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| Sunday, 1 August 2004 |
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| News Business Features Editorial
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A new approach to develop SMEs by Lloyd F Yapa The Economic Policy Framework of the UPFA government, includes an exciting new strategy for the development of Small and Medium Enterprises (SMEs).The overall goal of this approach is poverty alleviation, especially in the hitherto neglected rural areas, through the development of the traditional sectors such as agriculture, fisheries and others, which utilize domestic resources. The reference is to the proposed Cultivation and SME Zones affiliated to Townships. Background The backlog of the unemployed in the country is reported to be nearly one million persons with about 150,000 or so entering the labour force every year, besides the people, who are underemployed. One of the present approaches of solving this gravest of problems is to offer incentives to enterprises including SMEs and the removal of their disincentives. But it is the larger enterprises in the already better endowed Western Province, which benefit from this approach at the expense of the smaller ones in the rural areas, where most of Sri Lanka's poor, earning less than US $ 2 per day, live. The new strategy Without doubt a different approach is required to tackle the challenge of creating job opportunities in rural areas. Since agriculture, which is the main form of livelihood in rural areas, is subsistence in nature, what is required is to enable farmers to create a substantial surplus, by improving productivity ( defined as 'more and better with less'). The main approach of achieving this is increasing the scale of operations, greater investment and management on business lines. The first step of the process of establishing viable SMEs in rural areas is consolidation of the fragmented units of land to economic units. This could happen, if freehold possession of plots is given to farmers on State lands. When this happens, those who do not wish to continue with agriculture may sell their land to entrepreneurs, who wish to invest in farming for profit.Exit they must, for productivity to improve, as too many people (nearly 40% of the labour force) are dependent on land at present. Those who stay in agriculture, will be able to borrow extra capital for investment from banks by offering the land they own as collateral. (So far, banks have been reluctant to extend credit against lease permits issued by the government). Simultaneously a deliberate effort has to be made to accommodate those, who leave agriculture, in the processing of the surplus products and in the services, which will be attracted by the expanded production, provided the necessary infrastructure is available. The State has to play the role of planning and managing this process and providing the infrastructure, plus incentives. Apparently this is precisely, what the new government proposes to do. An effort has to be made to select crops on the basis of market needs (mostly of overseas consumers, as Sri Lanka is a small country with a small market) and the local supply capability, as well as further processing possibilities. Out of this assortment, we should grow, on a large scale, (with some diversification to avoid spread of disease) crops, which would give the maximum returns. This will enable certain areas of the country to specialize in selected crops, leading to realization of economies of scale ie reduction of unit costs and to value addition. This is the idea behind the proposed Cultivation Zones. Corporatization, is the next step, as individual plots are too small to be viable. The problem with SMEs is that even if they are viable initially and are propped up with incentives, they could buckle down in the face of the intense competition arising from the existence of numerous enterprises of the same size producing similar products. Only those producing unique products or resorting to value addition/differentiation may survive. Hence the need to combine the small holdings into corporate bodies, eg companies, to gain competitiveness, especially by reducing costs and adding value. The State may have to initially support and 'nurse' them until they can stand on their own feet. Each such large scale cropping area should accommodate a few small urban centers to service the villages and a well located urban 'cluster' to heighten the economies of scale and the possibility of adding value. These are apparently the SME Townships proposed in the Policy Framework of the government. An agri- cluster would normally accommodate supporting industries and the entire range of services such as R&D, extension, banking, storage, marketing and others. It should be noted, that these enterprises would be attracted by the higher demand generated for them in the area by the rise in incomes and the availability of surplus inputs, all catalyzed by the large scale cropping or husbandry, as well as the infrastructure provided by the State. These self- sustaining agricultural, industrial and services clusters, when scattered correctly, could ultimately become growth nodes. Benefits Such a rural development process, if properly planned and co-ordinated by the State, could yield enormous benefits. Farmer incomes would rise. With rising incomes, food and other necessities of life would become available to most people in these areas, relieving them of poverty. The rise in purchasing power in rural areas will create markets for goods and services produced by regional SMEs as well as other enterprises in the metropolitan areas of the country. The latter will also be able to procure a greater supply of intermediate goods of agricultural origin from rural areas to enhance production of industrial products and services. Thus there could be a natural self sustained all round increase in production, productivity and employment. |
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