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MGT601 - SME Management - Lecture Handout 09

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ISSUES AND POLICY DEVELOPMENT FOR SME – I

This lecture is concerned with the different issue and other obstacles faced by the policy makers while forming an SME policy for Pakistan. This includes both long term and short term issues.

Issues and Policy Development

Pakistan’s economy is an economy of SME. Policies in the past have given a general perspective, direction and defining broad parameters of activity within the macro environment framework, but efforts have focused on large enterprises, neglecting SME, which are at the heart of our economy. Our SME suffers from variety of weaknesses, which have constrained their ability to adjust to the economic liberalization measures introduced and to take full advantage of the rapidly expanding markets of the world. But SME importance and contribution in the economic activity suggests that there is a significant potential to enhance their growth through appropriate regulations and promotion.

While SME are mentioned in some of our socio-economic strategies and policy documents, measures are not specified and prioritized for us to be able to speak of any coherent SME policy or approach. The SME Sector Development Program seeks to improve the situation by inviting all concerned stakeholders to draft Pakistan’s future SME policy.

SME promotion is an important issue for many government departments and central offices. However, there is an existing lack of coordination and regular information exchange mechanism among institutions which constraints their ability to deliver in the SME development process. The responsibility for facilitating the SME policy development lies with SMEDA, attached to the Ministry of Industry and Production. One of the major reasons for the lack of coordination is that SMEDA has not been provided with a mechanism to initiate, coordinate, monitor and evaluate initiatives of SME development outside of its own scope of activities. Therefore, cross departmental and stakeholder consultations, resulting in the preparation of our national SME policy are our key to success. A network of institutions stimulating the growth of SME is also being proposed. The issues highlighted in this lecture give a retrospective view of things while giving a current picture of the SME business environment in Pakistan. There are issues we may only solve in the long term and which therefore are beyond our current scope. And there are issues we may solve in the short to medium term. These issues should become the focus of our SME policy. Short to medium term issues revolve around three major topics:

Business Environment

Creating a favorable business environment for SME in Pakistan’s economy and eliminating unnecessary obstacles, which obstruct their development. This concerns the relationship between Government and SME as well as specifically taxation and labor.

Delivery of Assistance and Access to Resources

Improving the delivery mechanism for assistance and the access to the resources for SME in Pakistan, inter alia finance, business development services, qualified human resources and technology, so as to improve their productivity and capacity for employment generation. Market driven support programs are important to attain substantiality, maximize the potential for cooperation with the private sector, and minimize the distortions in the economy. Yet the structures for such a system still need to be mutually agreed and implemented in Pakistan.

Monitoring Developments

Harmonizing enterprise size categories for Pakistan of what are to be considered micro, small, medium and large enterprises. Furthermore, the establishment of a sound mechanism by which their development of the SME sector and the effectiveness of the assistance provided the SME can be monitored. What is at stake is that we forego the benefits of learning from one another in order to continuously improve our support structures to meet the needs of the target groups, SME. There is also ample scope to make use of SME promotion channels to achieve major aims related to equitable and sustainable socio-economic development which we have not only yet exploited. Cases in point are gender development and environmental issues.
Implementing change requires the formulation of a policy for SME development and assigning specific responsibilities for its implementation and continuous improvement. A fair number of countries have opted for legislation on SME promotion. The appropriate format of the SME policy for Pakistan is to be decided by the Task Force.

Background of Basic Situation of SME and Their Support Structures

Current Status of SME

It is fair to say that our economy is an economy of SME. The significant role of SME is clearly indicated by research and statistics. Enterprises employing up to 99 persons constitute about 90%1 of all private enterprises in the industrial sector and SME employ some 78% of non-agriculture labor force2. They contribute over 30% to GDP, PKR 140 billion to exports, and 25% of manufacturing export earnings besides sharing 35% in manufacturing value added3.

Stability of policy is a necessary condition for achieving and sustaining high levels of economic development. A desirable mix of various other policies can insure the stability in the economy. In Pakistan, policies in the past have given a general perspective, direction and defining broad parameters of activity within the macro environment framework. However, efforts have remained limited focusing on the large enterprises, neglecting SME, which are at the heart of our economy. For example, institutions established to facilitate business activity, like Board of Investment (BOI), Export Promotion Bureau (EPB), Central Board of Revenue (CBR), to name a few have been concentrating their efforts on large scale industry.

The adverse influences of legal affect all economic agents. The evidence suggests small firms are discriminated against relatively large firms4 and while large enterprises and established holding structures possess the necessary economic and human resource potential to cope with and overcome these difficulties, SME, due to their size and due to their resulting peculiarities, are far less capable of adjusting and carrying on successful business5. While spared direct statutory or administrative discrimination, SME remain subject to unequal treatment, which distorts the competitive environment for business. The economic significance of this bias is apparent. Such an environment does not cater well to innovative activities which come from newly founded, small firms, and the new job creation potential of the economy is thus constrained while the informal sector tends to grow6. Our SME suffer from a variety of weaknesses, which have constrained their ability to adjust to the economic liberalization measures introduced by the Government of Pakistan and to take full advantage of rapidly expanding markets of the world. But SME importance and significant potential to enhance their growth through appropriate regulations and promotion.

