EMPLOYMENT- CREATION THROUGH SMEs IN ZAMBIA

1.0 INTRODUCTION
The International Labour Organisation (ILO) says enhanced government support to the
development of Micro Small and Medium Entrepreneurs (SMEs) can lead to the much
envisaged job creation in the country. (Times of Zambia)
World over MSMEs have been recognized as important drivers of economic growth,
employment creation and poverty reduction. Small and medium enterprises (SMEs)
account for about 90 percent of businesses and more than 50 percent of employment
worldwide(IFC). This signifies the smaller businesses are one of the developing worlds
most powerful economic forces, comprising the lions share of employment and GDP. If
well nurtured and under the right conditions and policies, the MSMEs can be key parts of
thriving, globally competitive industries, creating the large numbers of jobs needed to
reduce poverty.
Then Government of the Republic of Zambia has realised the potential of MSMEs to
economic growth, employment creation and poverty reduction, and this recognition has
been increasing over time from the 1980s. It is evident that MSMEs have assumed a
significant role in galvanizing the self-help efforts of the marginalized and vulnerable
groups such as the unemployed youth, female- headed households, and the disabled in
both urban and rural areas to meet their basic needs. However, despite this increasing
importance of MSMEs the contribution of SMEs to economic growth and poverty
reduction remains dismal. The reasons behind this dismal contribution are manifold.
The Zambian Government is alive to the fact that unemployment is one of the main
challenges the economy is facing which currently, stands at 12%. In view of this,
Government of Zambia sees MSMEs as solutions to the huge problem of unemployment
the country is facing and there is consensus among politicians, academicians and
economists that MSMEs are critical in the areas of economic development and
employment creation. As remarked by the current Finance Minister, Mr Alexander
Chikwanda;
SMEs need support because they are a fast route to growth of the economy with ample
opportunities for job creation - a major challenge in our economic development
endeavours, (Ministry of Finance website)
This paper is a desk analysis on the current SMEs experiences in Zambia. The paper tries
to explore the importance of MSMEs to the economy as a whole and to employment
creation in particular. It explores the significance of MSMEs in employment creation as a
source of poverty reduction. The paper is divided into six main sections. After this
introduction, the significance of SMEs for employment creation on the African subcontinent is assessed. The national socio-demographic and macroeconomic context is then
presented. Thirdly, the national, regional and international institutional environment within
which Zambias SMEs operate is discussed. Then the configuration of SMEs describes

their characteristics. Fifth, a situational analysis of the strengths, weaknesses,

opportunities and threats to SMEs towards employment creation is made before
concluding the study.
2.0 HISTORY OF MSMEs IN ZAMBIA
The existence of SMEs can be traced back to the period when Zambia was under the
Colonial rule. During this period, Zambia had a dual economy economic activity was in
the hands of a small privileged minority, while the masses of the people was limited either
to semi-subsistence agriculture, or to providing a reserve of skilled manpower(SNDP).
Most of the businesses during this period were operated by foreigners. Zambians only
provided the labour force. Its because of this background that many indigenous Zambians
could not engage in MSMEs. Moreover, the distribution of MSMEs support infrastructure
tended to favour the Colonialists and were mostly used for transportation of goods for the
Colonialists.
After independence, Zambia instituted a programme of national development plan, under
the direction of National Commission for development Planning: The Transitional
Development Plan(1964 1966) was followed by FNDP(1966 1971). These two plans
which provided for major investment in infrastructure and manufacturing were largely
implemented and were generally successful. During this phases there was no focus on
MSMEs as enablers of growth. The SMEs were not reconised to be enablers of growth.
During this period the unemployment levels were very low and poverty levels were
low.The macroeconomic variables were favourable.
To ensure economic growth and equitable wealth distribution, the Zambian government
took an active role through the Mulungushi Declaration of 1968. The declaration
transformed the country from semi liberal to economic nationalization(McCulloch 2000).
Government took full control of running the country and regulating most of the economic
activities. This also implied that most business entities were nationalised or partially owned
and run by the state. From this period, there was very little private enterprise. All goods
and services were provided by the State run monopoly enterprises. Private enterprise was
not allowed to blossom as the economic policy favoured industrial development through
private sector. The financial sector continued to be narrow and only served the needs of
the public sector enterprises. Private enterprises found it hard to thrive in this setup due to
lack of policy framework and difficulty business environment. In a nutshell, the
government at this point did not recognize the importance of Small businesses in an
economy. Instead focus was put on large enterprises which produced import substitutes.
There was heavy dependency on copper mining. The mines provided important revenue to
invest in various businesses as well as infrastructure development.
It was not until the Third National Development Plan (1979 1983) that the government
recognized the important role that small scale enterprises could play in industrial
development. As observed in the Third National Development Plan: Small scale
industries, whether in the manufacturing sector, non-manufacturing sector or informal
sector, generate more jobs per unit of investment than large firms(TNDP). Their indirect
employment impact is also greater because they draw more on domestic sources as against
3

