Building prosperity

I contested the last general elections from what many refer to as a rural community. It is a place where government services, such that exist in the country, are hard to come by. The people are on their own, using their genius and imagination to survive.

While decision-makers make vacuous claims and city folks spread despondency, my constituents quietly struggle to make ends meet. Each day they toil to increase produce off the land or track the market or connect to urban centres. When the government’s message is about sacrifice and ‘doom and gloom’, they are filled with purpose and hope. I could not have imagined so much potential among people living with such privation. They are not alone. Such stories abound throughout the country.

It is possible to revive the economy with the ‘can do’ spirit and enterprise of tens of millions of such Pakistanis. After many years of listless economic performance, it is time for a change of mood in the country. We must now actively rebuild the economy while staying within the limits of fiscal prudence. Despite their marginal standing in our public policy space, SMEs and village enterprises can play a key role in boosting economic activity.

Given our present dearth of resources, a major boost to capital-intensive growth would have to wait. SMEs fit well with present circumstances, as they do not need high amounts of capital, energy or technology. Yet, they afford a simple path to empower millions to better their lives. With shrinking basic services, citizens have suffered years of neglect, and their capacity to contribute to the country’s economic life reduced.

Buoyant SMEs are a tried and tested route to prosperity. They create new entrepreneurs and workers in the economy. As these small firms prosper, they will accumulate capital and know-how.

Worldwide, small firms have laid the base for the economy’s industrialization. In China, Vietnam and South Korea, small enterprises helped large swathes of people exit poverty. Also, they increase domestic demand for goods produced by other firms in the country. The most important benefit is that they create jobs.

Though business activity is innate to humans, experts trace the role of SMEs in industrialisation to the village enterprises of Europe. England and Scotland made wool fabric, leather goods, shoes, ceramics, furniture and iron products. France made silk. Germany and Switzerland made colour dyes, tools and clocks.

Later, the US, Japan and the rest of Asia followed. Japan produced silk, dyes and ceramics. Their iron foundries built tools. These were small firms whose know-how and experience accumulated to later make them dominant names in the world.

Scientific discoveries had a big role in Europe’s industrialization. But their application in industry would not have been possible without a large number of SMEs ready to acquire new technology. It is the principle of ‘evolving’ comparative advantage at work. As small firms earn profit, they add technology in bits and pieces. These entrepreneurs and specialized workers laid the foundation for mass production and later high-tech firms in Europe.

SMEs are quick to acquire new technologies. With the introduction of power looms, hand weavers of fabric in the UK became mass producers of textiles, boosted also by cotton and silk from colonies. Colour and dye makers in Germany and Japan laid the foundation for their chemical industry. With new furnaces and machines, ceramic producers moved to mass production of crockery and tableware. Soon they built a global network of markets for their goods.

According to the World Economic Forum, SMEs create nearly 70 per cent of jobs and contribute 70 per cent to world GDP. They have the potential to foster extensive growth and innovation.

Many excellent companies started as low-tech manufacturers of simple products. Matsushita began by making lamp sockets in 1918, while Samsung began life as a grocery store in 1938. Huawei started off in Shenzhen as the sales agent for Hong Kong made goods. There are many more examples of firms whose present dominance is a far cry from their modest beginnings.

These firms built on their then-low knowledge to diversify and steadily move up. Their countries suffered wars and colonization, but the firms had access to capital and ideas. With the spirit to improve quality, they became global powerhouses.

China and South Korea are the best-known recent examples of leveraging growth via small enterprises. SMEs was the first stage in Mr Deng Xiaoping’s economic development programme. Beginning in 1978, it transformed the Chinese industry. In China, SME industrial output grew 28 per cent per year for 22 years between 1978 and 2000. Exports from these units earned foreign exchange with which China imported industrial equipment for the next stage of mass production of goods. In 10 years, the number of small firms grew from 1.5 million to 19 million.

The wealth generated by these enterprises created a huge demand for domestically produced goods. It trained entrepreneurs and workers for the next stage of industrialization.

In South Korea, then-president Park announced a sweeping rural community development programme, the Saemaul Undong. South Korea rapidly raised its agricultural yields and increased low-tech industrial production. The programme connected the whole country with a transport network. South Korea spent about 2.5 per cent of GDP annually on the programme. “Ultimately, this was the key programme in the country’s long-term economic development,” ADB.

Pakistan must move from empty and shallow promises of help to SMEs to a national programme of support. The government may set up a dedicated team to study and prepare a plan. They must draw on the experience of China and South Korea. A new law should recognize SMEs as legal entities. It should define SMEs and register them; if possible, with tax comfort. This would enable them to apply for municipal services and avail credit from the formal sector. It would also allow them to resist extortion by state functionaries. Unwittingly, the government has forced SMEs to stay in the informal sector.

The government of Pakistan’s frequent efforts to increase SME credit do not bear results, as small firms cannot meet banks’ paper and collateral requirements. The government should also strengthen the national market. Contract enforcement would be a big help. Small firms must have the certainty that they will receive payments for services and goods delivered to distant customers. A national market needs a logistics network for quick input supply and delivery.

The SME programme must have a suitable institutional setup, from the federal to local governments. Their officials should be trained to support entrepreneurship. They must share ideas and information about new products and link small firms with financial institutions and export markets. They should also link SMEs with national and international technical support and help with skills development.

Quality must be an integral part of this plan so that at least some small firms become exporters. The government may set up local offices of the Pakistan Standards and Quality Authority to enforce minimum standards. Local government leaders must receive orientation so that they inspire in SMEs a quest for excellence by setting high standards for entrepreneurs’ performance and innovation.

Years of economic policy whose only goal is to avoid default have exhausted the country. During these years, the government’s main message has been to increase taxes and prices. This extractive public policy has left the people despondent and exasperated. There is a dire need to improve the self-belief of our people and include them in the economic mainstream. Otherwise, there is a risk of the country descending into social instability.

The writer is chair and CEO, Institute for Policy Reforms. He has a long record of public service.