COLLEGE : AGRICULTURE SCIENCE

DEPARTMENT : AGRICULTURE ECONOMICS

A Senior Seminar on the Roles of Micro and Small Scale Enterprise on Poverty
Alleviation in Ethiopia

Prepared By: Hasan Usumael

Id No Ru/0740/12

Advisor: Anmut (Msc)

MARICH, 2022

Bule Hora, Ethiopia

TABLE CONTENTS
Contents page

LIST OF TABLES i
LIST OF ABBREVATION ii
ABSTRUCT.........................................................................................................................
1. INTRODUCTION 1
1.1background of the seminar 1
1.2 Objectives of the Seminar....................................................................................................................2
1.2.1 General Objective.................................................................................................................2
1.2.2 The Specific Objectives of the Seminar.........................................................................2
2 . LITRETURE REVIEW
2.1 Definitions and concepts................................................................................................................2
2.2 Roles of micro and small scale Enterprise on poverty Alleviation in Ethiopia..............................3
2.2.1Employment Generation........................................................................................................3
2.2.2 Income Creation.............................................................................................................4
2.2.3 Potential for Resource Mobilization and Decentralization Argument............................5
2.2.4 Facilitate forward and backward linkages......................................................................5
2.2.5 Promote Rural Transformation and Entrepreneurial Development................................5
2.2.6 Enhance Development of Agribusiness Firms ( MSMEs)..............................................6
2.3.1 Demand Problems..........................................................................................................7
2.3.3 Limited Access to Equipment and Technology..............................................................8
2.3.4 Limited Access to Physical Infrastructure......................................................................8
2.3.5 Limited access to information........................................................................................8
2.3.6 Unfavourable Regulation and Laws...............................................................................9
2.3.7 Weak Support and Institution Arrangements.................................................................9
3.1 Conclusion........................................................................................................................................... 9
REFERENCES 11

ACKNOWLEDGEMENT

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First of I would like to thank the almighty Allah for his givens and protection in every time
and helping me in giving power and strength through out of accomplishments of my studies.
Then I would like to express my gratitude to my advisor Anmut (Msc) for providing me the
guidance, encouragements and inspiration. Beside he gives me comment on time regarding
my paper through out of work. Again my deepest gratitude goes to my family for their
financial support

LIST OF ABBREVIATION

ADLI- Agricultural Development Led Industrialization

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CSA- Central Statistical Authority

EE- Ethiopian Economic Association

FAO- Food Agricultural Organization

GDP- Growth Domestic Product

HASSEDA- Handcrafts and Small Scale Enterprise Development Agency

ILO- International Labour Organization

MDGs- Millennium Development Goals

MOFED-Ministry of Finance and Economic Development

MSE- Micro and Small Enterprise

MSME- Micro and Small Manufacturing Enterprise

MTI- Ministry of Trade and Industry

NBE- National Bank of Ethiopia

SSE- Small Scale Enterprise

LIST OF TABLES

ABSTRACT

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Micro and small scale enterprises have a vital role in poverty reduction, employment
generation as well as economic development in poor countries like Ethiopia. Our country’s
MSE includes a diverse set of operators ranging from petty traders to restaurant owners;
shoeshine boys to small shoe making enterprise; peddler in streets to grocery business
operators, etc. in Ethiopia, like any other developing countries medium and large scale
manufacturing or services giving sectors and state bureaucracies could not create enough
job to absorb the ever increasing labour force, especially in urban areas. A range of
interrelated factors contribute to this dismissal situation. These include town-ward migration,
population growth, landlessness, structural adjustment policies, etc. in such situations MSEs
plays a great role to improve this difficult problems, especially for poor and unemployed
people in both urban and rural areas as source of livelihood. They are also desirable because
they can be located in rural and small towns. Often large and medium industries are
concentrated in few urban centres, which entails undesirable rural to urban migration. Such
unwanted and unplanned flow of people from rural areas to urban create social problems to
urban centres on the hand and with draw the productive labour force from rural area on the
other hand. Besides, they develop a pool of skilled and semi-skilled workers that will be a
basis for a future industrial expansion and acts as ancillaries to large scale enterprises. Most
agribusiness companies provide a wide range extension services to farmers which include,
new technology, marketing information, inputs provides credits, marketing for products and
reduce their marketing risk. Therefore, emerging of vibrant agribusiness MSMEs could play
a crucial role in improving labour productivity, crop and animal yields, product safety and
commercialization level, and eventually increase farmers’ income. Even though micro and
small scale enterprises have huge advantages to end absolute poverty in our country, there
are a lot of obstacles to the development of this sector. Among them the major problems are
demand problems, infrastructures, capital constraints, limited access to equipment and
technology, limited access to skilled labour, weak support and institutional arrangements. If
these major problems are solved, MSE plays a great role on economic development of the
country and speed-up the MDGs.

