Empowering Local Businesses as Engines for Growth
Samuel D. Tweah, Jr. a young Liberian economist is recommending that government develops a private sector policy and implementation framework that brings together the Government, donors, the private sector and civil society that assures economic empowerment of Liberia’s small business entrepreneurs. Such a framework, he said, should collate existing private sector policies and disparate activities into a functioning whole to execute programs in a way that maximizes private sector outcomes and enhances coordination.
Also speaking at the International Symposium on the State of Democratic Governance and Development in West Africa and Challenges of the future held at the Monrovia City Hall on July 2, 2015 Mr. Tweah, Jr. who eulogized on economic challenges that continue to defy policy solutions -“Empowering Local Businesses as Engines of Growth and Development in Liberia”. His approach was from the perspective of private sector development, with emphasis on Liberian owned Small and Medium Enterprises, SMEs.
Mr. Tweah’s presentation summarized
The Evolving Structure of the Liberian Economy: Potential and Scope for SMEs
Putting the Liberian economy in a 50 year retrospect, Mr. Tweah described It as “an enclave in structure with large multinational extractives engaged in natural resource exploitation intended for export. He said “data from the Liberia’s Constraints Analysis shows thatbetween1964-1974the Industrial Mining Sector accounted for as much as 40%of Gross Domestic Product, with agriculture, dominated by rubber agriculture, accounting for as high as 27%. The services sector accounted for a little more than 30% during this period (Liberia Constraints Analysis, 2013 p.22).”Some fifty years later, Mr. Tweah noted that “data from the Central Bank of Liberia and the International Monetary Fund show that in 2014, Agriculture and Fisheries accounted for 25.7% of nominal Gross Domestic Product (GDP),Forestry 6.9%,Mining and Panning 16.8%, Manufacturing 3.7% and Services 47% (IMF Country Report No. 14/197).”
Tweah also noted that the structure of the Liberian economy is changing, albeit moderately. He emphasized that the economy is less enclave than it was 50 years ago, and that “the IMF projects that the share of mining as a percent of GDP will hover around 16% in2019, almost 25%less than the share mining consumed five decades ago. Agriculture, will ramp up oil palm production, and rubber is projected around 21% in 2019, down from 31.9 % in 2013.”
In other words, total revenue accounted for 26% of GDP in 2013 equaling (in dollar terms) about US$450 million. Also in 2013, mining contributed 2.7% to government revenue, or US$46 million. Tweah pointed out that “in 2019, mining is projected to contribute about 2.6 % of GDP oraboutUS$77 million to revenue. In other words, the share of public revenue accruing to mining will be around 12%in 2019, up by about 2%, since currently, mining’s share in public revenue is around 10%.”
With this statistics on hand, the questions now are how can Liberia improve foreign investor’s interests in our natural resources? What are the long term implications on Liberia’s economy taking into consideration foreign investment fatigue? Mr. Tweah explains:
“The implication of this is that over the medium to long term, the Liberian economy will be dominated by the services sector, which is projected to account for more than 52% of GDP over the next several years. Current shocks to prices of rubber and iron ore, which have precipitously declined over their spot prices one to two years ago, may partially explain the reduced contribution to GDP of the rubber and iron ore sectors. This evolving structure of the Liberian economy presents strong opportunities for Small and Medium Enterprises and for economic diversification. The timing of the structural evolution compels a priority policy shift toward strengthening the environment for local business in a manner that goes far beyond the modest impact of ongoing business and private sector reforms.”
This new push should aim to situate SMEs as the engine for job creation and growth, embedding them with capacity and capabilities to develop critical niches in all economic sectors- mining, agro-forestry, agriculture, manufacturing and services.
It is important to note that SMEs account for a marginal share in Liberia’s GDP and face a number of constraints. (Small Medium and Micro-Enterprise Policy developed by the Ministry of Commerce and Industry, Enterprise Policy, small enterprises are those with 4 to 20 employees while medium enterprises have 21 to 50 employees, with large enterprises having beyond 50 employees).
According to Liberia Business Registry data of 2012, registered businesses in Liberia were about 9,000. Between 2006 and 2012, an average of 2,342 new businesses were registered with the Liberian Business Registry, ranging from a low of 800 in 2006 to a high of 5,000 in 2012 (Liberia Constraints Analysis, 2012 p24). In 2012, 83% of all businesses in the economy were Liberian owned. Sole proprietorship businesses largely owned by Liberians made up more than half of the total number of enterprises recorded over this period. However, analysis of the data reveals a high failure rate among Liberian businesses, owing to many constraints. More than 50% of registered businesses are in the wholesale/retail trade and repairs, with agriculture accounting for only 3%. This suggests that most agriculture businesses are in the informal sector.
The 2010 Labor Force Survey date indicates that paid employment from non-farm private businesses, the type of businesses registered with the Liberia Business Registry, account for about 33% of the number of paid employment jobs, followed by Government and State owned enterprises - 29% (2010 Labor Force Survey). Non-farm private enterprise employment should far exceed public sector employment in any economy aspiring toward middle income country status.
