By Thembumenzi Dlamini and Mangaliso Mohammed
It is time for economic policies that will put a fair share of Eswatini’s economy in the hands of local entrepreneurs.
According to the World Economic Forum (WEF), Africa is becoming the most exciting economic frontier with Small and Medium Enterprises (SMEs) at the forefront of this transformation. Africa’s SMEs, which are now responsible for about 80% of employment, play a central role in establishing the continent’s new middle class, thus fuelling the demand for new goods and services.
As the name suggests, SMEs are small businesses though they cover widely different types of firms in the various sectors of the economy. They include fragile micro-firms generating subsistence level revenues through one or two employees, to fast growing medium-sized firms with up to 250 employees. These SMEs can range from fruit vendors to sophisticated software engineers.
However, as with all small things, SMEs tend to be overlooked for all the wrong reasons. Too often, they are easily forgotten in the shadows of ‘big business’ and ‘big money’ despite the fact that SMEs create the bulk of employment for the growing urban and rural labour force.
A study by the Organisation for Economic Cooperation and Development (2016) reveals that SMEs contribute over 55% of gross domestic product (GDP) and over 65% of total employment in high-income countries. In Europe, small businesses constitute 99% of all businesses that employ approximately 95 million people, an equivalent of 55% of total private sector jobs. In low-income countries, SMEs account for over 60% of GDP and over 70% of total employment.
Although SMEs are growing at a smaller pace in Eswatini, in 2010 there were 4 926 SMEs in the country, each employing about three people. To date, there are 68 536 local SMEs generating E2.8 billion monthly profits, about 5.2% of the E53.5 billion worth of GDP in 2016 (FinMark Trust, 2017). Furthermore, the SME sector provides jobs to 92 643 people (43.7% of the 212 130 employed in Eswatini). Hence, SMEs contribute to the economy in a big way.
Research shows that SMEs are recognised worldwide as significant contributors to national output and employment creation; they facilitate growth in exports and are the bedrock for entrepreneurship and innovation. Most importantly, SMEs have the ability to create opportunities for the youth to engage in business activities for locally produced goods and services. They can grow the middle class as well as increase disposable incomes for locals, and in tandem, SMEs can create new market opportunities for local and foreign investors.
It is a winning position that the country needs to capitalise on more boldly. With more investments directed to Eswatini’s SMEs, the economy can grow beyond the 2% GDP growth rate glass ceiling.
Unpacking the FDI trap
Economic policies for developing countries tend to focus on Foreign Direct Investment (FDI) and attracting ‘big business’ as a key catalyst for growth and employment creation. The immediate response is that FDIs come with big companies that offer an unprecedented number of jobs and capital. Understandably, we equate ‘big money’ and many jobs with increased output and economic growth.
For example, the Economic Recovery Strategy (ERS) launched after the fiscal crisis in 2011 emphasised the importance of large-scale foreign and domestic investment. It pushed for FDIs and ‘big business’ as good sources of substantial capital, sophisticated equipment and machinery, technical expertise, and access to the global market. The view was that FDIs would lay the foundation for commercial and industrial development, while at the same time become perfect spawning ground for SMEs to grow.
Government’s focus on attracting FDI is not without good reason: FDIs provide jobs, expertise, technology, state revenue, and when set up right, can transfer skills through learning-by-doing. However, there is an issue of sustainability.
What history has taught us is that big international firms operate at economies of scale with watertight business value chains linked to their home economies. What it means is that local SMEs usually get little to no opportunity to link-up with the business chains of the FDI companies.
Some FDI companies specifically set up shop in developing countries just to take advantage of tax holidays and cheap labour, among other benefits, so that when they have made their lucrative profits and sent them back to their home countries, they close shop and move on to the next perfect host economy.
In the case of Eswatini, the departure of some foreign investors has been followed by an economic vacuum and a plethora of issues, such as decreased government revenue, job losses, de-industrialisation, and a mass exodus of skilled labour to other countries.
Indeed FDIs create jobs; however, under the premise of sustainable economic growth, Eswatini has to consider the type and quality of jobs offered by the FDIs, the participation of local firms, and the linkages of the foreign company to the local economy. A good example is the textile industry, where a majority of low or unskilled labour is employed on low salaries tethering below the minimum wage, which is not even enough to cater for basic needs.
Nevertheless, the newly launched Eswatini Strategic Roadmap 2019-2022 recognises that to sustain long-term economic growth, the country will have to invest a little more aggressively on its SMEs. In other words, the country will have to deliberately formulate and implement economic policies that will support the creation of local entrepreneurs, with special focus on the youth.
SMEs for local development
The country desperately needs a more diversified and vibrant private sector for economic growth to occur. A one-sided focus on FDIs and ‘big business’ will most likely yield the same 0.9% – 1.9% GDP growth rates and fail to pull the country out of stagnation.
A paper published by the Eswatini Economic Policy Analysis and Research Centre (ESEPARC) finds that the country has put in place numerous institutional frameworks aimed at enhancing trade and creating an attractive macroeconomic environment favourable to both local and international investors. The study finds that for the most part, Eswatini has been importing more than it has been exporting. As a result, the trade balance remains largely negative. Moreover, Eswatini’s export basket consists of a limited number of export products with very little change in the type of export commodities over the years. This is despite all the efforts (institutional, trade relations, and infrastructure development) aimed at promoting local production and trade.
Therefore, government and the private sector need to direct investments to the SMEs owned by local entrepreneurs to ensure the production and circulation of money within the economy. If all these reasons are not convincing enough, the high unemployment rate (23%) makes a strong argument for raving up support towards Eswatini’s SMEs. For instance, the Eswatini Labour Force Survey of 2016 reports youth unemployment as high as 47.4%. This implies very low income generation and wealth creation opportunities for the country’s future generation.
Focus on sustainable economic development
It is time the country reconsiders the role of FDIs in shaping our economic path in Eswatini. At the very least of the FDI agenda, the country should leverage FDIs to nurture and grow Swazi-owned businesses, particularly SMEs. At the same time, the point is not to dismiss FDIs; they too can incite real growth if they are well targeted in certain sectors of the economy.
Sustainable development is about making investments in the things that matter in the long-term. In that spirit, government should deliberately increase support to SMEs to ensure that they sustain the integrity and growth of the economy in the long-term.