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Iqbal Mustafa and Farrukh M. Khan
One of the defining characteristics of a prosperous and growing economy is a flourishing small and medium enterprise (SME) sector. SMEs contribute to economic development in multiple ways, creating employment for expanding rural and urban workforce and providing much needed flexibility and innovation in the economy as a whole. Their ability to diversify economic activity makes a significant contribution to exports and alleviates poverty. Such benefits, however, have not been fully realised in Pakistan as yet. Development of small businesses has long been debated at public and private forums in Pakistan, but until recently the motivation behind these efforts was more socio-political than economic. The main focus of economic policies, budgetary measures and regulatory regime was large scale industry. As a result, structural imbalances were created in Pakistan's business environment, which got skewed unhealthily towards promoting large scale industry. Coined by economists during the 1990s, SME is a relatively new term in Pakistan's development jargon. In 1998, the government of former prime minister Nawaz Sharif, becoming cognizant of SMEs' economic importance, formed Small & Medium Enterprise Development Authority (SMEDA) as the flagship organisation meant to provide support to SMEs in Pakistan through: 1. the creation of a conducive and enabling regulatory environment; 2. development of industrial clusters; 3. and the provision of Business Development Services to SMEs in all areas of business management The present government also regards the SME sector as the future conduit for growth and investment in the country. SMEs There is no uniform definition of SMEs applicable across the board in Pakistan, which is an indication of the absence of concerted efforts to promote SMEs in the country. Different departments and organisations define SMEs in accordance with their functional ease rather than market situation. For example, the SME Bank defines an SME as that which has total assets up to Rs. 20 million whereas a medium scale enterprise may have total assets equaling Rs. 100 million. On the other hand, SMEDA defines SMEs according to the dual criterion of productive assets and number of employees. This disparity in definitions adopted by various SME support departments (Table 1), in itself acts as an impediment for the growth of these businesses.
Table 1: Various Institutional Definitions of SMEs in Pakistan
Institution Small and Medium EnterpriseDevelopment Authority(SMEDA SME Bank Federal Bureau of Statistics State Bank of Pakistan (SMEPrudential
10-35 Employees or 36-99Employees or Productive Assets of Rs 2- Productiveassets of Rs. 20-40 20 million million Total Assets of Rs. 20 million Less than 10 employees Total Assets of Rs. 100 million N/A
An entity , ideally not being a public limited company, which does not employee more than 250 persons
2003-04 The ILOSMEDA study titled: Creating a Conducive Business Environment for MSMEs in Pakistan. (ii)A manufacturing concern with total assets at cost excluding land and building up to Rs 100 million. up to Rs. They represent a significant component of Pakistan's economy in terms of both value addition and employment generation. in particular. Thailand. As they predominantly provide employment to lower income groups.Regulationseffective since January 2004) ( manufacturing) and 50 persons (trade / services)2and also fulfills one of the following criteria: (i)A trade / services concern with total assets at cost excluding land and buildings up to Rs 50 million. and generating one-fourth of the sector's export earnings. Japan. South Korea. 10 million excluding cost of land Entity engaged in handicrafts or manufacturing of consumer or producer goods with fixed capital investment up to Rs. Economic Importance of SMEs in Pakistan SMEs constitute more than 90 per cent of businesses in Pakistan. SMEs. Table 2: Contribution of SMEs in Manufacturing Sector Employment 80% GDP 30% Value Added 30% Export Earnings 25% Source: Economic Survey of Pakistan. SMEs in these countries make major contributions to employment creation as well as GDP growth (see charts below). estimates the share of SMEs in the total employment of labour force of . (iii)Any concern (trade. Malaysia and many others. services or manufacturing) withnet sales not exceeding Rs 300 million as per latest financial statements. they are also considered an important vehicle for poverty reduction. contributing over 30 per cent to GDP. 20 million excluding land and building N/A Punjab Industries Department Sindh Industries Department Punjab Small Industries Corporation Global SME Scenario SMEs play a vital role in the growth and development of leading economies of the world such as USA. Fixed assets with Rs. all of which function within the private sector and mostly operate in the undocumented informal part of the economy.10 million Including land & building Fixed investment. play a key role in the manufacturing sector by providing 80 per cent of the total employment.