the larger capital intensive firms, which rely heavily on imported inputs. In addition, small
scale industries are instrumental in encouraging local entrepreneurship. In view of the
manifold advantages of small scale industries and the appropriateness of the technology
involved, establishment of these industries, particularly in the rural areas was one of the
priorities objectives of TNDP. With this realization, Government started putting in place
systems to coordinate the activities of MSMEs. There was a realization/recognition that
marketing and finance were two major problems of small scale industries. The government
resolved to provide necessary fiscal incentive and credit facilities, and adopted a
preferential purchase policy towards the produce of small scale industries. For this
purpose the government through the Small Industries Development(SID) Act of 1981
established the Small Industries Development Corporation in 1981, as the apex
government institution that was given the task of fostering the development of small
enterprises. Furthermore, other non-governmental institutions such as the Village Industry
Services and the Small Enterprise Promotion Limited came on the fore to promote small
scale enterprises. Despite the introduction of these and many other institutions, there was
no drastic change in the development of small enterprises.
During this period of the Fourth National Development Plan(1988 1993) the Zambian
economy went through major transformations. In support of the SID Act, provision were
made in the Plan to provide infrastructure for operations of MSMEs, promote access to
credit by MSMEs with growth potential and to improve production capacities of MSMEs
with the view to increase incomes and employment. During this period there was increased
recognition of the importance of the MSMEs in Zambia. However, during the
implementation of the Plan, emphasis was placed on collective enterprise rather than
individual ownership. Private enterprises were not encouraged. The resources that the
Government allocated to the small enterprise sector were low and the role of public
institutions, which were the primary source of small enterprises support (i.e. the Small
Industries Development Organization (SIDO), the Development Bank of Zambia and the
Village Industries Services (VIS)), was not defined, except in the broadest terms.
Moreover, these organizations faced serious financial and organizational constraints.
Following the election of a new Government in 1991, there was a shift in economic policy.
The new Government adopted the free market/mixed economy with the support of the
IMF and the World Bank. The new Government embarked on an ambitious World Bankassisted structural adjustment programme with far-reaching market reforms. The reforms
transformed the economy from a centrally planned to a market economy. The reforms
involved liberalization of the economy. Under these reforms most State-Owned enterprises
were privatized and at the same time the economy was opened up to foreign products.
Most businesses had to close down as a result of the intense competition and lack of
protectionist policies. As a result of this unemployment and poverty increased. Many
people were thrown into the streets. Poverty levels increased to 76%. Subsidies on
education and health services were removed. The majority of the people could not afford
these services anymore. The formation of MSMEs were inevitable since most Zambians
were now out of formal employment and they had to find other means of surviving, also
because of the availability of the market from poor people who preferred to buy goods and
services from SMEs that were not so expensive with reasonable quality.

To encourage private enterprise, government undertook to encourage local governments

