Thursday, May 11, 2006

Help for Small Firms in Southern Sudan: Borrowing the European Model

By John A. Akec*
London, UK

Business is war, goes a Japanese proverb. "The extreme view [in America] sees the Japanese in their 1940s war mode but with corporate buyouts and land grabs and fists full of patents in place of guns and planes and war ships", wrote Bart Kosko who is a professor at University of Southern California in his masterpiece book, Fuzzy Thinking (HarperCollins, 1993). The land of the rising sun has made it from a country that was famed for "improving" on what Americans had invented to a leading industrialised economy and a home to industrial-technological giants such Toyota, Nissan, Honda, Fuji, Mutsubishi, Sony, Hitachi, to name but few. Japan with current gross domestic product or GDP of $4.96 trillion has made great strides and has emerged from the devastation of the Second World War to become the world’s largest economy next to the US (GDP $13.18 trillion). However, Economist Intelligence Unit predicted in January 2006 that in 20 years time (by 2026), Japan will be pushed back to a third place by China which will be trailing just behind the US in the size of GDP. In fact, predictions based on price-power parity (PPP) that takes into account the real buying power of local income (instead of GDP that values national economies using market exchange rates), China is poised to overtake the US by 2017 as the world largest economy. This is war of a different kind. The ammunitions are the dollar, the Yuan, euro, and yen. There should be no mistaking the fact trade and doing business have been shown to be the only means by which nations can pull themselves out of poverty and step into brighter future.

In South Sudan, we are starting from virtually nothing. From zero, as our politicians have eloquently expressed it time and again. A one million dollar question therefore is: starting from zero as we are, how does our government go about revitalising our war-ravaged economy in the fastest way possible? The answer lies with our economic planners’ ability to pinpoint and manipulate the relevant economic variables in a way that can deliver the ‘right’ macroeconomic objectives, be they full employment, low inflation, economic growth, stability of market prices, or a trade-off between this variable and that. A fundamental problem of economics is the management and allocation of scarce resources or factors of production, namely: land, labour, capital, and entrepreneurship. Proper utilisation of these factors is rewarded with rents of the land (revenues from exploitation of natural resources such as oil, wood, etc), wages in exchange for labour, interest paid on the capital employed to produce goods and services, and profits generated by business enterprises. The aggregate of these rewards is what is referred to as National Income.

It takes no economist to recognise that our government spending on infrastructure projects and on free services such as education and health will contribute in jobs creation, and therefore income generation for a sizable proportion of our citizens. Initially, oil revenues, foreign aid, and external borrowing will form the bulk of the government public spending. But as the economy begins to take shape, income tax and corporation tax, among others should become central components of the government’s revenues. This contribution which small firms (SMEs) can make to national economy and wealth creation need to be recognised by our government right from the start and be made part and parcel of economic and development agenda.
SMEs tend to be privately owned businesses that employ between 0 and 250 people. They are normally independently managed by the owner (or the entrepreneur), unlike large publicly quoted companies with more than 250 employees, and run by management boards on behalf of the owners (the shareholders). In European Union alone, small firms account for nearly 98% of 25 million registered businesses, employ 66% the work force, generating 60% of turnover (income), and contributing about 90% of all exports from the Euro Zone. Many of the small firms start initially as commercial ideas by the entrepreneur who uses his or her savings to start a business to serve niche, and often, local market. Frequently, small firms struggle with cash flow problems at the start. This is because of their high-risk nature that does not encourage the banks to lend money to them before their profitability is proven. Great majority of small firms rely on borrowing from friends and family in order to fund their business at start up phase. However in industrialised countries, a few promising businesses may be funded by the so called Venture Capital funds or Business Angels in exchange for share in the business (equity or shared ownership).