More recently, the importance of SME has been realized, with the Government’s efforts focusing on the hitherto neglected informal sector. The reason behind the increased stress on the SME sector is that SME promote entrepreneurial culture, create a wider base for employment generation and are a primary vehicle for poverty eradication.

Government’s Socio-economic Strategies and SME

SME are a distinct pillar of the economy that needs to be given due attention. It requires specific policy and regulatory space to turn SME into an effective tool for driving the economy and increasingly contribute to economic growth and employment. The Government of Pakistan has developed a number of strategies for socio-economic development.

  • Poverty Reduction Strategy Paper (PRSP)7
  • Micro Finance Sector Development Program
  • SME Sector Development Program
  • Education Sector Reforms 2001-05
  • Reform of Financial Sector
  • Reforms in Tax Administration

While SME are being mentioned in some of these important socio-economic strategies and policy documents, including even very specific measures for their promotion, these measures are not sufficiently specified and prioritized for us to be able to speak of any coherent SME policy or approach. The SME Sector Development Program seeks to improve this situation by inviting all concerned stakeholders to draft Pakistan’s future SME policy. Although SME policy is a sector specific policy, it should be noted that the task of formulation is not a simple exercise. SME are a cornerstone of our economy. Many changes in the existing legislation may have direct or indirect effects on SME, e.g. in labor law, financial law, export regulations, banking system regulations, tax regulation etc. SME promotion therefore comes close to a crosscutting issue. Furthermore, the environment for SME is constantly changing, in particular with an increased exposure to world markets due to the opening up of the economy. Therefore, SME policy within a socio- economic development strategy cannot be a one-off exercise. Only a process of regular review linked with predictable behavior by all stakeholders will ensure successful outcomes in the long run.

Coordination and Institutional Support

The role of government as a facilitator of business and its interaction with business support institutions is imperative for the establishment of a mutually beneficial relationship for the growth of the sector. SME promotion is an important issue for many government departments and central offices. For example, the Ministry of Labor plays an important role in shaping the labor market policy of the state. Similarly, in order to gather information on the health of the SME population the role of Federal Bureau of Statistics, the Ministry of Finance, and planning division is pivotal. Other ministries and divisions such as Ministry of Local Government and Rural Development, and the Ministry of Science & Technology also influence the situation of our SME. Provincial and local governments also take their share in responsibility.

However, there is an existing lack of coordination and regular information exchange mechanism among institutions, which constrains their collective ability to deliver in the SME development process. As a result of the Government’s recent efforts, two institutions Small and Medium Enterprise Development Authority (SMEDA) and SME Bank were created. The responsibility for facilitating SME policy development now lies with SMEDA, which is attached to the Ministry of Industry and Production (MOPI). SMEDA is responsible for creation and coordination of Government policy for the SME sector. Parliament, naturally, is responsible for monitoring policy and its implementation.

One of the major reasons for the lack of coordination is that SMEDA has not been provided with a formal mechanism to initiate, coordinate, monitor and evaluate initiatives undertaken for SME development, which fall outside of its own scope of activities. Therefore, cross-departmental and stakeholder consultations, resulting in the preparation of our national SME policy are our key to success. Regular information exchange mechanism and networking needs to be developed amongst our public and private sector institutions. There is a strong need to devise such an information exchange mechanism and redefine the role of institutions, specifying their functions in order to avoid duplication of efforts and allowing the best possible usage of resources.

Under the SME Sector Development Program it is expected that SMEDA:

  • Prepares Government documents on policy regarding SME.
  • Drafts relevant laws and regulations.

To form a collective view of all stakeholders, the SME task force has been established at the MOIP, SMEDA will serve as the secretariat. A network of institutions stimulating the growth of SME is being proposed. The institutions in this network cover all stakeholders involved in SME promotion; Regional Development Agencies, Business Support Centers, Chambers of Commerce as well as other organizations, which are established as an initiative of local communities.

Reference

The research cell SMEDA/LCCI
50 years of Pakistan’s economy by Shahrukh Rafi khan (Oxford Press)
UNIDO unit 2 studies on SMEs

Book recommended

Small entrepreneurs in developing countries by Dr Asghar S. Nasir

Key terms

Retrospective (having effect in past)
MOIP (ministry of industries and planning)

Related Content: MGT601 - VU Lectures, Handouts, PPT Slides, Assignments, Quizzes, Papers & Books of SME Management