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 1. INTRODUCTION
1.1 background of the roles of micro and small scale enterprise on poverty alleviation in
Ethiopia
Poverty in wide spread and remains a challenge of sustainable development and stability
(Lutheran world federation of Ethiopia, 2006; easterly, 2002). It is estimate that close to
half of the population in rural and urban areas of the country live in absolute poverty due
to lack of economic opportunities, governance crisis, inadequate basic household income,
and poor means of survival (mammo,2008);serneels,2004; EEA,2001).studies conducted
in 2003 and 2004 by the Ethiopia (2006) shows that nearly half of the71.3million
Ethiopians live below the absolute poverty line, lacking an average income of 1 American
dollar per day as a means of acquiring basic necessities of life. Currently, 50% of rural and
urban population of the country in the group between 15 and 30 years in unemployed due
to lack of opportunities (serneels, 2004).in Ethiopia there can be no credible sustained
national development policy unless otherwise the need of population are fed first and
foremost.

The structure of the Ethiopian economy indicates that agriculture is critical to the
Ethiopian economy. According to Hassan (2006) the sector directly supports about 85% of
the population in term of employment and livelihood. Although the contribution of
agriculture to GDP has decreased in recent years, it remains the largest sector, estimated at
about 40% in 2006, and generating about 88% export earnings. However, the agriculture
sector is characterized by small scale farming, highly fragmented landholdings, traditional
farming technologies, heavy reliance on rainfall, low input and low productivity.

In order to bring about economic growth and development in the country, although the
current government has pursued a new economic policy followed by reform programs
which have given top priority to the agriculture sector, the number of hungry people have
not grown over time since this regime came to power in May 1991 (Mammon, 2008).the
same report indicate that every year, an average availability of 7.5 million people have
always relied on food aid from outside irrespective of the of the rain, poor harvest or
drought. The future for the agricultural sector, therefore, determines whether or not
Ethiopia can break out of the vicious circle of food dependency. According to the UNDP
(2003), a comprehensive and integrated system of agricultural production along with good
governance is necessary for ensuring food security in the country (MK van ittersun 2008).

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1.2 Objectives on the Role of Micro and Small scale Enterprise on Poverty Alleviation
in Ethiopia

1.2.1 General Objective

The general objectives of this seminar is to review to review on constraints of micro and
small business enterprises in Ethiopia and also review how much the enterprise is playing
a role in reducing poverty.

1.2.2 The Specific Objectives of the Seminar

 Review the major constraints of the enterprise that need immediate solution and
that will be solved in the long run period.
 Review on the role of the sector in reducing unemployment and enhancing
development of agribusinesses.
 Review the contribution of the sector in improving the income level of people
and resource mobilization.
 To understand how MSE promote rural transformation and facilitate backward
and forward linkage.

CHAPTER TWO LITERATUR RIVIWE

2 Overview of the Roles of Micro and Small Scale Enterprise on Poverty Alleviation
in Ethiopia

2.1 Definitions and concepts

The definition of small scale industries is different from country to country. Even with the
same country it may vary from one of another. Therefore, it is seems that there has been no
universally accepted definition of the term small scale industries. Generally, enterprises are
classified as belonging to a certain size category according to the number of persons they
employ the amount of fixed capital investment, the volume of input produced, the type of
management, and the volume of sales the level of technology applied. Defining of small

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scale industries poses a problem because it must be distinguished on one hand from large
and medium industries and on the hand from Cottage (handcrafts) industries an enterprise
is considered as large or small in one country, may be categorized as being relatively small
or large in the context of the other. For example, by advanced countries standard probably
all industries in developing countries may fall under the category of small scale industries,
(Befekedu, 2001).

