Trade by SMEs: Africa’s opportunity beyond 2015

16 September 2014
ITC News
While 15 of the top 20 countries making the best progress on the MDGs are in Africa, the main issue remains how to prepare Team Africa for its post-2015 performance.

Team Africa’ is working hard to achieve the Millennium Development Goals (MDGs) by 2015. Its ability to do so depends on muscling up a number of critical sectors, primarily in agriculture, health services, transport and logistics, but also in energy and climate adaptation. And so far the team is winning in a number of competitions.

Fifteen of the top 20 countries making the best progress globally on the MDGs are in Africa. Still, many hurdles remain. The main issue is how to prepare Team Africa for its post-2015 performance. Much of that attention should go towards enacting policies that support small and medium-sized enterprises (SMEs) to deliver development results through trade and job creation. It should also aim at expanding choices available to consumers in health, nutrition, energy, and the environment.

Africa is on track regarding the goals related to primary education (MDG 2), gender equality and empowering women (MDG 3), combating HIV/AIDS, tuberculosis, malaria and other diseases (MDG 6) and global partnership for development (MDG 8). However, many challenges remain in the goals to eradicate poverty and hunger (MDG 1), reduce child mortality (MDG 4), improve maternal health (MDG 5) and ensure environmental sustainability (MDG 7) (The MDG Report 2013: Assessing Progress in Africa Toward the Millennium Development Goals, United Nations Development Programme).

The African countries that made it to the top 20 in terms of progress in meeting the MDGs succeeded mainly because they delivered sustained, equitable growth, with political stability and human development oriented policies. Some of the solutions countries employed to achieve sustained and equitable growth included enhancing the performance of SMEs. This was done in domestic and regional economies, including their contribution to local consumption, jobs, trade and export income.

Food insecurity remains a grave challenge as it has consequences for healthrelated goals. Concerted efforts to improve agriculture, the cornerstone of many rural economies and most developing nations, could enhance opportunities for economic growth and employment creation. Enhancement of food distribution and nutrition, not only in rural areas but also in the fast-growing cities of Africa, could fast-track progress towards other MDGs. Adapting to climaterelated shocks, particularly from extreme weather, could help Africa tackle risks of food insecurity. The good news is that food exports as a share of merchandise exports was high in most of the top performers on the MDGs, including Burundi (69%), Rwanda (51%), Kenya (48%), Côte d’Ivoire (47%) and Uganda (46%).

African countries depend on SMEs in the food sector and their performance is linked to important factors such as the productivity and sophistication of the agriculture sector. A number of countries have made tremendous progress in getting SMEs to register as formal businesses. In Botswana, nearly 94% of firms are formally registered when they start operations. Other top MDG performers do equally well in formalizing their SME sectors, including Kenya (91%), Rwanda (90%), Lesotho (87%) and Mozambique (86%). The rest of Africa needs to follow suit.

Research has shown that African countries that were dependent on agriculture but raised the level of sophistication of the sector and had better transportation and communication networks were more successful in creating jobs (Jobless Economic Growth: Is There a Role for Agriculture, Journal of African Development, Hanson and Léautier, 2013). The results show that key factors are central to the impact of agriculture on employment – the size of the sector and its potential to absorb large numbers of job seekers; the attractiveness of the sector to young educated people; and market-expanding opportunities that arise because of regional integration and trade policies.

Trade plays a critical role in delivering the opportunity for job creation in the agricultural sector and because of the breadth of the job types that can be created through trade, the inclusiveness of such job creation. This is because agriculture in Africa is mostly smallholder agriculture. To sophisticate the sector requires more use of scientific knowledge, fertilizer, mechanization, irrigation and transport. All these factors depend on services as well as merchandise trade.

Trade as a share of GDP exceeded 50% for nearly all of the top performers in progress towards achieving MDGs, including Lesotho (156%), Swaziland (135%), Botswana (115%), Mozambique (107%) and Côte d’Ivoire (105%). ‘Team Africa’ would have to focus attention on trade policies for trade to deliver inclusive growth, especially in relation to emerging countries like China, India and Brazil. Focus on regional integration policies would expand the space for increased intra-African trade and provide much needed market access for SMEs seeking to diversify geographically.

