Vol.

9, Issue 2
July - December 2019

ISSN: 2221-0946

From the Editor’s Desk

SMEs possess the capability to create employment and address income inequalities across the spectrum of society by contributing to GDP
and exports of a country. Spread across all sectors, SMEs bring much vitality to the economic landscape. In Pakistan, there are 3.2 million
SMEs, contributing 40% to GDP, 25% to exports and 72% percent to non-agricultural employment. Small and medium-sized enterprises
account for two-thirds of all jobs worldwide. Studies show that SMEs play a vital role in employment generation and that there is a positive
relationship between the number of SMEs and unemployment reduction in Pakistan. However, there are numerous issues that hamper
SME growth. Thus, it is important to address those issues though sound policy measures and strategy development.

In this Issue of SME Observer, an article highlights the importance of strategy development for policy makers by exploring the subject of
‘Strategic Foresight and Scenario Planning.’ Strategic foresight is the discipline that helps to explore a range of plausible alternative futures
and their implications. Strategic foresight development, as a tool to formulate strategies for future, is vital for policy making. Similarly,
scenario planning aids in understanding different future possibilities and helps in developing strategies for every possible scenario.
Scenario Planning analyzes future possibilities in a systematic way, and at the same time encourages out of the box thinking. A good
scenario plan also foretells where people are likely to make false judgments.

The Sector in Focus section of this Issue explores Pakistan’s Leather Sector and identifies its potential. Pakistan is a resource rich country
with a large livestock population producing around 13.0 million hides and 47.4 million skins per annum. The quality of goat skins, cow and
buffalo hides in Pakistan is quite good. Therefore, Leather industry of Pakistan relies on local raw material, which are both, cheap and easily
accessible. Pakistan ranks among the top meat consuming nations of the world, thus skins and hides produced by slaughtering of animals
serve as the backbone of leather industry.

This Issue also includes an article on Employment Generation and SME Development. The article highlights that during last three years,
civilian labor force has increased by 4.46 million, from 61.04 million in 2014-15 to 65.50 million in 2017-18. SMEs being the largest
contributor to employment generation, are unable play an effective role to manage the youth bulge through creating productive and quality
employment as they operate mostly in the informal sector and at rudimentary stage of development in terms of technology and skills. In a
country like Pakistan, where 64 percent of its population is below the age of 30 and almost 4 million youth attain working age every year,
SMEs may not be able to play the desired role, unless policy support is provided to them.

Lastly, Lahore on Rails section looks at a tool to create a free and professional website. The tool provides free reliable web hosting,
security, search engine optimization and a dedicated support team to address any query related to website development and its
performance.

We hope that our readers will find the articles of this publication useful. We welcome suggestions on making the SME Observer a leading
publication and information source on the SME sector.

Editor - in - Chief In this Issue

Fuad H. Rabbani Importance of Strategic Foresight and Scenario Planning for
Strategy Development:
CEO, SMEDA
Policy Making Process 2
Sector in Focus: Leather Sector 8
Editor
Employment: Employment Generation through SME Development 16
Nadia Jahangir Seth
GM, Policy & Planning Lahore on Rails: Website Builder – Wix 23

Turn Potential into Profit!

Small & Medium Enterprises Development Authority
Ministry of Industries & Production
Government of Pakistan SME Observer
1
 Strategy Development
Importance of Strategic Foresight and Scenario
Planning for Policy Making Process
Farhan Zafar*

The world today is changing at an unprecedented rate, resulting in an unparalleled level of uncertainty when it
comes to informed policy making. Policy-making process demands that we anticipate what the future holds.
However, leading edge policy-making must go beyond forecasting and explore the unexpected. This is where
strategic foresight comes in. Strategic foresight is the discipline that helps us to explore a range of plausible
alternative futures and their implications. This includes scenarios that may seem unlikely or even far-fetched
from our current perspective.

Strategic foresight, as a tool to develop strategies for future, is vital to challenge the assumptions of present
world. An important step in using foresight practically is to connect the future with the present, accept its
unpredictability and work collaboratively to comprehend it better. While developing future scenarios, it is
important to come to terms with the fact that although the future is unpredictable, it can be influenced by our
action or inaction today.

Strategic foresight guides us to see beyond our assumptions and helps us to shift from preconceived ideas of
the future and its possible scenarios to a more plausible future. The process of strategic foresight involves
scenario planning which includes careful analysis. This concept analyses how a certain decision will impact the
future. Thus, ‘Scenario Planning’ can be seen as a tool to forecast the future, to speculate future markets,
technology development directions, and new government policies. Scenario planning helps to understand
these different possibilities and make decisions accordingly. It analyzes future possibilities in a systematic
way, and at the same time encourages out of the box thinking. A good scenario plan also foretells where
people are likely to make false judgments.

*Mr. Farhan Zafar is currently working as Assistant Manager in the Policy & Planning Division, SMEDA

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2
In scenario planning process, it is vital to select a goal with a time frame. Thus, before initiating ‘Scenario
Planning,’ it is imperative to choose the right time and year into the future to develop multiple scenarios. If the
chosen year is too close to the present, then one can get trapped in today’s thinking, resulting in myopic
results. But if the chosen year is too distant from the present, it will be hard to find useful strategic decisions in
the present. An example is the Malaysian government, it has a 30-year strategic outlook, implemented in 5-
year national plans.

In scenario planning, an important point to understand is

“The illiterate of the 21st century will not
that our brains process information that has already
be those who cannot read and write, but
been learned in the past. Therefore, it is difficult to
those who cannot learn, unlearn and
accept new information if it does not fit old patterns –
unless the brain is trained to accept new things. In relearn.” (Alvin Toffler)
strategic foresight, a prudent approach to address this
shortcoming is to create a new cognitive space, in which we can escape the clutches of conventional thinking
and assess future through new perspectives. People who are experts in a specific field sometimes develop a
narrow focus and mostly overlook other connected issues outside their field of expertise.