330. 2003-04 There are a number of factors responsible for the importance of SMEs in Pakistan.7 Trillion 8 Billion 7 Billion Source: SMEDA estimates based on approximated number of future entrants in the job . half of the total SMEs activity is concentrated in five sub-sectors. First.000 and in a hand-knotted carpet factory (small/micro scale) Rs.8 Trillion 0. For the past three decades. To put these new entrants to work would take an investment of Rs. such as cotton weaving and surgical instruments. metal products and art silk.6 Trillion 0. SMEs are significant contributors to the Pakistani economy in terms of both valueaddition (30 per cent) and employment (80 per cent)5. grain milling.2 trillion in large scale sector while only Rs. Table 4: Investment Estimates for Job Creation Year New Labour Injected 2003-2008 New Labour Injected 2008-2013 Investment Required to Create Jobs (Rs) Labour Large Scale Medium Scale Small/Micro Sector Sector Sector 16 Million 14 Million 5. Government of Pakistan. cotton weaving and other textiles and. there will be an addition of 16 million persons to the labour force. they are an important vehicle for poverty reduction. Second.8 trillion. SMEs foster an entrepreneurial culture and provide resilience in the economy. In the medium scale sector the cost would be Rs. 50. the Ministry of Labour.2 Trillion 4.Pakistan to be about 35 per cent3. Approximately. wood and furniture. estimates that between 2003-2008. One of the strongest arguments advanced for favouring SMEs in Pakistan is that their efficiency in resource allocation is higher from a social viewpoint in that they provide more employment at lesser capital costs compared to large enterprises. surgical equipment4. For instance. 0. 8 billion in the small/micro scale sector. in a Stitching Unit (medium scale) Rs. cotton weaving. Export contribution from SMEs emanates from sub-sectors. the fastest growing export industries have been dominated by the SMEs. 500 is required to create one job.000. Table 3: Share of Key SME Sub sectors in Pakistan Sub-sectors Cotton Weaving Other Textiles Metal Products Carpets Art Silk Grain Milling Jewelry Others Percentage Share 13% 6% 7% 4% 5% 16% 4% 35% Wood & Furniture 10% Source: Economic Survey of Pakistan. Finally. Third. 5. These figures are based on SMEDA estimates assuming that in a textile spinning unit (large scale) Rs. SMEs dominate the fastest growing export sub-sectors.
market. it still represents almost 13 per cent for the manufacturing sector and 11 per cent for the trade and services sector. MSMEs' Share in GDP Micro. total employment in the formal manufacturing sector is 0. Employment in the informal manufacturing sector is estimated at 3 million persons7. 77 per cent of non-agricultural informal employment is being generated by micro enterprises in the services and trade sectors. According to the Census of Manufacturing Industries (CMI) 1995-966. Nevertheless. This low share is due to the dominant presence of micro-enterprises in the three sub-sectors services. Table 5: Distribution of Estimated MSME GDP by Sector . Further classification of data is done on the basis of formal and informal sector.29. ILO/SMEDA. Although the contribution of MSMEs to total GDP is not very high. Employment Statistics Wide differences exist between various data sources on total labour force estimates for Pakistan. indicating that the majority of establishments in the non-agricultural sector are micro enterprises. Source: Labour Force Survey 1997-98 figures quoted in Creating a Conducive Policy Environment for Micro. All establishments of less than 10 workers fall under this definition. Employment Distribution in Pakistan The share of non-agricultural sector in total employment is 53 per cent. (Geneva. Almost 68 per cent of non-agricultural employment is estimated to be in the informal sector. SEED Working Paper No. Small & Medium-Sized Enterprises in Pakistan. 2002).6 million (or 10 per cent of the total formal nonagricultural sector employment) The remaining employment in the formal nonagricultural sector is absorbed by the trade and services sectors. Thus. manufacturing and trade & hotels. the figure below maps the sectoral distribution of employment based on 1997-98 Labour Force Survey (LFS) data. with a share of 23 per cent of the total employment in the informal non-agricultural sector. and 9 per cent of agricultural GDP. 'Informal' is defined as those establishments that are not registered with any government department or agency. Small and Medium Enterprises (MSMEs) contribute around 7 per cent of the GDP. given that they are not required to register under labour laws.
