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Micro- and Small Enterprises as Vehicles for Poverty Reduction, Employment Creation and Business Development: The Ethiopian Experience
[ Introduction ] [ TOC ]
Introduction

In many countries, there is now a wide recognition of the contribution of micro- and small enterprises (MSEs) to economic growth. In a cross-section of both developed and emerging economies, the contribution of the MSE sector to total employment, entrepreneurship and innovation cannot be underestimated. For example, this sector generates about 6.2 percent of the aggregate employment in the United States, 22.3 percent in China, about 80 percent in India, 67 percent in Japan and about 70 percent in EU countries (Carter and Jones-Evans 2004). To further underscore the social and economic importance of micro- and small enterprises, one UN study indicated that the sector represented 99 percent of all enterprises and provided around 65 million jobs in EU countries (UNCTAD 2005).

The potential advantages of a dynamic MSE sector have generated high expectations in many developing countries about the contributions of this sector to job creation and poverty reduction. Add to this the optimism that the full development of the MSE sector can foster competitiveness in the economy and achieve a more equitable distribution of the benefits of economic growth in both developed and developing economies. Such considerations have motivated many governments to put in place national policies to stimulate the growth of this sector in service, distribution and manufacturing-related economic activities.

Throughout the 1950s and 1960s, the currently vibrant Asian economies greatly benefited from the growth of the MSE sector. Governments of these nations pursued a strategic focus on export-oriented, medium-sized enterprises that fuelled the overall industrialization process and helped penetrate the international market place. The secrets of success lay in the fact that these firms were adept at applying technology and training to address the needs of growing markets. Additional success factors include mutually cooperative inter-firm relationships that led to exchanges of information and know-how and thus rendered individual firms less prone to risks, not to mention government support in technological extension services, including research support and information on sources of technology and encouraging linkages and networking among enterprises (UNCTAD 2005; Kula, Choudhary and Batzdorff 2005).

Given the enormous differences between the socio-economic background of the Asian countries and other developing nations, a direct replica of Asian experiences may not be a realistic option. With this proviso, however, it is extremely important that developing countries take useful cues from the Asian experience in their attempt to develop the MSE sector and make it a robust engine of economic growth and employment creation. In this regard, recommended steps include appropriate macroeconomic policies; an outward orientation with a focus on export promotion; measures to attract foreign direct investment; and effective selective interventions. In addition, adequate institutional capacity to formulate and implement appropriate economic policies, undertaking selective interventions and attracting foreign direct investment; and an efficient infrastructure to ensure sustained economic growth are also suggested as essential options (Hawkins 1998).

From the perspective of developing countries, MSEs have a number of advantages that make them attractive in accelerating economic growth. First, because MSEs are fairly labor intensive, employment opportunities are generated with a relatively low capital cost, a factor with limited supply in many developing nations. Secondly, they utilize raw materials and labor-intensive technology that are domestically available. Thirdly, policies and programs can be put in place to encourage the development of these industries in different parts of the country thereby reducing concentration of enterprises in certain areas and promoting balanced economic growth. Fourthly, manageable production capacity and their flexibility make them suitable to respond to current national demand and the limited size of the market in many developing nations (Fasika and Daniel 1997; Andualem 2004).

MSEs can contribute tremendously to the growth of national economies. However, many developing countries have not been lucky to benefit from the growth of this sector mainly due to institutional and policy constraints. Ill-conceived development strategies; a complex legal and regulatory environment that stifles the growth of the sector; shortage of adequate business development services, including lack of access to finance, markets and business skills and appropriate technology are to be blamed for lack of success.

Within the Ethiopian context, despite the potential contribution of the MSEs to poverty reduction and employment creation, the Government had not, until very recently, extended adequate support to the development of the sector. Simply put, there has not been meaningful government support in terms of recognition and access to finance and skills required for operating small businesses and enterprises profitably and efficiently (UNCTAD 2005; Eshetu and Zeleke 2008). This has meant that this sector is at its infancy and therefore needs a major institutional and resource boost to contribute to the country’s program of sustainable development and poverty reduction. 

On the other hand according to the Household Income, Consumption and Expenditure Survey (HICES) of 2004/05, urban poverty incidence has increased from about 33% in 1995/96 to about 35.1% in 2004/05. At present, the urban unemployment rate stands at a staggering 25 per cent of the employable population. 

These two hard realities have forced the government of Ethiopia to turn to the MSE sector as a strategy that can have a lasting effect on reducing urban poverty, creating employment and bringing about overall growth in the business sector. As per the Government’s PASDEP, the plan is to reduce urban unemployment through support for small and micro-enterprises and acceleration of the creation of urban-based employment, including vocational and technical training programs, a community-based and labor-intensive urban works program; expanding micro-finance institutions; and providing market support and service premises for small and micro-enterprises.

This is also reflected in the national urban development policy which has two main packages:

 

i)        the urban development package; and

ii)      the urban good governance package

 

The objectives of the urban development package are to reduce unemployment and poverty, to improve the capacity of the construction industry, to alleviate the existing housing problems, to promote urban areas as engines of economic growth and to improve urban social and economic infrastructure particularly for youth. Among the package’s five pillars, micro-/small enterprise development program is the major one.

The micro- and small enterprise development program under the urban development package (2006) has the following objectives.

  • To reduce urban poverty and unemployment by supporting micro- and small scale enterprises;

  • To achieve fast growth through the creation of linkages between micro- and small enterprises with medium and large enterprises; 

  • To facilitate the growth and expansion of micro- and small enterprises and create a foundation for industrial development; and

  • To promote the economic linkages between rural and urban areas.

 

The development of micro- and small businesses therefore has been touted as a vehicle to reduce poverty and create jobs for the increasing number of graduates out of the nation’s technical and vocational education training institutes. Accordingly, the Government has earmarked significant resources for the expansion of the MSE sector in the different Regions.

This program has set ambitious goals to attack urban poverty and reduce unemployment in the urban areas of the country. Among other things, it planned to create employment opportunities for 1.5 million residents in 825 towns over the period 2006/07-09/10. According to the program, 50% of these beneficiaries will be women; and the Government plans to invest Birr 6.2 billion and provide 4900 hectares of land for MSE development.

While the government’s intention and policy are in the right direction, it is necessary to examine the effects of the policy and the extent to which the policy has achieved its objectives of employment creation, poverty reduction and business growth in a sustainable way. Evidence in this regard is hard to come by. To date, there has not been an independent assessment of the contribution of the MSE development strategy to poverty reduction, job creation and business growth either at the federal or Regional levels. To fill the gap, the Forum for Social Studies (FSS) commissioned this study in 2009 to assess the benefits and long-term sustainability of the strategy as well as the businesses/enterprises that have been set up by the large number of entrepreneurs. The aim is to provide policy inputs that can help create a vibrant and dynamic MSE sector and enhance its potential contribution to the country’s overall development.