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Beyond treating symptoms

Paul Lange | 29 October 2014

Support to SMEs in fragile and conflict-affected states has become a priority for the international development community. Yet thorough analysis of the broader institutional context in which these SMEs operate is needed to explain inequalities in the wider enabling environment and to make these interventions successful.

In the last few years, the development of small and medium-sized enterprises (SMEs) has become increasingly important in the strategies of the international development community, particularly in relation to fragile and conflict-affected states. A surge of studies explores the linkages between private sector development and sustainable growth and the promotion of peace, which also helps to build the case for the potential of inclusive SME development in these kinds of settings. 1  Despite this increasing interest, evidence to date on the impact of SMEs is sparse, particularly in settings affected by conflict and fragility. The impact evaluations that do exist suggest that the track record of private sector development interventions has very mixed results at best, as recently indicated by the Independent Commission for Aid Impact (ICAI) in the United Kingdom and by the Policy and Operations Evaluation Department (IOB) in the Netherlands. 2

What do we actually know about the real obstacles to inclusive SME development? Most of the conventional and dominant wisdom on SME performance is very technical, economically defined and strongly linked to the business environment. A prime example is the World Bank’s Doing Business report, which is very influential among policy-makers and academics. 3  The constraints identified in such studies (e.g. starting a business, protecting investors, obtaining construction permits) guide current private sector development policy and programme design, emphasizing primarily technical reforms, like simplifying business registration, developing an inspection and taxation system, and facilitating commercial dispute resolution.

With Seth Kaplan as one of its protagonists, there is increasing recognition that these kinds of studies, championed by the Doing Business report, focus too narrowly on generic and economically defined business constraints. They assume a kind of level playing field, both between businesses and among countries. What they overlook, or at least fail to address, are the wide range of complex political and social dimensions that impact the potential of SMEs in settings marked by conflict and fragility. The Clingendael Institute commissioned an SME survey in five countries affected by conflict and fragility (Sierra Leone, South Sudan, the Democratic Republic of Congo, Pakistan and Afghanistan) in which these kinds of specific challenges that are atypically severe become apparent. 4  Such challenges include political instability, lack of security for property or persons, poor governance, deep social divisions and structural inequality, all of which may add to the difficulty of doing business in these environments, no matter how simple it may be for an entrepreneur to register a business or receive a construction permit.

From an inclusive SME development perspective, what is most notably ignored is the role of informal or social institutions that, in the absence of firmly established formal structures, shape the wider enabling environment in which SMEs operate. For instance, religious or ethnic-based trade associations, artisanal traditions, gender roles or the influence of patrimonialism may each play a role in either strengthening or undermining SME potential. Considering the role of networks in these contexts often provides a helpful entry point for understanding the extent to which they provide some groups or individuals privileged access to and control over resources (e.g. access to finance), certain rights and entitlements (e.g. protection of property rights) and activities (e.g. trade). 5 Such informal institutions help to explain how some entrepreneurs are able to grasp economic opportunities and others, often women, youth and marginalized communities, are side-lined. For example, Ritchie discusses the influence of informal institutions on women’s business development in Afghanistan. She describes how in this context prevailing social and cultural norms and attitudes (purdah) negatively affect various business dimensions – business entry, operation, linkages, access to resources and services and formalization – and heavily constrain Afghan women’s engagement in business activities. 6

Caroline Reeg and Markus Loewe state that the role of the business environment is often overemphasized in explaining SME development. Based on fieldwork in Egypt, India and the Philippines they show that various ‘internal factors’ (e.g. access to quality education, work experience, exposure to international trends, ideas and relevant business networks) are at least equally important for SME development and can even compensate for an unconducive business environment. However, here to some extent the same problem applies as with the business environment perspective; it does not explain why other SMEs lack these characteristics and why they fail to grasp business opportunities. A thorough analysis of the broader institutional context in which these SMEs operate could help to explain inequalities in the wider enabling environment, even in settings which are not commonly labelled as fragile or conflict-affected, as with these case studies.