to review their infrastructure services and licensing regulations so as to support small
enterprises; legislation to support growth of the sector, decentralize business registration
and remove any impediments to the operation of the sector. However, as in the past, these
policies have remained public pronouncements, with little effort to implement them. This
was mainly due to the lack of coordination in implementation. As well as incoherence in
government policies. Most of the policies tended to favour the Large Scale Enterprises at
the expense of the intended MSMEs. Fifteen years down the line, the challenges facing the
MSMEs were not resolved despite the various policies and institutions put in place to help
curb the situation.
In 1996, in recognition of the challenges still facing the MSME sector and with the view
to enhance further development of the MSME sector, Government revised the SID Act
and replaced it with the Small Enterprises Development (SED) Act. Among the salient
features of the SED Act were to provide incentives to MSMEs.
Most of these incentives were however never implemented partly because the systems for
their implementation were never put in place. Despite these important changes, there was
policy and strategy in place to offer the direction for the growth of MSMEs.
ZDA ACT: Establishment of ZDA
PRSP PERIOD(TNDP) 2000 - 2004
Transitional National Development Plan, (2002 2005) placed the SMEs as one of the
instruments to economic recovery, employment creation and poverty reduction. Despite
this, the MSMEs sector has remained marginalized and poverty levels are still high.
During the Fifth National Development Plan(FNDP) the MSMEs were seen as critical to
the development of the broader national development goal of reducing unemployment,
increasing participation of citizens in economic development, equitable wealth
districbution and value addition to local raw materials.
The Fifth National Development Plan (FNDP) recognized the importance of stimulating
broad based wealth and job creation. In order to stimulate broad based wealth and job
creation the government endeavored to put in place sound macroeconomic policies and
political stability which has encouraged investment and growth in the recent past.
However, these conditions have mostly acted in favour of large businesses at the expense
of small businesses.
During the FNDP the MSME DEVELOPMENT POLICY was initiated and launched. The
Policy is the first one of the kind and is aimed at
Under the Sixth National Development Plan, measures have been put in place to promote
the growth of MSMEs. The SNDP aims at increase participation of indigenous Zambians
in the manufacturing sector, promote entrepreneurship training and development at all
levels of the education system, Encourage innovation and technological skills development
and on-farm agro-processing training, Facilitate access to market opportunities and
business development services, the establishment of business incubation centres and
linking them to industrial parks, the establishment of business industrial clusters, facilitate
business linkages between MSMEs and multinational corporations, Create the Trade and

Investment Fund targeted at MSMEs, and facilitate the establishment of Small

Aggregation Initiative joint ventures among MSMEs
3.0 SIGNIFICANCE OF SMEs TO THE ECONOMY: GLOBAL VIEW
The importance of MSMEs to economic growth, employment creation and poverty
reduction cannot be overemphasized. World over MSMEs are seen as catalysts or enablers
of economic growth. Due to their labour intensive nature, they also play a very important
role in employment creation. With more and more people being employed, and earning a
living wage, the MSMEs would contribute to poverty reduction. Therefore, the
importance of the MSMEs to the economy can be looked at from the perspective their
contribution to economic growth(GDP), employment creation, percentage of exports and
poverty reduction.
The importance of SMEs in the Developed world can be summarized by the following
exerpt from the European Commission, Report on the Expert Group titled(2009), Think
Small First, Considering SME interests in policy-making including the application of an
SME Test
Small and medium size enterprises (SMEs) form the backbone of the European Unions
(EU) economy. They account for 99 percent of European enterprises and generate about
58 percent of the EU's turnover, employing two thirds of the total private employment. In
the last five years 80 percent of the new jobs were created by SMEs. They are a driver of
innovation, competitiveness and growth and thus a key element.
There is a refocus from large enterprises to small enterprises in the developed world. This
is due to their many advantages of flexibility and employment creation.
In developing countries, MSMEs play a critical role in the socioeconomic situation of the
country. However, there is very limited evidence in the literature on the contribution of
SMEs to economic growth(MENON). Menon identified three mechanisms through which
MSMEs can contribute to economic growth of a developing country. Most research
shows that there is a strong positive correlation between GDP per capita and employment.
The role of MSMEs in economic development increases as the economy grows
persistently. Below is a graphical illustration of the importance of MSMEs. The graph
shows that the MSMEs role increase as the economy develops.
According to Francis Matambaya in his research titled Profile of Small and Medium Scale
enterprises in the SADC economies, which covered 14 SADC countries including Zambia
looked at the dynamic roles of the MSMEs, and argued that the SMEs play a significant
role in the ovulation of the SADC economies. SMEs are accountable for, (1)creating a
significant proportion of the new jobs, (2) mobilizing local human and non-human
resources. (3) providing flexible skilled and production base, (4) opening up new markets,
and (5) playing a crucial role for the economic development of the rural areas. The
research shows that the MSMEs also provide both forward and backward linkages with
the large businesses.

