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MGT601 - SME Management - Lecture Handout 06

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THE DEVELOPMENT OF SMES IN PAKISTAN

This lecture is about the history of industrial growth in Pakistan and its related factors; the factors for adopting an SME based industrial system, the institutional support of government in the shape of long term and short-term policies.

The Development of SMEs in Pakistan

The Industrial History of Pakistan

Pakistan’s industrial history has been dominated by a single-minded emphasis on industry and that too of large-scale enterprises. The fall out of that development strategy was formally adopted in the 60’s as conscious policy step in the start of second policy plan period (1960-1965) has been large scale industrial holdings, accounting for much of the country’s assets and capital. The feeling among the masses is that a few families control 70 to 80 percent of the country’s assets, led to political rebellion. That rebellion also culminated in the dismemberment of the eastern part of the country. The primary causes for that tragedy, were basically economic in nature. The upheaval also generated a parallel economic thought, exclusive to the peculiarities of Pakistan’s economy. That economic thought advocated across the board nationalization of economic assets as a vehicle for ensuring social justice in the society.

The fall out of that strategy was two pronged:

  • Inefficient labor
  • Shaken Business Confidence.

The reaction to that policy mix in the early 1980’s was reverting to the Ayubian model of economic development. The model was characterized by:

  1. Promotion of large-scale units.
  2. Expansion of large-scale enterprises.
  3. Banking sector turned to cater to large loans.

The IMF conditions and poor recovery rate of huge borrowings played a major role in creating a negative point for the progress curve. These constraints further pushed the economy towards recession, industry towards sickness and individual units towards default. All these factors precipitated the rethinking of a strategy to revive the growth of economy. It was due to dis-involvement that medium scale and small-scale enterprises has got the attention of the stakeholders i.e. the economic managers and the private sector. The development of SMEs suits the current situation on account of the following factors.

  1. Low overhead cost, low level of financing
  2. Lesser pressure on the banking system
  3. Employment generation
  4. Entrepreneurial development
  5. Vendor based development
  6. Development of large-scale industry on firm basis
  7. A more just distribution of resources and profits

The pre-requisites for the development of SME sector rest heavily on an infrastructure tuned to support such development that includes:

  • A banking system customized for SME development
  • One window operation

Currently, our banking system continues to be the large sector banker. Despite talk of SME development under the auspices of SMEDA and development of SME Bank and Khushali Bank, the financial sector’s general response has been influenced by the security issue, i.e. against which asset the bank would be advancing loans to the small and medium scale business entity. In the absence of a customized banking setup, the development in the SME sector so far has been evolutionary and not the result of any conscious activity.
The turning up of the system for development of the SME also includes an enabling environment. Though the need for an enabling environment is not exclusive to the SMEs and is a pre-requisite for all types of economic activity. That includes a one-window operation culture, where the investor does not have to go from pillar to post to get his task done. A conscious effort by the state to reform the banking setup and the attitude of the government functionary and the bureaucracy will set into motion the mechanics of change in the development strategy priorities of our economy.

The development of SME hold within its mechanics of expansion the growth of economy coupled with a more just distribution of wealth. The social justice aspect of it ensures that the development will not compromise the distribution of wealth issues. To begin with, the SME development does not depends upon the expansion of the family enterprises; rather, it is the outcome of the initiative of the single individual or asset of individual. Unlike the development of family concerns, where the emphasis on the particular group’s interests, the SME never seeks to totally control the market, rather, it only identifies its place in the market and sustains it. The modus operandi of most of the vendors in the auto sector is like this. They do not control a major chunk of the market. What they are doing is to maintain their share as a sustainable vendor. Thus the market is not blocked for the new entrant unless there is saturation point already experienced by the industry.

The small overheads involved in fixed and running cost structure of a SME unit means that each unit does not need excessive financing. As a result a large section of society benefits from the available resources. There is no accumulation of wealth in few hands and the money circulates in a fashion, where people are able to derive the needed benefit.

The availability of resources for the SME unit means that the opportunity to develop are not confined to a restricted section of society, rather anyone with a idea and plan can create a place for himself. The success of venture capital in the United States and the likes of Yahoo and Hotmail are indicative of the development of SME as a vehicle for equal opportunity, besides technological development. The other success stories like Microsoft, Linux owe their development to the practical implementation of the idea, which was presented by individuals or a set of individuals with not so privileged backgrounds. Yet they made it big. Bill Gates was not a Kennedy scion, but the opportunity to develop from a SME allowed him enough room. Even today, developers jointly own Microsoft. In the process the above-mentioned advantage of technological development as also been realized.

A more just distribution of wealth and prospects of technological development set the pace for the growth of economy. New technologies generate economic activity on industrial scale. That is not exclusive to developed countries. We have experienced in the context of the Information Technology that it did generate economic activity in the affiliated sectors and provided employment opportunities to many hardware engineers and software developers. The development of IT sector had a more egalitarian character to its credit allowing professionals to prosper, without having to be a large enterprise or scions of big families.

The recipe of SME development infects does two things. On one hand the processes are developed at a grass root level. Vendors are identified and the production process takes off. As small-scale vendors characterize most of the development, the profits are naturally divided according to the contribution to the process. There are no new big families appearing in the process, rather, it is the matter of fact stages of production line, which are identified. The Japanese and Italian economies are increasingly modeled on the basis of SME development. These societies are characterized by the dignity of work, not for the huge amount of sweat, the worker sheds, but for the rewards, which are ensured in this setup. The vendor knows the respect he earns and the rewards he is insured. For that very cause, peace and almost no records of militant trends have characterized the developed societies like Japan.

The debate in the support of the SME can be unending. The prescriptions for the societies and economies like Pakistan in the context of the best possible economic solution are simple. There is a need to retune the priorities of the state, if the results are to be realized, in the absence of which our efforts would remain devoid of any tangible results.

Reference

  1. Small and Medium enterprises development (A recipe For development and just distribution) A research paper by SMEDA Research cell
  2. The A to Z of healthy small business by Amer Qureshi (international edition Australia)
  3. 3-50 years of Pakistan’s economy (traditional topics and Contemporary Concerns by Shahrukh Rafi Khan (Oxford Press)

Recommended Book

50 years of Pakistan’s economy (traditional topics and Contemporary Concerns by Shahrukh Rafi Khan (Oxford Press)

Key terms

  1. Modus operandi (the way in which something is done)
  2. Overheads (a regular cost of running a business i.e. rent, wages, gas, electric bill etc)
  3. One window operation (provision of all facilities at one place)

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