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SMEs generally considered more productive than large enterprises

Published on 29th Sep, Edition 39, 2014

 

The expansion of SME sector is crucial to an economic revolution in Pakistan: experts

Developing and developed countries have recognized the importance of Small Medium Enterprises (SMEs) which play an important role in the development of national economy. In Indonesia, United Kingdom, South Korea, Thailand, China, USA, Bangladesh etc, SMEs have historically been the main players in the domestic economic activities especially as providers of employment opportunities. SMEs are the starting point of development in the economies towards industrialization as well as significant effect on the income distribution, tax revenue and employment.

China, on the other hand, hosts the largest number of small and medium enterprises in the world. According to the statistics released by the State Administration for Industry and Commerce, there were 25.057 million registered small businesses in China. The country tops the world by having 99.6 percent SMEs of the total enterprises and 75 percent share in GDP by engaging 80 percent of non-agricultural labor force. With $3,774 per capita income, China became the second largest economy of the world in 2010 by surpassing Japan. China’s economic growth stems from the opening up of its economy in late 1970s, by producing low-cost goods and services and later moving up in technology sophistication and investment in large industries like steel and plastics. In fact the spread of small technology intensive new enterprises in China was the result of the government’s various policies and programs to promote research and innovation in the SME sector.

According to the World Bank, SMEs are generally more productive than large enterprises and SMEs can boost the economic growth and development. In the developing countries SMEs are performing a very constructive role in the development of export led industrialization and SMEs are the biggest group in terms of number of industrial units.

In Pakistan, there are roughly 3.2 million business project in Pakistan and the share of SMEs in industrial employment is estimated 78-percent while the SMEs in Pakistan contributes 30 percent to the national GDP. In Pakistan SME sector is facing big challenges such as complications and fear of entrance in the global markets. Due to lack of capabilities, SMEs are not able to participate competitively in the national as well as international level. Lack of proper training and better education is the major causes of the failure of SMEs in Pakistan. Apart from this, high cost of doing business, non-availability of liquidity, high inflation and electricity and gas crises are challenges posed to the SME sector in Pakistan.

Pakistan’s SME sector constitutes 90 percent of the total enterprises with 40 percent contribution to GDP engaging 80 percent of non-agricultural labor force. Pakistan falls in the list of low-income group countries with $1,050 per capita income. Pakistan’s economic policy remained focused on large enterprise from 1950s to 1980s. However, the government of Pakistan has been focusing on the promotion of SMEs since late 1990s.

Experts told PAGE that Pakistan is the world’s 4th largest producer and 3rd largest consumer of cotton. The expansion of the SME sector is crucial to an economic revolution in Pakistan as loan recovery in the sector is 100-percent as compared to rich people who only repay almost half of their loans, they said.

 

According to them, SME sector could be an engine of growth for five reasons. The government cannot provide employment to a rapidly growing population and only the SME sector can cater for the need. The promotion of the SME sector in Pakistan was crucial to meet employment needs as the government cannot generate employment for the growing population.

They said, Gujrat, Sailkot and other cities have played a vital role in SME development but unfortunately they are unorganized due to lack of institutional support. They added that the SME sector plays a key role in economic growth of any country. Small and medium enterprises (SMEs) had increased in the world while large enterprises were closing. However, the SME sector is not growing in Pakistan due to the unavailability of required resources. The major reason is the government is the biggest borrower of loans from commercial banks while the remaining resources are lent by banks at very high mark-up and the SME sector cannot afford it, they said.

They further said SMEs accelerate economic activity, job creation and capital formation for the common good rather than increasing surplus for the few. Citing the examples of economic development set by a number of countries in Far East in general and Taiwan and China in particular, they said their development cannot be ignored as these two countries have SMEs dominated economies. Taiwan has achieved the status of an industrialized advanced country (IAC), while China is attaining the position of newly industrialized country (NIC).

Although Pakistan shares many common characteristics with Taiwan and China, support systems to SMEs were institutionalized by initiating various loan schemes for the unemployed youth and finally setting up Small and Medium Enterprises Development Authority (SMEDA) in 1998 and SME Banks in 2002. On the recommendations of SMEDA and other advisory bodies, various supports were provided to SMEs. Though the support environment to the SMEs is considered important in Pakistan, the economic indicators of the developing countries in general and China and Taiwan in particular reveal the sluggish performance of SMEs in Pakistan.

SME Clusters in Punjab are specialized in production from low tech cutlery products to hi-tech auto parts, from raw vegetable and fruits to value added food stuff and juices from handloom textile products to modern textiles, from hand-stitched footballs and wooden sports goods to mechanized balls and composite material sports goods, from traditional carved furniture to modern aesthetic design furniture and many more. The multitude specialization in production of different goods geographically spread from Lahore to Sialkot, Faisalabad to Sargodha and Multan to Rahim Yar Khan.

With easy access to liquidity, trained force, access to gas and tariff and raw material, Pakistan’s SME sector can lead the country to comity of developed nations. The government needs to provide conducive atmosphere for the growth of SME sector which is badly ignored.

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