As parliament finalises a law on micro and small enterprises, an ongoing study is revealing invaluable facets of this yet-untapped sector. Pierre Loza reports Micro and small enterprises (MSEs), still an under-exploited growth sector, continue to operate outside the formal economy to avoid government bureaucracy and profit-eroding taxes. This is among the principal findings of an extensive study which came to light recently entitled, "MSEs: Potential & Success Determinants in Egypt, 2003". The study is part of a major research project on MSEs that covers Egypt, Lebanon, Morocco and Turkey. It represents a gold mine of information on MSEs, a dynamic part of the Egyptian economy that still remains relatively undiscovered by the Egyptian research community. The study was discussed at a seminar organised recently by the Economic Research Forum (ERF), entitled "The promise of MSEs: The case of Egypt". Although the study has not been completed, an extensive presentation was given by Alia El-Mahdi, professor of economics at Cairo University and the project's principal investigator. The study examines a wide range of MSE-related issues, such as determinants of success, constraining factors, the role of women and MSE financing. It also will provide recommendations for policy-makers. The study has exposed thus far a number of constraining factors, which MSE owners regularly complain about. These include low profit margins as well as over-hiked tax rates, something the new MSE law did not tackle. "The new law does not make any mention of this pressing need. The new law will not change the present tax situation," El- Mahdi said. Many owners also complained about the labourious process of formalising business. This explains why 29 per cent of the research sample operated formally and 70 per cent operated informally. Complaints of weak market demand, lack of financial services, and competition from medium to large firms, and imports, were also prevalent throughout the study. The study also showed business support services to be virtually nonexistent. From the chosen sample, only five per cent said they had ever received any. The study labelled an MSE as "successful" if the labourer's share of the value added was higher than the industry mean. An MSE whose labourer's share of the value added was below the mean was labelled as "failing". The study showed higher rates of productivity and overall success when the capital to labour ratio increased. "The jump from six employees to nine, and the increase of working capital to LE5,000, clearly correlate with better growth prospects," said El-Mahdi. The chance of success was also greater if an MSE operated within a cluster of other MSEs that perform the same activity. A cluster tends to be a safer start-up environment, due to the ampleness of working "know how". The presence of basic infrastructure, location in a metropolitan area and access to finance were also influential factors that determined MSE success. "If all these determinants are present in a project, I think that its chances of success will increase drastically," she said. A more controversial finding was that the chances of success were higher if the owner was male. "We have to ask the question of why, if a woman owns a small enterprise, its chances of succeeding decrease," El-Mahdi said. The participation of women in MSEs has been receding in recent years. In the study's sample only six per cent of MSEs were owned by women. "A study conducted in 1998 showed that women owned 10 per cent of MSEs, which means that the role of women is now decreasing further," she said. Women were also more concentrated in more vulnerable one- employee activities, which were also in recession due to their marginal nature. An interesting find, was that 26 per cent of the women owning MSEs were either divorced or widowed. "This shows that these women have been forced into a market, where they have little experience and therefore are more likely to fail," said El-Mahdi. The study also shows that the majority of MSE owners financed their business from personal savings and inheritances. Only three per cent of the sample borrowed money from formal lending institutions. The rest turned to informal sources. Five per cent of the whole sample took out loans, 42 per cent of which were from banks, 40 per cent from informal sources, 11 per cent from the Social Fund for Development (SFD) and five per cent from NGOs. These numbers show that "despite great efforts by institutions, the finance of MSEs is a clearly untapped area of the market," she said. El-Mahdi also prescribed a few legislative recommendations, in an effort to create a growth-friendly environment for MSEs. The first recommendation was to differentiate treatment between micro and small enterprises, due to their differing natures, capabilities and challenges. Secondly, El-Mahdi stressed the need for a "lower tax rate that encourages productivity -- such as a lump sum tax -- and does not penalise businesses for growing". El-Mahdi suggested a unified tax rate that decreases with higher employment levels, to give MSEs an incentive to grow. El-Mahdi also called for a simplification of legal procedures and bookkeeping techniques. She also called for greater coordination and interdependence between larger enterprises and MSEs. For that to take place she suggested tax incentives for larger firms who purchase MSE goods and services. Better access to training, financial services and the creation of a monitoring body to judge the success or failure of development programmes, were also recommended. The need for a strategic planning body -- possibly a "Higher Council" for MSEs -- was additionally suggested. The study was financed by the World Bank , the Arab Fund for Economic and Social Development, the SFD, the European Commission and US-AID. Samir Radwan, managing director of ERF attributed great value to the study, in its "creation of a solid data base that covers 5,000 enterprises," he said. He also acknowledged the project's practical usefulness in allowing policy-makers to "build policy on solid facts". The project surveyed a nationally representative sample of 4,958 MSEs, chosen from 26,000 entities which spanned eight governorates and involved 120 statistical offices. During the ERF seminar, a letter was read on behalf of Hani Seif El-Nasr, managing director of the SFD. El-Nasr gave his apologies for not attending due to his being called upon by the parliamentary committee discussing the new MSE law. Unlike El-Mahdi, who felt the new MSE law would fall short of its target, El-Nasr was quite optimistic regarding the law's overall impact. He reminded his listeners that the law would have a positive effect, simplifying licensing procedures, ensuring the provision of nominally priced land for the use of MSEs and facilitating greater access to technical and financial services.
