Large enterprises can secure financing from banks and other institutional lenders, while microfinance institutions can help finance small enterprises. However, the needs of growing medium-sized enterprises cannot be met by microfinance institutions. As a result, medium-sized enterprises are the missing link — known as “the missing middle” — in many African countries’ economies.
Furthermore, Africa’s SMEs are often unable to secure long-term financing. High information and transaction costs contribute to the perception that investing in SMEs is complicated and expensive.
These smaller enterprises, often young and under-capitalized, appear riskier because they are usually found in poorly regulated markets characterized by an uncertain political or economic environment. This supports the view that investments in SMEs take as much, if not more, time to return a profit than less risky investments with a wider scope.
However, in recent years, many African governments have worked to reduce administrative and legal obstacles for SMEs. From 2000 to 2010, the average time needed to register property rights was reduced from 120 days to 65. The time needed to obtain an export license fell from an average of 230 days in 2005 to 212 days in 2010, while, over the same period, the time needed to enforce a contract was reduced by nearly a month.
African governments know that SMEs help to create new production channels for domestic markets, thereby generating significant added value. A larger domestic market encourages diversification of the national economy, reducing dependence on exports of natural resources and, in turn, exposure to global price fluctuations. This makes economies significantly less vulnerable to external shocks.
African countries’ drive toward domestic development has been accompanied by accelerating regional integration. Rather than allowing Europe and North America to continue to dominate their economic development, sub-Saharan African countries are increasingly pursuing partnerships with their neighbors.
As a result, roughly 15 percent of sub-Saharan African trade is intra-regional, up from only 7 percent in 1990. In 2010, South Africa alone accounted for 4 percent of sub-Saharan imports and 6 percent of exports. Remarkably, this reflects the emergence of new trade flows, not simply the redirection of existing ones.
Africa’s shift toward regional integration encourages competitiveness by distributing more effectively production factors — such as inputs and equipment — and by allowing greater labor mobility. However, it still has a long way to go.
African governments should pursue intra-regional trade liberalization, institutional integration and infrastructure development with greater determination than ever. Their commercial enterprises need to progress in these areas in order to develop further and improve living standards for all.
Jean-Michel Severino, former director of the Agence Francaise du Developpement, is chief executive of I&P Conseil. Emilie Debled is the communications director of I&P Conseil.
Copyright: Project Syndicate/Europe’s World