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LABOR ISSUES:Delivery of Assistance and Access to Resources, Finance

<< ISSUES IN SME DEVELOPMENT:Business Environment, Taxation Issues
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SME Management (MGT-601)
VU
Lesson 11
We are dealing with the short and medium term issues for SME policy formulation. In fact this
whole issue is inter-related in lessons No 10,11,12,13 and14.
LABOR ISSUES
Likewise, the intensity of the regulations is the second most important reason for firms to drift into the
informal economy all over the world. Labour Laws and regulations in Pakistan7 are considered to be one of
the most complicated areas with which any business enterprise deals. The present set of the labor laws was
the result of checkered initiative of various governments to create a healthy business environment for the
labor. Consequently, enterprises have to deal with fifty six (56) labor laws with some of them being industry
specific. The existing plethora of labor laws has made compliance impossible for the enterprises due to their
inherent inconsistencies. Numerous labor inspections under these laws are yet another impediment that
retards the growth of SME.
The labor market dynamics have changed considerably over the years, a higher degree of adaptability and
flexibility along with Labor market security, including protection against arbitrary loss of employment,
reductions in income and healthy work practices are essential requirements of new environment. Besides,
the condition for compliance for international labor standards under the global economic system is another
issue.
Taking into account the need of labor market and employers, the Ministry of Labor and Manpower
introduced an employment security regime. The new labor policy initiatives is aimed at creating a favorable
environment for facilitating industrial promotion and revival along with legislative and structural changes to
bring in an environment to devoid of restrictive labor practices, but protecting the rights and interest of the
workers.
It was proposed that existing labor legislation be simplified and rationalized into six basic laws. In addition,
for promoting bilateralism among government employer and employees, government established a forum
Workers Employers Bilateral Council of Pakistan (WEBCOP). The government is also working in the
development of Labor Inspection Policy under the SME Sector Development Program to reduce the
interface of government officials with businesses without compromising on the unhealthy work practices.
The only issue highlighted thus far through direct interaction with SME is that of co-ordination. The
business and labor community at large has been supporting the reforms.
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A committee on Reforms in Regulatory Legal and Policy Environment was established in the Ministry of
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Industries and Production in 2000 with the purpose to co- ordinate, review, identify issues of concern and
formulate recommendations on several laws affecting businesses. Some of their efforts have resulted in the
consolidation of the labor laws as announced in the Labor Policy 2002 and proposed amendments in the
Factories Act 1934, Drug Act 1976, Boiler Act 1923, and Explosive Act 1884, and as such reviewed 101
commercial and labor laws that affect the industrial sector.
Delivery of Assistance and Access to Resources
Competitive advantage is determined by the productivity with which a country, region or cluster uses its
human, capital and natural resources. Pakistan's international competitiveness markedly declined over past
few years1. Part of the blame is shared by lower productivity of the workers. The evidence reveals that
median labor productivity, as measured by annual value added per worker, is 25 percent lower in Pakistan
than in India and 35 percent lower than in china2.
Trade liberalization at the global and regional levels and the new information and communication
technologies have entwined to create rich opportunities as well as formidable challenges to all independent
countries and enterprises. Competition has become increasingly fierce among the global and regional
economies and enterprises. The structure of markets and their demand3 is increasingly complex.
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SME Management (MGT-601)
VU
Despite operating locally, Pakistan's SME need to be increasingly aware of the world market. They cannot
escape it even in their local economy. To meet this challenge, there is growing need for information on
global technology trends, rules and compliance cost including facilitation services regarding global issues.
An integrated program for improving competitiveness, promoting trade, and developing workforce can
help4. Training, research and development, labor productivity enhancement, technology transfer and up-
gradation and support to business startup through business incubation and various other business support
services, including finance, are issues that need to be addressed separately by the SME policy.
What is important is that access to resources and services necessary to compete in this global environment
are being provided to SME because their size poses an effective limit on their capacity to assess world
market conditions and tap appropriate resources. Old policy tools of protection now require replacement
with promotional and facilitation functions. The roles of business development services, hence, become
imperative.
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1 World Bank, Development Policy Review 2002, reveals that the annual manufacture exports of Pakistan
are barely 12 percent of those of Malaysia. 18 percent of Thailand's and less than a third of Philippines----
countries whose combined manufacturing exports were lees than Pakistan's in the mid 1960's.
2 Investment Climate Survey of Pakistan- 2003.
3 Consumer preferences and market standards have become more sophisticated and exacting. Competitive
advantage is now determined bu several non-price parameters such as quality, health and safety, social
equity in employment and production and ecological compatibility of products and processes.
