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ISSUES AND POLICY DEVELOPMENT FOR SME:Monitoring Developments

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SME Management (MGT-601)
VU
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.
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SME Management (MGT-601)
VU
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.
1
Census of Establishments-1998.
2
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.
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SME Management (MGT-601)
VU
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.
6
Under PRSP government is following a five point strategy which includes 1) Macro-economic stability
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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
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SME Management (MGT-601)
VU
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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Table of Contents:
  1. THE HISTORY:Cottage Industry, CONCEPT OF SMALL BUSINESS
  2. THE RELATIONSHIP BETWEEN SMALL AND BIG BUSINESS:The SME’S in Pakistan
  3. THE ROLE OF ENTREPRENEURSHIPS IN SMEs:Focus and Perseverance Guide the Entrepreneur
  4. THE ROLE OF ENTREPRENEURSHIPS IN SMEs:Kinds of Entrepreneurs
  5. SMALL ENTREPRENEURS IN PAKISTAN:National Approaches
  6. THE DEVELOPMENT OF SMES IN PAKISTAN:The Industrial History of Pakistan
  7. GOVERNMENT’S EFFORT TOWARDS SME DEVELOPMENT:Financing Programs
  8. THIS LECTURE DEFINES THE ROLE OF NGOS AND SMEDA:Mission Statement
  9. ISSUES AND POLICY DEVELOPMENT FOR SME:Monitoring Developments
  10. ISSUES IN SME DEVELOPMENT:Business Environment, Taxation Issues
  11. LABOR ISSUES:Delivery of Assistance and Access to Resources, Finance
  12. HUMAN RESOURCE DEVELOPMENT:Market and Industry Information, Monitoring Developments
  13. MARKET AND INDUSTRY INFORMATION:Measuring Our Success, Gender Development
  14. LONG TERM ISSUES:Law and Order, Intellectual Property Rights, Infrastructure
  15. THE START UP PROCESS OF A SMALL ENTERPRISE:Steps in Innovative Process
  16. TECHNICAL FEASIBILITY:Market Feasibility, Market Testing
  17. FINANCIAL FEASIBILITY:Financial resources and other costs, Cash Flow Analysis
  18. ASSESSMENT OF PERSONAL REQUIREMENTS AND ORGANIZATIONAL CAPABILITIES:Analysis of Competition
  19. Post Operative Problems of a New Enterprise:Environmental Causes
  20. HOW TO APPROACH LENDERS:Bank’s Lending Criteria, Specific Purpose, Be Well Prepared
  21. WHAT A BANK NEEDS TO KNOW ABOUT YOU:General Credentials, Financial Situation
  22. COMMERCIAL INFORMATION:Checklist for Feasibility Study, The Market
  23. GUARANTEES OR COLLATERAL YOU CAN OFFER:Typical Collateral
  24. Aspects of Financial Management:WINNING THE CASH FLOW WAR, The Realization Concept
  25. MEANING OF WORKING CAPITAL:Gross Working Capital, Net Working Capital
  26. RECRUITMENT, SELECTION AND TRAINING:Job Description, Job Specification
  27. SELECTION AND HIRING THE RIGHT CANDIDATE:Application Blank, Orientation
  28. TRAINGING AND DEVELOPMENT:Knowledge, Methods of Training
  29. CONDITIONS THAT STIMULATE LEARNING:Limitations of Performance Appraisal, Discipline
  30. QUALITY CONTROL:Two Aspects of Quality, Manufactured Quality
  31. QUALITY CONTROL:International Quality Standards, MARKETING
  32. MARKETING:Marketing Function, MARKETING PROCESS - STEPS
  33. MARKETING:Controllable Variable, Marketing Uncontrollable, Marketing Mix
  34. MARKETING:Demerits of Product Mix, Development of new product, SMEDA
  35. ROLE OF TECHNOLOGY:Training programmes, Publications
  36. ROLE OF TECHNOLOGY:Measure to Undertake for Promoting Framework.
  37. EXPORT POTENTIAL OF SME IN DEVELOPING COUNTRIES I:Commonly Seen Assistance Programme
  38. EXPORT POTENTIAL OF SME IN DEVELOPING Countries. II:At the national level
  39. WORLD TRADE ORGANIZATION (WTO):WTO Agreements: Salient Features
  40. WTO MINISTERIAL CONFERENCES:PAKISTAN AND WTO
  41. WORLD TRADE ORGANIZATION (WTO) PAKISTAN & WTO. II:International Treaties
  42. WORLD TRADE ORGANIZATION (WTO) PAKISTAN & WTO. III:Agriculture
  43. WORLD TRADE ORGANIZATION (WTO):PAKISTAN & WTO. III
  44. WORLD TRADE ORGANIZATION (WTO):CONCLUSIONS AND RECOMMENDATIONS
  45. SUMMARY & CONCLUSIONS:Financing Tool, Financing Tool