Smaller may not be better
Are small enterprises the cure for unemployment?
Small enterprise development has now taken top priority in the government's development strategy. Indeed, the idea has gained popularity among certain circles as the panacea for chronic unemployment. Small enterprises, according to Abdallah Tayel, chairman of the People's Assembly Economic Committee, form the "core of economic development in any country". The Shura Council's report on The modernisation of Egypt refers to the supreme importance of small enterprise in the development process and speaks of micro- industries as "a discovery" that is "reshaping" the industrial sector.
Does small enterprise, in fact, justify all this fanfare? Specifically, does it offer the key to solving the festering unemployment crisis? How does small enterprise relate to major high-technology industries, which are said to be labour-saving and capital-intensive, and therefore have only a marginal impact on reducing unemployment, or even are accused of being the cause of the problem.
Naturally, the government is keen to downplay the extent of the unemployment problem, and insists that the phenomenon is dwindling rather than on the rise. According to official statistics, the unemployment rate dropped from 12.5 per cent in 1986 to nine per cent in 1996 to less than eight per cent today. The government further claims that, in absolute terms, the number of unemployed has levelled off or is even slowly declining. Official statistics report that in 1986, the number of unemployed stood at 1.54 million, in 1996 at 1.57 million and in 2000 at 1.54 million.
Independent studies, however, estimate the current unemployment rate at between 15 and 17.5 per cent, or double the rate boldly claimed by the government. Other indicators appear to indirectly challenge government figures. For instance, there were some 4.4 million applicants for the civil service jobs announced by the government in the year 2001 alone.
Furthermore, Minister of Labour Ahmed El- Amawi reports that approximately 6.7 million university and technical secondary school graduates entered the job market in the 1990s. If the economy had actually generated enough jobs to absorb these vast numbers and more, this would suggest that Egypt in the midst of an unprecedented economic boom. Unfortunately, the nation's economic woes are only too obvious to its citizens.
To its credit, in spite of its propaganda regarding the stability or continued reduction of the rate of unemployment, the government clearly recognises that unemployment is a major and unsolved problem. As a solution, it has instituted an employment and training programme that would offer loans to young men and women to start up small enterprises and to workshops that offer jobs to youth. Many government and financial agencies have stepped forward to chip in to the drive. Foremost among these are the Ministry of Local Government (through the Shuruq Programme which focusses on various aspects of rural development), the Ministry of Foreign Trade (in order to promote small enterprises and micro-industries with an export potential), the Ministry of Finance (with its "popular credit" programme), the Industrial Development Bank of Egypt, the National Bank of Egypt, the Federation of Production Cooperatives and, above all, the Social Development Fund. Regardless of the bureaucratic difficulties sure to arise as these agencies try to work together, their sheer numbers underscore the hopes being pinned on the concept of small enterprises.
In justification of their ambitions, officials and other proponents of the small enterprise solution cite the role small business allegedly played in Japan and East Asia in the "Asian miracle". However, the evidence for these claims is lacking. While it is true that small enterprises gradually acquired considerable weight in those economies, they always paled in comparison with heavy and high-tech industries. It was the "big push" given to these latter industries that generated the industrial base in Japan in the 1950s and South Korea and Taiwan in the 1970s and laid the groundwork for the growth of small enterprises. The small enterprises only came into being as feeder industries for the major plants in East Asia. The proponents of the small industry dream seem to be unaware that the driving engine in the Asian economies consisted of heavy and high-technology industries, and specifically the intermediary and machine (capital goods) industries, without which small and micro- enterprises would never have gotten off the ground. In any case, economic development in those countries required extensive state intervention. Matters were certainly not left to the short-sightedness of market forces.
The small enterprise strategy stems form the neo-classical school of economics, the theories of which inspire the economic reform recipes issued by the Word Bank. According to neo-classical economists, because underdeveloped countries are flush in labour and sorely lacking in capital, they should promote labour intensive industries, such as small enterprises. Conversely, they should avoid high- tech and capital intensive industries, which in being non-labour intensive, aggravate the problem of unemployment.
