Small is beautiful

I’ve said it before, and I’ll say it again: SMEs (small and medium enterprises) are the way to inclusive growth and development. The single most important strategy we could embark on to create ample jobs and foster broad-based growth is to widen and deepen the role of SMEs in our economy. In a country where workers are plentiful and capital is limited, it stands to reason that we generate more jobs where it’s cheaper to create one, and that is in the SME sector. It is the best antidote for “jobless growth.” Consider this: Our economy grew by more than 7 percent over the past year, yet jobs only grew by 1.6 percent; total production and incomes grew nearly five times faster than jobs did. This is a sure-fire formula for further widening income gaps. The only way this can change is for us to find a way to get more GDP growth out of SMEs, and not rely primarily on large industrial or service enterprises to propel that growth.

To be clear, I am not talking about micro-enterprises here, or those having less than 10 employees or less than P3 million in capital. More than nine out of 10 (92 percent) of all our enterprises are actually like that. Only 7-8 percent are true SMEs, and less than half a percent are large enterprises—but guess who account for the bulk of our GDP? The problem is that those 92 percent mostly belong to the informal sector, aka the “underground” economy. A survey done in 2008 by the Global Entrepreneurship Monitor (GEM) found that six out of 10 Filipino businesses have no employees. They are, in effect, solo flight “businesses” (if you can call them that) likely to be in the form of vendors, pedicab drivers and similar self-employment occupations. Obviously, it’s not these enterprises that we want to depend on for long-term jobs for our workers.

Philippine society has a relatively and atypically thin middle class (the “missing middle”) compared to most other countries; our enterprise sector has a similarly thin small and middle sector. Thus, much of Philippine employment is informal and unstable, with about half of employed workers being either unpaid family

workers or self-employed. These are not the jobs that will entice our overseas workers to come home and keep their families intact and, at the same time, adequately provided for. In fact, it is having to settle for such jobs at home that pushes an estimated 2,000 Filipinos to leave every day to seek better employment overseas.

One would think that government has been well aware of what needs to be done. There

appears to be ample plans, policies and institutions to address the SMEs’ needs. We require banks to allocate credit to SMEs, apart from having SME credit or guarantee programs made available by government financial institutions. We have a Small and Medium Enterprise Development Council and a Small Business Guarantee and Finance Corporation. We even have a Magna Carta for Small Enterprises, enacted in 1991 and amended in 1997. We have had laws that encourage small businesses, especially informal ones, to flourish and grow through incentives and exemptions of various kinds. And yet our SME sector remains relatively underdeveloped compared to those in many of our neighbors.

The traditional hurdles SMEs must overcome are well known: access to finance, technology, raw materials and markets. On finance, the problem is not so much the lack of funds available for SMEs, as the difficulty of getting access to them. The GEM survey found that very few businesses—only one in 20—actually make use of any bank financing. In fact, only about one out of three deals with banks at all, even just to deposit funds. And yet, lack of financing comes up to be the most widely cited impediment to starting and maintaining a business. How, then, do we get small businesses to feel comfortable to use banks at all? But for the banks to be comfortable with them in turn, they must be able to practice the basics of sound record-keeping and financial management. There is much scope for creativity on how to make these happen, and the Bangko Sentral ng Pilipinas’ Inclusive Finance Unit, whose mission is to get financing to flow to SMEs, would do well to work with other government agencies and nongovernment organizations to help make large numbers of SMEs bankable. And there’s lots of experience in countries around us to draw on.

Low levels of technology hamper most SMEs in the country, with production methods that are generally inefficient, even wasteful. The result is inconsistent product quality and slow processes, rendering them uncompetitive. Product quality could be better addressed if more firms follow certified methods and undergo performance or quality tests. However, we lack common support facilities like testing centers and standardization agencies, whether government- or private sector-operated. We also need common research and development (R&D) facilities serving SMEs, inasmuch as they cannot afford to undertake their own R&D in-house.

Getting in the way of SMEs’ access to raw materials and markets is inferior transport and communication infrastructure. SMEs also have limited access to market information; hopefully, wider phone and Internet access is changing that. A key impediment to our SMEs’ gaining a foothold in export markets is the inability to respond to volume demands. Assistance toward clustering of small producers is thus crucial, and this need not be a role for government alone. SMEs need all the help they can get, and it would take a concerted nurturing effort by all agencies of government and nongovernment groups to assert that in the economy and in enterprise, small is indeed beautiful.

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