Strategic foresight and scenario planning can help us escape this narrow focus by planning (in a team), to
include different opinions and point of views and identify possible futures. There are a number of
methodologies to develop foresight, which can then be used by policy makers to formulate strategies. Some
key methodologies in a Strategic Foresight framework are; Environmental Scanning, Scenarios and
Backcasting.

Environmental scanning involves the study of current situation. It aids in identifying the early signals of
potential changes in the environment and also detects whether these changes are already under way or not. It
can reveal ambiguous, incomplete, or unconnected data and information. One of the tools for Environmental
Scanning is the VSTEEP framework, which means analyzing, the past, present and future, in light of VSTEEP
(Values, Society, Technology, Economics, Environment, and Politics). Through VSTEEP, a plausible future
can be forecasted, which; is well informed, challenges collective assumptions, provides statistics and stories,
and produces outcomes to use in strategy development. Environmental Scanning enables us to identify drivers
of change for every VSTEEP category. Subsequently, it has to be followed by a process to ascertain drivers of
change, which can be done through the Double Driver Methodology.
The Double Driver methodology identifies top two significant drivers of change with high variability to create

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plausible futures within which an existing or a new strategy can be tested. The following example illustrates the
double driver methodology. Take for instance, a possible future scenario of what Asia will look like in 2050.
Initially, drivers of change that will define Asia 2050 are identified. These drivers may include; innovation, smart
cities, knowledge sharing, friendly business environment, free trade, artificial intelligence, GDP growth, Asian
Federation, etc. and suppose that, among these drivers, ‘innovation’ and ‘knowledge sharing’ are identified as
main drivers of change. Choosing 2 main drivers of change and identifying their boundaries is the most
important step of Double Driver Methodology, as they help in defining any potential scenario. The next step is
to start policy making process (for Asia 2050), which is supported by developing four different scenarios. The
two identified drivers form the axes of a four quadrant matrix that defines four possible future worlds. Scenario
number 1 may try to question; what may happen if there is innovation and knowledge sharing; second, if there
is no knowledge sharing (individualistic approach) and innovation; third, if there is sharing but old school
technology (no innovation), and fourth, if there is no knowledge sharing (individualism) and no innovation. In
this example, Environmental Scanning (VSTEEP) of each scenario will be different, to identify what Asia will
look like in 2050. Each of the four quadrants will present completely different scenarios and challenges, which
may require similar or totally different strategies to address. Strategies identified in the four scenarios can be
similar or different, depending on the situation. However, there may be a few strategies that are overlapping
and suitable for every situation. Such strategies are called robust strategies. A robust strategy is one which can
be applied in any of the given four scenarios. Therefore, such a process helps in prioritizing strategies and
implementing those strategies that work for any scenario first.

Another Example of Scenario Planning is illustrated in the diagram below, given that Trade and Business
Environment are chosen as main drivers of change.

Environmental Scanning and developing plausible scenarios are an important part of strategic foresight,
however, it can be strengthened by Backcasting and strategy development. Backcasting is a way of planning,
in which an outcome is imagined in the future and is linked to a previous strategy that led to the desired
outcome. This process can be done in incremental stages in reverse chronological order, e.g. from 2040 to
2030 to 2020. This is more effective than relying too much on forecasting, which tends to have the effect of
presenting a more limited range of options, hence precluding and stifling creativity. Backcasting allows us to

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work backwards to build a plausible causal chain from one point in time to another. It is usually used as a
team-oriented brainstorming tool for policy makers, often as part of a scenario-based foresight methodology.
Backcasts are not intended to reveal what the future will be, but rather to weigh up a number of possible
futures, and decide the implications and preferable options and then map out steps along the way.

What should Policy Makers do while devising Policies and Strategies?

Dos and Don’ts of Scenario Planning

1. Fight the urge 2. Beware of 3. Don’t assume 4. Combat 5. Work in a team,
to make giving too much the future will look overconfidence encourage free and
decisions based weight to unlikely like the past and excessive open debate
on what you events optimism
already know
What to do What to do What to do What to do What to do
Review all trends, Evaluate and Build scenarios Assess the impact Instill the discipline
especially prioritize trends around critical of each scenario of scenario based
interconnections using first uncertainties, and develop thinking with
between issues qualitative, then engaging top strategic systems, processes
and markets quantitative executives through alternatives for and capabilities that
approaches experiential each sustain it
techniques
What to avoid What to avoid What to avoid What to avoid What to avoid
Relying on readily Focusing on Outsourcing or Planning for a Using scenario
accessible numerical delegating the scenario deemed planning as a one-
information or precision early in creation of scenarios most likely, to the off exercise or
evaluating trends the process to junior team exclusion of all ignoring social
only within the members others dynamics such as
same geography groupthink
or industry
context

Availability bias Probability neglect Stability bias Over-confidence bias Social biases
Source: Mckinsey & Company

Scenario planning model is a dynamic and gradual process with a spiraling nature, which requires constant
judgment, verification and correction during the planning process. Therefore, there is a feedback loop between
each link. A complete scenario planning process is a closed-loop process consisting of three aspects; defining
problems, planning scenarios and learning scenarios.

1. Defining the problem

First and foremost, it is vital to determine the objectives of a scenario plan, so that the plan is carried out within
a specific framework. However, framework boundaries should not be particularly strict, to inspire imagination of
policy makers.

2. Planning scenarios
Second, it is important to identify and classify the factors that affect development as comprehensively as
possible, in accordance with the planning objectives. Furthermore, factors that are clearly impossible or
unreasonable must be eliminated and elements that are essentially the same should be combined. Factors of
the same nature should be grouped into one category (such as technical factors, etc.) and on this basis, each
type of factor should be analyzed. According to importance of various factors, the influencing factors are
divided into deterministic factors (constant, predictable) and uncertain factors. The policy makers may select

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early signals from deterministic elements.