Stances and Morse in 1998, try to see the definition of small scale industries from the
content of different countries. For example, in middle east countries, SSI refers to
enterprises employing between 10-49 people, in Indonesia small scale industries, include
all productive units employing less than 10 full time workers and not use machinery driven
tools, in India, the definition is based on capital consumption that is with capital not
exceeding 15 million birr. In Italy small scale industry is defined as a manufacturing plant
with 500 or less employees and a capital investment is not more than 1500 million birr.

 Poverty alleviation (or reduction) describes strategies to eradicate poverty. It is any

process which seeks to reduce the level of poverty in a community, or amongst a
group of people or countries. Poverty alleviation programs may be aimed at
economic or non-economic poverty. Some of the popular methods used are
education, economic development, and income redistribution. Poverty alleviation
efforts may also be aimed at removing social and legal barriers to income growth
among the poor. Economists such as Hernando De Soto see improvement in
property rights as being instrumental in poverty reduction. Other economists also
highlight government corruption as a chief problem in reducing poverty in the
developing world.BA OLKEN 2011

2.2 Roles of micro and small scale Enterprise on poverty Alleviation in Ethiopia

2.2.1 Employment Generation

In the Ethiopian context, the challenge of employment generation is equivalent to
achieving the objective of sustained growth and reduction of poverty. In fact they are
inseparable and interdependent long run development goals. Thus with the rapidly
increasing population of 3% per annum and even faster growth of the youth population
reaching working age, combined with population pressure one agricultural sector, the
demand for micro and small business enterprises are increasing from day to day. One of

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the efforts unemployment is alleviated in most countries was through industrialization and
developed countries, for countries like Ethiopia unemployment problem can be solved
through development of MSEs which employee more people per capital than large firms
(Ministry of finance and eco. Dep’t (MoFED) 2000).The employment creation capacity of
small manufacturing enterprise has been given less attention by policy makers and
development planners in Ethiopia (SHIFERAW 2017). Small manufacturing enterprises
(SMEs) have a tremendous potential to generate employment for the majority of urban
labour force. There are also important sources of income not only for those people who
could not find employment in other sectors but also provide cushion to falling incomes of
low wage earnings.

With the MSE sector cutting across all sectors of the economy, however, it has proved to
be a source of productive employment next to agriculture, both in urban and rural set-ups.
In rural areas, growing cohorts of landless youth are dictating the expansion of micro off-
farm business activities. According to the 1997 CSA survey, the Ethiopia informal sector
along with the small scale manufacturing sector comprised of labour force which is eight
fold compared to the medium and large scale manufacturing sector (IC Net Limited 2007).

The cottage and handcrafts and small manufacturing sub-sectors account for 87% and 7%
of total employment of the manufacturing sector respectively. Similarly, micro enterprises
constitute 97% of the establishments and account for 19% of the gross value of production
in the manufacturing sector. The share of small scale manufacturing is 3% and
8%respectively.The percentage share of medium and large scale manufacturing is
therefore 0.1% and 73% respectively (CSA 2003 as cited Fantahun, 2004).

2.2.2 Income Creation

National survey on small scale manufacturing industries conducted by CSA in 2001/2002
and covering 48 major towns reported that more than 750,000 people are engaged in
informal sector and small manufacturing businesses. The small scale enterprises together
with the micro enterprises account for 3.4%of GDP, 33% of the overall contribution of the
industrial sector and 52% of the manufacturing sector to GDP (Ministry of Trade and
Industry, 1997) according to the records of the Bahir Dar special zone micro and small
enterprises, Development Branch Office, currently there are more than 134 small
enterprises, which are engaged in manufacturing activities such as wood, metal, food and
non metal products processing.

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In Ethiopia, the services sector accounted for 46.3% of GDP on average in the period
between 1991 and 2002 (EEA, 2003/04). During this period, the sector showed an increase
of 14.3% in terms of its share of GDP on average (NBI, 2003/04). For instance, table
below shows that between 1995 and 2001 the contribution of the services sector to GDP
increased from 38.6% in 1996 to 45.7% in 2001,while the contribution to GDP by the
agricultural sector declined by 7.5% during the same period (National Bank of Ethiopia,
2003/04). The trends in sectorial output share of GDP shows that the contribution of
agriculture to the country’s total GDP shows is declined. However, the decline is not by
structural transformation of the economy as it is desired for economic growth, rather it is
associated with the poor performance of the sector.

