Zimbabwe: SMEs are vital, but in a country with viable big corporations

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By Hillary M Chindodo on December 30, 2013.

In his 2014 national budget statement, new Finance Minister Patrick Chinamasa signalled a shift in policy; a shift in policy towards a new thriving economy driven by the Small to Medium Enterprises (SMEs).

Speaking at a recent post-budget breakfast meeting in the capital Harare, Deputy Finance Minister Samuel Undenge reaffirmed this policy thrust saying small businesses led by small-scale miners and farmers were playing an increasingly bigger role therefore the government had to recognise their contribution. The government in 2014 will avail US$100 million to support the small scale mining operations some of which have previously been largely illegal.

While the growth of the SMEs is welcome in any economy, it seems unfortunate on the part of Zimbabwe that government wants to shape its policy around the same at the expense of established big corporations in industry and commerce.

What the Minister fails to realise is that the growth in SME participation in Zimbabwe is a result of the shrinking industrial base and not necessarily a growth in their contribution to the economy. SMEs should not be moving into a market created by the departure of a large corporation. They should be moving into markets created by the expansion of the economy and in areas where the large corporations may not be able viably provide service or if they do require support from small dedicated service providers.

It is in the best interest of the SMEs themselves that Zimbabwe’s large corporations are revived and begin to operate at a decent capacity. The increased capacity in large corporations will create a vital market for the SME through outsourced services. It is a large corporation like Econet which can give a small printing company a sustainable contract to print business cards or airtime recharge cards. It is Delta Corporation that can be that anchor customer for a small stationery supplier to be considered for a loan at the bank. It is the expansion of supermarket chain OK that will create more opportunities for the young couple with a cleaning company.

An economy dominated by SMEs will ultimately become much more expensive in the absence of economies of scale and the general lack of capacity to develop efficient processes. As a result of higher production costs from less efficient processes, the SMEs are less likely to pay higher wages for labour. The country will continue to have incomes too low to be able to support SMEs in the long term. The sum effect is the country will continue to have many small operations starting and failing with a year or two and the owners moving to set up shop in another industry which may be “profitable” at the time.

The high costs of an SME dominated economy do not apply to just the production supply of goods and services. The costs extend to the administration of the economy as a whole. The government will required to employ more resources for every dollar it collects in revenue. One large corporation could be paying US$1 million in taxes as one transaction. The same amount coming from 1,000 different small operators means a thousand transactions. While the government has collected the same amount of money, the cost of doing so will be much greater if the revenue was coming from a string of multiple sources that if it were from a single entity.

The main role of SMEs in any economy is to fill the gap that is left by the big corporations in the marketplace.  Over a long period of time, the SME can work towards eating into the large corporation’s market until it is at par or at the least in direct competition. Zimbabwe cannot be successful with pockets of thousands of operators all over without large businesses anchoring the economy.

While the efforts of the SMEs led especially by the new breed of young, eager and hungry entrepreneurs are most encouraging for a country like Zimbabwe, the government must expend all its efforts in reviving large industry. The SMEs will be a lot better off in an economy with a well-developed large industrial sector.