How to Stop 80 Years of Unfriendliness towards Small Businesses in Ethiopia

In the first part of this series, which was published in EBR’s 40th edition, I presented how and why our government fails to effectively support small businesses, especially those that prefer not to be organised under the national micro and small business development plan. In this second part, I will suggest solutions that will help reverse the current unfriendly situation.The first thing our government needs to do is to correctly position its thinking – which is to adjust its ideology to be indiscriminately and diligently pro-small business.
The United States, the world’s largest economy, with gross domestic product of USD17.42 trillion in 2014 according to the World Bank, has hundreds of giant corporations, many of which were once small businesses. For example, Wal-Mart, once a small retail shop, had an annual turnover of USD482.2 billion in 2015. This is much larger than the entire Ethiopian economy, which stood at USD55.61 billion in 2014 according to World Bank data.
For such a huge economy like the U.S., most of us would be tempted to think that small businesses don’t matter. However, that is incorrect. Read this mission statement from the Small Business Administration (SBA), which has been supporting small businesses for more than 60 years: “We recogni[s]e that small business is critical to our economic recovery and strength, to building America’s future, and to helping the United States compete in today’s global marketplace”.
If small businesses are “critical” and get support from the government of the world’s largest economy, they should be supported in one of the world’s smallest economies – Ethiopia.
It is true that the size of the Ethiopian private sector is still small and may lead one to conclude that small businesses are inconsequential. But a forward-thinking, growth-oriented government should ask some serious questions: Why is the private sector in Ethiopia still small? Are the future fruits that come from this sector worth paying a price for them now?
The main reason the private sector in general and small businesses in particular have not flourished is because of the country’s leadership which, both in the past and present, either had a completely negative attitude (like the Dergue regime) or did not make it one of their main agenda items (like the regimes of Haile Selassie and the EPRDF) to proactively support it at the fullest level. After 80 years of hostility and indifference, how can the current government expect the private sector to be in a stronger state than it is now?
To say the private sector is weak and doesn’t deserve to be supported is to miss the logic of why they must be supported. The reason to support all of them (not just those organised under the national micro enterprise development system) is to provide an equal chance for all so that they may unleash the huge positive socio-economic impact kept dormant in them. These benefits include employment creation effect, increased tax revenue to government, increased backward and forward linkages, the possibility of creating disruptive inventions that might have global markets, the amazing possibility for some of them to become regionally or even globally dominant corporations. The support they deserve has more to do with their potential impact than with their current scale.
Therefore, as a steward of the nation mandated by the people to do the right things for the good of the country, the ruling party must change its party ideology toward supporting all private businesses in Ethiopia, particularly small businesses, in a politically unbiased and organised fashion, far from just providing weak administrative services for them.
The second thing that the government must do is to design and implement well-graded support. Micro, small, medium, and large private businesses have different needs and challenges; therefore, each demands targeted support to contribute their maximum share toward the development of the nation. In order to formulate and implement such advanced graded solutions, the government must undertake a comprehensive study on the matter; create a proper classification system to categorise businesses based on sets of measurable variables such as net sales – annual gross profit and number of employees; formulate and implement the right mix of supportive laws, regulations and systems that are suitable for each category (which does not exist now); and put in place a much more efficient administration system and monitor its performance among others.
There are a number of pragmatic steps the government can take to achieve this.
First, small businesses need a low barrier to entry in the market and support once they establish themselves. An entrepreneur should be able to receive their business license within a few hours – he or she should be asked to fulfil the bare minimum of a valid identification card and an application form. The current process is cumbersome, multi-faceted and unnecessary, draining time and money from entrepreneurs. The government should also establish a support organisation that will provide critical knowledge, like employee recruitment, advertising, management skills training, export logistics and choosing the appropriate technology for your business.
Secondly, the government should make the costs of running a small business less burdensome. For instance, they should make financial penalties of cash register fraudulence progressive – give a warning prior to issuing a maximum penalty, as initial wrongdoing is often unintentional. Reducing the business tax rate from 35Pct to 10 or 15Pct may also be helpful, as small business owners can reinvest most of their profits into the business. Additionally, make the pension and health contribution 10Pct the rate of large businesses, so that small businesses carry a proportionally small burden than larger ones.
Certain administrative matters should be streamlined to make running a small business easier. For example, for the sake of easy identification, service provisions and contractual relations, small business licenses should have a certain code or colour. This will allow them to be taken care of under separate laws and regulations wherever they go. The government should also encourage small businesses to purchase cash register machines through a programme that incentivises their use – and to purchase them using credit. Allowing certain qualified small manufacturing businesses (not just those organised under government programmes) to access low-cost production and sales outlets will also be beneficial.
Another way the government can streamline administrative matters is to make reporting requirements quarterly based – once every 3 months – as opposed to the current practice of reporting every month. Additionally, regulators should set maximum credit period limits for all credit sales from small businesses, specifically manufacturers made to retailers or supermarkets – ideally not more than 30 days. Currently, a lot of retail outlets, especially supermarkets, are hurting small businesses by holding their payments for up to one year. This may sound an issue outside the government territory, but given its regulatory power, the government must step-in for the sake of accelerating the growth of small businesses.
Last but not least, what the government needs to do is to act now. The need for a robust, well-supported private sector, particularly small businesses, is of the utmost importance. This is because Ethiopia is at a crucial juncture as it continues to embark on the second phase of the Growth and Transformation Plan and as it enters the global economy, driven by the ascension to the World Trade Organisation. Now more than ever, the private sector needs to be strengthened by well-functioning small businesses.
For the sake of the nation’s economy, we can and must design and implement the best, politically unmotivated, generous, and long-term oriented solutions that favour the private sector in general and all small businesses in particular. This does not require the rise of another generation of leaders to understand and do it. It can and must be done now.