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Pakistan ignoring driving engine of economy

Published on 3rd June, Edition 23, 2013

 

Economic analysts are clearly divided into two distinct groups, one that believes small and medium enterprises (SMEs) are the real driver of economy and another that believes that conglomerates are the real creators of value. Some management gurus believe it is only the perception but both are so minutely intermingled that one just can’t survive without other. They also believe that better these enterprises understand needs of each other higher is the synergy achieved.

They accelerate economic activity, job creation and capital formation for the common good rather than increasing surplus for the few. The examples of economic development set by a number of countries in Far East in general and Taiwan and China in particular cannot be ignored as these two countries have SMEs dominated economies. Taiwan has achieved the status of an industrialized advanced country, while China is attaining the position of newly industrialized country. Although Pakistan shares many common characteristics with Taiwan and China, such as having legacies of monarchy, colonial past and officially declared independent states in the late 1940s and have a large SMEs’ population, it is still struggling to get on the trajectory to development. SMEs-driven success stories offer prolific case studies and countries like Pakistan can learn lessons from their experience.

Taiwan, a small island country, hosts 97.8 percent SMEs. Taiwanese SMEs contribute 85 percent to the country’s GDP by engaging about 85 percent of non-agricultural labor force. The vibrant SMEs of Taiwan have expedited economic growth making Taiwan the sixth largest per capita ($16,400) earner in Asia and holder of the fifth largest foreign exchange reserves in the world. The SMEs role over the last four decades in Taiwan’s economic development has attracted much attention of the development economists from all over the world. It is generally concluded by these researchers that SMEs have played a major role in Taiwan’s rapid economic growth in early 1960s and 1970s. The source of strength to the Taiwanese SMEs is government’s continued support to the small enterprises for their growth and development.

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 in 2012, there were more than 25 million registered small businesses in China. The country tops the world by having more than 99 percent SMEs of the total enterprises and 75 percent share in GDP by engaging 80 percent of non-agricultural labor force.

Some management gurus wish to talk about Fortune-500 companies because of the immense power enjoyed, at times even the government policies are dictated by these entities, which directly or indirectly posses nearly 90 percent of the wealth. This can be best understood if one looks at Saudi Arabia, the largest oil producing country of the world. However, the entire production is controlled by one exploration and production company, ARAMCO. The real users of refined products are billions of people who get the refined products from millions of dispensing stations operating in every nock and corner of the world.

The other example is automobile assemblers and it will become much easy to understand if one looks at Pakistan only. Around half a dozen assemblers of cars and light commercial vehicles are operating in the country. However, the number of local manufacturers of parts and accessories exceeds 3,000, which employ around half a million people directly and indirectly.

 

Yet another example is textiles and clothing industry. In the past spinning units aggregating around 500 were considered the textile industry. It was only about two decades ago it was realized that thousands of made ups and garment manufacturers are the backbone of industry. This perception changes because at one time yarn used to fetch 50 percent of total export proceed, which has now reduced to around 15 percent. According to some estimates there are more than 30,000 small and cottage units, which produce bulk of the value-added products.

If one looks at the lending of financial institutions bulk of this goes to large corporate sector and most of the SMEs operate on the capital of owners/partners or money borrowed from informal sector. It is only a recent phenomenon that farmers are given credit amounting to around Rs320 billion, which meets less than 40 percent of the needs of farmers. As against this three times the amount is disbursed among the manufacturing units.

It is on record that nearly 40 percent of agriculture produce goes stale before reaching the market. It is because of highly inadequate transportation and storage facilities. Pakistan is among the top five milk producing countries but has remained dependent on imported milk power. Even today around 5 percent of the milk produced in the country is packed in tetra packs, which enjoy longer shelf life.

Karachi having a population of around 20 million has huge demand for fresh milk. Previously animals were kept in highly unhygienic conditions and a substantial quantity of the milk produced used to go stale. Now ‘baras’ are operating on scientific grounds. This has not only increased production of milk but also reduced import of milk powder. It became possible because financial institutions started financing purchase of buffaloes and cows and even camels. This type of financing became possible with the involvement of insurance companies.

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.

The 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 Bank 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.

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