Ethiopian Business Development Services Network (EBDSN)

 Short Overview of the MSE Sector

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Overview of the MSE Sector
(Extract from:
Zewde and Associates, SEED-ILO Addis Ababa 2002
Jobs, Gender and Small Enterprises in Africa. Women Entrepreneurs in Ethiopia. Preliminary Report


Size and Diversity of the Sector

The sample survey, conducted in 48 major towns by the Central Statistical Authority (CSA), in May 1997, showed that there were 584,913 informal sector activity operators and 2,731 small-scale manufacturing industries, employing a total of 739,898 people.

The survey revealed that a microenterprise on average engages one person, with the average annual operating surplus at about Birr 1,300 ($162). With regard to the diverse nature of activities in the informal sector (mainly microenterprises), the survey indicated that the majority of activity is concentrated in two main broad sectors: namely, 47 per cent in manufacturing and 42 per cent in trade and services. The distribution of activities among the rest of the MSEs is about 6 per cent in community and personal services, with the remaining 5 per cent involved in the areas of agriculture, hunting, forestry and fishing, mining and quarrying, construction and transport activities. The part of the survey covering "Small-scale Manufacturing Industries", showed that the small manufacturing industries are mainly engaged in the manufacture of food, fabricated metal, furniture and clothing. These sub-sectors constitute more than 85 per cent of the surveyed small-scale manufacturing industries.

Each small-scale manufacturing activity engages, on average, 3 persons per establishment, including the owner. The average annual wage per employee is Birr 1,914 ($239). The average operating surplus per industry is Birr 18,934 ($2,368), which shows that income generated by small manufacturing activities is much greater than that generated by operations in the informal sector. The average capital per informal sector activity during the survey period was found to be Birr 3,528 ($441), while the average capital per small-scale manufacturing industry was Birr 38,354 ($4,794).

As highlighted above, the MSE sector is characterised by a range of highly diversified activities, which can create job opportunities for a substantial segment of the population. This suggests that the sector may be a quick remedy for the unemployment problem. To curb unemployment and facilitate a suitable environment for new job seekers and for self-employment, direct intervention and support by the Ethiopian Government is crucial.


Role and Contribution of the Sector

In successful developing countries, MSEs by virtue of their size, location, capital investment and their capacity to generate greater employment, have demonstrated their powerful propellant effect for rapid economic growth. The MSE sector has also been instrumental in bringing about economic transition by providing goods and services, that are of adequate quality and are reasonably priced, to a large number of people particularly in rural areas, and by effectively using the skills and talents of a large number of people without requiring high-level training, large sums of capital or sophisticated technology.

The micro and small enterprise sector is also described as the natural home of entrepreneurship. It has the potential to provide the ideal environment for enabling entrepreneurs to optimally exercise their talents and to attain their personal and professional goals. In all successful economies, MSEs are seen as an essential springboard for growth, job creation and social progress. The small business sector is also seen as an important force to: generate employment and more equitable income distribution; activate competition; exploit niche markets; enhance productivity and technical change and, through the combination of all of these measures, to stimulate economic development.

While we cannot deny the importance of large industrial and other enterprises for the growth of the Ethiopian economy, there is ample evidence to suggest that the labour absorptive capacity of the small business sector is high, the average capital cost per job created is usually lower than in big business, and its role in technical and other innovative activities is vital for many of the challenges facing Ethiopia.

According to the results of the study mentioned above, the whole labour force engaged in informal sector activities and small-scale manufacturing industries is more than eighttimes (739,898 persons) that of the medium- and large-scale manufacturing industries (90,213 persons1).


Constraints Facing the Sector

In most developing countries, MSEs face a wide range of constraints and they are often unable to address the problems they face on their own - even in effectively functioning market economies. The constraints relate amongst others to: the legal and regulatory environments; access to markets; finance; business information; business premises (at affordable rent); the acquisition of skills and managerial expertise; access to appropriate technology; access to quality business infrastructure and, in some cases, discriminatory regulatory practices.

In Ethiopia specifically, MSEs have been confronted by many of these problems. According to the CSA Report (1994-1995), the major obstacles experienced by smallscale manufacturing industries were the irregular and erratic supply of raw materials and a shortage of suitable working premises. The lack of working premises was also found to present difficulties for the informal sector operators who, faced with insufficient capital, were often impeded from the start. It is suggested that the problems of raw material shortages, lack of working capital and effective marketing which face small manufacturing industries, result in the failure of these businesses to expand. Whereas the same set of problems, when experienced by informal sector operators, have the effect of preventing their expansion almost from the beginning of their operations. For instance, the results of the survey on "Urban Informal Sector Activities" showed that out of the 584,913 informal sector activity operators, about 50 per cent replied that their first major difficulty when starting their operation was the lack of sufficient initial capital. According to their responses, this problem becomes more critical when they intend to expand their businesses.


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