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    PoliticsStarting small: microenterprise revolution in Ethiopia

    Starting small: microenterprise revolution in Ethiopia

    Date:

    In the back drop of the recent political unrest in the Amhara and Oromia regional states, the Government of Ethiopia is poised to embark on another program of mass job creation and entrepreneur incubation. The 10 billion birr revolving youth fund set aside by the federal government has already aroused expectations and speculation among the public, while scholars and MSE operators insist that the new scheme should be informed by urban job creation programs which come before it, writes Asrat Seyoum.

    Over the years, the Ethiopian Peoples’ Revolutionary Democratic Front (EPRDF-led) government has stayed true to its big push approach towards development. In line with that, on top of what can be characterized as a heavy regulatory presence in economy, the Ethiopian state has insisted on maintaining its noticeable involvement in a number of economic activities. While enjoying uncontested monopoly over the nation’s telecom sector, government’s presence or better yet dominance in some of the sectors such as banking and finance, aviation, transport and transit is a well-documented fact.  When it is not participating directly, the government makes its presence felt by tightly managing market institutions in many sectors.

    This is the characteristics of a developmental state or a variant of that, which the Ethiopian government has chosen to exercise. The state takes full responsibility for the emergence of a handful of new industries and economic sectors in Ethiopia. Recent dynamism created in Micro and Small Enterprises (MSEs) is no doubt on top of this list. This movement in MSEs and cooperatives, largely in the densely populated urban areas of the country, is one such development dynamism fully initiated and incubated by the government’s own policies and strategies.

    When it started to roll out 2004, the strategy of providing critical support to MSEs, which in turn ushered in an era of booming small enterprises in Ethiopia, targeted poverty and poverty only; urban poverty to be exact. This was to be achieved through massive job creation schemes in urban areas. For that, the state borrowed cooperative organizational structure and microfinance institutions from the rural development program. The strategy entailed a minimum of five people to come together and form enterprises in developmental sectors of their choosing. This would make them eligible to access credit facilities at any of the local microfinance institutions without stiff collateral requirement.

    It does not stop there; in fact the government goes the extra mile in providing working space for these enterprises, basic technical and managerial skill trainings and lastly the critical market linkages with the government’s own massive public projects.

    Although the data is not reliable, according to the Federal MSEs Agency, as much as 700,000 new enterprises were created by the government’s support program during the first Growth and Transformation Plan (GTP I). Zenene Kumo, director general of the Federal Urban Employment Creation and Food Security Agency, admits that reliable data with regards to the government enterprise support program and the number of jobs created is hard to come by. In an exclusive interview with The Reporter, Zenebe concedes that even the agency in charge of employment creation does not have the accurate data as to the number of enterprises created in past decade or so; not to mention their performance and how many jobs they ended up creating.

    However, the plans for GTP II are more grounded and more reliable, Zenebe believes. “During GTP II, the plan is to create 2.1 million additional jobs and 160,000 extra enterprises in various urban centers across Ethiopia,” he says. And, so far, the agency says that it has assisted the creation of some 56,000 new enterprises which translated into 940,000 additional jobs being created.

    Indeed, creating and nurturing MSEs was one strategy to which so much hope and resources have went into. Both the federal and regional states poured billions of birr into this program. The result was an unprecedented boom of MSEs in the urban areas and a considerable improvement in the livelihood of millions.

    It was also a policy that saw the ruling party make a shift from its singular focus in rural development and began to see urban areas as potential contributor to the national economy. This very idea influenced policymakers to extend the target of reducing poverty through creating jobs to developing the manufacturing sector via MSEs. Although slightly ambitions, the government has placed so much hope in these small enterprises to revolutionize the technical and production capacity of manufacturing sector in a matter of a few years.

    However, this is where things get a bit complicated. As far as the government agencies are concerned, the MSE dynamism is doing wonders in terms of building productive capacity of the nation. As can be expected, there are evidences countering these claims. According to Ethiopian Development Research Institute (EDRI) working paper entitled “State-inducement Versus Self-initiation”, and the evidence collected from 13 major cities in Ethiopia, the government induced enterprises (cooperatives) are neither more productive nor technologically advanced than those enterprises setup by the independent drive of individual entrepreneurs. In fact, the study shows that many of these cooperatives have ended up contracting in terms of employment since start-up. But, this does not mean that the average earning in such income groups have stagnated.

    To the contrary, many benefiting from the MSEs support program have experienced a significant increase in the earning and profit, the paper details. This has direct impact on the country’s poverty reduction efforts but not on productivity, the paper admits. The whole debate extends to the role of the government as initiator of MSEs and the quality of services that it provided to enterprises.

    The implementation of this strategy, nevertheless, has given rise to enterprises which are run by young and ambitious entrepreneurs. Hailu Woldesenbet and Zelalem Fikre (names are changed), both young and college graduates, are also products of this nation-wide program. The likes of Hailu and Zelalem have already broken a lot of barriers by deciding to pursue their dream of making it in the business world instead of looking for a formal high-wage employment as many of their age-peers do. On top of that, their choice to go into urban farming practices such as poultry and dairy farming activities is far more daring for city folks living in Addis Ababa.

    Hailu and seven of his friends established the poultry farm located around Megenagna two years ago by a per head contribution of 3,5oo birr to make up 20 percent of the 100,000 birr loan they applied for at the Addis Credit and Savings SC. After sailing through the bureaucratic red-tape for the past two years, the group has finally managed to secure 150 chicks a few months ago and have begun actual operations.