4 The Ministry of Science and Technology is preparing a National Quality Policy and Plan and another
initiative of the government is working on the development of National Productivity Policy.
The capacity to deliver such services by the public or private sector led institution is a major topic for
debate but also relates to the specifics of the service in question. However, market-driven support programs
are a cornerstone in any SME support system which strives for sustainability. This also maximizes the
potential for cooperation with private sector organizations and minimizes the distortions in the market
economy. Yet the structures for such a system still need to be mutually agreed and implemented in Pakistan.
Below we flag the important issues.
Finance
Access to equity and formal debt financing has repeatedly been identified as recurring constraint to SME
growth and development. Commercial bank apply conservative policies in lending to SME. More,
importantly the existing structure of financial sector was developed to serve medium to large enterprises
which are organized as a formal business. Most banks prefer to hold risk free-income generating assets and
lending to SME is unattractive due to a range of objective and subjective factors. These include high
transaction cost, inability to do away with tangible collateral requirement, no linkage of financial products
with sector needs and the inability to structure/ offer and manage risk-prone SME specific medium to long
term financing options.
It has been observed that 57% of new investment for small and Medium Enterprises and 67% of working
capital finance come from internal finance or retained earnings; only about 7% of funds for investment or
working capital come from banks or other financial institutions. Even suppliers' credit rivals the
contribution of the banks as a source of working capital (4.5%) 5. Another survey6 concludes that SME are
indeed being rationed out of the credit market, rather than merely exhibiting a lower demand for credit.7
However, financing SME is one of the key pre-requisites for the future development of the national
economy and the achievement of economic growth. The government of Pakistan had originally responded
to the growing needs of the sector by introducing a Self Employment Scheme through Small Business
Finance Corporation (SBFC) in 1992. SBFC continued to grant loans to small business and disbursed 12
million by June 1998, catering to the needs of 157,162 unemployed persons. Other schemes for SME
development or employment generation included the Youth Investment Promotion Society, and Yellow
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SME Management (MGT-601)
VU
Cab scheme. But all of these efforts lacked coherence across institutions, and, in the absence of any national
policy, resulted in disjointed efforts and even corruption
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5 SMEDA- World Bank Investment Climate Assessment Survey was conducted between May and
November 2002 by using SMEDA in collaboration with the World Bank covering a random selection of
965 mainly manufacturing businesses (90% being SME), drawn from 12 largest cities of Pakistan. To date it
represents the most comprehensive data set.
6 Faisal Bari, Ali Cheema, & Ehsan-ul-Haque; Barriers to SME growth in Pakistan: An analysis of
constraints, June 2003.
7 This finding is corroborated by the World Bank (2001) survey, which finds that over 50% of their sample
SME who had ever approached a bank reported difficulties in obtaining credit. SMEDA-ILO Study 2001
also reports a similar finding.
Previous efforts have therefore had limited results and were highly inefficient because the financial sector
accumulated a huge portfolio of non-recoverable loans under these schemes. The SME Bank will need to
undergo restructuring for next three years.
Furthermore, severe damage has been done because the financial sector has developed disinterest for any
such initiatives in future, and we need to basically start from a scratch. The banking industry in general is
also not venturing into the areas where new processes and procedures with a view to improve SME's access
to credit are required. It is likely that market-led mechanisms will take some time to improve the access of
smaller firms to formal credit. In particular, outreach shall remain to be a problem for the due to the limited
presence especially in the rural SME market.
The government is seeking to facilitate the participation of commercial baks in SME leading by training
with the assistance of the ADB. The sooner commercial banks obtain the know-how how to successfully
engage in cash-flow based lending to small business enterprises, the better.
Finally, new prudential regulations increase the likelihood of viability and sustainability in the financial
sector. However, the broad definition of SME also bear a risk of upward filtering of the loan portfolio
towards the higher-end medium enterprises unless targeted programs for micro and small enterprises exist.
The creation of SME credit endowment fund may be one way of mitigating the effect.
REFERENCES
1-Gallup/BRB world bank survey
2-Policy issues papers by SMEDA
3-50 years of Pakistan's economy by Shahrukh Rafi Khan
4-Reseasch cell LCCI
Book Recommended
Small entrepreneurs in developing countries by DR Asghar S. Nasir
KEY TERMS
Productivity (The rate amount produced by a worker)
Tangible asset (An asset that has physical existence and value at least equal to liability)
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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