35% Cotton Weaving 15. Table 6 compares the two in terms of their relative advantage in value addition and potential to serve as engine for future growth. Some studies have estimated the share of MSMEs in GDP at a much higher level.31% 15. Second. First.29. Aggregate data reveals a very small role played by SMEs.53% Non-Metallic 7. The comparison shows that the performance of SMEs in Pakistan is currently below potential. Depending on the methodology. the structure of value-added in both the SME and the large scale manufacturing (LSM) sectors has not changed significantly. It further establishes that being a low-income economy Pakistan can effectively exploit the potential that is inherent in this sector. (Geneva. SEED Working Paper No. figures about the share of MSMEs in GDP may be either under or overestimated.16% 13.ILO/SMEDA.18% 3.19% 1987-88 100 All Industries 17.11% 7. Services Share in GDP 17% 2.15% . This suggests that the potential of these enterprises remains largely untapped in the Pakistani economy8.11% 11.69% Jewellery Products Wooden Furniture Leather Footwear SMEs 1996-97 1987-88 100 6. the discipline imposed by competition forces firms to innovate at a faster rate in order to survive.e. 2002).27% 6. firms employing between 9 to 99 workers.65% 100 5..65% 5. Small & Medium-Sized Enterprises in Pakistan.96% 5. which in turn forces higher levels of learning among firms. both geographically and in terms of the number of firms. This occurs through two mechanisms. Sectors dominated by SMEs tend to generate higher levels of competition and mobility.Sector 1.95% Silk and Art Silk 3. in Pakistan's existing manufacturing structure. Table 6: Contribution of the Dominant Sub-sectors in Manufacturing Value-Added (As a percentage of value-added) Large-Scale Manufacturing 1995-96 All Industries Textiles Food & Beverages 100 22. The subsequent portion of this article deals with the factors responsible for constraining the growth of SMEs in Pakistan. SME Development: Potential and Opportunities There is considerable evidence to show that sectors dominated by SMEs are better able to exploit 'dynamic' gains through widely dispersed learning.98% 7. it is interesting to note that it has been estimated that the ‘undocumented economy’ accounts for 55 per cent of the GDP of Pakistan. the size of enterprises covered and the varying results obtained in surveys.96% 4. which increases the probability of a firm developing or adapting better organisational and technological traits.95% 6.19% Electrical Machinery 7. Manufacturing 30% 3. In this context. Trade & Hotels 53% Source: Creating a Conducive Policy Environment for Micro. liberal entry into the population of firms allows greater experimentation. Second.67% & Supplies Industrial Chemicals 8. i.
the exiting structure of financial sector was developed to serve medium to large enterprises that are organised as formal businesses.08% Structural Products 5.18% 10. the absence of an effective business information infrastructure. Impediments To SME Development in Pakistan Despite their economic importance. These include high transaction costs. Such a clarification is not to be found in Pakistan. The issue of SME definition therefore requires careful consideration. In what follows we will discuss some of the major issues that are hampering the establishment of a flourishing SME sector in Pakistan. Barriers to SME Growth in Pakistan: An Analysis of Constraints. no linkage of financial products with SME sector needs. and a relatively low level of integration in global value chains. Definition It is extremely important to have a uniform definition for SMEs in order for the support institutions to implement assistance programs for all enterprises in lieu of resource constraints. etc. the attractiveness of an enterprise to financial institutions varies with SME size. SMEs' inability to comply with tangible collateral requirement. only about 7 per cent of funds for investment or working capital come from banks or other financial institutions. A. Until there is an acceptable definition of SMEs. the level of economic development. the SME sector is not homogeneous. the inadequacy of the existing support services for entrepreneurship development and promotion..00% dominant sectors Source: Bari. SMEs in Pakistan suffer from a variety of weaknesses.Tobacco 6. Cheema. Most banks consider lending to SMEs an unattractive venture due to a range of objective and subjective factors.26% Total contribution of 67. More importantly. structure of organisation.32% 3. F. SME specific medium to long term financing options. . industrial structure. level of technology. industrial sector. applicable across all institutions. their development will remain subject to the whims of the organisations they have to deal with. the character of labour market and more importantly. it was observed that 57 per cent of new investment for Small and Medium Enterprises and 67 per cent of working capital finance comes from internal finance or retained earnings. & Ehsan-ul-Haque. Within the Investment Climate Survey9 sample. which have constrained their ability to adjust to the economic liberalisation measures introduced by the Government of Pakistan and to take full advantage of rapidly expanding markets of the world.03% dominant sectors Total contribution of 38. as a direct result of its relative size and the ensuing characteristics. Despite the fact that it is understood that being an SME refers to a state of disadvantage as a business entity within our economy. taking into account the position of SMEs in the national economy. etc. As one should expect. Access to finance Access to equity and finance has repeatedly been identified as a recurring constraint to SME growth and development. the banks have also been unable to structure/offer and manage. Commercial banks apply conservative policies while lending to SMEs.98% 39.June 2003. These weaknesses include a relatively narrow base of the formal SME sector and its focus on low value-added products. the value which society attributes to the concept of public policy.08% 61. therefore. maturity.