3. Learning scenarios
In order to learn from scenarios obtained in the previous step, possible changes in the future environment may
be considered, to discover hidden opportunities and threats. Scenario development is a continuous process
and measures need to be continuously adjusted, according to planning results.

Comparison of characteristics between traditional planning and scenario planning.

Traditional
Element Scenario Planning
Planning
Mainly professional Planners, local officials, community representatives, private companies,
Participants
planners public institutions, private sector, and other different stakeholders
Aims Fortune-telling Improve your ability to adapt to the future
Attitude towards
Negative, obedient Positive, creative
the future
Program One way Spiral
View Biased Comprehensive
Logic Assuming the future Backcasting
Variable
Linear, stable Nonlinear, dynamic
relationship
Fatalism,
Method Qualitative and quantitative integration, cross-impact and system analysis
quantification
Simple,
Future picture Multiple, uncertain, timely adjustments
deterministic, static

Role of Scenario Planning

Scenario planning is a method of helping policy makers
to be avant-garde in a highly uncertain environment. It
not only helps decision makers make specific decisions,
but also makes decision makers more sensitive to
signals that require change. The core of scenario
planning is to think systematically, change the mental
mode, and stimulate imagination.
“Unless we can influence the mental
impressions of important decision makers
on the actual situation, our views on the
future are like water sprinkled on stones,
scattered and unable to condense.” (Pierre
Wacker)

Scenario planning means a plan for several possible future scenarios. If it does not impact the biased ideas
of decision makers and does not change the thinking pattern, then it does not comply with the standards of a
good plan.

Conclusion - Inspire ambition, vision and imagination

The biggest difference between a scenario based plan and a typical strategic plan is that it does not sacrifice
the complexity of a situation at the expense of decision-making. It does not start with principles and beliefs, but
from an open minded approach. It is similar to a game. In the beginning, no one knows or assumes a result,
and one or more unexpected results appear when the game unfolds. Similarly, scenario planning is based on a
series of logical and empirical facts. Through scenario planning, policy makers can make a thorough and in-
depth analysis of various factors that affect their decision-making, and avoid personal bias.

Scenario planning is a strategic planning approach that inspires ambition, vision, and imagination. Although the
future is full of uncertainties, there is a need to simulate future with a series of credible and possible future

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scenarios, and repeatedly test and modify them. Robust scenarios portray the future in terms of politics,
economics, sociology, demography, technology, and industrial structures.
Using strategic foresight to plan scenarios can be complex. While we can try to understand how things may
pan out in the future, we still cannot predict them. So are policy makers in Pakistan employing strategic
foresight and scenario planning? It is hardly seen that such methodologies are adopted to develop prudent
scenarios. If such an exercise is done thoroughly it can have myriad benefits.

It is difficult to disentangle future as it is a mix of scenarios intertwined in every possible way. Fundamental
transformations such as emerging technologies, increasing population, and climate change are happening all
around us. Policy makers that endeavor to move into the challenging future without strategic foresight may find
themselves overwhelmed by forces that were visible for some time, but which were overlooked. On the other
hand, while no methodology can reproduce the past and predict all eventualities, policy makers that regularly
engage themselves in strategic foresight will find that they are better prepared to navigate the unpredictable
conditions ahead. They will prosper and develop effective policies because they can understand the structure
of the near-future context through strategic foresight. In essence, a well-crafted approach to predicting the
future reduces uncertainty and reveals the grounds of otherwise-unavailable strategic options.

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 Sector in Focus
Leather Sector
Muhammad Raza*

At the time of independence, there were a small number of tanneries producing sole leather at a very small
scale. Later, during 1950s, some well-equipped units were established at Karachi and Lahore. Subsequently,
during the 60s and 70s more units were established at Kasur, Sialkot, Hyderabad, Multan, Sahiwal and
Gujranwala. Today, tanneries in Pakistan are producing not only wet blue and crust, hides and skins, but also
finished leather and leather products. The leather industry consists of six sub-sectors including tanning,
leather footwear, leather garments, leather gloves, leather shoe uppers and leather goods. The Tanning
industry plays a vital role in the growth of sub-sectors by providing the raw material. Pakistan is among the
leading countries in the production of Leather Garments and Gloves. In fact, Leather sector is one of the
major export-oriented sectors of Pakistan. Leather finishing and made-ups industries contributes more than
800 million US dollars in exports.1 The sector, however, has immense potential to increase volume of exports
through improvement in quality, adherence to international standards and focus on diversification of the
products particularly leather garments and leather footwear.

Significance of Leather Industry

Leather Sector is a significant contributor to the economy of the country and contributes around $800 million
annually to the country’s export earnings (SBP).

According to Pakistan Tanner’s Association (PTA), the leather sector is one of the most important and vibrant
industrial divisions of Pakistan. The segment encompasses a vast number of small and large units, with more

*Mr. Muhammad Raza is currently working as Manager in the Policy & Planning Division, SMEDA

1 Economic Data http://www.sbp.org.pk/ecodata/Export_Receipts_by_Commodity.pdf

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8
than 800 tanneries in operation. This sector is a labor-intensive industry and provides employment (directly
and indirectly) to more than 500,000 people and contributes 5% of GDP and 5.4% to the overall export
earnings of the country (PTA). Pakistan is considered to be the hub of producing high quality Leather and
Leather products.

Over the past few years, the demand for leather products in the global market has showed a rapid increase.
The estimated worth of the leather industry increased from US$80 billion in 2010 to US$200 billion in 2014 2
Pakistan's exports represent 7.9% of world exports for the 'articles of apparel and clothing accessories of
leather (Trade Map - 2018).

