Small is beautiful: revitalizing the SME sector of Pakistan

Dr. Hassnain Javed

January 25, 2019

 

 

In many countries around the globe, and in particular the developing economies like Pakistan, the governments are facing low growth in foreign investment, trade deficits and unemployment. With the increase in economic disparity, citizens are in a state of dissatisfaction with the current affairs of the state. Most importantly, there is a lack in the extent of globalisation and technology as compared to developed nations. Against this backdrop, the digital transformation and restructuring of industries in Pakistan is essential for promoting economic growth and providing a more inclusive globalisation. One such opportunity lies in developing the cottage industry or Small Medium and Enterprises (SMEs), in Pakistan.

Many industries ( like the cotton weaving, textiles, surgical instruments, carpets, leatherwear industries etc) rely on SMEs for the generation of new ideas or value addition in the current product lines. Pro-poor governments in the growing economies have introduced subcontracting policies to integrate the industries along their size and scope. One such example is of the automobile industry that has integrated almost 60-70 percent of its component part supply from SMEs. This is perhaps one of the best examples of efficient collaboration of large corporations with SMEs. Forward integration, with showrooms and repair shops are further examples of how large firms can cover the vast geography of the countries by the extensive network of small enterprises. Likewise, Pakistan can develop its own petrochemicals and mineral industries by collaborating to ensure that the benefits are not only reaped by Punjab or Sindh but also to underdeveloped regions of Balochistan and Khyber pakhtunkhwa. Such a move would provide inclusive growth opportunities, through interdependencies of the region.

The growth of cottage industries is imperative for the sustainable growth and development of the economy of Pakistan. Firstly, the cottage industry boosts economy by creating jobs in the market. Generally small firms are more labor intensive than larger firms that rely more on automation for reaching economies of scale. According to Pakistan Poverty Reduction Strategy Paper, SMEs have a huge potential for the alleviation of poverty in Pakistan after agriculture and construction of housing schemes. Secondly, SMEs have the potential for participating and creating previously unsought benefits of a globalised and digital economy. As inferred from the success stories around the globe major breakthroughs in technology are mostly brought about by innovative ideas put forward by SMEs. For instance, in China Small-medium sized enterprises (SMEs) contribute 60 percent of China’s industrial output and create 80 percent of its jobs. Breaking down the statistics, China’s Bureau of Statistics (CBS)’s 2013 report, revealed that approximately 97.9 percent of all registered companies are SMEs, that contributes to 53.4 percent of all assets in China and 62 percent of all it profits, building this amount to a whopping 4.26 billion Yuan. Moreover, the economic surveys show that SMEs also contribute to nearly 58 percent of the GDP and 68 percent of exports. According to the listing of SMEs in the National Equities Exchange and Quotations (NEEQ) system net profits have increased from about 26.29 percent in 2016. Additionally, their annual reports presented an increase over 25 percent of the annual business revenue.

Despite of the discovery of the scope of SMEs in Pakistan, the sector faces many constraints hindering its growth to the full extent. Some of these impediments include lack of skilled labor, energy crisis, poor marketing and management especially regarding exports and most importantly lack of financial capital. According to the World Business Environment survey conducted on a sample from 54 countries and 4000 SMEs, one of the major problems cited by the businesses was the lack of capital. Due to the small size of these businesses, the management lack economies of scope and therefore an information asymmetry which consequently increases the search and processing costs. Moreover, in some situations these costs may often exceed profitability of the business thus further creating panic in the investor’s mind. Mostly, banks also avoid extending small venture firms to avoid the risk of default hence further increasing the costs of credit searching for SMEs. The inability of these firms to provide a collateral renders the banks unable to identify the earning potential of the SME.

Recently, SMEs have also been seen contributing rapidly towards a green economy because small firms transition more quickly to more sustainable patterns of production and consumption. Following the examples of the Malaysia around 98.5 percent of business establishments in Malaysia are all SMEs. This totals to an amount of 907,065 establishments of SMEs in Malaysia which contributed to 36.6 percent of Malaysia’s GDP in 2016. In terms of geographical locations, Malaysia has set up most of its cottage industries of apparel and textiles, along the previously underdeveloped West Coast in Johor, due to the availability of cheap lodgings. Similarly in the case of China Pakistan Economic Corridor, the initiative intends to develop the west of China’s for an inclusive economic development of the country. These trends from developed economies may serve as blueprints for expanding Gwadar as a hub for sustainable growth of the often overlooked treasure that is Balochistan.

Once the scope of the cottage industry in Pakistan is realised the next challenge for the government lies in the need to fill the gap in the demand and supply of skilled labor in Pakistan. This can only be achieved through relevant industry experience to the new working class by providing them with internship opportunities and apprenticeship programs. Moreover, educational institutions and polytechnics should be advised to implement a revised curriculum which is relevant to business today and hire professionals from the industry.

Conclusively, Pakistan is recovering from a growth which was fueled by short term debt and declining investments. The economy is in a bad shape, and by the end of year 2018 Pakistan was almost on the verge of bankruptcy. Unemployment and poverty challenges to Pakistan are major setbacks for its vision of development in future. Especially the situation in Balochistan has always been of political and economic exclusivity with post-9/11 issues in Afghanistan. With the beginning of 2019, Pakistan would be entering into the the second phase of China Pakistan Economic Corridor which promises the start of an era of development for the province. However, in Balochistan doubts have started to ebb, with a cautious optimism. The government should focus on trade policies and industry development moving on from infrastructure that is inclusive of all the provinces in Pakistan. Large multinational companies are already interested in setting up industries in the automobiles, telecommunications, energy and electronics industry, but in order to truly tap the undiscovered potential of the people of Pakistan, promotion of SMEs would be integral. A well-targeted government action plan should be set in motion provided such interventions do not intervene with the private sector.

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