12 December 2012

Zimbabwe: SMEs, Job Creation


Lately, the issue of job creation has assumed a high profile in Zimbabwe as evidenced by various policy initiatives aimed at boosting employment.

The just-ended ZANU-PF Conference was emphatic on the need for accelerated employment creation predicated on its indigenisation and economic empowerment programme. On the other hand, the MDC-T ambitious Jobs, Upliftment, Investment, Capital and the Environment policy framework also aspires to create new jobs going forward.

Over the weekend, the Reserve Bank of Zimbabwe has added its weight to the issue of job creation by proposing heightened support to SMEs and agriculture because of their proven job creation potential. The new policy framework advanced by Reserve Bank of Zimbabwe (RBZ) Governor Gideon Gono deserves special mention because it fits in with conventional wisdom on economic recovery and growth, employment creation and poverty alleviation. These developmental goals are important for Zimbabwe going forward. This instalment focuses on empirical evidence supporting the link between small to medium-sized enterprises (SMEs) and employment creation based on comprehensive studies conducted between 1991 and 1998.

The SME sector definition has been fraught with the problem of definitional clarity (Simpson et al, 2010: 26- 27). For instance, the distinction between "informal or micro-sized enterprises" and small-scale enterprises has been one source of such definitional fuzziness while the distinction between "small enterprises" and "medium enterprises" has also wrought contestation. To that extent, the SME sector in Africa has been prone to varied labelling: "micro and small enterprises" or MSEs (USAID, 1991) and "micro, small and medium enterprises" or MSMEs and also referred to as "small, micro, and medium enterprises: or SMMEs (Gelb, et al., 2009; Zimbabwe, 2002a). However, the standard definition of the SME sector has been provided by the SME Department of the World Bank (ibid) which views small enterprises as those formal sector entities with up to fifty (50) employees and total assets and total annual sales of up to US$3 million. In Zimbabwe, an MSME Policy and Strategy Framework has defined small and medium enterprises as those who are 'registered in terms of their legal status' and 'employing anywhere between six to <100 workers' (Zimbabwe, 2008: 20). The RBZ is proposing a review of the current definition of SME to ensure that it includes those which have the potential to create sustainable jobs.

SME sector has been shown to impact positively on economic recovery and growth, employment creation and poverty alleviation (UNDP, 2010). For example, the employment creation potential of the SME sector is well documented in both developed and developing countries (World Bank, 2003). Globally, the SME sector contribution to total employment creation varies from 57.24 per cent in high-income countries to 17.56 per cent in low-income countries (World Bank, 2003:22-23).

In Africa, this phenomenon has been studied by various researchers (Daniels, 1995; Daniels and Mead, 1998 and McPherson, 1998). These studies have sought to discuss the employment creation potential of SMEs within the context of real Gross Domestic Product (GDP) per capita growth rate and have demonstrated how changes in a country's economic growth rate mediate the employment creation of SMEs (Liedholm and Mead, 2001).

To best understand the nexus between SMEs and employment creation, one needs to look at the employment trends in the country over the past two decades. Zimbabwe's economic melt-down started in earnest in 1997, which saw the GDP growth rate of 1,7 percent collapse to -17,7 percent in 2008. This period has been labelled the crisis years (Simpson and Dhlela, 2010: 20). Between 1997 and 2004, employment growth averaged -1,6 per cent (UNDP, 2008:103).

Formal sector employment fell from a peak of 1,24 million in 1998 to1,01 million in 2002 on the back of the land reform programme. In the formal agricultural enterprises, an estimated 150 000 jobs were lost with a negative knock-on effect on other non-agricultural sectors such as manufacturing due to the strong inter-sectoral linkages between commercial agriculture and these sectors (Simpson and Dhlela, 2010: 20).

For instance, manufacturing output was less than 30 percent of its 2003 levels while 75 percent of industry was operating at less than 50 percent capacity utilisation. In 2004, manufacturing employment was 26 percent below its peak level in 1998 (CZI, 2008).

Historically, there has existed a discrepancy between formal-sector employment and the growth rate in the labour force in Zimbabwe giving rise to a pattern in which the later has outpaced the former. One study has noted that between 1980 and 1987, the formal employment growth rate averaged only 0.7 per cent (Mhone, n.d: p.12) while another study established that between 1986-1990, formal employment growth stood at 2.5 percent while the average growth rate in the labour force stood at over 3.0 per cent (Kanyenze, 2009a:4). Recent figures quoting the United Nations Office of the Coordination of Humanitarian Affairs (2008) indicate that only 480, 000 out of the 12 million people were formally employed in 2008 down from 3, 6 million jobs in 2003 (NANGO, 2011).

Several studies on the employment creation of the SME sector in an economy have used the hypothesised link between the sources of these new jobs and the state of the macro-economy (Liedholm, 2001: 13). A decline in the real GDP per capita of a country leads to a significant increase in net new jobs as a result of new SME creation and a corresponding decline in net new jobs created through expansion of existing SMEs. Conversely, economic stagnation results in a significant decline in net new jobs created through expansion of existing SMEs and a corresponding decrease in net new jobs created new SME creation (Daniels and Mead, 1998).

Another observation that has been made is that formal SMEs, those which have graduated to the "middle", create more sustainable employment than the informal or "survivalist" SMEs which in most cases are single-worker enterprises and that such SMEs are likely to exhibit efficiency gains in the use of human capital (Simpson and Dhlela, 2010: 41; Liedholm and Mead, 1999). This is largely due to the fact that they are likely to employ workers with higher skills and are able to pay higher wages (McPherson, 1992; Cabal, 1995; and Parker, 1994) and this translates into accelerated enterprise growth. This is the crux of the RBZ new thrust on supporting SMEs for employment creation.

Review of extant literature on the employment creation dynamics of the SME sector in the foregoing has demonstrated the empirical link between the sector and employment creation.

The current problem of unemployment in the country, especially among the youth suggests that the SME sector could be an attract route in generating new jobs.

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