Classification of the Leather Industry

Table 1: HS-Code Leather Sector
The leather industry can be divided into two main
areas: Leather Tanning industry and Leather Products No. of Tariff Lines
S. No. Leather Products
industry; which can be further classified in the at HS-6 Digit
following sub-sectors: Leather Garments &
A: Leather Tanning industry: 1 Gloves 5
1. Hides and Skins (hides mainly of cattle and 2 Leather Footwear 9
buffaloes and skins mainly of sheep and goats) 3 Leather Goods
2. Leather Manufacturing including: 3 (i) Industrial 3
a) Tanning
3 (ii) Consumer 17
b) Finishing
B: Leather Products industry 4 Finished Leather
4 (i) Leather Hides 4
1. Footwear
2. Garments 4 (ii) Leather Skins 8
3. Gloves 4 (iii) Other Leather 6
4. Leather Sports Goods industry
Source: ITC Trade Map Definitions of HS

Sources of Raw Material

Pakistan is a resource rich country with a large livestock population producing around 13.0 million Hides and
47.4 million Skins per annum.3The quality of goat skins, cow and buffalo hides in Pakistan is quite good. The
leather industry of Pakistan mainly relies on local raw materials, which are both, cheap and easily accessible.
The basic raw materials required for the production of leather are ‘skins and hides’. These skins and hides
are also used in the production of other goods, such as glue and gelatin. Pakistan ranks among the top meat
consuming nations of the world; thus the skins produced by the slaughtering of animals serve as the
backbone of the leather industry. The animals that are most widely consumed include cows, buffalos, goats
and sheep; each of these animals has unique characteristics and are used for the production of different
kinds of leather products.

SWOT Analysis of Leather Industry of Pakistan

Strengths
Pakistan is Islamic country with population count of approx. 220 million. All Muslims have Eid Qurban
occasion, once a year, where they slaughter/sacrifice minimum one of the animals from cow, buffalo, goat
and sheep on that day. The tanneries fulfills almost 60% to 70% of their total year’s raw material requirements
and at much cheaper price with easiest way to buy in 1-2 days.

2 UNIDO (2010). Future Trends in the World Leather and Leather Products
3 Industry & Economic Bulletin – 2017, National Bank of Pakistan

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Weaknesses
Appr. 90-95% of the total count comes from the knife/hand flayed. Skins normally damaged if animal being
slaughtered by the unprofessional butchers. Since huge quantity of hides and skins are being produced in just
1-2 days, therefore, it becomes almost impossible to handle all the skins with care. Consequently, a large
number of skins got damaged and lost their grain because of sun/heat. Hides and skins are also damaged
due to skin diseases, malnutrition and primitive slaughtering techniques.

Opportunities
Pakistan has become a hub of leather trade and processing in central Asia. The availability of raw hides has
almost become double the count what Pakistan infect produce due to soft border policy of Pakistan with its
neighboring countries like Iran and Afghanistan. There is a great opportunity for the bulk quantity
buyers/importers to buy more from Pakistan.

Threats
Most of the part of Pakistan leather market consists of unorganized sector. Majority of the leather and leather
products manufacturers do not have sufficient knowledge of export world. Threat for raw hide market is
largely due to seasonal diseases as well as some time floods. According to sources approximately 1.5 million
animals were killed due to the devastating floods in the country.

Fig 1: SWOT Analysis of Pakistan Leather Industry

Strengths Weaknesses
• Muslim Country • Unprofessional butchers
• Eid Qurban • Skin diseases &Malnutrition
• Primitive Slaughtering
Techniques

Opportunities Threats
• Hub of leather trade • Unorganized sector
• Soft border policy with • Seasonal diseases
neighboring countries • Floods

Challenges and Issues of Leather Sector in Pakistan

Leather and leather garment industry of Pakistan is confronted with various challenges. These include the
following:

Absence of advanced technology, shortage of skilled manpower

Absence of high-tech quality products and shortage of skilled manpower are basic issues of the leather
industry of Pakistan. There is a growing need to prepare labor force having capacity to produce leather
garments on scientific lines and comply with the requirements of international market to compete.

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High Cost of production
Cost of production is also very high in Pakistan as compared to competitors like China and India. The high
cost of various inputs, especially utilities and taxes make Pakistan’s products – finished and unfinished –
uncompetitive in the international market.

As per International Trade Center (ITC) data, Pakistan's exports represent 1.2% of world exports for this
product and its ranking in the world exports is 21. Leather and leather products (raw hides, skins and leather)
exported by Pakistan during the last five years (2014-2018) is given in Table 2:

Table 2: Leather and Leather Products exported by Pakistan during last five years (2014-2018)

Exported value Exported Exported value Exported Exported value

Importers
in 2014 value in 2015 in 2016 value in 2017 in 2018
World 547508 425085 349003 335345 296773
Italy 73218 57662 53091 51656 46910
China 55424 42133 37120 37040 35080
Hong Kong, China 130449 87500 53775 39129 32324
Viet Nam 31322 27845 23173 25309 27318
Bangladesh 12606 14031 20891 22810 19252
India 36202 34334 28602 21414 17344
Spain 15956 15530 15391 18815 13718
Korea, Republic of 30995 26924 21632 16394 13286
Germany 27413 16651 13129 11086 10691
Indonesia 13097 8479 8263 9353 10070
South Africa 16315 16578 8322 9034 7400
Turkey 15332 6617 3992 5557 5894
Cambodia 7935 7464 5973 6849 5823
United States of America 6614 5758 4844 3950 4543
United Arab Emirates 1033 3095 4123 9667 4514
Portugal 4857 3259 3308 3136 4273
Japan 7466 6041 5069 4768 3709
Netherlands 2671 3591 4263 3590 3611
Austria 5797 4421 3412 2832 2740
Thailand 3318 5296 3592 4296 2393

Source: ITC calculations based on UN COMTRADE statistics (https://trademap.org/)

Environmental Impact
Leather tanning tends to have an adverse effect on the environment as compared to other manufacturing
industries. Numerous measures are suggested to take care of the environmental hazard. At every unit of
output, the level of toxicity is high due to the heavy hides-leather converting process.

