10 workers and that is not mentioned as part of SME’s. While SBP literature defines the entity separately, it still does not modify the definition of small enterprise to reflect the distinction between micro and small enterprises. This anomaly can be rectified by amending the relevant definitions and the sector should be re-named as Micro, Small and Medium Enterprises (MSME) in accordance with the current international practice. This clarity is important given the fact the micro segment accounts for over 99 percent of the total SME’s and employs an estimated 65 percent of total non-agriculture (SME) workforce, with small enterprises employing 25 percent.

It is not only their capacity to employ a disproportionately large number of people and boost economic growth that SME’s provide an attractive solution to Pakistan’s current economic problems, in particular the youth unemployment

It is not only their capacity to employ a disproportionately large number of people and boost economic growth that SME’s provide an attractive solution to Pakistan’s current economic problems, in particular the youth unemployment. Their characteristics focus on innovation, geographic dispersion contributing to rural industrialization, diversity, resilience to economic shocks, reliance on local rather than imported inputs, and ability to connect across the industries — especially their ability to link the rural industry with the urban, low cost production, etc. make them an extremely powerful economic tool that every developed country in the world has leveraged successfully in achieving prosperity. Not surprisingly governments across the world have aspired and provided the SME’s every possible support to help establish and flourish them.

Unfortunately, in Pakistan one has to contend with the fact that far from having the government as their chief support, the SME’s have had to view the government as one of their major problems and therefore it is no coincidence that they have been struggling, stagnating, and losing; Pakistan has not produced a single icon of international business that has got global recognition like, for example, India’s Infosys, Reliance Industries and TATA have. In the journey to a state of private sector development where the sector itself becomes the godfather of SME’s, a decisive state role is indispensible for them.

The federal government established Small and Medium Enterprise Development Authority (SMEDA) in 1998, in Lahore under Federal Ministry of Industries and Production with the mission “to assist in employment generation and value addition to the national income, through development of the SME Sector, by helping increase the number, scale and competitiveness of SMEs”. SMEDA has made efforts to achieve its mission through providing business information, technical assistance and training programs to the entrepreneurs, while becoming a voice for the SME sector. However considering the overwhelming problems of the sector, SMEDA’s scope, budget, and scale of operations are plainly insufficient.

A WB study in 2002 identified the top five problems of Pakistani SME’s as lack of finance, shortage of skilled labour, getting business site, bribes, marketing of products and services. A later WB study found that Pakistani SME owners ranked electricity, corruption, court systems, crime, transportation and inadequately trained workforce ahead of access to capital. Based on my own experience and study over the years I would rewrite the list as lack of business culture, finance, shortage of skilled labour, high business cost and taxes, dysfunctional regulation and corruption, lack of affordable real estate in urban areas, high transportation costs, lack of market research data, ineffective labour laws, lack of a supportive legal framework in particular efficient dispute resolution mechanism, and subpar supply chain and distribution infrastructure.

Since Pakistan’s economy is still transitioning from a predominantly agriculture-based to an industrialized one, most of the citizens are not aware of how a modern business works, or what crucial economic role SME’s play in a modern society. All businesses are thus largely viewed and treated with suspicion. The stereotypes that society holds against capitalism influence people’s views about the SME’s too and consequently pursuit of a business does not attract as much of recognition as some other professions do. This is unhelpful in many ways, in particular in attracting promising people to start a business. Admittedly change of culture is an uphill task, but it must through government supported awareness campaigns and appropriate content in the school syllabi.

The problem worsens at a regulatory level. Whether it is the police, district administration, courts, or regulators, small businesses are widely abused and exploited. They are viewed as the vulnerable ATM’s which must pay out of the way on the slightest of excuses. Price control and food authorities have openly transgressed their powers in the recent past while vying for unfair publicity feeding on negative popular perception. Imagine yourself running a food outlet — your bread and butter — and one day a group of officials “raids” your premises and on finding a bottle of mineral water ‘expensively’ priced or on finding a rodent in your otherwise tidy premises asks you to close your outlet and face fine or arrest or both, if you don’t pay a hefty bribe. In one instance the food authority wasted a whole tanker carrying thousands of litres of milk into a canal on a mere field test of milk in a live transmission, an indefensible act by any standard. Whenever a mishap takes place in a hotel or another retail outlet, the easiest scapegoat is the business owner who is picked up without a thought. When society would treat businesses with such mindset, who in his right mind would venture with his hard earned savings out of his free choice? Consequently entrepreneurship is considered the riskiest career in the country.

Continued

The writer is a graduate of MIT and an experienced entrepreneur with previous service in public sector, based in Islamabad. The above is first of a series of related articles. He can be contacted at tasadduq69@hotmail.com

Published in Daily Times, October 2^nd 2018.