Five steps that create inclusive growth through SMEs
Despite being the world’s second fastest-growing region, Africa’s challenge is translating this growth into broad-based improvements in well-being. Tackling five key areas for sustainable SME development (infrastructure, regulation, capacity, finance and business linkages) together with targeted investment in high-growth sectors will put Africa on the trajectory toward booming, yet inclusive economic development.
How can a 5% GDP growth fail to translate into a commensurate reduction in poverty, over years and years? Perversely, how can Africa have managed to increase the number of people living in extreme poverty over the past decade?
It all boils down to economic expansion with insufficient job creation. In some countries, this is because GDP growth is mostly stemming from resource extraction and foreign investment, with relatively little upscaling of the local services or manufacturing sectors. For example, according to Standard Bank, the discovery of the world’s 4th biggest gas reserves in Mozambique is predicted to more than quadruple GDP over the next 20 years, but create less than 1 million jobs in a country of over 20 million (mostly young) people. In some cases, there is a misalignment in the types of jobs created and the educational backgrounds of and resources available to citizens. Insufficient local job creation is compounded by increasing urbanization of former agricultural producers, inadequate infrastructure, paltry public services, sub-par intra-regional trade and other limitations. All of this gives rise to the current situation, in which “lived poverty” pervades and remains virtually unchanged across Africa.
Promoting local small and medium enterprise is the most effective and sustainable solution for creating more inclusive growth. SMEs, in general, comprise the majority of firms and the largest employer in much of the world. As opposed to foreign investment, which may be concentrated in a particular sector or region, local SMEs create opportunities across geographic areas and sectors and employ much broader and more diverse segments of the labor force. In addition, preliminary evidence suggests that formal small enterprises provide better stability, higher pay and better benefits to their employees than micro enterprises and informal firms. In comprising the majority of firms and reaching much deeper and earlier market penetration than foreign firms, local SMEs are often the principal provider of goods and services in lower and middle income communities. They also are more tapped into local networks and are instrumental in creating offtake for other local suppliers, thus strengthening local value chains.The expansion and fortification of these local value chains means higher local job creation and increased revenues to both private and public sectors.