In low-income countries, especially in the least developed economies, the contribution of

SMEs to employment and GDP is less than that of the informal sector, where the great
majority of the poorest of the poor make a subsistence level of living. Therefore, an
important policy priority in developing countries is to reform the policies that divide the
informal and formal sectors, so as to enable the poor to participate in markets and to
engage in higher value added business activities(OECD).
An important contribution of small businesses to national economy is that of employment
creation. MSMEs are more labour intensive and are better placed to create jobs for the
many unemployed Zambians. This is the main reason why the government should focus
more on enhancing and helping MSMEs rather than focusing on the capital intensive large
enterprises. Zambia is characterized by abundant labour supply and is plagued by
unemployment and underemployment. Under these circumstances the small-scale sector is
a boon.
SMEs contribute not only to income generation but also income distribution. Large firms
normally tend to produce an elite number of high wage income earners whereas SMEs
produce a significantly large number of relatively low-income earners. The development of
SMEs would therefore help spread income to more people.
Inter-linkage between Enterprises
SMEs help to absorb productive resources at all levels of the economy and add to the
formation of flexible economic systems in which small and large firms are interlinked. Such
linkages are very crucial for the attraction of foreign investment. Investing transnational
corporations look for sound domestic suppliers for their supply chains (Fida, 2008). SSI
units are supplementary and complementary to large and medium scale units as ancillary
units. Many small units produce sub-parts, assemblies, components and accessories for the
large scale sector especially in the electronic and automotive sectors.
Balanced Regional Development: Dispersion of small business in all parts of the country
helps in removing regional imbalances by promoting decentralized development of
industries. It helps in industrialization of rural and backward areas. It also helps to reduce
problems of congestion, pollution, housing, sanitation etc.
UNEMPLOYMENT IN ZAMBIA: CURRENT STATUS
Zambia has been facing the challenge of high unemployment since the early 1990s when
the economy was liberalized. The problem of youth unemployment poses serious political,
economic, psychological and social challenges to our economy. Therefore, finding new and
innovative ways to address the levels of unemployment is one of the Zambian
governments most urgent priorities.
The preliminary Labour Force Survey(LFS) report of 2012 shows Zambias population in
2012 was just over 14 million. Of these, more than half were above the legal working age
of 15 while 2.7% were aged 65 or older. The working age population (Population aged 15
years and older) was estimated at 7, 837,038. Zambias labour force was estimated at
5,845,250 of which 3,048,342 were male and 2,796,908 were female in 2012.
7

Zambias unemployment rate stands at 7.9 percent of the labour force in 2012. In urban
areas, unemployment rate was 15.3 percent compared to 3.1 percent in rural areas. In
addition, urban areas had a relatively higher unemployment rate for females at 18.7
percent compared to that of males recorded at 12.7 percent. Youthful age groups were the
most vulnerable to unemployment, with the highest rate recorded among the 20-24 yearolds at 16.3 percent. Results also show that the unemployment rate was higher among
females, at 8.6 percent than among males, at 7.1 percent. In urban areas, unemployment
was generally high among females, with those aged 15-19 years old recording 35.8
percent unemployment rate.
The survey shows that the country recorded a labour force participation rate of 74.6
percent. In the male population, participation rate was 80.0 percent while in the female
population, participation rate was 69.5 percent. The labour force participation rate was
lower in urban areas (66.2 percent) than in rural areas (81.1 percent). The survey further
shows that out of the total employed population, 88.7 percent had informal jobs and 11.3
percent had formal jobs.
The problem of unemployment poses serious concerns to the general public in Zambia.
Everyone in Zambia knows that unemployment is a bad thing for society as well as for
the unemployed. The importance of the issue can be evidenced by the 2013 Afrobarometer
Survey which shows that the issue of unemployment topped the list of the most
important problems facing Zambia that the government should address, with 19 percent
respondents choosing it (Afrobarometer 2013).
OVERVIEW OF MSMEs IN ZAMBIA
FEATURES AND CHARACTERISTICS
Manju(2012) estimates that estimates that there are, on average, about 1.02 million
informal MSMEs in Zambia and 29,350 formal MSMEs, bringing the estimated total to
1.05 million MSMEs in Zambia. The ZBS notes that most MSMEs in Zambia operate in
the informal sector and are mostly found in rural areas (about 81 percent). The figure
below shows the distribution of MSMEs by sector.