& Ehsan-ul-Haque. Business Support Centres. (which will facilitate SMEs' access to modern technology and related training). Government's socio-economic strategies and SMEs The Government of Pakistan has developed a number of strategies for socio-economic development of the country. But greater coordination and similarity of approach in needed to turn these initiatives into a focused and orchestrated effort. In order to achieve this following measures are recommended: Improve SME competitiveness and regulatory environment .. A. Requisites of SME-led economic growth Sustained development of SME sector in any country requires clear and transparent commitment of the government for the development of indigenous SME sector that is able to adapt to changing conditions and compete internationally. F. an SME Task Force has been established in the Ministry of Industry & Production with SMEDA as its secretariat. Chambers of Commerce and a number of other organisations which are established as an initiative of local communities.Barriers to SME Growth in Pakistan:An Analysis of Constraints. Justice and Human Rights Ministry of Education Ministry of Science & Technology Export Promotion Bureau Board of Investment Federal Bureau of Statistics Provincial & Local Governments Small & Medium Enterprise Development Authority Provincial Small Business Promotion Agencies Private Sector Chambers & Associations PCSIR. For coordination among all these institutions. These institutions cover Regional Development Agencies. The following programs define government goals and priorities with respect to development: • • • • • • Poverty Reduction Strategy Paper (PRSP)22 Micro Finance Sector Development Program SME Sector Development Program Education Sector Reforms 2001-05 Reform of Financial Sector Reforms in Tax Administration Most of the activities mentioned above include assistance in the creation of a network of institutions stimulating the growth of SMEs.Table 7: Firms Access to Formal Finance(as percentage of total in the category) Firm Size 0-10 11-49 50-99 100 or more All Sizes Age of Firm (years) 6-10 11-20 21 and more All Firms 0% 0% 0% 0% 15% 83% 50% 0% 29% 50% 80% 59% 35% 0% 0% 0% No of Employees 0-5 100% 67% 75% 100% 75% 75% 50% 67% 64% Source: Bari. Cheema.June 2003 • • • • • • • • • • • Ministry of Law. Federal and Provincial Technical Institutes.
SME firms are not large enough to furnish sufficient demand to be an incentive for high quality input suppliers. in 2002. These problems are clearly linked to the manner in which the law enforcement and criminal justice system functions. Other issues are related to reforms of local labour offices and active measures of labour market policy still remain outside the scope of the reform agenda being undertaken by the government.5 per cent. and easy registration processes and business friendly one-stop-shop arrangements to improve the coverage of registration. especially for small and medium scale manufacturing sector. Some of the issues are related to the inability of SMEs to enter export markets are: tough bargaining price (36%) and supplies on credit (34%) and other are related to absence of public sector programs aiming at internationalisation of SMEs and binding public sector for procurements from SMEs. SMEs have to rely on suppliers' credit to procure high quality raw materials. Pakistan. Firms in NWFP spend 4. inefficient contract repudiation and distorted competition are some of the key retardants in the growth of manufacturing and retail firms in Pakistan. Second. For growth-oriented exporting firms. cheap. Based on concerns related to the rights of labour. According to a survey conducted by Gallup. inadequate vocational training facilities are weaknesses that need immediate attention. sourcing of quality inputs is a major problem due to the lack of a network of reliable suppliers. For this purpose. Market constraints A typical SME in Pakistan caters to the domestic private sector and their activities are mostly concentrated in specific regions. which prevents them from investing in manufacturing high quality products. Competition from smuggled goods and unregistered companies is also acting as a severe constraint on firm-level SME growth. in Sindh and Punjab 1 to 2 per cent of their revenue on security. . Improve quality standards for industry and labour. low skills of work force. in the absence of diverse sources of credit. Law and order problems weaken property rights and as a result weaken the investors' decision to invest. Law and order The law and order situation in Pakistan has always been regarded as worrisome. Only 8 per cent SMEs are exporters15 and fewer than 4 per cent are suppliers to the government sector. which adds to the transaction costs. Not only are these laws inherently inconsistent but also entail numerous labour inspections that further impede the growth of small and medium enterprises. there are 56 labour laws complying to which is literally impossible for SMEs. One in four SMEs consider law and order to be a severe problem16. This can be achieved by reducing the abuse of power by inspectors through a non-invasive inspection policy and promotion of self-inspection by the private sector. Enhance export readiness of SMEs through enabling policy measures and an action plan. Limited training options for middle management. one in five businesses interviewed had been a target of at least one crime during the survey year. Export Labour issues Labour laws and regulations in Pakistan14 are considered to be one of the most complicated areas with which a business enterprise deals. effective collaboration among SMEDA. High market transaction costs.Establish simple business registration to facilitate entry into the formal economy it has been proposed to assist the Government in undertaking measures of awareness building and to support the development of simple.
