SMEs and our development goals
Md. Joynal Abdin
The Daily Star on February 25, 2017
Small and medium enterprises (SMEs) are the most important segment of any economy in the world. SMEs are getting the highest priority from policymakers due to their already proven multidimensional contribution to the socioeconomic environment of a country. These enterprises are easy to start, require only minimum capital, employ a comparatively higher number of people, and produce goods that meet local demands as well as contribute to export earnings. Definition of SMEs is based mainly on indicators of replacement cost (invested amount), number of people employed, yearly revenue, etc. Size of the indicators varies based on the socioeconomic condition of the country or even the region. Table 1 shows how the government of Bangladesh has defined SMEs in its latest industrial policy, the National Industrial Policy of 2016.
Table – 1: Definition of SMEs in Bangladesh.
|Type of Industry
(excluding land and factory building’s cost)
|Number of employed workers
||BDT 7.5 million to 150 million
||31 to 120
||BDT 1 million to 20 million
||16 to 50
||BDT more than 150 million to 500 million
||121 to 300 /
But for RMG / labor intensive industry not more than 1000
||BDT more than 20 million to 300 million
||51 to 120
Source: National Industrial Policy 2016.
Contribution and significance of SMEs
The 2013 National Economic Census conducted by the Bangladesh Bureau of Statistics shows that there are in total 7.81 million economic entities in Bangladesh. About 88 percent of these economic entities are cottage enterprises, while 11 percent are SMEs. But in reality, about 99 percent of Bangladeshi formal business enterprises are SMEs (ADB Institute, 2016). They constitute about 75 percent of non-agricultural employment and contribute about 25 percent to the national GDP. This 25 percent is contributed by only the manufacturing SMEs. However, this amount could in fact be much higher if the contribution of service sector SMEs could be calculated. Till now there has been little data available on service sector SMEs of Bangladesh, even though this sector contributes around 56.34 percent to the GDP, making it the largest contributor.
The significance of SMEs can be clearly observed if we take a look at the contribution of SMEs in some select Asian countries. For example, about 97.3 percent of enterprises in China, 97.3 percent in Malaysia, 97.5 percent in Kazakhstan, and 97.7 percent in Vietnam are SMEs. Furthermore, about 99.4 percent of enterprises in Singapore, 99.5 percent in Sri Lanka, 99.6 percent in the Philippines, 99.7 percent in Thailand, 99.7 percent in Japan, and finally, 99.9 percent in the Republic of Korea are SMEs.
SMEs also play a vital role in employment in these countries. For example, SMEs make up 87.7 percent of employment by enterprise in the Republic of Korea, 80.3 percent in Thailand, and 71.8 percent in Cambodia. Similarly, SMEs are contributing to GDP growth and increasing export earnings of these countries. They generate 60 percent of GDP in Indonesia and China, 47.6 percent in the Republic of Korea, 45 percent in Singapore, and 43.7 percent in Japan.
In terms of export earnings, about 42.4 percent of export earnings in India comes from SMEs, 41.5 percent in China, 26.3 percent in Thailand, 20 percent in Sri Lanka, 18.8 percent in the Republic of Korea, and 15.7 percent in Indonesia.
Targets of Bangladesh in Vision 2021
Vision 2021 has eight broad objectives that are to be achieved by 2021, the golden jubilee of our independence. Objectives of this perspective plan include: (i) caretaker government, democracy, and effective parliament; (ii) political framework, decentralisation of power, and people’s participation; (iii) good governance through establishing rule of law and avoiding political partisanship; (iv) transformation of political culture; (v) a society free from corruption; (vi) empowerment and equal rights for women; (vii) economic development and initiative; (viii) branding Bangladesh in the global arena, etc.
As the election manifesto of the current Awami League government led by Prime Minister Sheikh Hasina during the national election of 2008, it aims to transform the socioeconomic environment of Bangladesh from a low income economy to the first stages of a middle income economy. Along with higher per capita income, Vision 2021 lays down a development scenario where citizens will have a higher standard of living, be better educated, enjoy better social justice, have a more equitable socioeconomic environment, and the sustainability of development will be ensured through better protection from climate change and natural disasters. The associated political environment will be based on democratic principles, with emphasis on human rights; freedom of expression; rule of law; equality of citizens irrespective of race, religion and creed; and equality of opportunities. The Bangladesh economy will be managed within the framework of a market economy, with appropriate government interventions to correct market distortions, ensure equality of opportunities, and ensure equity and social justice for all.
Vision 2021 comprehensively lays down milestones for the country on its path to middle income status. In the sphere of education, the government targeted100 percent net student enrolment at primary level by 2010; free tuition up to degree level by 2013; full literacy by 2014; and a population skilled in information technology by 2021. In water and sanitation, the government aimed to supply pure drinking water for the entire population by 2011, and bring all households under hygienic sanitation by 2013.By 2012, they hoped to attain self-sufficiency in food production; and by 2021, 85 percent of the population are targeted to have standard, nutritional food.
