AFTER the conclusions of the Asia-Pacific Economic Cooperation (Apec) and Association of Southeast Asian Nations (Asean) integration meetings last week, the real work must now begin. Specifically, it is the role of small and medium enterprises (SMEs) that was highlighted as key in making the connection between facilitating trade and making growth inclusive.
The connection begins from understanding that the new order of trade is no longer competing and outselling others via a complete product but through a gamut of intermediate goods production. Consider the electronic products and gadgets that we have today. While the label says made in China, the actual product is an agglomeration of parts contributed from different countries. This way, it makes sense to be part of a regional agreement to cooperate rather than compete with each other. This also helps countries like the Philippines get into the global supply chain in a shorter time and in an efficient manner.
In the recently concluded Philippine Economic Society Annual Meeting, keynote speaker Ganeshan Wignaraja of the Asian Development Bank presented data on SMEs in the Southeast Asian region. Among the things he highlighted are as follows: a) 9 percent of SMEs in the region are part of the global supply chain; b) large firms dominate SMEs in the global supply chain; c) access to finance is a critical constraint; and d) most SMEs are financed internally, among others. These observations present a big challenge for SMEs in the region, as well as for the Philippines, in particular. Consider the table below (summarized from Wignaraja), it is clear that SMEs can play a big role in making growth inclusive, as they provide for more than 60 percent of employment and have a considerable share in GDP of about 40 percent. However, the shares are lower when considered for trade, as SMEs’ shares to exports are about 20 percent and individual country’s shares to the global supply chain is less than 3 percent. This means that the challenge is to convert and improve the current SME environment to allow them to participate in, and, thus, benefit from, trade. It is, therefore, important to have a target of how much do we expect SMEs to contribute to exports and supply chain.
For the Philippines, the Department of Trade and Industry (DTI) has been at the forefront of helping SMEs ride the global supply chain. In a recent industry meeting which the DTI organized and I participated in, I have validated that many SMEs are being tapped by the international buyers to produce products for them. However, similar to the findings of Wignaraja, many of them are unable to fulfill the requirements due to lack of funding and lack of sustained skills and capacities. Responding to these challenges is not straightforward, as different industries have different needs. However, the government has already put in place national policies to assist the SMEs, in general. There are two existing laws that should help support SMEs, these are the Magna Carta for SMEs and the recently passed Go Negosyo Act. The Magna Carta requires banks to provide at least 8 percent of their loan portfolio to the SME sector, while the Go Negosyo Act provides a broader environment of facilitation and also funding support for start-up firms with a centerpiece Negosyo Centers in all cities and municipalities. The Magna Carta has been in effect since 2008.
However, it is noted that the banking sector is not able to fully comply with the required 8-percent lending to the SME sector, despite the P500,000 penalty per quarter imposed by the law. Based on existing data from the Bangko Sentral ng Pilipinas, banks are only able to lend about 5.6 percent of their portfolio to the sector. This means that banks are willing to pay the penalty than take the risk of lending to SMEs. Thus, the issue is not access to funds per se, but the capacities and sustainability of the SMEs accessing banking funds. Lack of capacities means also that the SMEs are too small to become formal firms.
It is hoped that the Go Negosyo Act can be the catalyst for bringing SME first into the formal sector, and then eventually to the global value chain. The law rightly put in the core of SME development at the local level and not through the national government agencies. This should force local chief executives to be strategic in understanding their local competitiveness and provide the right environment for developing SMEs. These could include commitment to fast business permit approval; providing training for skills; capacities in basic financial accounting; creating local supply chains; facilitate the organization of local business associations; and helping smaller SMEs organize into a cooperative level, among others. It is a long way to go, but the journey has already started.
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Alvin P. Ang, PhD, is professor of Economics and senior fellow of Eagle Watch, Ateneo de Manila University’s macroeconomic forecasting unit.