Competitive advantage is now determined by several non-price parameters such as quality. Regarding power supply.e. which stand at a mere 0. Competition has become increasingly fierce among the global and regional economies and enterprises. region or cluster uses its human. however. high rates of power. Trade liberalisation at the global and regional levels. as measured by annual value added per worker.50. Pakistan's international competitiveness markedly declined over the past few years17.5 per cent of the value of exports by improving its trade and transport logistics systems. Similarly. health and safety social equity in employment and production and ecological compatibility of products and processes20. The Investment Climate Assessment notes that the chief problem in the provision of telecom services is the shortage of new fixed line connections.6 million a year for the whole country. According to the Investment Climate Assessment of Pakistan conducted by the World Bank. Globalisation Of the many impacts of globalisation.. in Pakistan is 46 per cent higher than Bangladesh18.6 per cent in annual sales revenue due to just this single factor. Differences associated with firm size recognize that smaller firms are relatively hard hit in comparison to the larger ones because of their inability to arrange alternate power source in the form of private power generators. issues related to power supply. is 25 per cent lower in Pakistan than in India and 35 per cent lower than in China. there is a growing need for . Competitive advantage is determined by the productivity with which a country. nations must continue to innovate. change and upgrade. by nurturing a burgeoning entrepreneurial spirit and skill development of human resources. A review19 of trade in selected commodities estimates that Pakistan could save up to 16. In order to maintain their competitive advantage these days. poor quality of delivery and unreliability are serious concerns for SMEs in Pakistan. The survey estimated that a typical business in Pakistan loses 5. the following two are of particular interest to SMEs: • • Acceleration in the pace of growth of world trade High levels of competition in the global market place With the coming of WTO regime. unscheduled power shut downs and access to connections are irritants which significantly affect the productivity of firms in Pakistan. patterns and organization of production will need to be transformed fundamentally. Labour productivity. Infrastructure Basic physical infrastructure is a prerequisite to growth and development. capital and natural resources. Therefore. SMEs have to manage growth and change in an environment where the pace. Inefficiency in transport alone is estimated to cost the economy Rs. to meet the globalisation challenge. i. lack of access to telecommunication facilities and transport also prove detrimental to smooth growth and transition of smaller firms to larger ones. Consumer preferences and market standards have become more sophisticated and exacting. the new Information & Communication Technology (ICT) tools have combined to create rich opportunities as well as formidable challenges to all interdependent countries and enterprises. Part of the blame is shared by lower productivity of the workers. 320 billion a year. Evidence reveals that median labour productivity.Human resource development One of the major challenges that SMEs have to face is the emergence of the knowledgebased economy.