2.2.3 Potential for Resource Mobilization and Decentralization Argument

Economic growth in Ethiopia is constrained, among other things, by shortage of capital.

The country is in early stage of industrialization. Thus, much of the required investment
for the industrial sector should come from domestic savings. There are, however, reserves
of idle savings that could be drawn into productive use if the owners had the choice to set
up business by their will. Thus, one of the objectives of developing small scale industries
is to mobilize the unutilized and underutilized saving so as to make them productive.
(Fantahun, 2004)

Small scale enterprises are desirable because they can be located in rural areas and small
towns or villages. Often large and medium industries are concentrated in few urban
centres, which entails undesirable rural to urban migration. Such unwanted and unplanned
flow of people from rural areas to urban areas could create social problems to the urban
centres on the one hand and with draw the productive labour force from the rural areas on
the hand. In general, they are loose foot and also convenient for geographical spread of
industrialization. The decentralization process may help balance the disparity in economic
growth between rural and urban areas .Hence, decentralized distribution of industries and
the promotion of industrial growth in small towns and rural areas with potential resource
base is very essential for the country. (Daniel 2001).

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2.2.4 Facilitate forward and backward linkages
They produce relatively cheaper goods and services locally using labour intensive methods
satisfying the needs of particularly the poor people, hence contributing to the variety of
consumer goods. Besides, they develop a pool of skilled and semi-skilled workers that will
be a basis for future industrial expansion. They promote subcontracting arrangements and
acts as ancillaries to large scale enterprises. They facilitate effective technology transfer as
a result. In addition, they provide significant intercourse linkages, integrating economic
sectors through forward and backward linkage. (D Saikia 2009).

2.2.5 Promote Rural Transformation and Entrepreneurial Development

The rural areas, they constitute centres of innovation as well as of economic and social
changes thus helping transform rural areas into market economy, through gradual
magnetization. Hence, they contribute to the economy, especially rural trade and
production in terms of outputs and skills (Andualem, 1997). They are also seedbeds for
entrepreneurial development and offer excellent opportunities for entrepreneurial and
managerial talents to develop and mature, the critical shortage of which is often stressed as
a major handicap to economic development of most developing countries. They also have
great reliance on indigenous resources-raw materials. They generally show less need for
developed and costly infrastructure. In generally, the small enterprise sector is seen as an
important force to generate employment and more equitable income distribution, to
activate competition, exploit niche market, enhance productivity, technical change and as
a result stimuli)the local as we as national economic development.MA Ayemu 2011

2.2.6 Enhance Development of Agribusiness Firms ( MSMEs

According to FAO, (1997) the agribusiness sector is regarded as having the potential to
accelerate the development of the agricultural sector and generate economic growth. In
many developing countries the interest to promote the agribusiness enterprises is usually
associated with its potential to create forward and backward linkages that in turn generate
demand among smallholder farmers for agricultural inputs as a result of higher income and
value addition of the primary agricultural products. The MSSEs are regarded as suitable
strategy capable of stimulating growth and development as they are in line with the scarce
resources that developing countries comprise. Literature indicates that MSMSEs are
important vehicle for addressing the challenges of unemployment, poverty and economic
growth in the country (PC Kesavan 2008).

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In recent years, the significance contribution and the potential of the MSMEs sector has
been recognized in Ethiopia. Accordingly, the government has adapted the new micro and
small enterprises development strategy to promote the sector. The policy document
highlighted the crucial contributions of the sector in Ethiopian economy and the
government commitment for improving their constraint (A Shiferaw 2017). The white
paper on the promotion of the MSMEs sector is an important step, which indeed shows
government’s attention to the promotion and development of the sector. However, while
the document paper gives much attention to the potentials contributions of the sector,
regrettably. There is no clear and systematic approach to alleviate constraints of the sector.
Many challenges still exist. The existing reality show that the development prospects of
the sector is constrained by several factors including the high competition from
international and domestic large firms. In Ethiopia in order to improve productivity and
production in agriculture sector in an environmentally sustainable way, modernization of
the current agricultural production techniques is critical. In this regard MSMEs play
significant role in innovation through technological change and innovation adoption. It is
their role in agricultural research and technology adoption that will drastically affect the
Ethiopian agricultural production system. For instance, food processing sector and
furniture making the patterns of innovation and diffusion is frequently changing.
Innovation among small enterprises enhances improvements in production processes and
products in the sector.