This theory may appear perfectly valid within a static framework. However, when considering a dynamic framework founded upon expanding production over the long term, it fails to hold water. Although it is true that low-tech industries absorb immeasurably greater quantities of labour in the short run, this does not remain the case over the long term. The low productivity of these industries and, as a consequence, meagre capital surpluses inhibit their capacity to generate savings and reinvestment. This in turn constrains the future creation of new employment.
The flip side of this principle applies to capital-intensive industries. Higher productivity levels lead to much greater capital surpluses and savings and reinvestment capacities. They are thus capable of generating jobs over the long term at many times the rate of low- technology labour intensive industries. Therefore, while the individual high-technology capital intensive industrial unit may itself be non-labour intensive, its spin-off effects can have a greater impact on ameliorating the economic situation and allowing for the reduction of unemployment.
It is also important to note that unemployment among skilled and technical labour in industrialised nations is largely temporary and cyclical. The unemployed are quickly reabsorbed because the expanding scope of their economies offsets the continuing obsolescence of certain jobs as a result of technological development. Were this not the case, industrialised nations would be experiencing forever spiralling rates of unemployment as all jobs were mechanised. The problem in underdeveloped countries emanates from the fact that they possess at best only a very limited modern industrial sector and are, therefore, unable to generate the savings and reinvestment capacities that would enable them to absorb vast numbers of unemployed in the short term.
It therefore seems more appropriate for Egypt to adopt a two-pronged strategy that takes advantage of both the long-term growth potential of modern advanced technology industries and the short-term labour-absorptive advantages of small enterprises.
At the same time, it is important to bear in mind fundamental differences between various strategies for supporting small enterprise, particularly pertaining to aspects of social reform versus some of the exploitative characteristics of capitalist entrepreneurship. Most significantly, market deregulation, free trade and the neo-liberal economic approach in general are not inherently conducive to industrial development at either the heavy manufacturing or small enterprise level, which brings us back to a brief discussion of the policy of extending credit to small enterprises.
This so-called remedy, which aims to offset the destructive effects of economic deregulation, in fact dooms many small enterprise undertakings to failure. In spite of the fact that interest rates on credits extended to small enterprise entrepreneurs have been reduced to between seven and nine per cent (approximately half of the rate charged on the open market), this still exacts a heavy toll on small-scale industries. Add to this the fact that the grace period for repayment is only six months to a year and fails to discriminate between commercial and manufacturing enterprises; the latter of which require a long, continuous learning process, regardless of the theoretical training their practitioners have received. With such formidable conditions, it is little wonder that so many small enterprises are floundering and that youth are reluctant to take the risks associated with starting a business.
The neo-classical school holds that since developing countries suffer a scarcity of capital, its cost should reflect this reality. In other words, the real interest rate (calculated by subtracting the rate of inflation from the nominal rate), must be high. This logic can only lead to stagnation, channelling investment into short-term, high-profit ventures and consequently failing to promote industrial development. Nevertheless, this is the logic that has imposed itself on the micro-credit policy in Egypt. Although the interest rate being offered to encourage small enterprise is lower than the market rate, it is still formidably high. After deducting the rate of inflation, which according to official figures stood at 4.3 per cent in 1997-98 and three per cent in 2000-01, the real interest rate still ranges between three and six per cent.
An alternative approach conflicts with the market mechanisms espoused by the neo- classical school, and emanates from a strategy for developing the industrial infrastructure. This method espouses a cheap credit policy that awards funding on the basis of criteria that discriminate, firstly, between commercial and manufacturing enterprises and, secondly, between enterprises -- both small and large -- that are regarded as worthy of promotion and others that either do not need to be subsidised or are regarded as superfluous at a particular point in time. The countries of East Asia applied this approach. Indeed, most scholars maintain that in South Korea, during its period of industrial development from the 1960s through the 1980s, the real interest rate for loans was negative and formed an important stimulus for industrial development and contributed to transforming that economy's role in the international division of labour.