Roughly 70 percent of MSMEs are agricultural (see Figure above). The next most
important sector is wholesale and retail trade about 21 percent of MSMEs operate in
this sector. In contrast, there are relatively few manufacturing MSMEs (only about three
percent of MSMEs), hotels or catering enterprises (two percent) or enterprises in other
sectors (four percent).
Survival Rate: Currently, there is no information regarding the failure or success of
MSMEs. There seems to be a high failure rate among start-up businesses. 80-85% of
enterprises disappear within five years of start up (ROB 1998:4 ). A substantial
proportion of micro-enterprises however neither disappear nor grow. They survive
because the proprietors have no alternative or other potential source of income.
Linkage Effects: Most MSMEs in Zambia supply their goods and services directly to
individual and household consumers, rather than to manufacturers. In this way,
they have a strong output non-production link but weak production linkage.
Enabling Environment: The political and economic climate in Zambia is ideal for MSME
development because the country has a democratic and stable economy, prudent financial
discipline and management and low inflation. There exists a regulatory framework which
guarantees legal and property rights which facilitate the enforcement of contracts. Prices
and markets provide clear signals to producers and consumers.
There have, however, been inherent biases against SMEs development due to the absence
of clear government policies which govern this sector. Zambia has until recently, lacked
clear Government policies aimed at creating an enabling environment in terms of clearly
defined MSME development objectives and the required institutional mechanisms to guide
and implement such policies. From 2009, Zambia has come up with the MSME
Development Policy which provides a framework for MSMEs.
DEFINITION
9

Micro, Small and medium-sized enterprises (MSMEs) are a very heterogeneous group.
They are found in a wide array of business activities, different markets and may be in the
formal or the informal economy (OECD 2004).
In Zambia, Micro, Small and Medium enterprises(MSMEs) are defined according to a
number of variables which include the following; total fixed investment, sales turnover,
number of employees and legal status. According to The Micro, Small and Medium
Enterprises Development Policy, MSMEs are defined according to the table below:
Informal
Registered with No
the Registrar of
Companies
K50,000
Total

Micro
YES

Small
YES

K80,000

K80,000
K200,000

K200,000K500,000

K80,000

K150,000

K151,000K300,000

K150,000

K150,000
K300,000K250,000
K800,000
11-49workers
50

100
workers

investments
excluding land
and Buildings
K50,000
InvestmentServices
and
Trading
Unspecified
Turnover
Employment

1 9 workers

1 10 workers

Medium
YES

Source: The Micro, Small and Medium Enterprise Development Policy, MCTI January
2009
Note: To qualify as an MSME, the legal status and total investment criteria must be met
together with at least one other criterion.
MSMEs AND EMPLOYMENT IN ZAMBIA
World over the MSMEs are often looked at as the source of jobs and employment. In
Zambia, the MSME sector employs the majority of the population. As argued by the
United Nations, unemployment and underemployment are at the core of
poverty given that labour is often the only asset that the poor can use to
improve their well-being. The creation of productive employment
opportunities thus becomes essential for achieving poverty reduction and
sustainable economic and social development. It is crucial to provide decent
jobs that both secure income and empowerment for the poor, especially
women and younger people.

Manju(2012) tudy further noted that the MSME universe comprised of 4.68 million
workers, which is roughly 90% of the total labour force based on the LFS 2008. Most
MSMEs are small home-based, self-employed individuals or family enterprises. About 35
10

percent have no employees of any type (paid or unpaid, full- or part-time) other than the
owner (see Table below), and fewer than 10 percent have more than 10 employees. If
unpaid workers are excluded, the number of single person enterprises increases from 35
percent of MSMEs to 67 percent of MSMEs, further emphasizing the small size of most
MSMEs.
Distribution of enterprises based upon different definitions of employment
All paid and
unpaid
employees(%)
35
10 58

No employees
Micro (1 to
employees)
Small and medium 7
(11 to 50
employees)

Only employees
paid with cash or
in-kind(%)
67
30

Only employees
paid in cash(%)

79
19

Source: Zambia Business Survey

Note: Each column shows firm-size based upon that classification of employees. For
example, the first column counts all unpaid and paid employees. So it says that 35
percent of firms have no paid or unpaid employees. Similarly, column 2 shows that twothirds of firms have no employees paid in cash or in-kind.