2.3 Constraints of Growth of Small Enterprises in Ethiopia

The constraints identified by various studies on small enterprises and expansion in

Ethiopia also associated with demand problems, paucity of capital, equipment and
technology, human and material inputs, rules and regulations and institutional bottle necks.

2.3.1 Demand Problems

According to Andualem (1997), SMEs in Ethiopia, usually market constraints and inability
to their products and services are listed as one of the most serious obstacles to the starting
of business and growth beyond mere subsistence level. The CSA (2003) report which is
based on 31,863 small scale manufacturing industries all over the country, of which
19,996(62.75%) are located in urban and the remaining were in rural areas, showed that
48% of the total establishments have faced a problem of demand or access to market. This
demand problem has prevailed because of existence of weak or absence of interlink age

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mechanisms with other medium or large enterprises and existence of weak or absence of
appropriate marketing channels, open markets, trade fairs, displays etc. which SMEs
would have used to market their outputs (CSA 2003).

2.3.2 Capital constraints

Getachew (1997) contend that most SSEs require rather small amount of initial and
expansion capital as well as working capital, except in certain cases where the SSEs are
relatively large, or use modern or improved technologies. Even the later cases, capital
requirements may be moderately large. Yet shortage of both types of capital is often a
major constraints faced by SSEs. The initial capital for starting up SSEs is usually raised
by the proprietors from their own resources (family saving, sale of property). They also
raised working capital and expansion capital from their own sources, including any profit
made and from individual money lenders.

Therefore, given their limited means and usually low profits SSEs are always haunted by
inadequacy of capital, particularly that of working capital, where as they can usually draw
upon a large reservoir of cheap unemployed or underemployed labour. The result may be
capital/labour ratio so low as to result in very low labour productivity in many small firms.
Inadequacy of capital, limited access to institutional credit, cumbersome procedures, and
mismatch between required levels vis-à-vis availability are the most serious problems very
often encounter by them. The access of such enterprise to institutional credit is limited
because of collateral requirement, and documentation requirement by the formal financial
markets, which is criticized for its inflexible formal banking system in the area of available
credit to small scale enterprises (Andualem 1997).

2.3.3 Limited Access to Equipment and Technology

According to Assefa (1997), SSEs have difficulties in gaining access to appropriate
technologies and information on available techniques. This limits innovation and SSE
competitiveness. In this vein, woldey and gebrehiwot (2004) contend that the small scale
enterprise sector in Ethiopia is contained by poor production.

2.3.4 Limited Access to Physical Infrastructure

Poor infrastructure is one of the major problems of SSEs. This category includes lack of
capital or high cost of business promise or location, poor utilities and transport. The poor
state of road in general and remains a major problem for many SSEs. The supply of most

8
utilities is unreliable and costly (Andualem 1997, AssEFA and Getachaw 1997). Limited
access to raw material and supplies shortages of raw materials are also frequent problems
faced by SSEs.

According to Assefa (1997) this problem may raise from a shortage of working capital
which effectively ties the enterprise to high priced, unreliable or low quality supplier. They
may not the right source and best price of inputs they want due to limited access to
information.

2.3.5 Limited access to information

Inadequate access to appropriate, relevant and easily understandable information and
advice is one of the most important problems of SSEs. Such information and advice
revolves around identifying the types of activity about necessary inputs and market
information, regulation and legislation, accounting, managerial advice, referrals to
appropriate bodies and interlink age information. According the survey by the CSA shows
that lack of information to identify type of activity and lack of information about
appropriate machinery were identified by 21.28% of the respondents respectively (CSA
2003).