Literature Review on the Impact of SME’s on Economic Growth/Development
It is a known fact that some resource poor countries experience higher economic growth and better standard of living than many resource rich countries. The African Development Bank notes that the African private sector contributes around 80% of the continent’s GDP. Micro and small enterprises employing fewer than 20 full time employees create between 67% and 80% of jobs, and contribute between 30% and 35% of GDP (Private Sector Development Strategy, AfDB, and March 2012).
According to Mr. Tweah, “private small and medium sized enterprises (SMEs) typically account for more than 95% of all firms outside the primary agriculture sector, constitute a major source of employment and generate significant domestic and export earnings in the OECD, transition and developing countries.” Therefore improved SME competitiveness could contribute to economic and social development, and poverty reduction (promoting Entrepreneurship and Innovative SMEs in a Global Economy, 2nd OECD Conference for Ministers Responsible for SMEs, June 2004).
Recent studies find that SMEs contribute over 55% of GDP and over 65% of total employment in high-income countries. They also show that SMEs and informal enterprises account for over 60% of GDP and over 70% of total employment in low-income countries, while they contribute over 95% of total employment and about 70% of GDP in middle-income countries (Ayyagari, Beck and Demiguc-Kunt, 2003 p.27-28).Using a sample of 45 countries, the study finds strong association between the importance of SMEs and per capita GDP growth but no evidence that SMEs alleviate poverty or decrease income inequality(SMEs Growth and Poverty: Cross Country Evidence, March 2005).
Economists generally agree that a strong vibrant private sector is sine qua none to economic growth and poverty reduction, even if they disagree on the mix of policy that generates the biggest impact on growth, employment and poverty reduction.
Constraints to Private Investment in Liberia
“The Liberia Constraints” developed in support of pending Millennium Challenge Corporation’s investments in Liberia, summarizes the key constraints to private sector investment and growth in Liberia. The study used “the Growth Diagnostics Methodology developed by Ricardo Hauseman, Dani Rodric and Andres Velasco” which shows that private sector constraints follow two broad channels: low returns to economic activities, and the high cost of finance. Low returns to economic activities are affected by macroeconomic risks, such as macroeconomic volatility as in the commodity price shocks presently confronting Liberia’s rubber and iron ore sector; by micro risks such as corruption, ineffective tax administration and weak contract enforcement or market failures. On the high cost of finance side, private investment is discouraged by costly finance/financial intermediation, and low savings.
Other binding constraints to private investment could be caused by the following contributing factors:
Gains made by the Government of Liberia and Donors include:
Electricity: Rehabilitation of the MT. Coffee Hydroelectric Dam, which is expected to come online in 2016; Road rehabilitation; Central Bank of Liberia Credit policy’smedium term lending to micro and small businesses; Human Capital -GoL and UNDP’s Private Sector Development and Natural Resource Governance Program, intended to address obstacles to enterprise development in administrative and regulatory areas, licensing, registration, taxation, regulatory compliance requirements and expanding access; effective natural resource management (NRM) and linking NRM to value-addition and job creation ( Private Sector Development Project, UNDP);Launch of the MSME policy; Enactment of about 60 investment climate reforms, enabling Liberia to jump 21 places on the World Bank’s Doing Business Indicator, though the country still ranks amongst the lowest in the World; Small Business Empowerment Act among others.
The Need for a more Comprehensive Private Sector Focus
The UNDP’s Private Sector Development Project Document argues this point rather forcefully. It observes that “there are currently a number of sector policy frameworks and strategies aimed at enhancing the development of the private sector. These include the MSME Policy, the Industrial Policy and Strategy, PPP Guidelines and Strategy, Special Economic Zones Law; and Business Linkages and Growth Corridor Studies. However, there is no overarching policy framework to serve as a convergence platform for these various initiatives and co-ordination among the various institutions whose work impact on private sector development is limited.”
So the private sector is like a child who is loved by everybody but at the same time is loved by nobody. Politicians and policy makers make references to the private sector as the engine of growth but do very little sustain it. Donors expatiate on the importance of private sector as the pathway to sustainable economic transformation but the private sector gets about the smallest share of donor funding. Of course, donors are funding the major roads and power infrastructures, but these are public goods. Maybe the lack of momentum on robust private sector outcomes in the governance reform process is partly obtaining because the private sector as an “interest group” or a business lobby, has not found a way to exert a meaningful influence on the political economy of Liberia. Maybe the Liberian Chamber of Commerce or the Liberian Business Association may have to be more forceful in their attempts to situate the Liberian private sector on higher rungs of the policy ladder. Of course, this phenomenon is not unique to Liberia. However, it is no gainsaying that in Liberia, political economy incentives for private sector development are about the weakest among low-income countries.
To reverse this situation, the country has to move towards a strong, robust consensus on private sector development.
Policy and Program Prescriptions for Private Sector Transformation/ Recommendations
Concluding, Mr. Tweah said the challenge with SMEs “development “consists of progressively enforcing appropriate policies, and developing and implementing innovative programs that assure private sector transformation. He maintained that his proposed “development of a private sector policy and implementation framework”, as previously mentioned can achieve strong outcomes in the private sector, particularly the Liberian private sector, if taken into consideration, stressing the time to act is now..
