Financial Times

Export competitiveness of SME's and the rock of Sisyphus
By Shehara de Silva
CEO - ESP Consult: Director Strategic Planning - Clinch Advertising
Is poverty the rock of Sisyphus that we must dislodge before all this talk of competitiveness as a nation? Sisyphus was that ultimate hero of the absurd in Greek mythology condemned by the Gods to the futile task of rolling a stone up a mountain, though he knew the rock would always roll down.

My question is, that if the rules of the game are preset by a vicious cycle of poverty, dependence and aid (the Rock in this context), and not by the critical success factors that will be intrinsic to the nation's sustainable comparative advantage (location, services infrastructure, trainable people and quality of life versus the rest of South Asia), are we walking the wrong talk? Is that why we still crawl to develop basic industry characteristics which would be on par with our development indicators across the region?

The latest buzz in town with the donor groups, economic pundits and chamber elites is the need to push the SME sector towards modernisation, skills development and growth. We could thus chug the nation, towards the ultimate destination - poverty alleviation. There's nothing new in heaven they say and certainly this angle is well heeled. We Sri Lankans have known for long, we need to get up and walk. We have, even at times, known or thought we knew where we wanted to walk to.

Away from poverty was of course something my ten year old child could have grasped. To the all-knowing analysts - 30 poverty reduction programmes and 3.2 million persons on the poverty line were markers, of the depth of the pit. To my little girl, no doubt it was a moment of truth, when yet another power cut intruded on her privileged existence and she felt like the other 40 % did all their lives, sans basic amenities like water, power and roads.

What about us adult elites? What do we think needs fixing? We better leave aside basics like healthcare, nutrition and law and order and of course those two show stoppers - the absence of sense and sensibility amongst our political playmakers and the illusive propensity of the will to peace, by those many with vested interests. Yes, let it be said for the record as a token grouch and lets move on, or we will be off on all sorts of standard sidetracks on the path to development.

The critics who say we have an implementation impasse, say "walk the talk". Walk we must. But, what if the roadmap is not that clear and the first steps are yet to be defined? Are we getting places or are we really stuck in peat and if so why? My short essay here, is but an attempt to challenge the very basis of this discourse, in the context of the export competitiveness of SME's, and the solutions identified as the way forward in the yet to be published white paper on "A National strategy for Small and Medium Enterprises Sector Development in Sri Lanka" dated December 2002.

SME's are seen traditionally as an ideal vehicle to combine economic growth with poverty alleviation. The SME sector is believed to hold the key to reducing unemployment. SME's are variously defined as per their fixed assets or the size of employees. As asset definitions need to be pegged to inflation and we are again into the realm of a disputed statistic or government fiddling, it is best we stick to an employee base for categorisation.

This makes it easy to remember, small - under 30 employees and medium at fewer than 150. The White Paper and thus now hopefully all industry stakeholders and analysts are agreed to a definition of enterprises with fixed assets under Rs. 20 million as small and under Rs. 50 million as medium (both excluding cost of land and building). Figures would be adjusted for inflation based on the implicit GDP deflator.

Whoever says otherwise, we have a huge problem on data regarding the SME sector as the available data is only in the main of the manufacturing sector (96% of all industrial units within this manufacturing sector are SMEs and contribute 36% to industrial employment and 20% of value addition). It makes one wonder if it's not simply better to crack unemployment through bigger projects, as 4% of large industrial plants contribute to 64% of employment.

But then economists don't use 80-20, principles, only businessmen and pragmatists do! Further, as the economy is skewed to the service sector, it leaves a black hold of uncollected data, so much so in fact, the white paper admits - "The total contribution of the SMEs to the national economy cannot be estimated due to the paucity of information".

Context
Most developed nations got where they did, on a model of high intervention and capital intensive strategies for industrialization and growth. The current mantra is one of less state intervention and increased efficiencies (call it productivity if you will). And we need to switch to jargon speak that strange gobbledygook language of evasion that is the preserve of these beings/economists. The solution lies we are told in "pro-market policy environments and the economic reform to broaden supply side constraints, and sector specific policy measures to overcome demand side constraints." (Get the drift? ...lack of institutional support and policy inertia etc, etc. So where do we go from here?

The White Paper is going the route of all recent strategies - be it - Regaining Lanka, e-Lanka, tourism, peace communication or tea. The route starts with an "enabling environment" that will catalyze the "achievement of a broad based, resilient and internationally competitive export sector". Institutional support would have four strategic elements - 1) Establishing an SME authority - SMEA, 2) Reform of existing institutions, 3) Inter-Institutional co-ordination and 4) Developing staff and institutional capacity.

My heart churns when I see the best laid plans of our business elites play footsie with the monolithic bureaucratisation of all plans through institutional and capacity building motifs. Have we not learned that the path ahead will thus be strewn with turf and reform issues that whilst being necessary will take too long. And that is, if we are lucky enough to get the right people in to run the place and can hold a political regime long enough to see one set of strategies to fruition.

As a marketer I beg the simple questions that I have asked many a time before. Look at MJF and Dilmah as we all know what made them critical funds, the right contacts at the right time to inject the right help from the EDB and the right man to take an opportunity and make it happen.Of course the White Paper goes on to such issues. Key amongst these being:

a) Implementation of low cost credit access and monitoring by IDB

b) Encouraging active participation of VC's and leasing companies to provide credit support for SMEs.

c) Allied facilities through BDS services and a voucher scheme and a comprehensive database

d) Amending the loan recoveries act and escape route for sick industries to reconstruct

e) Establishing a Technology Training Fund

f) Introducing a voucher scheme for SMEs to engage in R & D work

g) Initiating low cost Advertising and sales promotion programmes

The paper then gets lost in a broad sweep of leftover agendas and ongoing programme issues such as tax reform, subcontracting, technology parks in rural areas, industry cluster strategies, productivity enhancement, cleaner production programmes and logging WTO regime.

All this laudable activity belies the basic trap we are in and does not address the short term sustainability in adequate quick fix milestones that will add strength and vigour to the process.

Let me quickly end this note with a sense of context once again, of where we are. A recent baseline study conducted by the ADB in association with the Sri Lanka Business Development Centre on enabling SME growth dated April 2003 (unpublished) states that 86% of SMEs surveyed (527 SMEs, of which 340 were small and the rest medium size enterprises), were in mainly domestic business; 14% were in exports or a combination of exports and domestic markets; 71% were not computerized and next to none of the BDS services ever used by SMEs was in marketing services.

The boulder of poverty alleviation seems to go beyond mere institutional capacity. Critical success factors such as market entry costs an promotional spend into international markets for developing market success, that build over time, a critical mass, must be prioritized.

I would recommend, identifying 10 companies at a minimum of a $1.3 million grant and the attraction of 5-10 top marketers at a minimum of $5-10,000 a month on two-year contracts, as the first steps. Not rocket science in my uncomplicated simplistic and rather cynical mind. White Papers and donor Pundits notwithstanding.

Back to Business