IN our editorial several weeks ago, we argued for the government to reassess its micro, small and medium enterprise (MSME) development strategy. Our argument at the time was that to maximize entrepreneurship in a way similar to great examples such as Singapore and Israel, government policy should move away from advocating cottage industries and self-employment , and finding ways to promote business growth, innovation and market disruption.
Two recent analyzes tend to confirm that thinking bigger in the development of MSMEs is the right path. The first was a report titled “Bridging the Gap: Unlocking Synergies between Private Sector Development and Development Finance,” which was released in April by British International Investment (BII) and Gatsby Africa. The second was a study published a few days ago by the Philippine Institute of Development Studies (PIDS) which analyzed the impact of the Generalized Scheme of Preferences Plus (GSP+) tariff regime applied in the Philippines by the European Union .
The PIDS study illustrates the flaw in long-standing government policy towards MSMEs. Despite the goal of providing greater export market opportunities for smaller firms, the study found that most of the benefits of GSP+ are captured by larger ones. More alarmingly, the implication is that GSP+ in some ways works against MSMEs, as it has led to lower prices for many export goods, and this impact particularly affects goods that are produced in small volumes by small businesses. Where export inclusiveness increased was largely in low-productivity agricultural sectors, the study found, so the gain in value to the economy was modest.
The PIDS study attributed the main cause of the unmet expectations of the GSP+ agreement to the “anti-developmental” state of the country, which includes characteristics such as the country’s dependence on imports, consumption private sector, foreign investment and economic zones; challenges to expanding the capacity of the country’s exporters; difficulties in developing local supply chains and the country’s infrastructure; and disparities in income and political power. The message here is that while GSP+ benefits are available, the government has not yet implemented policies — which would implicitly involve significant changes in the country’s overall economic focus — to take advantage of them, saying GSP+ “would help small Filipino businesses” a hollow statement.
The BII-Gatsby report provides some clues as to how this might be overcome, and backs them up with case studies of successful application of the ideas in Africa. The thesis of the report, summed up in the simplest possible terms, is that the economy of nearly every country in the world is private sector driven, but when governments look to sources of development finance to s improve and grow, they usually think in terms of the public sector. Thus, development aid tends to be directed towards things like infrastructure, social concerns at the public level like health and education, governance and administrative capacity building, etc.
If, on the other hand, governments were to consider using development finance aid more to develop the private sector – by transforming small businesses into big ones – many of the institutional and social challenges they seek to address would be resolved, or at least significantly reduced. The main challenge, which has been starkly illustrated by the stubborn refusal of Philippine banks to meet the Magna Carta 10% lending mandate for MSMEs, finding it cheaper to consistently pay penalties for non-compliance , is the investment risk. MSMEs are considered high risk from a lending perspective, and this risk is not easily mitigated, so they continue to miss the resources that would help them grow.
The solution to this problem, according to the report, and very convincingly, is to find lenders/investors who have a more flexible risk appetite, or in other words, who are more willing to bet on private companies. whose potential growth would meet greater economic and social needs. Goals. This investment can be found among development finance institutions; It is not for nothing that large institutions such as the AfDB and the World Bank maintain well-staffed and experienced private sector departments. As the new administration embarks on its quest to see how it can improve the Philippines, this opportunity to facilitate substantial growth should be considered carefully.