By Ben White on October 29, 2010
Africa faces the challenge to provide better economic opportunities to its citizens, through sustained growth led by the private sector and to alleviate the poverty that has long plagued the region. A strong private entrepreneurial sector plays a vital role in this respect, in particular the small and medium-sized enterprises (SMEs) that provide many Africans employment, income and hope for a better future. SMEs contribute around two thirds of national income and provide the foundation for a stable middle class in many countries. They help form strong communities and are a powerful force for poverty reduction. Indeed, SMEs play a significant role in building economic stability and sustainability for the future.
Bottom line, SMEs are the backbone of most economies in Africa. Innovative and creative entrepreneurial approaches are needed to help African SMEs adapt to global standards and realize their economic impact. SMEs in Africa face different social, ethical and environmental challenges, opportunities and dilemmas than their counterparts in Europe or the US. Their problems are shaped by economic factors (e.g. poverty, debt, industrialization, trade flows), political factors (e.g. level of democracy, corruption, legislation, institutional capacity), social factors (e.g. cultural context, urbanization, ethnicity, basic services, public health, HIV/AIDS), and ecological factors (e.g. drought, desertification, deforestation, resource scarcity, pollution).
Labor costs may be low but often not enough to offset the high costs of transport, raw materials, utilities, and other inputs. African businesses therefore find it difficult to compete in export markets, particularly in markets outside the region, and to compete against imports of a range of goods from other developing regions. Moreover, many African companies, especially SMEs, lack reliable financial data that allows financial organizations to scrutinize the health and prospects of the company. Most SMEs in Africa also lack assets that can act as collateral and mitigate the risk involved. As a result, capital in Africa remains too expensive for most entrepreneurs looking to build a sustainable enterprise.
Paul Collier, in his book The Bottom Billion nicely illustrates the need for private capital. He says, ‘clearly there are brave people within these societies who are struggling to achieve change. It is important to us that these people win their struggle, but the odds are currently stacked against them.’ He goes on to explain the numerous challenges ahead, but introduces a valuable line of thinking that builds the case for supporting local entrepreneurs seeking to implement solutions that are designed for a local context, the growing needs that come with the emergence of a billion consumers. Watch out because Africa has a rising middle class that will surprise you!
And it’s not just professors in the West who make this claim. Andrew Mwenda, who has one of the best TED talks ever recorded and is the chief editor of the Independent Magazine in Uganda, argues we need to replace ‘Poverty Reduction’ with ‘Wealth Creation.’ The focus needs to be taken off of symptoms (food, medicine and peace keepers) and in the effort to start addressing the real underlining problems i.e. the ability to generate an income, a trading opportunity and the ability to find a well paying job. His argument is clear; wealth is a function of income. The focus should be placed instead on entrepreneurs as agents of wealth creation. Entrepreneurs make up about 4% of the population and 16% of the population then follows as ‘entrepreneurial imitators.’ Any development efforts should thus be focused on these individuals and the areas of the economy where there are opportunities to productively grow. An emphasis should be placed on private investment and on the institutions and tools that can empower these individuals to do business