    Zelalem on the other hand is paired with 10 other youngsters to venture into the dairy and dairy production sector. Putting up the individual 10,000 birr savings each, Zelalem and his group have managed to secure 210,000 birr credit from the same microfinance institution this year. Both cooperatives are just testing the markets very recently since they became operational only a few months ago.

    On the back drop of the recent political unrest in the Amhara and Oromia Regional States, the Government of Ethiopia is poised to embark up on another program of mass job creation and entrepreneur incubation. The 10 billion birr revolving fund which will be administered by regional governments and the Commercial Bank of Ethiopia (CBE) has already aroused expectation from different corners of the country. According to formula released by the agency, Oromia, Amhara and Southern regional states will take larger share of the fund claiming 3.4, 2.6 and 1.8 billion birr, respectively.

    Although the details are yet to be made clear, the project-based financing facility is expected to make a dent on the growing frustration over unemployment in urban areas. Nevertheless, the challenges of the previous MSEs support program has to be alleviated properly if the new financing facility is to make meaningful impact on employment and poverty, scholars contend.

    True to form, Zelalem’s and Hailu’s business represent many of the enterprises striving to make it in urban areas across Ethiopia. But, the prospect is not as rosy for some others. Tilahun, the only surviving member of a disintegrating cement brick producer cooperative, is not as hopeful as the previous two. The cooperative, which was established seven years ago on 40,000 birr capital to produce hollow and solid cinder blocks, has failed miserably leading to the disbandment of all 15 members of the cooperative.

    Tilahun remembers things were not always bad. Once we were connected to the Addis Ababa Integrated Housing Program, he says, and there was ample demand for our products. At one point we have seen our paid up capital going up to 300,000 birr, Tilahun says, but it did not workout at the end.

    “After enjoying three years of smooth business operations, our products started to pile up and we started to struggle to find markets for our blocks,” he says. Tilahun blames the government for allowing more than 40 cooperatives to do the same thing (produce cement bricks) from the area.        

    Currently, there are only two members in the cooperative as most of them have decided to leave the cooperative leaving their working shades and machineries stranded in the old project site.

    Those alive and kicking as well look to feeling pressure these days. For starters, the likes of Hailu and his friends have already exhausted about 10 percent of their working capital even before starting their formal operations. “The administrative hurdle is a nightmare,” Hailu told The Reporter. He says his enterprise has spent two years just looking for space to work. In fact, acquiring shades looks to be a testing endeavor for MSEs in Addis Ababa. According to the two informants, the city administration did not have a designated space to be used as working space, hence, the enterprises have to scout for one and ask the administration to transfer it to them.

    It does not stop there, Hailu says; after acquiring working space, fulfilling the needed infrastructure is something that is left to the enterprises themselves. And that costs money; money that they do not have; and money that they need for physical investments. For Zelalem, acquiring credit was also as testing for him and his friends. “It took us almost one year to get the loan mainly because of the stiff collateral requirement of microfinance institutions, which ironically was supposed to be collateral free,” he explains. Zenebe do not deny this problem. Rumors of high collateral requirement such as cars and houses are still widely circulating in the economy. Zenebe as well thinks that this practice is against the overall strategy of the government to support the MSEs.

    In the grand scheme of the matter, the government support structure towards MSEs does not look to be up to the task. For one, the government’s strategy to provide one-stop service to MSEs, which includes provision of working space, credit, training and market linkages, is the major gap which enterprises are suffering from. The agency says 1,500 one-stop service centers across the country are established to ease these challenges.

    On the other hand, some of the services in the support package appear to be non-existent altogether. For instance, both Hailu and Zelalem attest that no members from their cooperative have received training on managerial skills and on the basics of accounting and record keeping. They do say that the one-month training program in the Technical and Vocational Education Training centers pertaining to the specific sectors they operate in had come in handy in their day to day activities. But, none of the business and management related trainings have been delivered so far. “We are suffering because we lack basic training on tax and accounting. That’s something desperately need,” Hailu explains.

    As far as EDRI paper goes, there is no evidence supporting the link between the training that is offered to cooperatives and their productivity or technological adaption.            

    Moreover, the inherent selection bias, which the MSEs program is accused of, is something that warranties a proper remedy. Access to support of the government is claimed to be reserved to party supporters and affiliates in the past. This in one hand shows the existence of a serious selection bias. As far as selection goes, working paper claims that government initiated MSEs stand a lesser chance of being led by a true entrepreneur. Such mass access programs might have the mechanism to select the right growth oriented entrepreneurs, it argues.

    All this is reflected in the limited number of MSEs graduating every year to Small and Medium (SMEs) category which, according to the agency, is marked by a capital 1.5 million birr and above. Zenebe claims that 1,586 firms have graduated in the last budget year. But, he did not downplay the fear of SMEs to graduate and face the competitive market. The support package in SMEs has been non-existent for many years, Zenebe admits but now a separate agency dedicated for that purpose has been setup. In fact, reports indicate some enterprises are shying from revealing their true capital level in fear of being promoted to SMEs level and loosing whatever support they might be legible to.

    At end of the day, operators which do not have the right entrepreneur attitude would make these enterprises mere entities dedicated for the survival of the members; not engines of for industrial growth.                   

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