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By UNCTAD
GENEVA -- Unless immediate action is taken to improve the supply
capacity of small and medium enterprises (SMEs), the Palestinian
economy will be effectively transformed into one of subsistence,
warns a new UNCTAD study. Palestinian SMEs: Dynamics and
Contribution to Development (UNCTAD/GDS/APP/2004/1) notes that the
protracted conflict in the occupied Palestinian territory has
generated profound structural distortions and changes in the
functioning of these enterprises that are unlikely to be reversed
once political stability is achieved.
The study examines the
SMEs' contribution to economic growth by shedding light on their
life cycle and the factors influencing their establishment,
survival, growth and decline before and after the ongoing crisis. It
focuses on of SMEs in the industrial, construction and tourism
sectors, which were selected because of their large contribution to
employment and growth.
The study is based on a
comprehensive field survey carried out by the Palestinian Central
Bureau of Statistics (PCBS) in cooperation with UNCTAD, covering the
period from June 2000 to June 2002. The survey involves a structured
sample of 15 per cent of the population frame (3,735 enterprises),
and was supplemented by PCBS statistics on the main performance
indicators of the enterprises surveyed in 1999, 2001 and 2002.
Palestinian SMEs:
Deep-Seated Structural Weaknesses
Even before the widespread economic crisis, the Palestinian SMEs
were performing poorly, the study asserts. They were dominated by
small enterprises, employing fewer than five persons, and mainly
involved in labour-intensive activities, with limited growth
prospects. The study explains that in 1999, the enterprises surveyed
were locked in a "low productivity trap", which meant lack of
improvement in product quality and declining sales and capacity
utilization. This, in turn, has reduced productivity even further
through insufficient retained earnings, thereby obstructing capital
formation. Capital formation was further hampered by the
enterprises' limited access to bank credit and the high degree of
uncertainty generated by the lack of political stability. This has
forced enterprises to concentrate purely on survival techniques, and
managers to be more concerned with short-term problems and needs
than long-term improvement opportunities.
Protracted Conflict:
Contraction in Size of Enterprises
The study shows that the crisis has resulted in a severe contraction
in the size of medium enterprises and a surge in the number of
labour-intensive small enterprises. SMEs are also assuming the brunt
of the crisis, with productivity declining at a steeper rate than
wages. The share of wages in the enterprises' dwindling value added
increased from 35 per cent in 1999 to 44 per cent by the end of
2001, reflecting lower returns on capital.
SMEs involved in tourism
activities have been the hardest hit, with most of them in fear of
being wiped out. Construction enterprises registered a less steep
decline, but remain in critical condition. Thus far, the industrial
SMEs have proven to be the most resilient, acting as a "shock
absorber" for the troubled economy. The study attributes this mainly
to the marked expansion in manufacturing enterprises' activities,
namely, small enterprises engaged in the production of food and
beverages (F&B), mining and quarrying activities and the
manufacturing of furniture, whose paid labour force grew by 84 per
cent, 71 per cent and 29 per cent, respectively, between 1999 and
2001. This growth was accompanied by a surge in total value added
and wages, which increased by 42 per cent and 61 per cent,
respectively, in the case of F&B manufacturing enterprises; 86 per
cent and 22 per cent, in the case of furniture manufacturing
enterprises; and 9 per cent and 62 per cent in the case of mining
and quarrying activities.
However, the
proliferation of the crisis is undermining these enterprises'
ability to maintain such a role, forcing them to take tougher
austerity measures in 2002. This is particularly the case for those
enterprises involved in manufacturing F&B and furniture products.
These enterprises cut back their paid labour force by 44 per cent
and 30 per cent, respectively, between 2001 and 2002, and reduced
their wage levels by 56 per cent and 49 per cent.
Options for Rehabilitating Palestinian SMEs
The study argues that
the starting point for developing Palestinian SMEs is enabling them
to raise their productivity. This requires reorientation of external
support by reconsidering current emergency relief and rehabilitation
efforts to create and enhance synergies between immediate and
long-term development efforts. Thus far, donor-funded programmes
have been focused primarily on addressing the enterprises' financial
crises, particularly through credit facilities. As important as
financial assistance is, however, on its own, it misses the pressing
problems facing these enterprises and risks breeding long-term
dependencies on foreign aid, the UNCTAD warns.
Above all, efforts need
to be placed within a sector-focused strategic policy framework that
seeks to improve the productivity of enterprises by building their
skills and technological capabilities. This involves enhancing the
enterprises capacity to adapt imported technologies to local needs
and assimilating more complex techniques through product
development. The study notes that this requires focusing on those
sectors that involve greater spillover benefits to other sectors,
especially capital- and technology-intensive sectors. There is also
a need to target labour-intensive activities with promising export
potential, as these are critical for addressing the unemployment and
poverty problems.
The study identifies existing bottlenecks to improving the SMEs'
technological capabilities at the micro, meso (institutional) and
macro levels and proposes a number of policy measures and programmes
to that end. For its part, the UNCTAD is implementing an SME
development programme (EMPRETEC), which addresses immediate and
long-term development needs. The results of the study will be used
by the EMPRETEC team for defining the Palestinian entrepreneurial
profile, adapting follow-up services to the local business
environment and sectoral needs and helping the Palestinian Authority
to design support policies for these enterprises.
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