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Leather & Leather Products Exports
Annually, around US$ 800 million worth of Leather sector products are exported. The export of leather &
leather products is progressing gradually in terms of value, quantity and unit price of the leather articles.
Importing Countries for Pakistan’s Leather include Italy, Germany, France, USA, Portugal, Singapore, UK,
Canada, Australia, Japan, Belgium, Spain, Korea, Netherlands, Norway, Sweden, Mexico, Chile, Poland,
Russia, Denmark and South Africa4. Leather and leather products (raw hides, skins and leather) exported by
Pakistan in 2018 are given in Table 3:

Table 3: Leather and leather products exported by Pakistan in 2018

Value Growth in
Trade balance Share in Growth in exported
exported in exported value
Importers 2018 (USD Pakistan's value between
2018 (USD between 2017-
thousand) exports (%) 2014-2018 (%, p.a.)
thousand) 2018 (%, p.a.)

World 296,773 240,129 100 -14 -12

Italy 46,910 45,668 15.8 -10 -9

China 35,080 34,028 11.8 -10 -5

Hong Kong,
32,324 32,236 10.9 -30 -17
China

Viet Nam 27,318 27,291 9.2 -4 8

Bangladesh 19,252 19,119 6.5 14 -16

India 17,344 16,164 5.8 -18 -19

Spain 13,718 13,366 4.6 -1 -27

Korea,
13,286 12,309 4.5 -20 -19
Republic of

Germany 10,691 9,283 3.6 -20 -4

Indonesia 10,070 9,985 3.4 -4 8

South Africa 7,400 5,579 2.5 -20 -18

Turkey 5,894 5,584 2 -19 6

Cambodia 5,823 5,823 2 -7 -15

United States
4,543 3,701 1.5 -11 15
of America
United Arab
4,514 -3,747 1.5 51 -53
Emirates

Portugal 4,273 4,191 1.4 -3 36

Japan 3,709 3,708 1.2 -15 -22

Netherlands 3,611 3,576 1.2 6 1

Austria 2,740 2,718 0.9 -18 -3

Thailand 2,393 1,382 0.8 -8 -44

France 2,329 2,167 0.8 -20 -32

Source: ITC calculations based on UN COMTRADE statistics (https://trademap.org/)

4
(Shahab 2013; Ghafoor et al, 2014; Siddiqui et al, 2016)

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Share of partner countries in Pakistan’s Export of Leather and Leather Products in 2018 is given below in
Table 4:

Table 4: Share of partner countries in Pakistan’s Export of Leather and Leather Products in 2018

Source: ITC calculations based on UN COMTRADE statistics (https://trademap.org/)

Times have been hard for the leather industry in Pakistan over the past several years now. The recently
released leather export numbers by the Pakistan Bureau of Statistics (PBS) show a mixed picture with some
segments showing growth while others continue to struggle as shown in Table 5 below:

Table 5: Leather Exports (Value)

Source: Pakistan Bureau of Statistics (PBS)

The above table shows that leather gloves and leather footwear registered growth of 15 and 17 percent
respectively and have been enjoying good demand in international markets especially when it comes to
gloves. However, leather garments which account for the bulk of leather exports remained stagnant and
reflect negligible growth.

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 Table 6: Trends in Leather Industry Production

Source: SBP SoE Report FY 2017

The downward trajectory has intensified with leather garments falling by 16.8 percent in FY2017 as against to
falling by 6.5 percent in FY2016. Leather gloves dived by a whopping 28.6 percent in FY2016 while falling by
5.1 percent in the last year. In its analysis the SBP has cited a variety of factors that are behind the leather
sector’s bleak performance.

An important issue has been the persistent smuggling of live animals to Afghanistan, creating high pressure
on supply of skins and hides to leather manufacturers in Pakistan. Last year, large quantities of hides and
skins were damaged due to inadequate preservation mechanisms, increasing reliance on imported raw
material. Other factors, include, inefficient leather supply chain, dearth of quality labor as well as lack of
modern technology. The electricity and gas tariffs have been a painful subject with leather manufacturers
pointing to at least 30 percent higher tariffs when compared to regional competitors like Bangladesh, Vietnam
and India.

There has also been a lack of investment in Balancing, Modernization and Replacement (BMR) by local
companies which have argued against the imposition of 4 percent custom duty and 17 percent sales tax on
import of machinery. To add to this situation, high cost of doing business has affected every sector in the
manufacturing industry.

Brands and retailers are increasingly sourcing orders from only those manufacturers which follow guide-lines
of the international Leather Working Group (LWG). The irony is that that only three leather manufacturers in
Pakistan are members of LWG, while India and China have 88 and 76 respectively.

The fall in leather prices internationally over the last three to four years has also forced leather exporters to
suffer huge losses. It also goes without saying that declining profitability has led banks to avoid further lending
to leather manufacturers.

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Recommendations:

Following suggestions are proposed to improve the competitiveness of the leather manufacturers in Pakistan:

1. Pakistan needs to initiate bi-lateral Free-Trade Agreements for leather products with important markets
such as USA, Canada and Australia.

2. Incentives be provided at par with competing countries such as India, China and Vietnam.

3. Increase export restrictions on raw hides and skins, wet-blue leather and finished leather sheets to
encourage exports of finished products such as leather gloves and bags.

4. Restrict the export of live animals to ensure local supply of raw hides and skins. The livestock industry is
already facing the issue of smuggling, hence it is essential to restrict the export of livestock.

5. The leather industry has been adversely affected due to the shortage of skilled labour force. Training
institutes need to improve their facilities and train labour to increase their productivity.

