SMEs in Africa: the “Missing Middle”

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BIBLIOGRAPHY - E-COMMERCE FOR DEVELOPMENT: PROSPECTS AND POLICY ISSUES - By OECD Development Centre

The development of the private sector varies greatly
throughout Africa. SMEs are flourishing in South Africa,
Mauritius and North Africa, thanks to fairly modern financial
systems and clear government policies in favour of private
enterprise. Elsewhere the rise of a small-business class
has been hindered by political instability or strong
dependence on a few raw materials. In the Democratic
Republic of Congo, for example, most SMEs went bankrupt
in the 1990s – as a result of looting in 1993 and 1996 or
during the civil war. In Congo, Equatorial Guinea, Gabon
and Chad, the dominance of oil has slowed the emergence
of non-oil businesses.

Between these two extremes, Senegal and Kenya have
created conditions for private-sector growth but are still
held back by an inadequate financial system. In Nigeria,
SMEs (about 95 per cent of formal manufacturing activity)
are key to the economy but insecurity, corruption and poor
infrastructure prevent them being motors of growth.

Africa’s private sector consists of mostly informal microenterprises,
operating alongside large firms. Most
companies are small because the private sector is new
and because of legal and financial obstacles to capital
accumulation. Between these large and small firms, SMEs
are very scarce and constitute a “missing middle.” Even in
South Africa, with its robust private sector, micro and very
small enterprises provided more than 55 per cent of all
jobs and 22 per cent of GDP in 2003, while big firms
accounted for 64 per cent of GDP.

SMEs are weak in Africa because of small local markets,
undeveloped regional integration and very difficult business
conditions, which include cumbersome official procedures,
poor infrastructure, dubious legal systems, inadequate
financial systems and unattractive tax regimes. Many firms
stay small and informal and use simple technology that
does not require great use of national infrastructure. Their
smallness also protects them from legal proceedings (since
they have few assets to seize on bankruptcy) so they can
be more flexible in uncertain business conditions.

Large firms have the means to overcome legal and financial
obstacles, since they have more negotiating power and
often good contacts to help them get preferential
treatment. They depend less on the local economy because
they have access to foreign finance, technology and
markets, especially if they are subsidiaries of bigger
companies. They can also more easily make up for
inadequate public services.

Financing SMEs in Africa
by Céline Kauffmann
Policy Insights No. 7 is derived from the African Economic Outlook 2004/2005, a joint publication
of the African Development Bank and the OECD Development Centre

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BIBLIOGRAPHY - E-COMMERCE FOR DEVELOPMENT: PROSPECTS AND POLICY ISSUES - By OECD Development Centre

About the Author: OECD Development Centre

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Created in 1962 by the Organisation for Economic Co-operation and Development (OECD) in Paris, the Development Centre is an interface between OECD Member countries and the emerging and developing economies. The Development Centre occupies a unique place within the OECD and in the international community. It is a forum where countries come to share their experience of economic and social development policies. The Centre contributes expert analysis to the development policy debate. The objective is to help decision makers find policy solutions to stimulate growth and improve living conditions in developing and emerging economies.
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