SME support strategies that do not take into account these underlying political and social dimensions are less likely to contribute to inclusive SME development. In such cases, formal reforms will most likely not be sufficient to enable underprivileged individuals or groups to reap the benefits of an improved business environment. For example, in its evaluation of DFID’s private sector development work, more specifically in relation to its Enterprise Growth programme in Bangladesh, ICAI states that "[t]he link between a more conducive investment climate and improved lives for intended beneficiaries – the poor – is indirect and complicated. Ultimate beneficiaries are often not the direct target of interventions. This is particularly true for macro-level programmes, which include reform programmes designed to make changes to the regulatory environment for business in the expectation that this fosters growth that will ultimately benefit the poor." 7

These kinds of strategies may even have adverse effects. For example, based on fieldwork on women enterprise development  in Afghanistan, Ritchie concludes in her PhD thesis that "market development programmes tend to overlook the fundamental importance of these (dynamic) social institutions and the nature of local contexts, and their influence on social relations, trust and cooperation. Over the long term this risks being counterproductive. [As indicated by this thesis] pursuing a strictly economics-based strategy may indeed perpetuate and exacerbate the nature of existing social exclusion, particularly in an informal and unstable context."

In addition, the SME survey commissioned by the Clingendael Institute provides anecdotal evidence suggesting that access to capital in South Sudan is to a large extent a question of having the right connections. It is highly doubtful that in this case formal reforms to improve the capital market will reach those entrepreneurs that are not well-connected. Business environment constraints are, in that sense, more the symptoms than the root causes of SME underperformance or non-inclusive SME development in these settings.

Insights like these are vital for the international development community to constructively inform and calibrate their interventions towards inclusive SME development in settings marked by conflict and fragility. This can help to design interventions that address the specific challenges in these settings, respond to the needs of underprivileged individuals and groups and alleviate adverse network exclusion, for example in the form of targeted credit assistance and business training, through lobby and advocacy programs or by supporting the facilitation of existing and new (business) networks through linkage programs and cluster development initiatives.

However, it is also fair to say that some of these challenges are beyond the control of SME support strategies. They require profound political and social systematic change in the wider enabling environment, from the macro-level down to the micro-level. In short, there is a need for theories of change for inclusive SME development that do justice to the complexities in settings marked by conflict and fragility. 

This is by no means a plea to throw out the baby with the bathwater. Efforts to improve the business environment by building on valuable evidence like that in the Doing Business report are critical in every case. But solely treating the symptoms won’t do the trick.

Footnotes

1 The website of the Donor Committee for Enterprise Development (DCED) is a helpful source of knowledge on the broad debate on the potential of private sector development in developing contexts, including settings affected by conflict and fragility.
2 UK: Independent Commission for Aid Impact (ICAI), DFID’s Private Sector Development Work, May 2014; The Netherlands: Policy and Operations Evaluations Department (IOB) In search of focus and effectiveness. Policy Review of Dutch Support for Private Sector Development 2005-2012, 2014.
3 The World Bank, Doing Business
4 Anette Hoffmann and Paul Lange (2014), Coping or growing? Evidence from small and medium enterprises in fragile settings, Conflict Research Unit (CRU) – Netherlands Institute for International Relations ‘ Clingendael’, The Hague (forthcoming)
5 For the role of networks and its exclusionary effects, see for example: Tyler Biggs and Manju Kedia Shah, African Small and Medium Enterprises, Networks and Manufacturing Performance, World Bank Policy Research Working Paper 3855, February 2006:
6 Holly Ritchie, Examining women in enterprise development in Afghanistan. Barriers and solutions, IS Academy Research Brief, 2013
ICAI, DFID’s Private Sector Development Work, p.14
8 Holly Ritchie, Negotiating Tradition, Power and Fragility in Afghanistan: Institutional Innovation and Change in Value Chain Development, PhD thesis, defended at ISS, The Hague Sept 2013

Photo credit main picture: Oxfam International / via flickr

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Paul Lange

Paul Lange is project-assistant at the Conflict Research Unit (CRU) of the Netherlands Institute...

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