6. Products that cannot be further processed may be exempted from export surcharge. This will encourage
the export of final products such as leather garments, leather gloves etc. instead of raw material.

7. Manufacturers be facilitated to re-export temporarily imported goods such as accessories required for
manufacturing.

8. Import of prototypes of machinery be facilitated and industry be encouraged to produce the required
machinery locally.

9. Industry players should concentrate on marketing activities such as branding of leather products.

SME Observer
15
 Employment
Employment Generation through SME
Development
Maryam Anas Ganaie*

Introduction
The role of small and medium enterprises (SMEs) in the socio-economic development of a nation cannot be
overemphasized. SME sector is considered as a key driver for most of the employment opportunities realized
and jobs created. The advocates of SMEs, as a viable tool to generate employment in the country, believe that
direct government financial and institutional support may enable SMEs to create jobs for an expanding labor
force. It is also believed that SME expansion boosts employment more than larger firms as they are more labor
intensive as compared with the capital intensive nature of large businesses. Therefore, SME development is
seen as a significant tool to alleviate poverty and inequality in developing countries. However, SMEs are
dynamic in nature that make them vulnerable to market distortions and policy changes. Nonetheless, the real
challenge is to target the right enterprise size as SMEs also include a large number of small even micro
enterprises that create jobs that are neither productive nor decent. Despite strong empirical evidences
confirming SMEs as an engine for employment generation, not all government policies to generate employment
opportunities through SMEs may reap the desired result and impact.

Role of SMEs in Employment Generation in Pakistan

In overall economic development, a significant role is played by small and medium enterprises where they
promote level of competition, productivity growth as well as have external benefits on the economy at large.
Fast-growing SMEs are essential generators of new employment in developing economies. In Pakistan, there
are 3.2 million SMEs operating in the country, contributing 40% to GDP, 25% to exports1. The Census of
Establishments 2005 provides the basis for statistical analysis of the sector. As evident from Graph 1, 99.06%
economic establishments have an employment size of 1-10. Therefore, most of business in Pakistan are
*Ms. Maryam Anas Ganaie is currently working as Assistant Manager in the Policy & Planning Division, SMEDA

1
Pakistan Economic Survey 2010-11

July – December 2019 16

operating at micro and cottage industry level that relies on household workers.

These micro/ cottage enterprises are accepted as a source of employment in developing countries. However,
the employment generated by such units is neither decent nor productive and may not bring positive change at
macroeconomic level. Nonetheless, these businesses provide income generating activities to the majority of
the populace.

Graph 1: Percentage of SME Establishments by Employment Size

Source: Census of Economic Establishments (2005)

According to ownership structure of economic establishments as depicted in Graph 2, it is interesting to note

that 96.66% of economic establishments fall in the category of sole proprietorships while only 2.10% are
partnerships and 0.076% private corporations. Concentration of bulk of SMEs in the owner-managed category
is also indicative of the extent of informality in the economy. These enterprises are not registered, and
therefore it is difficult to monitor their performance and devise policies for their long term uplift.

Graph 2: Ownership Structure of SMEs

Source: Census of Economic Establishments 2005

SME Observer 17
Such informal enterprise segment mostly consists of subsistence entrepreneurs, however, there is a sizeable
higher tier of growth-oriented informal enterprises that may have potential to contribute significantly to
employment generation. The Labour force survey 2017-18 defines non-agriculture Informal economy as:
 All household enterprises owned and operated by own-account workers, irrespective of the size of the
enterprise (informal own-account enterprises),
 Enterprises owned and operated by employers with less than 10 persons engaged. It includes the
owner (s) of the enterprise, the contributing family workers, the employees, whether employed on an
occasional or continuous basis, or as an apprentice, and
 Excluded are all enterprises engaged in agricultural activities or wholly engaged in non-market
production.

Sectoral classification of non-agriculture employment given in Graph 3 suggests that the informal sector
accounts for 72% of non-agricultural employment while formal sector contributes around 28%. As informal
economy consists of non-agriculture small enterprise having employment size less than 10, therefore, it can be
considered as SME sector contribution to Non-Farm employment, that is 72%. Within the non-agriculture
informal sector, wholesale and retail trade contributes (32.5%) followed by manufacturing (22.8%), construction
(16.2%), community, social & personal services (16.0%) and transport (11.5%).

It is important to note that most SMEs in Pakistan, like other developing countries, are low productivity informal
micro-enterprises having limited ability to grow and create additional jobs. Therefore, SMEs being the largest
contributor to employment generation, are unable play an effective role to manage youth bulge through
creating productive and quality employment as they operate mostly in informal sector and operate at
rudimentary stage of development in terms of technology and skills. A country like Pakistan where 64 percent
of its population is below the age of 30 and almost 4 million youth attain working age every year, SMEs may
not be able to play the desired role, unless strong policy support is provided to them. During the last three
years, civilian labor force has increased by 4.46 million from 61.04 million in 2014-15 to 65.50 million in 2017-
18. Pakistan needs to create 4.5 million jobs over the next five years (0.9 million jobs annually). If the labour
force participation rate increases to 66.7 percent, Pakistan must create about 1.3 million jobs every year for the
next five years. Failure to create additional employment opportunities can lead to 43 million people being
unemployed by 2050 (Youth Development Index: 2016). This situation calls for serious attention of Government
in terms of assessing true ability of SME sector against their expectations from the sector to create jobs in
order to manage an expanding labor force.

