When one speaks of the ‘private sector’ we must be duly cognizant of the fact that the bulk of it comprises Small and Medium Enterprises (SMEs). In South Asia, SMEs comprise 97 percent of all enterprises and contribute in range of 40-60 percent of GDP or value added. In Nepal, it may be as high as 60-65 percent of national product with these businesses providing 70 percent of all employment. Such is their significance and role in the national economy as they are second only to agriculture.

Even in the much more developed Southeast Asia, to illustrate, the ratios are high. SMEs contribute to 50 percent of all their output and employment. It must be noted that 80-90 percent of all enterprises in industrial societies are SMEs. It is the life-line of the macro economy, but also of the regional, district economy and rural economy. Sadly, SMEs are largely ignored by development planners and policy makers in Nepal who provide only rhetorical and anecdotal support to it. At a time when more and more SMEs are going global, it is time to give due political attention to the role of SMEs for Nepal’s participation in the globalised business processes.

To expect that the private sector can play a lead role in economic growth when SMEs are so ignored is a mirage. The need to formalise the informal private sector, of whom most are SMEs and traditional cottage enterprises, is paramount. Continue to ignore their importance, while calling for ‘public-private partnership’ as the new mantra of development, will come to naught if SMEs are not recognised as the national spinal cord for a liberal, competitive market economy.

Fears abound amidst SMEs that if ‘market capitalism’ is being equated with ‘state capitalism’ or worse yet with ‘crony capitalism’ then no ‘enabling environment’ for the private sector is  likely as it  requires the state guaranteeing political stability, full economic freedom and firm application of the rule of law and the absence of syndicates and cartels. An ‘enabling environment’ must be conceived as one that allows SMEs to flourish as a source of social creativity and innovation in the quest for profit based on fair competition duly regulated by the state. In short, it must seek to promote national ‘human capital’ for all round prosperity and maximum social mobility. There should not just be educational planning, but one that is integrated with manpower planning as the new strategic thrust to perspective and mid-term planning by the National Planning Commission (NPC).

The foremost need for an effective policy towards SMEs is to eradicate the structural constraints over a time bound period through strategic policy making and management that engages the government with key institutional stakeholders. A strategic policy for SMEs must be demand-driven and bottom-up and not, as in the past, be top-down and supply-led. SMEs must be conceived as subjects of the policy and not as its objects.

It must be underscored that these structural constraints are different in their severity as seen from the perspective of small and also rural SMEs. So, one must avoid the natural temptation, primarily amongst central policy-makers, to deliver ‘one-size-fits-all’ policies as has been so chronically done in the past.

The severity of constraints could be different for SMEs in Nepal: (a) located at the central and at district levels with they being more severe for those in the periphery, (b) by their size with smaller SMEs facing greater severity compared to larger SMEs, (c) SMEs in rural areas facing greater constraints than those in urban areas and finally (d) SMEs in remote underdeveloped regions being most handicapped. Precise constraints, their priority and severity needs empirical verification based on applied research.

However, by and large, they tend to be the following. The government is the main constraining factor and the high transaction costs of doing business. Unscientific fiscal policies also discriminate against the SMEs. There is a scarcity of land to set up business establishments in a cost effective manner. Infrastructure such as roads, electricity and water too are often inadequate. Further, there is an insufficient supply and stringent requirements over collaterals.

Little management and entrepreneurial skill in the workforce coupled with low investment is also another concern.

We raise the above issues as they provide the general conceptual background to a new policy approach to SMEs as the core factor for a private sector-led economy in the spirit of global economic order and the financial and economic globalization process at large where Nepal needs to find its competitive niche.

Rana is a former finance minister of Nepal and an economist and Thakur is a New Delhi-based columnist.