Six Blind Men touching SMEs.

Although history can not be filed away into neat little time packages because events and processes do not conform to solar calendar (or lunar for that matter). Never the less, past few decades have enveloped course of events conveniently to make it appear as if history can be packaged into decades. Fifties was the decade of constitutional wrangling; sixties was the decade of golden growth and green revolution; seventies turned into a socialist decade; eighties belonged to Islamisation; nineties was the decade of privatisation and market economy. The current decade began with two dominant themes: Poverty and SMEs (Small and Medium Enterprises). Having re-discovered these two inter-related entities, the government created loud hype about elimination of poverty and uplift of SMEs in the country, ironically without recognising their relationship – hence the disintegrated approach; poverty to be attacked through assistance and SMEs through plans of economic empowerment.

Special focus on SMEs began after the Second World War in the developed countries – Jasmec in Japan, SBA in the U.S and similar agencies in European countries were created to address the unique problems of SMEs and provide business facilitation. Over half century the industrialised countries have developed efficient agencies to ensure that SMEs remain dynamic and efficient. In any economy SMEs account for over 90 percent of enterprises. In Japan 99.6 percent enterprises are SMEs, contrary to common perceptions; so is the case in U.S. In the top 6 industrialised countries, they contribute between 50 and 75 percent of total production with a similar share of employment, Italy being most SME dependent with 78 percent share production and providing 80 percent of employment. Since many SMEs are vendors for large corporations, their significance in the economy is that much more critical. Even more obscure is the fact that over 60 percent of innovations are created by SMEs, not the large companies.

Pakistani governments, including Bhutto’s much touted ‘people oriented’ regime, remained oblivious of SMEs up till late nineties. They have been relegated to economic ‘untouchables’, scratching out livelihoods in the murky shadows of the informal economy, officially looked down upon as inefficient, unimaginative, tax evaders, parasites of the society. Dr. Mahboob-ul-Haq went as far as to justify his Harvard School of Economics development strategy in these words: “It is well to recongnise that economic growth is a brutal, sordid process. There are no short cuts to it. The essence of it lies in the making labourer produce more than he is allowed to consume for his immediate needs, and to invest and reinvest the surplus thus obtained….. What is important and intellectually honest is to admit frankly that the heart of the growth problem lies in maximizing the creation of this surplus. Either the capitalist sector should be allowed to perform the role or if this found inefficient because of the nature of the capitalist sector in a particular country or is distasteful, the State should undertake it. It would be wrong to dub the consequent emergence of surplus as exploitation: it is justification of economic growth…”

He didn’t elaborate on what happens to those ‘surpluses’. Do they trickle down the economic scales in society or used to build social infrastructures that make a civilised society or are they whisked off to Dubai, Switzerland, London, Boston or Canada? Anyhow, that development mindset, the nostalgic golden era of Ayub Khan, has become engraved in the national vision towards progress. Progress is a 40 acre, smoke belching factory on Multan road; it is a joint venture branded new beverage, it is a new oil company, a new cement brand, a new bank or a leasing company with glittering head office on main boulevard in Gulberg or a new range of automotive vehicles. Progress is when an already rich family business diversifies into a new tariff protected venture on borrowed money. SMEs do not figure in this vision of progress anywhere.

If a small family set up of artisans develops parts for F-16s and tank antennas, or hydraulic pumps for bulldozers and tractors, that is not progress. If SMEs are breaking their backs to keep 150 million people of the country fed, clothed, housed and traveling that is not progress. Al-fatahs and Haji Kareem Bukhshes for the miniscule percentage of affluent ladies of the privileged is progress! Out of the 25 billion litres of milk produced in the country the 4 percent that is packaged in monopolistic UHT packaging is progress. Out of the 500 million garments produced by street tailors annually, two million knitted polo T-shirts for exports is progress. SMEs are the silent beasts of burden, quietly keeping the wheels of the real economy turning, without glamour, without recognition and on top tarnished as the ‘black economy’. They provide fat sustenance for underpaid, ill-trained staff of CBR, labour department, utility corporations and horde of other redundant regulatory bodies of the government who feed off them like lice off a sheep.

On the other hand, it is also true that SMEs have a dark side to their existence. They violate international labour laws, they indulge in adulteration, they steal utilities (that’s not their exclusive privilege though, big fish does it better), they don’t pay taxes (but then who does except salaried class and multinationals) and they do not conform to standards in their products and services (but are their any relevant standards?). Fresh milk, for example, has no standards in the country. In the food Act 1961, there is only a definition of milk and milk products. So why blame the gawala if he sells milk, which has all fat removed from it and starch added as a thickener with a dash of penicillin to keep it going sour in heat.

Most SMEs exist outside the umbrella of the formal support system. SECP does not differentiate between a 2 million family enterprise or a 30 billion business conglomerate when it comes to their ‘corporate governance’ rules and guidelines. State Bank of Pakistan had the Prudential Regulations for the Banks that treated Chowdry Fazal Din in Wazirabad making cheap knives at par with Shell Pakistan. Only now have they issued a new set of regulations for Corporate, SME and Consumer banking laws. Given the proclivity of Banks to adopt new directives, we can safely assume that by the year 2010 some of these regulations will begin to translate into practical manifestation. SMEs, who contribute 40 percent to GDP have been receiving hardly 11 percent of total credit in the country; this disparity is not likely to evaporate very soon despite the fast developing cult of SME divisions in the Banks and hyperbole attributed to the sector.

Factory Act and Labour Act does not differentiate either between SMEs and the big guys. To circumvent the bane of regulatory yoke most small entrepreneurs prefer to keep their sweatshops smaller than 9 employees – the cut off point where they are netted under labour laws. They would rather forego growth than subject themselves to exploitation of government regulatory inspectors.

It is in this backdrop that Government of Pakistan resolved to develop the SMEs. General Musharraf’s four point agenda of economic revival placed SMEs at number two priority after Agriculture and before IT and development of natural resources. When SMEs emerged on the economic revival agenda, much confusion ensued. The sector was an amorphous mass of informal businesses stretching across the country. There was no data available on SMEs, neither was any expertise on how to handle the sector, barring a few self-appointed experts who had done academic research on SMEs in the developed world and had learned fancy jargon to impress the planners. All they had was their fancy ties and a few power-point presentations that were as clear as mud with relevance to Pakistani situation.

It was like six blind men touching an elephant, except that in this case the elephant was the SME sector. What followed will be revealed in subsequent columns.

Iqbal Mustafa
21 November 2003

1330 words