The ten-year plan aimed for eight percent annual growth by 2013, and sustained 10 percent growth by 2017. Agriculture is to constitute 15 percent of the GDP, industry 40 percent, and services 45 percent by 2021. Employment in agriculture is to reduce to 30 percent in 2021 from the present 48 percent; while employment in industry is to rise to 25 percent from the present 16 percent; and employment in services is to rise to 45 percent from the present 36 percent. Unemployment is targeted to decrease to 30 percent in 2021 from the present 48 percent, and poverty rate is to decrease to 15 percent from the present 45 percent. 7,000 megawatts of electricity was set to be produced by 2013, 8,000 megawatts by 2015, and 20,000 megawatts by 2021.
All contagious diseases are targeted to be eliminated and longevity is to rise to 70 years by 2021. Infant mortality is to drop to 15 per thousand from 54 per thousand in 2010, maternal mortality to 1.5 percent from 3.8 percent, while the use of birth control will rise to 80 percent.
So where do we stand on the path to realising Vision 2021? Though we have had remarkable achievements in power generation, we failed to achieve eight percent GDP growth by 2013, and it will be tough increasing the contribution of industry up to 40 percent by 2021. The only way forward is to promote SME growth, entrepreneurship development, and industrial cluster development, through a congenial investment-friendly policy. In this regard, establishing 100 special economic zones (SEZ) was a praiseworthy initiative and a step in the right direction. However, experience shows that making an SEZ functional takes up to ten years or even more. While we may be lagging behind in achieving our aspirations, the ball has begun to roll, and late is better than never.
Ecology of SME development and challenges
Chapter 5 of the National Industrial Policy of 2016 concentrates on the development of micro, small, and medium enterprises and cottage industries. Special initiatives by the government are in place to eliminate the still existing barriers to SME development. Major commitments include the provision of collateral-free, single-digit SME loans; refinancing of SMEs; cluster-based SME development; a 15 percent quota for women entrepreneurs taking SME loans; continuous training for capacity building of SME entrepreneurs; special drive to increase market access and market linkage of SME products; special incentives for procuring environment friendly and productive machineries; priorities for export oriented SMEs to get fiscal and non-fiscal incentives, etc. The National Council for Industrial Development (NCID) headed by the Prime Minister, Executive Committee of National Council for Industrial Development (ECNCID) headed by the Minister of Industries, Bangladesh Small and Cottage Industries Corporation (BSCIC) and SME Foundation are among the various entities working hard to create and maintain an SME friendly policy regime in Bangladesh. Despite so many achievements till now, there remain some mentionable challenges toward SME development in Bangladesh. These have been laid out in Table 2.
Table – 2: Challenges of SMEs in Bangladesh
||Issue specific challenges
|1. Absence of skilled manpower
||1.1 Absence of modern machine operator and trouble shooters.
1.2 Absence of qualified managers and innovators.
1.3 Absence of trained designers and research people.
1.4 Higher educated but unemployed young generation.
|2. Use of old machineries
||2.1 Poor quality of products.
2.2 Low productivity.
2.3 Higher cost of production.
2.4 Wastage of raw materials and other resources.
|3. Lack of products diversity and new products design and development
||3.1 Same products being saturated over time.
3.2 Small products basket.
3.3 Lack of product diversification.
|4. Lack of information
||4.1 Lack of market access.
4.2 Lack of market share.
|5. Poor quality of products
||5.1 Inability to achieve quality certification.
5.2 Limited ability to meet buyer’s specification.
5.3 Losing market share to imported products.
|6. Limited and complicated access to finance
||6.1 Absence of promotional schemes like startup financing, credit guarantee, export guarantee, modernization of machinery, innovative product development etc.
6.2 Limited investment capacity.
6.3 Higher interest rate.
|7. Limited support from regulatory government agencies
||7.1 SME are yet to receive proper support from law enforcement agencies, department of environment, department of inspection for factories and establishment, and NBR etc. government agencies.
|8. Absence of harmonized tariff and non-tariff policies.
||8.1 Tariff on raw materials and finished goods yet to be harmonized.
8.2 Many investment promotion commitment of the government is yet to be implemented by NBR and other regulators.
|9. Absence of export orientation of capable SMEs
||9.1 Single product dependency to export.
9.2 Rural SMEs are out of export business circle.
9.3 Limited export destinations.
|10. Absence of sector demanded skills in academic curriculum
||10.1 Unavailability of required skills.
10.2 Higher educated but unemployed young generation.
10.3 Absence of product specific manufacturing skill training.
Source: Author’s research findings.
We could sum up the findings in this article on the note that SMEs are important for self-employment, generating employment opportunities for others, increasing GDP growth, contributing to export earnings, supplying livelihoods to stakeholders, and poverty alleviation of the country. Cluster-based SME entrepreneurship development could be an effective tool to accomplish Vision 2021. But existing challenges like creating skilled manpower as per sectoral demands, providing product-specific manufacturing skills to the youth, improving productivity and product quality by adopting new technologies, increasing investment capacity by creating and maintaining an enabling environment through harmonisation of government policies, must be addressed if we are to achieve our development goals.