The World Bank’s 2018 “Doing Business” report finds a strong correlation between inclusive growth and the regulatory environment for business activities. The report, spanning 190 countries, uses 11 indicators that matter to entrepreneurship for the rankings, including newly expanded coverage of aspects relevant to the operations of private-sector business activity.
The link between the “Doing Business” ranking and inclusive, job-creating economic growth is straightforward: When the ease of doing business improves and a country rises in the rankings, its economy is performing better mainly because of expanded small and medium enterprise (SME) business activity.
As an example, this year India reached 100 in the rankings (up from 130 the prior year). This rise is a result of improvements made across the board in the business environment. Improvements in the rankings are usually driven by strong job growth powered by the SME sector, and given that India has a million job seekers entering the labor market every year, regulatory reforms should help boost the overall economic growth in the country in the years to come.
In emerging market countries, SMEs account for 75-90 percent of commercial enterprises in the formal sector, 45-50 percent of employment and 30-40 percent of gross domestic product (GDP). Removing the regulatory hurdles to establish and run a business greatly enhances the ability of SMEs to create jobs, lift people out of poverty and contribute to economic growth.
The benefits of regulatory reforms to an economy to boost SMEs-led, private-sector activity are obvious. But in a way, the advantages are limited as a large number of SMEs in emerging markets, either by their own choice or because of excessive regulations, continue to operate in the cash economy and do not fully integrate into the formal sector.
This restricts their ability to tap into the benefits of a digital economy. Access to finance, digital technologies and vital networks of the modern economy are necessary for SME growth and diversification as well as central to the inclusive growth objectives of national governments.
Governments worldwide are aware of this challenge and are keen to address it as it also influences their ability to improve transparency in revenue collection and curb the shadow economy. One of the primary areas of focus under the United Nations’ sustainable development goals has been to promote strategies that will help with more efficient domestic resource mobilization for inclusive growth.
So, how do we ensure more SMEs can contribute to economic growth? The “Doing Business” report provides the necessary framework for removing regulatory obstacles to promote SME-led, private-sector business activity. But is this sufficient to address the informality issues and the inefficiencies associated with it?
In recent years a number of private-private initiatives have started to address the constraints SMEs face in integrating into the formal digital economy. These business models are now also being extended to other neglected segments—rural farmers and female entrepreneurs. As an example, a Mastercard-Unilever partnership in Kenya is digitizing the supply chain and providing access to working loan capital to a number of SMEs that previously dealt in cash. In another example, also from East Africa, Mastercard has launched the 2Kuze platform, which increases economic empowerment for smallholder farmers, many of whom are women.
The momentum is already there; Her Majesty Queen Maxima’s 2017 annual report for the UN’s Secretary-General’s Special Advocate highlights addressing the needs of informal SMEs as a priority. Private-sector companies are already collaborating to empower SMEs through digitization of supply chains and more. What is missing are across-the-board commitments from the broader private sector to address this challenge.
Davos 2018 provides this opportunity. Leaders from a broad range of private-sector companies will convene and chart the course for meaningful interventions to address the needs of SMEs. Argentina’s G20 presidency for 2018 has also prioritized the issue of addressing the informality of the SME sector. Setting the right tone in Davos will be key as this will set the course for policymakers and the private sector in 2018 and beyond.
Baijal is vice president of global policy affairs for Mastercard.