How eleemosynary economics hurts SMEs

Last week, we called attention to the role which freebees could play in shaping the conduct of economic agents, especially those operating on the fringes of the economy. We noted that on the average, SMEs in Nigeria do not invest significantly in capacity building. The need for a better appreciation of the importance of training and development in the sector was canvassed.

Contrary to what appears to be the conventional wisdom, which projects finance as the leading handicap of the sector, there is evidence that the bulk of their problems come from their lack of capacity occasioned by lack of interest in learning and knowledge. The importance of learning becomes amplified when we understand how innovation comes about and the role it plays in the transformation of economies. Nor shall we ignore how new product development and processes improvement fuel enterprise prosperity.

Clearly, our SMEs have been spoilt by the freebees flowing from many public and private institutions. The Enterprise Development Centre of Pan Atlantic University is in the forefront of this together with some banks. They sometimes bend over backwards to encourage learning in the sector. While no effort should be spared in promoting a vibrant SME sector in Nigeria, we should begin to demand some form of accountability from operators.

We have seen from recent activities of various private, public and even multilateral institutions that we practice what may be termed eleemosynary economics towards certain persons and institutions. The problem with eleemosynary or charity economics is that it tends to assume strongly that the charity activity would be a temporary phenomenon. Unfortunately, this is not what we find. Rather than be a short term activity, charity often becomes self-propelling giving rise to further demand for charity. As a result, when we practice eleemosynary economics towards one entity, we tend to expect or even compel it to also extend such charity to others down the line.

The good thing about history is that it saves one the trouble of learning from one’s own experience, which may be very painful. That is why it is lack of wisdom to take history lightly. Our experience with eleemosynary economics was extensive and varied. However, it was put on full display during the days of the then National Electric Power Authority (NEPA). The acronym, NEPA, which was often freely and openly translated as Never Expect Power Always, was probably the most inefficient Social Overhead Capital investment Nigeria ever made. It became the precursor of the current weak electricity distribution companies (Discos) that have at best failed Nigerians and at worst extended their waiting time for stable power supply.

Eleemosynary economics has been encouraged by the seemingly inexhaustible and relatively disproportionate resources available to the federal government, which encourages it to dump money at problems, often without prior study or proper understanding of the challenges entailed. NEPA was a classic case of this practice gone overboard. It was therefore not surprising that NEPA also freely mediated this charity economics to consumers of electricity, such that when it fails to do so consumers, on their own, extended the charity to themselves by refusing to pay bills for energy consumed. The fact that charity mentality dies hard is evidenced by the current electricity distribution companies’ disregard for or aversion to effective revenue collection, epitomised by their reluctance to meter consumers. This eleemosynary inheritance is behind the lingering inability of the Discos to deliver on the conditions or reason for their birth – stable power supply.

In relation to the SMEs, charity economics is very much at play. There is ample research evidence that relates SMEs level of efficiency to their likelihood of being constrained by lack of finance. As recent as 2014, a study by Veselin Kuntchev, Rita Ramalho, Jorge Rodríguez-Meza and  Judy Yang, of the World Bank and the International Bank for Reconstruction and Development, showed that labour productivity may hold the answer to the key question of which companies are likely to be bugged down by lack of access to finance. According to the study, high performance SMEs, measured by their labour productivity are less likely to be financially constrained than those with less productive labour forces. Additionally, it suggests that access to credit is positively related to labour productivity. Need we say more about the importance of human capital in SMEs?

This is an important finding because it indicates that the enterprises that are likely to be more constrained by finance are those with low labour productivity challenges. It follows therefore that these institutions are the ones that will seek and focus on finance as their main problem. Meanwhile, the problem is low productivity. In the same vein, throwing money into such enterprises may not change their fate, since that would be like applying the wrong medicine to an ailment.

The key issue therefore is to boost productivity, and there is a consensus that productivity is a function of many factors including training and the general work environment. Of these two, the easier to tackle is training as the work environment may be a complex factor. So SME operators should get themselves trained for improved productivity and hence access to finance. The market being awash with on-lending facilities has crowded out the efforts of SMEs at improving themselves.

We must continue to find ways to improve the lot of our entrepreneurs who are already beleaguered by environmental challenges. The part SMEs play as agents of the private sector in its role as the engine of growth is always to be appreciated. However, we cannot allow them to get hooked on the deadly nectar of eleemosynary economics. If we do, we should expect the same result as we found in the power sector – failure to innovate and improve.  Perhaps, some accountability criteria, especially in human capital development, as part of the financing and development strategy for the SME sector, may improve our benefits from the intervention funds on offer.