ISSUES AND POLICY DEVELOPMENT FOR SME:Monitoring Developments

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SME Management (MGT-601)

Lesson 9

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 FOR SME

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.

SME Management (MGT-601)

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

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

Pakistan Country Association Strategy, World Bank Report, Annex 2, page 3.

Census of Establishments-1998.

3Economic Survey of Pakistan 2002-03.

4SME policy Note, the World Bank; ILO SMEDA Study 2001 on MSME, LUMS study on SME

Constraints.

5LUMS in its study on "Barriers to SME Growth in Pakistan: An Analysis of Constraints" compared the

growth rates of Large v.s Small scale manufacturing and established that during 1970's both were growing at

a comparable rate of over 4% whereas in 1990's during the period of economic downturn small scale

manufacturing growth dropped to 2.6% against large scale growth rate of 3.6%.

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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.

SME Management (MGT-601)

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.

Non-Linear Model to estimate underground economy in Pakistan, SBP Research Department.

Under PRSP government is following a five point strategy which includes 1) Macro-economic stability

and fast growth. 2) Investment in Human Resources 3) Government's involvement in particular sectors

(including SME). 4) Expansion in social security system and 5) Good Governance.

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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

SME Management (MGT-601)

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 reseach cell SMEDA/LCCI

50 years of Pakstans 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)

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