Despite the many funding hurdles the SME’s have to overcome, many governments in the industrialised countries provide funds to help small start-up firms. For example, local authorities, regional agencies, the Irish and the UK governments, and the European Commission provide grants (free money) and soft loans (subsidised loans at low repayment rate of interest) that can total up to more than 3 billion Euros (US $ 3.5 billion). Regional agencies in the UK include Scottish Enterprise, the Welsh Development Agency, and Rural Development Commission. Local authorities in England and Wales have business advice units and award small grants to help with rent of premises for start-up companies. What’s more, the UK government offers a range of grants and Loan Guarantee Scheme through Business Link, and Department of Trade and Industry (DTI). The awards include the Small Firm Merit Award for Research and Technology (SMART), and Support for Products Under Research (SPUR). Loan Guarantee Scheme authorises banks and other financial institutions to issue loans of between £ 100,000 and £250,000 to small firms wit promising businesses performance but whose owners cannot provide collateral (an insurance against failure to repay the loan). The government guarantees the payment of up to %70 of the amount lent.

The government of Irish Republic is famed for its unmatchable support of small start-up firms. All information about the Irish government help for start-ups can be obtained from Enterprise Ireland. County Enterprise Boards and Industrial Development Agency channel help to small firms through Small Business Programme, Enterprise Development Programme, and Business Innovation Centres. For example County Enterprise Boards pay out about grants totalling £12 million annually with each grant worth 5,000 for business plan preparation, and up to £ 50,000 to cover the start-up costs. Irish Science & Technology Agency funds research and development in technology and science for the development of new products and raising expertise in industry and academia. Small Business Programme provides grants of up to £ 425,000 to start-ups towards research and development costs, employment and equipment grants, and loan guarantees.

A study I came across that was published in 1997 showed that although one in five companies in the UK that received loans through Loan Guarantee Scheme failed to repay the loan, more than 44,000 jobs were created at a cost of £ 2,200 per a job. One may wonder as to why a government should spent public money to create jobs for individuals. The first answer is deeply rooted in the centuries of struggle for freedom and social justice in the Western societies. Here governments are bound to provide safety nets for citizens through system of social welfare while helping them to get back on the employment ladder to contribute to the nation’s economic life. It is better that they can catch the fish themselves as opposed to being fed with fish daily. Second, those economically active pay income tax and national insurance and pension and hence support those who have entered a life of retirement and the unemployed. Third, once a firm succeeds to survive and make profits, the government rips the benefit by collecting corporation tax as well as other indirect consumer taxes such as value added tax (VAT), fuel duty, tax on beverage (alcohol), and tax on tobacco, among others. Fourth, when people have meaningful jobs and are earning for themselves and their families, they are less likely to get involved in criminal activity. That helps in maintaining law and order as well as social cohesion. Because of all these invaluable benefits, governments around the world do not only support their citizens to start their own small businesses, but try their very best to bail out national companies teetering at the edge of bankruptcy in order to safe thousands of jobs and protect livelihood of families that could be affected by potential company closures.

Back to South Sudan, those individuals from the Diaspora with business ideas who made the long journey to Juba to discuss their bright business ideas with the authorities in the government of South Sudan (GOSS) discovered that there are no provisions or plans for supporting start-up businesses. The reasons? One reason given was the fear that giving money out to individuals to set up their businesses would be viewed as corruption. Sure. This is a great misconception! One simply needs to review some of many initiatives and provisions which European Commission and EU member states have made in order to help small firms, as mentioned above. Far from being called ‘corruption’, supporting small firms ought not be an after thought or low-priority issue in the allocation of resources, but an essential and indispensable component of the economic regeneration package. Mechanisms and organisational structures similar to ones established in the developed countries could be adopted in South Sudan to channel funds into helping small businesses during start-up phase without great effort to reinvent the wheel.

To remind us about the importance of small businesses in the enhancement of our freedom values, the words of the former British prime minister, Margaret Thatcher, who more than any prime minister, dead or living, did so much to reinvigorate the spirit of entrepreneurship and small business in Britain:

""Small businesses are the very embodiment of a free society - the mechanism by which the individuals can turn his leadership and talents to the benefit of both himself and the nation. The freer the society, the more small businesses there will be. And the more small business there are, the freer and more enterprising that society is bound to be".

The great French philosopher Jean-Paul Sartre said: man is destined to be free. By that he meant all of us can only define our very existence through the actions we take and choices we make.

*First posted on splm-diaspora on 28 Feb. 2006


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