Inadequate knowledge and resource base for searching for partners and sources of new technology. (which will facilitate SMEs' access to modern technology and related training). Federal and Provincial Technical Institutes. Lack of skills/experience to operate the high technological machinery. through SMEDA. non-availability of cheap raw materials. . SME development to date has been uncoordinated and ineffective. Insufficient knowledge of possibilities for technological co-operation. Justice and Human Rights Ministry of Education Ministry of Science & Technology Export Promotion Bureau Board of Investment Federal Bureau of Statistics Provincial & Local Governments Small & Medium Enterprise Development Authority Provincial Small Business Promotion Agencies Private Sector Chambers & Associations PCSIR. However. Due to these high costs. rules and compliance cost including facilitation services regarding global issues.an information repository and dissemination mechanism to sensitise SMEs on global technology trends. enterprises in developing countries tend to be ineffective in exploit available technology options. Hence. is primarily responsible for the coordination of development efforts for SMEs. The major constraints21 to effectiveness today lie in the high transaction costs associated with the development of capacities and capabilities to manage and generate technological change. Cross-departmental consultations and formulation of programmes and policies are required for an orchestrated SME development initiative. The Ministry of Industries and Production. Some of the bottlenecks can be identified as under: • • • • • • • • Inability to acquire sophisticated testing equipment and R&D facilities. Technology transfer and upgradation The effectiveness of technology transfer is essential for SMEs to stand their ground in a changing global business climate. SME's often lack information on target market quality requirements and regulations as well as knowledge to achieve the quality levels. as well as in utilising the transferred technologies. inefficient production techniques and limited access to profitable markets. SME's see it as a financial problem. Absence of appropriate testing and other quality control or measuring equipment and related infrastructure as common facility centres Coordination and institutional support Given the limitation of SMEs in terms of technical inadequacy. This also maximises the potential for cooperation with private sector organisations to minimise distortions in the market economy. it requires precisely defined tasks on the part of following institutions: • • • • • • • • • • • • • • Ministry of Industries and Production Ministry of Finance Ministry of Law. coordinated business support programs are a cornerstone of any system which strives for sustainability.
These institutions cover Regional Development Agencies. Enhance export readiness of SMEs through enabling policy measures and an action plan. Export Promotion Bureau (EPB). But greater coordination and similarity of approach in needed to turn these initiatives into a focused and orchestrated effort. cheap. an SME Task Force has been established in the Ministry of Industry & Production with SMEDA as its secretariat. Business Support Centres. Requisites of SME-led economic growth Sustained development of SME sector in any country requires clear and transparent commitment of the government for the development of indigenous SME sector that is able to adapt to changing conditions and compete internationally. and Pakistan Standard and Quality Control Authority (PSQCA) has been proposed for the development of a policy and action plan to enhance export readiness of SMEs with the help of these institutions. equity investment products and to invest in capacity building of their staff to deal with the peculiarities of the SME sector. This can be achieved by reducing the abuse of power by inspectors through a non-invasive inspection policy and promotion of self-inspection by the private sector. Improve quality standards for industry and labour.Government's socio-economic strategies and SMEs The Government of Pakistan has developed a number of strategies for socio-economic development of the country. following steps are required for increasing their access to formal financial sources: Establishment of support infrastructure to improve coverage of credit information to facilitate quick and reliable loan processing mechanism Improve access to risk capital by revising tax regulations for risk capital investors Deepen supply and marketing channel financing to small clients of corporate entities through partial credit guarantee. Chambers of Commerce and a number of other organisations which are established as an initiative of local communities. For coordination among all these institutions. Improving SMEs' access to finance In addition to SME friendly Prudential Regulations. For this purpose. Support commercial banks to develop SME dedicated financing capabilities. Therefore. In order to achieve this following measures are recommended: Improve SME competitiveness and regulatory environment Establish simple business registration to facilitate entry into the formal economy it has been proposed to assist the Government in undertaking measures of awareness building and to support the development of simple. . and easy registration processes and business friendly one-stop-shop arrangements to improve the coverage of registration. The following programs define government goals and priorities with respect to development: • • • • • • Poverty Reduction Strategy Paper (PRSP)22 Micro Finance Sector Development Program SME Sector Development Program Education Sector Reforms 2001-05 Reform of Financial Sector Reforms in Tax Administration Most of the activities mentioned above include assistance in the creation of a network of institutions stimulating the growth of SMEs. the business plans for SMEDA & EBP are being developed so that SMEs are facilitated. effective collaboration among SMEDA.