The role of entrepreneurship development and new enterprise in employment generation is also an important
element that cannot be ignored. In this regard, it is imperative to assess entrepreneurial mindset of the youth in
terms of their ability to be job creators as opposed to job seekers. Statistics show that in Pakistan, around 1.4%
of total labor force opted to be an employer. Gender wise, 1.77% employers are male and 0.1% are female. In

July – December 2019 18

the informal sector, more entrepreneurial activity is observed at micro level as 2.6% of total labour force
deployed in informal sector is employer (LFS 2017-18). Initially, startups or new enterprises play a very
important role in job creation, but have a limited effect on net job creation at macro level over time, because
about one-third of all startups close by their second year of existence and fewer than half of all startups remain
in business after five years. However, economic research suggests that the influence of small startups on net
job creation varies by firm size. Startups with fewer than 20 employees tend to have a negligible effect on net
job creation over time, whereas startups with 20-499 employees tend to have a positive employment effect that
continues to increase for five years after their formation. Therefore, size, life of startups and new enterprises
also matters when it comes to employment generation through SMEs.

Regarding the employment contribution of the SME size class, the general conclusion may be formulated as
“Small is still beautiful”, at least within the context of formal enterprises from the non-agricultural sector. The
results of recent studies show that the SME size class may be considered the main job engine, not only for
developed countries but also for emerging and developing countries. It becomes more critical in case of
Pakistan where the small enterprises face constraints to graduate from small to medium sized firms and close
down within the first two years of operations. Among other constraints faced by the sector, informality of SME
sector limits its growth and development. Other challenges that SMEs face include, access to finance, skill
development, acquisition of state of the art technology, integrating into global supply chains, and achieving
competitiveness that requires gearing up and continuously introducing and implementing changes in controls,
systems and procedures. Corporatization is an important step for building this strong internal system, that not
only streamlines internal processes, but is also beneficial to the firm in obtaining business development support
and availing services from the public and private sectors, for growth and development. It is an established fact
that the formal enterprises have larger ability to create jobs as compared to the informal enterprises.

International Best Practices

The business environment that a firm operates in also matters.2 Policymakers should identify and tackle the
specific needs of SMEs or sub-groups of SMEs with, for example, (complementary) non- financial measures for
stimulating technology development and innovation, as the market does not provide enough stimulus for
innovation. Creating a favourable business environment by removing macroeconomic and institutional
obstacles that affect SMEs disproportionately is important. In addition, market failures in financial sector may
be resolved by providing sufficient access to finance for SMEs. Keeping in view the special needs of SMEs in
order to enable them to be an effective channel for job creation, various programs have been implemented
worldwide. Details of some prominent projects/ programs implemented internationally are given as follows:

A. Impact of ILO interventions3

 Uganda: combining entrepreneurship training based on the ILO’s Start and Improve Your Business
programme with loans or grants (for loans and training: employment increases between 45% and 66%
respectively)
 Tajikistan: Training and loans for potential women-owned start-ups based on the ILO’s Get Ahead
programme (self-employment increases by 60 %)
 One-stop shop (combining municipal, state and federal business registration procedures) in urban areas
in Mexico (Reform increased business registrations by approximately 5% and also increased
employment; the increase in registered businesses was mainly due to previous wage earners opening
new businesses)

2 (2013), “Is Small Still Beautiful” GIZ & ILO

https://www.ilo.org/employment/Whatwedo/Publications/employment-reports/WCMS_216909/lang--en/index.htm
3 https://www.ilo.org/wcmsp5/groups/public/---ed_norm/---relconf/documents/meetingdocument/wcms_358294.pdf

SME Observer 19
B. Employment subsidies
 In Cyprus, the Subsidized Employment Scheme for the Hotel, Food and Tourism Industry, implemented
by the Ministry of Labour, Welfare and Social Insurance in 2013, aims to combat unemployment (with a
target of 6,000 new jobs) as well as to further enhance the quality of services provided by the industry
through the recruitment of qualified staff. The scheme subsidizes 40% of the wage costs of new staff
during the first eight months of employment if the employment period lasts at least 12 months, or 30% of
the wage for the first 5 months if the employment period lasts at least 7 months.
 In 2013, Slovenia introduced a temporary incentive for the employment of young people. Employers that
conclude an indefinite employment contract with a person younger than 30 years of age who has been
unemployed for at least three months are exempt from employers’ contributions (pension, disability,
health, parental protection and unemployment insurance) for the first two years of employment. As the
intended objective of 7,000 new jobs was not achieved by the end of 2014 (with about 2,400 new jobs
supported), the measure was extended to the end of 2015.

C. Public funding linked to job creation

 The Microfinance Ireland initiative, established in 2012, targets microenterprises that experienced a
bank credit refusal (removal of this requirement is being considered) and provides them with loans of up
to €25,000 under favourable conditions. These loans facilitate job creation and retention in commercially
viable enterprises. In its first two years of operation, the initiative supported more than 330
micro‐enterprises and more than 740 jobs. More than three‐quarters of the loans went to enterprises
outside Dublin (Department of Jobs, Enterprise and Innovation, 2015).
 The SME Initiative is a joint financial instrument of the European Commission and the European
Investment Bank Group, funded by the European Structural and Investment Funds, COSME
(Competitiveness of Enterprises and Small and Medium‐sized Enterprises) and Horizon 2020 (see, for
example, European Commission, 2015; La Moncloa, 2015). The initiative offers guarantees to financial
intermediaries to provide SMEs with access to finance on favourable terms. Spain was the first country
to put this scheme into practice in early 2015, with strong involvement of the regional governments.
Overall, the total amount of loans to be made available to SMEs will reach €3.2 billion to €4 billion over
the next three years. Guarantees to cover up to 80% of the loans. It is expected that more than 32,000
SMEs will benefit from this scheme, creating 6,400 new jobs and consolidating employment for more
than 120,000 people.