2.3.6 Unfavourable Regulation and Laws

In many developing countries, the markets for capital, foreign exchange and labour are
affected by numerous types of regulation and taxation policies. Ethiopia is not an
exception in regard. Most small firms have very limited access to bank and institutional
credit as a consequence. Most small firms are also at a disadvantage when it comes to
negotiations for exception from any form of regulation, permission to operate, etc. lack of
transparent rules and procedures victimize the SSEs to the undesired result. Government
policies and programs which exert significant influence on SSEs include trade regulations
and tax laws which are viewed as discriminating in favour of large, capital intensive
enterprises (Fantu 2001 and Assefa 1997). According to the CSA survey finding setting
license and regulation on obtaining working premise were reported 41.5% and 32.01% of
the enterprises as constraints to the firms (CSA 2003).

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2.3.7 Weak Support and Institution Arrangements
The lack of cohesiveness and the wide range of SSE interest limit their capital to defend
their collective interests and their effective participation in civil society. In most countries,
little attention was given to how pursuing appropriate policies could have a positive effect
on SSEs development. However, since the early 1980s economic development
environment brought most countries, particularly developing countries, to recognize the
role played by them. Despite the realization of the importance of the sector, absence of a
clear policy, framework as well as poor institutional arrangement among the various
stakeholders (government, private institutions, associations’ donors and NGOs) involved
in the promotion of the sector has resulted in lack of effective coordination and utilization
of resources (Getachew 1997 and Assefa 1997)

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3 CONCLUSIONS and recommendation

3.1 conclusion

Ethiopia is one of the country that challenge absolute poverty, which is characterized by
low levels of income, low level of consumption and an increased number of
unemployment. To end this absolute poverty, micro and small scale enterprises have a
great roles especially in improving the income level of people, in enhancing development
of agribusiness firms, in promoting resource mobilization, in rural transformation and
generating employment opportunity for a number of peoples. Where the number of
unemployment is increasing from day to day, the micro and small scale enterprise has
opened a huge employment opportunity for many people especially for those who have
minimum skills and capital. Most of the people who engage in this sector improve their
income level.

In the rural areas, they constitute canters of innovation as well as of economic and social
changes thus helping transform rural areas into market economy through gradual
magnetization. Hence they contribute to the economy, especially rural trade and
production in terms of outputs and skills. The sectors also known as an instrument in
bringing about economic transition by effectively using the skill and talent of the people
without requesting high level of training, much capital and sophisticated technology.

Though, the sector has such a role its development is at very low stage of development and
faces development problems. The major problems that the operators of this sector faced is
like lack of sufficient working capital that inhibits them not to expand their business, lack
of sufficient credit facilities, market problem, lack of infrastructural facility and other
related problems.

So, if these major problems are solved and the sector has given high consideration by
government, non government organization and private sectors, the MSE sector plays a
great role on the economic development of the country and speed up the millennium
development goal the country planned to achieve.

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 3.2 recommendation

4. REFERENCES
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Ageba, G and Amah, W. (2004). Policy Impact on Regulatory challenges of Micro and
Assefa, T. (1997) Small Scale Enterprise and Economic Development of Ethiopia.
BAOlken( 2011)corruption in developing country Harvard University
Central Statistical Authority, (2003), Report on Small Enterprise.
Denial, S (2001), Financial Micro and Small Scale Enterprise in Urban of Ethiopia.
D Saikia (2009 ) agriculture industry inter linkages Munich personal Repec Archive
Easterly, (2002). Growth in Ethiopia Retrospect and Prospect, Counter for the Global
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EEA, (2003/04). Industrialization and Industrial Policy in Ethiopia: Report on Ethiopian
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Ethiopian Concepts, Definitions and Issues.
Fantahun, M. (2004). Micro and Small Scale Enterprise Development: potential and
constraints.
Gade, A. Shimeles, A. and Weeks- (2003). Growth, Poverty and Inequality in Ethiopia: which
way for pro-poor growth: Journey of Eastern and Southern African Social Science
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Getachew, M. (1997): The Informal and Formal Sector Enterprises Dynamics of Linkages
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Hassan, R. (2006). Measuring the Economic Impact of the Climate Change on Ethiopian
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IC Net Limited. (2007). Pilot Study for Project Formation on Micro Financial and Capacity
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Liedholm, C. And Meed, D. (1999), Small Enterprises and Economic Development.

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Luterian World Federation, (2006). Department of world service country programs
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Adds Ababa: The Federal Democratic Republic of Ethiopia, Ministry of Trade and
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MK Van ittersum 2008 integrated assessment of agricultural system
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