SME development efforts in Pakistan will have to be comprehensive. subsidized training facilities need to be developed. revenue growth and employment generation. In fact. would require nothing short of a shift in cultural paradigm among all the public and private sector stakeholders. In contrast to the piecemeal and sporadic (mostly donor induced and politically hyped) approach of the past. He can be contacted at: email@example.com Million a year are considered Small by the State Bank of Pakistan and Export Promotion Bureau. However. along with Oil & Gas. Enterprises exporting up to US$2. SEED Working Paper No. SMEDA needs to be empowered in terms of resources and its autonomous status needs to re-established as the apex body for SME growth stimulation. The government with its archaic state machinery in the form of ministerial departments and SMEs with their characteristic short-term outlook and non-entrepreneurial attitude.. the qualitative fruits of these efforts are yet to reach the SMEs. He is currently working as Manager. Conclusion As discussed earlier. Creating a Conducive Policy Environment for Micro. Telecommunications & Housing & Construction sectors. 2. A similar potential exists in Pakistan. 2002). Marketing Services at SMEDA. 2003-04 .29. will not be able to provide viable answers to the current and impending challenges that Pakistan economy faces. awareness-building activities. End Notes 1. 3. SMEDA as a facilitator for SMEs. and prepared a number of important sector strategies. preferably through private sector BDS providers. cluster specific. Economic Survey of Pakistan. All the growth impediments discussed above are symptoms of this basic problem. Lahore). Government of Pakistan has declared the SME sector to be one of the four major drivers of growth. compounded by the inability of SMEs to graduate from micro to small to medium to large scales. (Iqbal Mustafa has been a member of the Central Board of the State Bank of Pakistan from 1997 to 2001.e.Improved access to Business Development Services (BDS) To develop demand for upgrading technical and management skills of SMEs. Small & Medium-Sized Enterprises in Pakistan. Given this scenario. low business start-up and survival rates. He was the CEO of Small and Medium Enterprises Development Authority (SMEDA) from 2001 to May 2003. However.com) (Farrukh M. Thus in order to achieve a significant outreach to the SMEs and fulfil its mandate more effectively. publications and feasibility studies for SMEs. a number of developed countries of the world depend on their small and medium for technological innovation. Khan is a marketing professional with an academic background in development economics. i. 2003-04 5. Chapter 3 puts it ‘…the foundation of industrialization could not be established without an efficient network of SMEs’. SMEDA has so far undertaken significant advocacy work. if not magnitude. 4. Economic Survey of Pakistan. demand driven technology common facilities centres should be established to benefit a large number of enterprises. This situation leads to a non-conducive business environment for SMEs in the country. dynamic and sustainable over a long period. In addition. (Geneva. SMEs are the foundation upon which the edifice of their large scale sector stands. ILO/SMEDA. to kick start an economic revolution of this nature. As the Economic Survey 2003-04.
The survey was conducted for Investment Climate Survey of Pakistan (2003). and less than a third of Philippines countries whose combined manufacturing exports were less than Pakistan's in the mid-1960s. Some of their efforts have resulted in the consolidation of labour laws as announced in the Labour Policy 2002 and proposed amendments in the Factories Act 1934.000 represent a very small proportion of the credit volume. published by the World Bank Group. A committee on Reforms in Regulatory Legal and Policy Environment was established in the Ministry of Industries & Production in 2000 with the purpose to coordinate. June 2003. Drug Act 1976. and as such reviewed 101 commercial and labor laws that effect industrial sector. Cheema and Ehsan-ul-Haque. and Explosives Act 1884. a vast number of . 5. 15. after the war in 1949. 7. tariff barriers have become an ineffective tool for developing countries to discourage exports which they deem unfit for imports to their economies. which show that loans up to a size of Rs. 11. as not all the registered establishments report their data in the census whereas they might as well be in operation at the time of the census.int/comm/environment/ecolabel/index_en. 17.000. published by the World Bank Group. World Bank Investment Climate Assessment survey was conducted between May and November 2002 by SMEDA in collaboration with the World Bank covering a random selection of 965 mainly manufacturing businesses (90% being SMEs). Table 7. visit < http://europa. For instance. 10. review. This is also corroborated by recent State Bank of Pakistan Annual Reports (various issues). 19. countries of the European Union have come up with non-tariff barriers such the ‘Eco-labelling’ of products with strict environmental and health friendly criteria. The 56% figure is an addition of the three tax related responses: High taxes 28%. however. The CMI is a census of all manufacturing sector establishments that are registered under the Factories Act 1934. 18. 20. Boiler Act 1923. Barriers to SME Growth in Pakistan: An Analysis of Constraints. For details. However.htm > 21. 