Ethiopian Business Review

Micro Indeed: How MSEs are Failing to Support the Manufacturing Sector

When his career hit a bump in the road a decade ago, Dagnachew Bayabill, 36, moved to Bahir Dar for a fresh start, andbrought with him, his ample experience in the shoe manufacturing industry. After settling in the capital of the Amhara regional state, he started making traditional sandals. Business was good due to the availability of cheap raw materials and lack of competition. Years later in 2007, when Dagnachew and his colleagues asked the city administration for a piece of land for their workshop, the administration suggested that they organize themselves as a micro and small enterprise. This resulted in the establishment of Edget Behibret Leather and Leather Products Enterprise, with a total capital of ETB18,000. Currently, the enterprise has more than ETB one million in capital,  and employs more than 50 permanent workers; it has graduated to a “transitional level” that will enable it to join the medium manufacturing industry.

Last year, after the company’s ‘‘graduation”, Dagnachew and his colleagues applied for a plot of land and a loan to expand their factory. “We have submitted a project proposal to get a permanent land and an ETB four million loan to import modern machines” Dagnachew told EBR. The company, which has already started exporting its products to Sudan, aims to produce high quality leather and leather products to satisfy the local market and to increase exports.

No. of MSEs* 137,897 206,352 283,767
Jobs created 651,366 806,322 1,223,679
Loans supplied 994,086,791 1,088,137,275 2,725,090,809
Market link local in ETB 1,771,592,609 3,949,329,542 8,450,741,573
Market link Foreign in USD 3,387,195 22,187,831 21,000,000
Savings in ETB 317,999,624 1,445,527,229 3,418,359,602

The success story of Dagnachew and his colleagues is what the government  envisioned when it revamped the Micro and Small Enterprises Development programme in 2006. Micro and Small Enterprises (MSEs) were given the pillar objectives of realizing equitable economic growth by creating jobs, generating income, and establishing a foundation for the industrialization of the nation. Though the programme has performed better in the area of job creation, it has failed to achieve its mission of establishing the industrial base of the country. 

By June 2013 more than 280 thousand MSEs were established and 3.9 million jobs have been created across the nation according to Asfaw Abebe, deputy director of development at the Federal Micro and Small Enterprises Development Agency (FeMSEDA). “These people have been able to make their living, change their desperate lives and most of all they have changed the poor work culture that prevents many Ethiopians from earning a living” says the Deputy Director. 

In addition to contributing to improving the lives of many desperate youths, the resurgence of MSEs is also seen as a pedestal for the industrialization of the nation. Ethiopia’s Growth and Transformation Plan (GTP) has aimed to transform the economy of the nation into an industrial one using MSEs as a vehicle for this change. One of the major objectives of the GTP is developing the micro and small-scale enterprise sector in order for it to contribute, to the development of the industrial sector. The industrial policy of the nation has also clearly stated the vital role that MSEs play in the industrialization of the present agrarian economy. However, regardless of this policy direction set and re-set by the government more than seven years ago , major shifts in the role that MSEs play in the industry are still absent.

Some major objectives of the development of MSEs, which aim to link MSEs to medium and large scale manufacturing industries, as well as to transform them to medium level manufacturers is a long way from being achieved. The role these MSEs are playing in supplying raw materials, and producing goods that can be exported in high quality and quantity has been very limited. Only 1,775 SMEs, less than one Pct of the total established MSEs, have reached a stage that will enable them to transform to medium levels (they must have more than thirty workers and ETB1.5 million to join the medium level). Even among graduates, only a small minority are engaged in the manufacturing sector.

With the exception of few projects that are centered on firms like MAA Garment and Textile, Mesfin Industrial Corporation in Mekelle, and Metal and Engineering Corporation in Bishoftu, initiatives that try to link the MSEs with factories are hardly present. The implications of this can be seen in many cases where global buyers have requested textile and leather products and Ethiopia was unable to supply the desired amount. “The country was not able to coordinate the MSEs available, to put together the demanded amount and quality of products,” says Tsegabirhan Woldegiorgis an economist at Addis Ababa University.

Mengistu Hiluf, Planning and Information Management Director at the Ministry of Industry blames the lack of concrete action from the government and the absence of trust from industrialists when it comes to using inputs supplied by MSEs as the main reason for this dismal performance.

The Deputy Director at FeMSEs accepts that there are shortcomings; the main reasons for this being the poor competitiveness of MSE products and lack of entrepreneurial skills. Furthermore, lack of working area and financial support has also contributed to the hindrance of these enterprises, keeping them from realizing their potential. In the process, the manufacturing sector has paid the price for these inadequacies and shortcomings. It does not mean, however that none of these challenges have been tapered through time. For example, when MSEs were first introduced into the country, there were no more than three microfinance institutions. These organizations, which mainly render credit services to micro and small enterprises, were obviously lacking in presence and capacity; however, the number of microfinance institutions in the country has now reached 32.

Ethiopia’s present industrial policy drawn in 2002 has chosen the selective industrialization strategy which gives priority to some specific sectors, according to Tsegabirhan. “Though the results of this policy are remarkable compared to the past, it lags behind in bringing basic economic structural changes,” he confers. The share held by this sector is no more than 12Pct of Ethiopia’s GDP. This number needs to be closer to 40-60Pct to bring about an economic transformation.

Though the industrialization policy hinges on both domestic and foreign direct investment (FDI), the response of domestic investors is quite low and worrisome. One of the strategies to develop domestic enterprises could be to encourage SMEs as they serve as a springboard for the development of the manufacturing industry and other sectors of the economy. 

For a country like Ethiopia, where there is a low level of industrial development, a large agrarian poor population and unemployed youth in the urban areas, MSEs are “instrumental” for poverty alleviation and livelihood diversification, asserts the economist.

An example of the transformative nature of MSEs can be found in Brazil. In the country’s Sinos Valley, one can find a shoe manufacturing cluster that has become one of the most astonishing success stories of MSEs. The valley, home to thousands of MSEs is one of the biggest suppliers of shoes in the world market. These MSEs produce shoes independently and supply their products jointly to global buyers. This was achieved through international market links and aggressive marketing strategies, headed by government initiatives in collaboration with the producers. Experts suggest that a similar way of organizing and networking MSEs is needed here.

It seems the country’s endeavors in general, and its SMEs policy and development plans do not give due attention to local institutions like Iddir, Equb and other social associations which could serve as bases for nurturing networking and clustering of both SMEs and medium and large enterprises to supply the export market.

What is clear now is that the country will not achieve what it has set out to; with regard to industrialization, if the involvement of MSEs continues in this way. Besides job creation, which is still dependent on the government for finance, training and market access, the Micro and Small Enterprises Development Program should start producing entrepreneurial industrialists in numbers. Evaluating the performance of the sector and identifying the strength and weakness should be the first step to correct the past. Experiences of other countries can also be a valuable tool.

The lessons from many South East Asian and Latin American countries indicate that if these MSEs are handled strategically and with proper planning, they can change the setting of the nation’s economic course. “MSEs should play a big role in transforming the nation in to an industrial economy,” the economist concludes.

2nd Year . November 2013 . No.9

Leave a comment

Make sure you enter the (*) required information where indicated.Basic HTML code is allowed.