SMEs The African error

I was disturbed to see a newspaper in Namibia today, publish the same old urban legends about SME's.

SME's are the great deliverer of jobs to the masses! But are they? SME's are more labour intensive than large business! Are they? SME's create more jobs than big businesses! Do they?

IFC research has shown that firstly, SME's are not more labour intensive than large businesses. In fact completely the reverse is true. Large businesses are a lot more labour intensive than SME's, simply because they can afford to employ more people. SME's are by their very nature often strapped for cash flow, and as a consequence, cannot afford to employ unnecessary staff.

Then the question of whether SME's create vast numbers of jobs. One again research shows that in the informal sector, the high failure rate is often equal to the start up rate at best. However, most of these informal SME's employ no staff. They are survivalist in nature and cannot afford to employ staff.

In the formal sector, although SME's do employ staff, the net gain in jobs is often nil, as the failure rate equals the start up rate. A number of countries such as Japan and New Zealand introduced specific interventions to increase the start up rate, so that it would increase the start up rate in excess of the failure rate, in order to have a net gain in jobs. However, I have yet to see similar interventions in Africa. Unfortunately, although highly understandable, there is always a drive to fund only the survivalist businesses. Africa has too many uneducated and illiterate people, for whom a survivalist SME is the only hope. Therefore it is an imperative that Africa continue with these interventions until the education level in African countries is raised to a high enough level.

But Africa must address the other segments of the SME market as well, and with the correct interventions, if they wish to create jobs. Once again the research done by the IFC and others, clearly points to the fact that only once SME's start to grow fast, and move from small to medium, does the rate at which they create jobs become significant.

So please Africa, stop trotting out all the same old urban legends. They do not help anyone but politicians to extend their political careers.

Rob Smorfitt To learn more about this author, visit Rob Smorfitt's Website.

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