Ruido

The concept of a "missing middle" has often been used in development economics when discussing issues of entrepreneurship in developing countries, particularly in Africa. According to UNCTAD (1998a) there are four major defining features of the existence of a 'missing middle' in an economy. These are, first, the disproportionately large contribution by large-scale enterprises to Gross Domestic Product (GDP). Secondly, SMEs tend to be concentrated in the informal sector, craft and agricultural sector. Consequently they tend to be mostly small, of relatively low productivity and not growth-oriented. Thirdly, there tends to be limited opportunities for entrepreneurs to move from the informal sector and then grow. In this regard, the most commonly cited impediments include an inability to attract finance and a lack of managerial skills. Lastly, there is an absence of a core group of dynamic SMEs. This group has a history of achieving, on average, growth rates that are at least double the rate of national economic growth rates, and are generally inclined to be internationally competitive.

3.5.2 Evidence on the 'Missing Middle'

Development economists have often complained of a 'missing middle' when discussing issues of entrepreneurs in Africa (Theocharides and Tolentino, 1 998). They argue that Africa has vast state companies and thousands of subsistence hustlers, but virtually nobody in between, thus implying that SMEs are either absent or insignificant. UNCTAD ( 1 998a) argues that some developing countries face a structural imbalance in terms of both the distribution and economic role of their enterprises by size. Furthermore, the presence of a 'missing middle' (absence of

growth-oriented SMEs) in these economies makes it difficult for these countries to achieve long-term sustainable growth; it blunts their competitive edge; and most importantly, it deprives them one of the most important engines for driving economic growth, i.e., the "entrepreneurial engine."

In Sub-Saharan Africa, whilst small firms make up the bulk of enterprises, larger

fIrms tend to make a more signifIcant contribution to economic growth (Daniels, 1 999; UNCTAD, 1 998a; Anderson, 1 982; Nafukho, 1 998; Wignaraja, 2002). Smaller fIrms, on the other hand, are in the informal sector and tend to face diffIculties in making a transition to growth, partly because they lack the prerequisite management skills and fInancial resources (UNCTAD, 1 998a; Daniels, 1 999; Gray, Cooley and Lutabingwa, 1 997; Miller, 1 993; van Dijt, 1 992; Rabelloti, 1 995).

Liedholm and Mead (1 999) acknowledge the heterogeneity among small enterprises and categorise them into four groups: 'new starts', 'non-growers', 'small growers' and 'graduates'. They estimate that, at any point in time, 'new starts' constitute about 25 percent of all micro and small enterprises (MSEs), and state that teething problems among this group are many, consequently survival rates tend to be low; 'non-growers' (measured in terms of employment) constitute a majority of MSEs, they are mostly women-owned, and located mainly in rural areas (about 75 percent); 'small growers' are the group of enterprises that have survived the difficulties encountered in the early stages of establishing a business (about 20 percent), and the owners possess characteristics that suggest a more commercial, business-like approach to the enterprise; lastly, 'graduates' are the enterprises that, although started very small, have managed to grow. Of major signifIcance from this categorisation is the fact only one percent of enterprises that started out very small managed to grow.

SMEs in developing countries tend to be very small and they tend to be concentrated in activities that have very little value added possibilities. In a study involving six

countries in Southern and Eastern Africa, Mead ( 1 994a) reported that one-person enterprises constitute more than 60 percent of micro and small enterprises; about 50 percent are engaged in trade, 45percent in light manufacturing, and the remaining 5 percent in transport, construction and other services. The dominance of one-person enterprises may contribute to the 'missing middle' because, research evidence

suggests that they are the least efficient, and most of them don't grow (Liedholm and Mead, 1 999).

There is no doubt that the lack of a reliable statistical base on the small, micro, and medium enterprises (SMMEs) in developing countries constrains thorough investigations and analysis of the dynamics of this very important sector. The evidence at hand, however, seems to confirm the existence of a 'missing middle' in the enterprise structures of these countries. It also highlights the possibilities of a growth dilemma facing the majority of smaller enterprises in developing countries.

3.5.3 Causes of the 'Missing Middle'

Little ( 1 987) argued that for a long time, many developing countries equated development and industrialisation with the growth of large-scale industries and hence paid inadequate attention to small and medium industries thus creating an imbalance in their economies. He argued that in these economies the large firm bias created a situation where, a small minority of people work with ever increasing amounts of capital, while the great majority continue to scratch a bare living with few primitive tools. Commenting on the large firm bias Tendler (1 988) stated that most small firms cannot compete effectively with larger firms because of preferential government policies and programs that tend to favour the latter.

In Sub-Saharan Africa the 'missing middle' has also come about partly as a result of historical policies with respect to private sector development. Antoine ( 1 988) argues that in many such economies the private sector played a limited role because many African governments pursued policies that tended to discourage large private sector investments, consequently the private sector was dominated by small, relatively unsophisticated enterprises. Research in both developed and developing countries has also shown that, several policy biases, including export-promotion programs have contributed to the 'missing middle' problem because of their direct or indirect negative impacts on SMEs (Young, 1 993 ; Weaver, Berkowitz and Davies, 1 998; Moini, 1 995, 1 998; UNCTAD, 1 998a; Bijmolt and Zwarts, 1 994; Levy, Berry, and Nugent, 1 999).

ID small developing countries the over dependence on FDI for export growth has, to a large extent, contributed to the missing middle problem. Small countries in their desperation to attract export-oriented FDI have either neglected or not paid adequate attention to their 5MB sectors. The export oriented FDI in these countries has mainly been directed at larger projects and larger firms (Co le, 1 993; UNCTAD, 1 998a). Large firms have contributed tremendously to export growth in many small developing countries, and such contributions are worthy of recognition. However, over time it has become apparent that a focus on large firms and export growth, per se, does not always guarantee a solution to the many problems faced by these countries. In fact, in many cases such a strategy has not only fallen short of the country's macro economic and social objectives, it has lead to a structural imbalance in their economies (UNCT AD, 1 998a).

Accepting the potential crucial roles of exports and SMEs in developing countries implies that that there is a need to marry the policies in the two sectors and ensure that they are both complimentary and reinforcing. One way of ensuring that this marriage lasts over time is to continuously assess the impact of existing SME policies and export assistance programs so as to improve their effectiveness. The design of well­ targeted assistance programmes is crucial in achieving high levels of effectiveness in these programmes. The starting point in designing well-targeted assistance programmes is to develop a full understanding of the factors constraining SMEs from achieving their full development potential. In the next section we investigate the various problems facing SMEs.