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Effectiveness of Small-Medium Enterprises to raise communities out of poverty

“How important are SMEs (small and medium enterprises) and entrepreneurship as a vehicle for job creation in GHEA? How do small firms and entrepreneurs create jobs, provide incomes and reduce poverty? Recently published analysis by the Centre for the Study of African Economies (CSAE) provides evidence and insight from Ghana… CSAE’s analysis attributes this fall in poverty (the proportion of people living below the poverty line fell from 36.5% in 1991 to 18.2% in 2005/6) to ‘the increased earnings within jobs, rather than self-employment.’ New data found a ‘steep rise in earnings for the unskilled’ and ‘rapid growth in wage jobs in small firms.’

“Ghana’s experience suggests that a) small firms created a significant proportion of new albeit low-paying jobs, and that b) wage employment is a more effective weapon against poverty than self-employment.”

Speaking about SMEs in Kenya, Uganda and Tanzania, Society for International Development writes that “the ‘Ghana effect’ of poverty-reducing job creation by the small firms is unlikely to have taken place in Kenya, simply because too many firms are one person businesses, and they are located in rural areas… MSMEs (micro, small, and medium businesses) in Uganda seem to be increasing their share of the demand for jobs. Might the fact that 80% of Uganda’s SMEs are located in urban areas (recall Ghana’s experience) have something to do with what looks like an impressive job-creating potency?... The rather spotty look at trends in Tanzania’s SME landscape since 1991 seems to describe a sector that absorbs a fair share of the expanding labour force, but it generates income levels that barely affect the share of Tanzanians living under the poverty line. Indeed, despite an average annual economic growth rate of 7%, higher than Uganda’s since 2000, Tanzania‘s has managed a very modest 2.1% point reduction in the poverty rate from 35.7% to 33.6% between 2001 and 2007.

Implications from Society of International Development:

“Ghana’s and Uganda’s experiences suggest that urban-based SMEs which provide wage-paying jobs, instead of simply being sources of self-employment, can be powerful drivers of poverty-reducing job creation. What is common across the East African countries is the predominance of trading and services activities that are being carried out by SMEs. This is a clear indication of the changing structure of the regional economy, from agriculture and even manufacturing to services.”

Implications from Institute for the Future:

Analysis like what is provided here is vital for development agencies from Kiva to the World Bank and a plethora of other micro-finance and SME focused organizations to be effective in their goal of poverty reduction. While it may be hard to think that providing money for a single person living in a rural community to start a business can be bad, it is possible that it isn’t helpful either.

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Sources:

Society for International Development, July 2010 pgs 6-7 http://newsletters.clearsignals.org/SID_July2010.pdf#page=5

Centre for the Study of African Economies Report
http://www.csae.ox.ac.uk/workingpapers/pdfs/2010-01text.pdf