SMEs for inclusive growth

No one else among our Southeast Asian neighbors saw poverty worsen in the last 10 years the way we did in the Philippines, in the face of record economic growth at that. Ours is a classic case of growth that has failed to be “inclusive,” now the favored term to describe economic growth with widest participation and benefits, best ensured through equal opportunities. Our situation stems in turn from a highly concentrated economic structure, with a very narrow segment of the economy accounting for an inordinately large share of total output and incomes in the economy (measured by gross domestic product or GDP). We have an economy where total output and income is dominated by a small number of very large enterprises.

Consider these data: 90 percent of our firms are “micro” enterprises (defined as having less than 10 workers), and another 9.6 percent are “small or medium” enterprises (10-199 workers), or what are officially known as SMEs. The remaining 0.4 percent that are large enterprises (200 workers and up) actually account for more than two-thirds (68 percent) of our total economic output, while less than a third is spread thinly across the other 99.6 percent!

There is much evidence from economic research that a robust SME sector could bring higher income growth, greater employment of domestic resources, more gainful integration with global and regional trade and investment, and greater equity in access, distribution and development.  The value of a strong SME sector in fostering broad-based, thus inclusive, growth is widely recognized and often extolled by policymakers and industry observers. Still, the government persistently finds difficulty providing the right amount and the appropriate nature of support to the SME sector to adequately address their age-old lack of access to financing, technology, raw materials and markets. Hence, the mortality rate for SMEs tends to be high, with very few able to survive beyond three to five years, often much less.

Through the years, I have argued that the need is for a more comprehensive and integrated approach to SME promotion and development. Fostering a conducive and nurturing environment to enable SMEs to flourish is not a job for the Department of Trade and Industry alone. Most if not all instrumentalities and levels of government could have an important role to play in building a vibrant and resilient SME sector, spanning provision of credit, infrastructure, technology support, and market linkages. The work requires an aggressive, orchestrated and sustained effort wherein the President provides the proper impetus and guidance for all government entities to play out their respective roles as a team, and make a tangible contribution.

There are four important points to consider in building a dynamic and resilient SME sector:

First, distinction must be made between microenterprises and SMEs. We tend to have a misplaced tendency to lump them together, and yet the circumstances of the former, which are mostly in the informal economy, lead to needs quite different from those of more formal enterprises falling under the SME category. There is now a propensity to adopt the combined term “MSMEs” to refer to micro, small and medium enterprises all together, thereby falling further into this trap.  But institutional support for the two must arguably be kept distinct and separate, and is probably best handled separately by distinct government agencies as well.

Second, there is need to cluster SMEs together to facilitate consolidation and necessary quality control of their outputs, in order to meet volume demands from institutional buyers and export markets. Successful clustering needs an effective broker to facilitate the process of bringing individual SMEs together. This can be done either by organizing them formally into a cooperative or corporation, or by simply consolidating outputs of independent small producers systematically, to attain sustained desired volumes. Successful examples of clustered SMEs typically came about because a third party (e.g., a “nucleus” producer, a motivated NGO, or an effective government entity) invested effort in initiating and sustaining the clustering arrangement.  This was the case with the Northern Mindanao Vegetable Growers Association (Normin Veggies), and the Sultan Kudarat Muscovado Farmers and Millers Corp., both of which were initiated with impetus coming from an NGO and a foreign donor-funded project, respectively.

Third, technology support is critical for SME development, as smaller firms will by nature not have the internal resources for effective research and development. As SME development can be considered a desirable public good, the case can be made for public provision of R&D services focused on SMEs (calling the Department of Science and Technology). Developing environment-friendly SME production technologies is particularly important, given common observations that in many cases, SMEs rather than large enterprises are the ones more responsible for environmentally damaging production methods (as in the case of small-scale mining).

Finally, it is worth stressing that focus on SMEs should not imply a bias against large enterprise; indeed, a key element of the SME strategy should be to foster closer synergy between large-scale enterprises and SMEs, as is common among Japanese firms. By deliberately relying on SME contractors as suppliers of product components as in the Japanese auto industry, large enterprises could actually help sustain, rather than supplant, smaller enterprises, and vice versa.

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