D. Favourable tax treatment to foster job creation

 The crédit impôt recherche (research tax credit), established in France in 1983, among other expense
categories can be applied to the costs (including social charges) of employees with the appropriate
technical skills dedicated to R&D projects. More than 15,000 businesses have received the research tax
credit, declaring €18.39 billion of research expenditure in 2011. Total tax relief for recipients amounts to
€5.17 billion (Ministère de l’éducation nationale, de l’enseignement supérieur et de la recherche, 2014).
 In Sweden, the 2012 VAT reduction on restaurant and catering services is estimated to have created
9,200 new jobs in one year after its implementation (an increase of about 7%) (Tillväxtanalys, 2014).
This was against an initially estimated long‐term impact on employment of just under 6,000 full‐time jobs
at the annual cost per job of SEK 0.6 million (approximately €63,000) in reduced tax revenues
(Lagrådsremiss, 2011).

Conclusion and Way forward

As discussed, SMEs have potential ability to generate employment for expanding workforce. However, legal
status, size and life of business are critical in this regard. SMEs that operate in formal sector with long term
stability can create better jobs for expanding work force as compared with informal sector businesses.

July – December 2019 20

Unfortunately, this is not the case with Pakistan as SME sector of the country is stuck in informal sector with
poor survival rate. There is a dire need to introduce measures to accelerate growth of SMEs in order to support
them to become a true channel of job creation. High SME growth and innovation are linked to conducive
business environment, workers’ education, firms offering formal training and firms’ quality certification. This
underscores the importance of policy and institutional reforms to strengthen these factors. Innovation is also
linked to competitive pressure, whether local or international, which emphasizes the significance of integrated
competition policy to facilitate market dynamism. Furthermore, because SMEs suffer more than large firms
from many policy and institutional constraints arising from imperfect markets, they benefit disproportionately
from reforms. Small firms in particular significantly stand out in the degree to which they identify regulatory
policy uncertainty, corruption, access to land, taxation, access to finance, and electricity as serious constraints.
This situation calls for policy direction and direct intervention to enhance productivity, increase efficiency,
quality, market linkage of SME products of Pakistan. In this regard, there is a need to introduce an SME
package to boost business activity necessary to generate employment. Some interventions under key thematic
areas are given as under:

Thematic Area Proposed Area for Intervention

Fiscal instruments  Developing exclusive fiscal package for SMEs to enhance their
productivity and growth including tax incentives, subsidies,
simplification of regulations and procedures etc.

Entrepreneurship and Enterprise  Developing support system for new startups (regulation, taxation
creation and registration)
 ‘one-stop-shops’ for facilitating establishment of new business
 Reducing administrative burdens for new and existing SMEs, by
improving administrative processes, simplifying procedures etc.
 Incubation Centres at Universities
 Business consultation and guidance
 Improving upon the quality of legislation; clarity, enforcement
and education/information on legislation, and removal of
redundant legislation.

 Ease of SMEs to get finances from formal financial sources

 Venture capital firms
Access to Finance  Angel investment programs
 Crowdfunding

Quality of infrastructure  Logistics

 Energy Supply
 Developing SME Specific Industrial Zones
 Common Facility Centres
 Compliance and Certification Assistance
 Testing & Calibration Labs
 Laboratories Accreditation
 Inspection Bodies Accreditation
 Halal Certification Bodies

SME Observer 21
 Training and Human Resource  Technical Education
Development  Vocational Training
 Apprenticeship Training Program

Invention and Innovation  Industry Support for Productivity Improvement, in the area of
Energy Efficiency, Green Productivity etc.
 Common Facility Training and Manufacturing Centres
 Technology transfer and installation

References

Acevedo & W.Tan (2010), “Impact Evaluation of SME Programs in Latin America and Caribbean”, Poverty and
Gender Unit, World Bank
Digler (2018), “Small Business Administration and Job Creation”, Congressional Research Service

Nasr.S and Pearce.D (2012), SMEs for Job Creation in Arab World, SMEs Access to Financial Services, The
World Bank
Haltiwanger, S. Jarmin, and Miranda (2013), Who Creates Jobs? Small Versus Large Versus Youn, The
Review of Economics and Statistics, Vol. XCV
“Job Creation in SMEs: ERM Annual Report 2015”, Cornell University ILR School

Kok.D, Deijl. C and Veldhuis (2013), “Small Still Beautiful? Literature Review of Recent Empirical Evidence on
the Contribution of SMEs to Employment Creation”, International Labour Organization (ILO) and Deutsche
Gesellschaft für Internationale Zusammenarbeit (GIZ)
“Small and Medium-sized Enterprises and Decent and Productive Employment Creation (2015)”, International
Labour Conference, 104th Session

July – December 2019 22

Lahore on Rails
This segment ‘Lahore on Rails’ is basically inspired from ‘Madrid on Rails’ adapted from a famous open source web application framework,
‘Ruby on Rails’; a project initiated by the City Council of Madrid to motivate SMEs to use open source technologies

Website Builder – Wix

Irfan Raza Naqvi*
If your small business needs a website (and the answer to that for most businesses is a resounding "yes, it
does") and your website building needs are basic, then try using a free website builder such as Wix, which
offers a free account. Wix can help you create a full-featured, mobile-friendly website that won't break your
budget.

You can create a free and professional website all on your own. With Wix, you can start with a stunning
template and customize it, or get a personalized website made just for you. When you choose Wix, you don’t
just get a drag and drop website builder, you get the whole package. Free reliable web hosting, top security,
the best SEO and a dedicated support team to help you along the way.

Over 160 million people worldwide choose Wix to create a free website. And you can do it, too.
For more information visit: https://www.wix.com/
* Mr. Irfan Raza Naqvi is currently working as Assistant Manager in the E-BDS Department of SMEDA

For Feedback and Comments

Maryam Anas
Small & Medium Enterprises Development Authority
4th Floor, Building No. 3, Aiwan e Iqbal Complex, Egerton Road, Lahore
Phone: 92 42 111 111 456 E-mail: maryam@smeda.org.pk
23
We are on the web: www.smeda.org.pk
SME Observer