Regional integration policies and programmes need to better support entrepreneurial SMEs that can modernize agriculture through repeatable models. Those models should tap into regional export and import market opportunities, support creation of value chains that enhance the value added from agriculture, and excite youth to work in the sector. This includes activities critical for transforming the sector, such as supporting the modernization, productivity and growth of SMEs engaged in the agriculture and food value chains at the retail level, as well as growing regional and international trade in agricultural products and services.

The majority of these goods and services markets in Africa are provided by SMEs. Moreover, SMEs have shown they can take advantage of making consumer products accessible to broad swathes of the population, as is done so effectively through the vending of food products visible in all African markets and city neighborhood shops. If the sophistication and innovation that has gone into mobile banking and payment systems can be turned towards trade, the results could be tremendous.

With the growth of the African middle class, household disposable income has risen, presenting an opportunity for cross-border and national trade in consumer goods. Consider that household final consumption expenditure as a share of GDP is as high as 91% in Lesotho (World Bank, 2014). All countries in the top 20 performers in progress towards the MDGs post household consumption expenditure levels above 50% of GDP.

Since this statistic measures the market value of all goods and services, it is a powerful indicator of the potential for trade beyond the realm of food. Furthermore, durable goods such as cars and refrigerators are important contributors to food distribution and preservation and help expand the usability of perishable agriculture and food products. Most countries in Africa import their durable products and the vibrant installation and repair service around used merchandise run by SMEs creates muchneeded semi-skilled jobs.

Supporting an SME-driven trade agenda would depend on the improvement in efficiency of public expenditures, especially from channeling investments to infrastructure needs of SMEs engaged in the agriculture and food value chain. Health diagnostic services are in high demand as the new risk profiles now include cancer and other ailments that come with development. Improving access to diagnostic clinics could avert many risks to women during childbirth and save the lives of many infants. All these services could contribute to the goals on maternal (MDG 5) and child health (MDG 4).

Investing in SMEs could also boost the chance of meeting the de-carbonization targets at the global level as SMEs in Africa are fast adopters, and adapters, of new technologies. Much progress can be seen in the customization of solar panels for domestic and small industrial use. In many parts of the world, solar and wind power are already at grid parity (A Message on Climate Change to World Leaders, www.unsdsn.org/climate-letter). There is room for investment in distributed energy systems that can serve clinics and diagnostic centers as well as mechanization of agriculture, all with important contributions to the MDGs of maternal health (MDG 4), child mortality (MDG 5) and food security (MDG 1). The partnerships that could be developed across countries to effectively de-carbonize would greatly enhance trade. Success in achieving such partnerships would depend on the policies related to debt markets and access to finance for SMEs, as well as strengthening local capital markets.

Private equity can be an effective instrument to provide much-needed finance to support the so-called ‘missing middle,’ the SMEs needing growth and expansion capital between US$1 and US$15 million. At Mkoba Private Equity Fund, which I lead, we believe the main challenges for Africa-based SMEs to access capital are grounded in:
(1) Difficulties in accessing credit from the banks that remain concentrated in few markets;
(2) Unaffordable interest rates and strong dependence on collateral for lines of credit by banks when made available to SMEs;
(3) Too shallow domestic financial markets with insufficient capital for term and amount relative to SME needs;
(4) Concentration of private equity funds in a handful of markets, with limited onthe-ground presence in a large number of countries.

Many of the SMEs we seek to support have the potential to become regional players and are active in the import-export trade area in sectors like agribusiness and agroprocessing, logistics, transport and health. Investment in SMEs in these sectors is important to realize the MDGs. But investment must come hand in hand with sound trade and regional integration policies. Therefore, the idea of transforming Africa one company at a time would be a good guiding principle for those countries seeking to develop a post-2015 development agenda. But it must go beyond the targets set for the MDGs to achieve the goals that ‘Team Africa’ has yet to realize.