CONSTRAINTS FACING MSMEs IN ZAMBIA

Like most developing countries, Zambias MSMEs face a manifold challenges with regards
to the growth and productivity of MSMEs. Various studies undertaken in Zambia before
and after the 1990 liberlisation have highlighted a number of constraining factors to the
advancement of SMEs. Before 1990 most of the economic activities were undertaken by
GRZ, and very little private sector involvement. Actually the business environment was
not conducive to the growth of the MSMEs despite the various institutional and support
mechanisms put in place at the time. The heavy handedness and involvement of GRZ in the
affairs of the economy hampered MSMEs growth and contribution to the economy. After
1990, the economy was liberalized, and government tried to improve the business
environment for the private sector. GRZ reduced its involvement into the affairs of the
economy. However, despite the efforts GRZ has made so far in terms of creating an
enabling environment, MSMEs still face the major challenges as before the 1990s.
According to the Zambia Business Survey of 2010(ZBS 2010), a number of factors affect
MSMEs performance in specific and in general. In general, enterprises of all types and in
all sectors are affected by differences in access to basic infrastructure and business support
services such as financial services, and distribution networks for inputs such as fertilizers.
Enterprises that do not have access to basic infrastructure, whether hard (such as energy,
transport or water) or soft (such as education or financial services), find it difficult to
perform to their potential. Many of these constraints are particularly binding in rural areas.
11

Further, the ZBS argues that MSMEs productivity are also affected by characteristics
specific to a business and/or its manager. These include factors such as the experience
and/or education level of the owner, the amount of capital-machinery and equipment-used,
financial record-keeping, and use of cellphones and other ICT services.
Based on the ZBS, the key factors related to productivity at the level of the enterprise or
entrepreneur include (not in order of priority): (i) access to water/energy; (ii) access to
finance; (iii) education of owner/manager; and (iv) use of technology cellphones and
internet; (v) access to electricity and water, this is especially true for MSMEs in the
agriculture sector.
It has been observed that MSMEs that use financial services, managed by educated
owners and have access to hard and soft infrastructure are generally more productive than
those that dont.
The main factors affecting MSMEs are as follows:
1. Access to finance; despite the growth registered in the financial sector, there is
very low usage of formal financial products (transaction products, savings, credit
and insurance) by MSMEs. About 80 percent of the MSMEs have no access to any
formal or informal financial service implying that they are financially excluded, and
most of these are found in rural areas. Lack of physical access to banking
infrastructure and the high cost of banking products, relative to the incomes
generated by most MSMEs, emerge as the most important constraints on banking
access(ZBS 2010).
2. Access to credit: The MSMEs find it extremely difficult to obtain credit because of
lack of collateral security. This acts as a big handicap, especially in the initial
stages. It can also be argued that mostly the commercial banks products do not
target most Zambian MSMEs, this absence of targeted products can be attributed
to due to high default rates by SMEs and high failure rate.
3. Transportation; this is one of the most important factors affecting the performance
of the MSMEs. Access, cost and efficiency of the transport system has great
influence on most MSMEs in Zambia. This is especially so in the rural areas.
4. Access to land mostly affects the MSMEs in the agricultural sector. The factors
affecting the access to land include the process of procurement and the cost of the
land.
5. Education; Educated entrepreneurs add more value to their services/products than
those with less education. Better educated persons can absorb new information
faster and can apply unfamiliar inputs and new processes more effectively.
6. Demand/ market for products: Lack of market for products ranks highly among
small businesses challenges. Most entrepreneurs find it difficult to find customers
for their products, especially customers who will pay a fair price. (CAFOD,
JCTR). MSMEs also face high competition from large firms. They cannot supply
12

