Academic journal article Eastern Africa Social Science Research Review

Policy and Regulatory Challenges Militating against the Development of Youth-Owned Micro- and Small-Enterprises in Ethiopia

Academic journal article Eastern Africa Social Science Research Review

Policy and Regulatory Challenges Militating against the Development of Youth-Owned Micro- and Small-Enterprises in Ethiopia

Article excerpt


The role of Micro and Small Enterprises (MSEs) in providing employment opportunities and boosting entrepreneurship and innovation has attracted attention of policymakers and other stakeholders. MSEs serve as important sources for job opportunities not only for developing countries but also for developed economies. According to Carter and Jones-Evans (2004) in Gebre-Egziabher and Ayenew (2009), the MSE sector constitutes about 70 per cent of the total employment in EU countries; about 67 per cent in Japan; 62 per cent in US; about 22.3 per cent in China; and about 80 per cent in India. In developing countries, too, the informal sector is the main source of employment, particularly in urban areas. The share of informal employment (outside agriculture) to the total non-agricultural employment accounts for about 72% in sub-Saharan African countries (ILO 2002).

One of the essential elements of economic growth in developing economies is the dynamism of the private sector (particularly the MSE sub-sector), the performance of which is influenced by the policy, legal, institutional and regulatory frameworks. The removal of institutional obstacles to MSE might be a low-cost way of supporting the growth of MSEs. The key factors that positively contribute to the growth of MSEs include: (a) policy, regulatory and legal environment that is simple, fast, inexpensive and free from corruption; (b) finance that is accessible at low cost and does not require providing physical collateral; (c) access to affordable business development services; workers who are trained in appropriate skills, including basic health and education that strengthens human capital; (d) culture that supports and rewards entrepreneurship; (e) access to domestic and global markets on a fair and equal basis with large enterprises; and (f) reliable infrastructure (transport, energy, telecommunications, water, etc.) ILO (2002).

Regulatory challenges and underdeveloped institutions frequently entail a disproportionate burden on smaller businesses because larger firms are better able to manoeuvre around obstacles or cope with the high fixed costs they impose (Tybout 2000). According to De Soto (1989), strict regulations and high taxes may keep firms small and informal, thereby contributing to increased transaction costs from problematic property right protection and contract enforcement. In the Ethiopian context, with the objective of promoting investment, large firms are exempted from import duties on capital and benefit from other subsidies while small firms are denied similar support. Furthermore, some government policies that actually aim to benefit MSEs may provide disincentives. For example, India offers attractive incentives to small enterprises, but by some accounts, these measures backfire because growth beyond a specified level entails losing valuable benefits (Mitra and Pingali 1999). Since the manufacture of certain products in India is restricted for small firms, some owners even split up their MSEs into several enterprises in an effort to make them look smaller (Kashyap 1988).

The regulatory and institutional environment is burdensome in developing countries compared to developed countries and usually hinders the growth of small enterprises (Nuwagaba and Nzewi 2013). Liedholm (2002) argued that small firms may also be restricted from making growth-enabling investments due to the existing institutional and regulatory challenges. Moreover, import duties on capital equipment may disproportionately hurt MSEs while larger firms can simply bypass these duties by qualifying for investment incentives.

The availability of favourable legal frameworks, such as: (i) wellentrenched property rights; (ii) efficient business registration procedures; (iii) simple and transparent rules for operations; (iv) supportive taxation; (v) effective and cost-efficient contract enforcement; (vi) streamlined systems of arbitration and dispute resolution; and (vii) effective law enforcement and crime prevention, reduces the transaction cost of MSE operators. …

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