Small enterprises adjusting to liberalization in five African countries

This study investigates three issues concerning the role of indigenous entrepreneurs in the transition from a state−led development strategy to a more market−oriented approach with the private sector taking the lead: (i) the effects of liberalizing the policy regime on the conditions for micro and small−scale enterprises (MSEs); (ii) the responsiveness of MSEs to changes in incentives and market conditions; and (iii) the capacity of MSEs to mobilize savings, absorb employment, and contribute to growth. The study consolidates the results of surveys undertaken to assess the effects of structural adjustment programs (SAPs) on MSEs in five African countries. The positive effects of SAP reforms on the environment for MSEs included greater access to imported inputs, a shift in relative prices in favor of domestic inputs (which MSEs tend to use more intensively than larger firms do), and less restrictive regulation of private business. On the negative side, many MSEs faced increasingly intense competition from imports and from a growing supply of self−employed workers. Small−scale enterprises (SSEs) with 6 to 49 workers were generally better able to respond to changing conditions than microenterprises with 1 to 5 workers. They were more likely to change product lines, buy new equipment, and seek export markets. SSE owners were also more likely to have entered business in response to a market opportunity, whereas microentrepreneurs were more likely to have been motivated by ''push" factors such as family tradition and lack of other opportunities. Women tended to be concentrated in microenterprises in activities such as food processing, textiles, clothing, and soaps and cosmetics. The MSEs in the surveys generally showed an increase in employment following SAP reforms, even in firms whose production did not increase. New entrants were particularly dynamic—perhaps reflecting a typical initial growth spurt, but also indicating a positive investment response by entrepreneurs of MSEs. Lack of access to finance was a commonly perceived constraint on growth, although many MSEs nevertheless achieved quite rapid growth based on reinvestment of profits, often supplemented by advances from customers and suppliers' credit. Many MSEs also experienced difficulty with access to raw materials or their cost. Although generalizations overlook the wide diversity within a given category of enterprises, the study findings suggest a two−pronged approach to development of MSEs. First, facilitate widespread participation in microenterprise activities by lowering the cost of entry and establishing an economic environment that generates demand for the goods and services of MSEs. The large numbers of microenterprises and the fact that few of them will grow significantly means that direct firm−level assistance can have only limited impact. Donor agencies should, rather, focus on the institutions that serve microentrepreneurs, such as the educational and informal financial systems. Second, for dynamic small enterprises, more targeted measures may be appropriate to lower the costs of formality, increase access to credit, and provide demand−driven business services.break Small Enterprises Adjusting to Liberalization in Five African Countries