12. The new system allowed certain tax merits if a tax return is made with a ‘certain formula of quick bookkeeping. Data from the latest CMI are for 1995-96 while data from the LFS survey are for 1997-98. To date it represents the most comprehensive data set. In Japan. Investment Climate Survey of Pakistan (2003).6. as there was hardly any growth in the registered manufacturing employment between 1990-91 and 1995-96. old taxation system was replaced by new system to resolve the problem of incomplete bookkeeping and fear of over-taxation of SMEs. World Bank SME Policy Note 2001. identify issues of concern and formulate recommendations on various laws effecting businesses.’ This system resulted in not only the improvement of financial accounting bu also the strengthening of financing systems for SMEs. According to the World Bank's survey for SME Policy Note 2001. World Bank Development Policy Review 2002 reveals that the annual manufactured exports of Pakistan are barely 12 per cent of those of Malaysia. However. 14. To counter this situation. High Sales tax16% and high Income Tax Rate 12% 13. does not point to a strong correlation between access to credit and firm-age. F. The results of SMEDA-World Bank Investment Climate Survey 2003 also confirm this finding. A. drawn from 12 largest cities of Pakistan. this inference should treated with caution. 8. as it could well be a consequence of poorly designed sampling frames employed for both the Census and Survey data-sets in Pakistan. 16. The data might be underestimated. Bari. Obtained by deducting employment in the formal manufacturing enterprises (CMI data for 1995-96) from that of total employment in manufacturing according to LFS data. in the wake of implementation of WTO rules. it can be safely assumed that the growth between 1995-96 and 1997-98 would be minimal and no extrapolation between these two years is necessary. 9.eu. World Bank Development Policy Review (2002). 18 per cent of Thailand's.
World Development. (India retained the incentives for IT sector for another six to seven years). and educational institutions (25%). ‘Does leadership Matter in the Economic Reform process? . Kelegama. vol. On sources of technical know-how it reveals Books and journals (30%). parlance with Government and would suggest government the required suggestions with respect to investments. Steve Chan. If the company has signed the Memorandum of setting up its base but will start the actual production after 6 months or one year then in that case it would get 15-20 per cent reduction in land registration charges. If the trend continues then Sri Lanka will find itself in a deep economic crisis from which it will not be able to recover for decades. ii. 2001) and the major reason was heavy expenditure on defence sector.. j) The government should take a series of measures in attracting FDI by providing location specific incentives. and S. Where it would be: i. ‘The economic cost of the war in Sri Lanka’. Jayasuriya. Orbis. S. For example. Kelegama. various years. Issue 9. and only 4% from formal institutes as a source of acquiring technical know-how. internet (13%). ‘The Impact of Defense Spending on Economic Performance: A Survey of Evidence and Problems’. 1985. if the foreign company establishes its branch or subsidiary immediately then the company need not pay 75 per cent of land registration charges. The government and the LTTE need to make sure that the peace talks initiated by the support of Norway should not fail. vol.small entrepreneurs are highly interested (42%) or moderately interested (40%) in acquiring new technology. the government should provide tax holidays in order to woo the potential foreign investors. g) Do away with the BOI (Board of Investments) and implement a 'Two way system'. 403-34. 1483-500. D. 2001. Hyderabad) End Notes N. (Krishna Chaitanya is Assistant Professor at the Dhruva College of Management. Under PRSP government is following a five point strategy which includes: 1) Macroeconomic stability and Fast growth 2) Investment in Human Resources 3) Government's involvement in particular sectors (including SME) 4) Expansion in social security system and 5) Good Governance. 22. Automatic Approval. It further elaborates that SMEs learn their skills from own family (40%). other companies working in the same field (23%). Though Government's Approval. Central Bank of Sri Lanka. p. Annual Report. pp. Dunham and S. Conclusion In the year 2001 the public debt of Sri Lanka was greater than its GDP (Sri Lanka Budget report. h) The Investment Commission has to give a statement 'Investment policy' for each year and at the end of the year the commission should give an 'Action Take Report' on the progress made and targets achieved during that fiscal. working for another employer (35%). issue 3. 29. Arunatilake. 29. It is time for the Sri Lankan government to draw a strategy for attracting FDI perhaps by visiting the Fortune 500 companies personally and presenting them the investment benefits in Sri Lanka. i) Depending upon the industry.
vol. ‘Measuring the Economic Costs of Internal Armed Conflict A review of Empirical Estimates’. 1997. (4-5 June 2003) arranged by The United Nations University. Paper for the conference: Making Peace Work in Helsinki. World Development.Liberalization & Governance in Sri Lanka’. 25. no. Goran Lindgren. 2. World Institute for Development .
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