ERPG: A vote for SME-focused industrialization

Now that we are about to reboot the Nigerian economic system through the Economic Recovery and Growth Plan (ERGP), there is need to look at some issues that could help us to maximally benefit from the recovery effort now under way, especially as it affects the SME sector. While the details of the ERGP are still being untied, there is something clearly new, good, and promotable in the plan – its intention to promote SME based industrialization. SMEs are the foundation of this economy. On the assumption that the plan harvested and embodies the views of all critical stakeholders, I think we need to pause briefly and agree on certain principles that would aid the effective implementation of the plan. The first principle is to avoid aggregated solutions to disaggregated problems. The second is the need for public ownership spirit for the plan. We have not been good salesmen.

In my view, the change we seek and indeed the change that will change Nigeria for the better will not be a private fad of a section of the country or a particular department or agency of government; or even the party in power. For the avoidance of doubt, a particular movement could galvanize the people to change but change will not happen if it is perceived as a private property of that movement. The change that works is the change of the people. Similarly, a plan that works is a plan of the people. It must have their confidence and buy in. Regardless of who put this ERGP together, it must be sold to Nigerians if it is not to become like an annual budgetary activity for which nobody accounts.

I know that road shows may already be on the card. There should be road shows to communicate the plan. However, I recommend local road shows (in Nigeria) before we think of selling it abroad. If we do not take ownership of this plan those who made it labour in vain and no foreigner can do it for us. A Nigerian road show will serve two purposes. First it will help the planners to hear the other side of the story – from those outside the government and the planning group; and they are many – including the opposition, whom I believe should understand the efficacy of opposition not deployed for its own sake but for the national interest; intelligently and constructively. Second, hearing the other side will help us avoid some of the mistakes of the past, whereby we applied aggregated solutions to disaggregated problems. The result will naturally be failure.

This brings me to an important plank of the ERPG – SME-focused industrialization. This is very appropriate and shows that we are beginning to successfully trace the sources of our past failures. An economy that is 60 per cent informal will do well on a plan that recognizes its informality. Those Nigerian leaders who wondered why the economy continued to survive despite all the missteps failed to factor in the role of the informal sector. Just imagine the number of Nigerians who wake up every morning to “write their own pay cheques” working for themselves. That is the real economy and the plan of the ERGP to focus on it is positive.

The informal sector epitomizes man’s struggle with nature. This is evidenced by its dominance by youths and the presence of Micro, Small and Medium enterprises (MSME) that continue to battle with apparently intractable challenges. Since the time of the Structural Adjustment Programme (SAP) implemented in 1986, there has been numerous programmes and policies aimed at improving the SME sector. In particular, the problem of access to finance has been the focus of a number of major policy initiatives, including the reform of the financial system of the 1990s and many more. The Peoples Bank and the community banks were designed to resolve the sector’s funding challenge, especially the micro and small enterprise subsector. That policy was not very successful due to poor implementation.

The introduction of the much celebrated microfinance policy was based rightly on the hope that it would be better able to resolve this funding challenge. Clearly, the result we are getting in relation to that vision is not very positive.

We must now avoid the mistake of looking at the SME sector as one homogeneous group. It is far from homogeneous. Of the over 37 million enterprises constituting the sector as at 2013, about 99 per cent (36 million) are microenterprises. Second, the needs of microenterprises differ from those of small and medium enterprises. As if to show a disregard for this distinction, the concept of SME has been promoted in most jurisdictions instead of MSMEs. We have by that convention shortened the acronym of the sector MSME to SME, eliminating the M for microenterprise. This modification, seemingly simple and harmless, has conditioned our attitude to matters affecting the sector. We tend to think more about medium enterprises alone in disregard of microenterprises – the bulk of the group. We need solutions that cover the field. I had written elsewhere in this column about the Financial Purgatory experience of enterprises in transition from micro to small and small to medium. Indeed, there is a major financial disequilibrium that happens when an enterprise bestrides two groups – say small and medium – as transition takes place. We must be that detailed in implementing this plan.

We should therefore avoid blanket implementation of the SME-focus of this plan. This is one area we need to travel a new rout. As I used to tell my colleagues in the Financial Systems Strategy Committee of the Vision 2020, the real path to Nigeria’s economic development is the informal sector. We must provide it with growth nutrients and help to engineer fruitful economic linkages between it and the formal sector. This predominantly informal economy cannot be successfully run on principles that isolate the informal sector or one that does not recognize its key features. We need not amplify the damage already done by the formal financial superstructure that does not support the substructure of informality carrying the economy.

The current microfinance policy is a welcome disaggregative financial solution to the failure of the banking system to fund MSMEs. It is however tottering because some operators chose to function as caricatures of commercial banks or simply micro commercial banks. When in the then Ministry of Finance, and Budget and Planning, in the 1990s, we designed the financial sector reform programmes of the time, we targeted boosting federal revenues and the canalization of funds to starving economic agents. We created the Value Added Tax to boost revenue and introduced new financial institutions and instruments, including the Peoples Bank, Community banks and licensed finance companies to do the requisite financial disaggregation. They initially rightly focused on those economic agents structured to the periphery by the incongruent financial superstructure. Sadly, they soon opted for “Inter House Placements” – a mimicry of Inter Bank Placements among banks and their foundations unravelled and the programme failed. Now that the ERPG has recognized the need for an SME driven industrialization, it must also recognize the need for focused or disaggregated implementation, while preventing the shenanigans of the past.

Emeka Osuji