A policy framework for addressing inequality in developing countries Small and Medium Enterprise Promotion
Any attempt to achieve inclusive growth by generating employment for the tail end of the income distribution in developing countries needs to consider small and medium enterprises. Small and medium enterprises are responsible for over two thirds of employment in developing countries, with the poor disproportionately represented in this sector (Fajnzylber, et al., 2006). Furthermore, the expansion of small and medium enterprises can boost employment more than large firm growth because small and medium enterprises tend to be more labour-intensive. Empirical studies in eight African countries show that household enterprises were responsible for generating more new jobs than large corporations (Fox and Sohnesen, 2012). A recent World Bank study estimated that, if each self-employed worker created a single additional job, such additional job creation would amount to 8 percent of total employment in Kenya, 5 percent in Egypt and 4 percent in Costa Rica, as a share of the working age population (World Bank, 2013). However, small and medium enterprises often face difficulties accessing finance and markets, which limits their capacity to grow and expand. Governments can implement a number of policies to help these firms to be more efficient and competitive, while at the same time creating relatively good-income jobs, by improving the business environment under which they operate. Lack of capital is a major hindrance to start-up and a major impediment to staying in business or expanding operations for small and medium enterprises. Some countries have started experimenting with small and medium enterprise financing through central bank mechanisms along with special public funds to stimulate and guarantee bank loans linked to their business plans (e.g., India, China, Indonesia, Malaysia) (ADB, 2009). Others, through regulations, encourage affordable credit to small and medium enterprises that operate in strategically important sectors. To help small and medium enterprises adopt new technologies and access new markets, governments can act as facilitators of information on topics such as improved production methods, products and markets, technical support services and vocational training. Governments can also strengthen business links between small and medium enterprises, large enterprises and government by providing incentives for contracting with small and medium enterprises. Some governments, for examples, have quotas for a proportion of government procurement to be contracted to small and medium enterprises. Integrating entrepreneurs with large-scale enterprises is another practical strategy to support small and medium enterprises. Malaysia’s development strategy was based on developing a manufacturing sector, mainly driven by consumer goods production, including electronics and machinery. The strategy deliberately ensured that small and medium enterprises were integrated with the industrial sector as providers of inputs and raw material to bigger firms (Kawanabe, 1995). Employment Guarantee Schemes
Employment can be enhanced, especially in rural areas, through government-sponsored employment guarantee schemes. In such schemes, the government acts as employer of last resort. This is an important tool to absorb low-skilled poor workers and allow them to earn a basic income. The main aim is to raise the income of poor families by directly creating jobs and acting as a safety net to guarantee a certain level of income for those otherwise unemployed, while putting in place much needed economic and social infrastructure (ADB, 2012).
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