standardized goods of high quality and as a result cannot compete with products of
large companies. They usually do not have a brand name or loyalty, as there are
hardly any funds for advertising or sales promotion.
7. Taxes: Tax regulations can often be challenging for businesses of all sizes. This
include the process involved in paying tax as well as that tax rate. Most MSMEs
view the tax rate to be unfairly applied as small businesses are taxed on turnover
while big businesses pay their tax on profits.
8. Regulations and governance; The red-tapism involved in registering a business is
yet another inhibiting factor in the growth and productivity of MSMEs.
9. Lack of adequate policy mechanism: Until recently, Zambia had no stand alone
policy on MSMEs. The recently formulated MSME Policy 2009 also lacks in
various aspects as it does not cover the MSMEs operating in the informal sector,
despite the recognition that this is forms a significant proportion of MSMEs. There
is also lack of policy coordination between various policy makers and
implementers.
10. Attitudes and culture: The attitudes and cultures in Zambia also have a great
bearing on the development of MSMEs in Zambia. Zambians have a very poor
work culture, they have no financial discipline and lack focus when it comes to
running their own businesses, and most of all people are always looking to
government or donors to offer help. There is very little self confidence and
belief(Task force on SMEs 2006)
11. Lack of basic management and technical skills: Most managers and owners of
MSMEs lack the necessary skills of managing and running a business. These
include strategic management capacities, functional management skills i.e. skills
required in production, finance, purchasing and marketing to improve production
of capital, quality control etc;Technical management skills i.e. the actual technical
know how to achieve the required quality and quantity. This has resulted in high
incidence of sickness and deaths among the MSMEs
12. Information: Chibbabbuka in his Masters Thesis, titled communication strategies
used to promote small and medium enterprises development in Zambia, cites
information as a major constraint on MSMEs growth. He argues that access to
timely, current, relevant and adequate information is critical to better decision
making. He observes that most MSMEs do not have access to the relevant
information to enhance their business performance. Inadequate information
resources on trade, investment, technology, training and application of quality
control etc;
13. Obsolete Technology: Most small businesses use old technologies because they
cannot afford better. As a result the quality of their goods is inferior and the cost of
production is higher than in case of other big ventures. This has acted as a serious
handicap especially after opening up of the economy when they have had to
compete with imported goods.

13

14. Lack of entrepreneurship abilities. As compared with other countries, the level of
enterepreneurial activity in Zambia is very low.
15. Macroeconomic policies: Predictability of the business environment is a crucial
factor determining business decisions. Not only SMEs, but also large firms,
including foreign invested ones, depend on the ability of government to implement
sound and consistent macroeconomic policies. Unstable and increasing inflation
can have negative consequences on business activity. Volatile exchange rate is also
another factor that can have negative effects. (Check Sesh)
RECOMMENDATIONS
SMEs contribute to employment and income generation and export revenues. However, in
order to tap into the potential of SMEs for development and poverty reduction, transition
and developing country governments, development partners and SMEs themselves need to
address a number of challenges they face.
OECD 2004
Notwithstanding such specificity, past and present experiences and practices of developed
countries and scholarly assessments of results accomplished are of value and offer a menu
of lessons and best practices for transition and developing countries. The responsibility
rests with the transition and developing countries to make their choices based on sound
assessments of their own context. OECD and other development partners can assist
developing countries by building capacities in conducting such assessments, and when they
make the choices, by providing capacity building assistance towards implementation.
To date, the following SME development lessons seem to hold true, independent of region
and level of development among countries:
Peace and stability is a key requirement for the development of SMEs and for
attracting foreign investment. Studies show that war and crime are main deterrents
of private investment, in particular for foreign investors.
SME development requires a crosscutting strategy, (i.e. its success depends on the
ability of governments to implement sound macroeconomic policies, the
capability of stakeholders to develop conducive microeconomic business
environments, and the ability of SMEs to implement competitive operating
practices and business strategies). Good policies come in clusters. Thus, SME
development strategy must be integrated into the broader national development
strategy and/or poverty reduction and growth9 strategy of transition and
developing countries.
Dialogue and partnerships between the stakeholders is essential (public sector,
private sector and civil society) Dialogue and partnership foster ownership of
SME strategies, engenders them more implementable (by better addressing SME
needs), politically more credible, and more sustainable.
Investments in physical infrastructure and business services and the
implementation capacity of policy makers, local level administrators and support
structures determine success. Access and integration of SMEs into local, national,

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regional and global markets require substantial investments in sustainable physical

infrastructure development and business service delivery to SMEs in all areas,
including those that are rural and/or remote. Continued dialogue and partnerships
between stakeholders into implementation and review of supportive measures,
particularly, those related to capacity building in institutions at all levels, yields
improved outcomes.
Enhancing womens ability to participate in SME development should be taken into
account at every stage and level, as women account for an important share of
private sector activity and contribute most to poverty reduction. Gender
dimensions need to be mainstreamed throughout SME development strategies
and programs, with additional specific, targeted initiatives directed at critical
roadblocks.

A crosscutting SME strategy embedded in the national development framework

SMEs cut across sectors. Improving SME competitiveness requires policies that act on the
economic, political and social institutions within the country, on the resulting markets and
on the organizations that regulate, stabilize and legitimize these markets. As such, an SME
development strategy has to bring to the forefront the challenges that SMEs face due to
size effects and address the deficiencies
2090
A limited number of so-called high-growth SMEs make important contributions to job
creation and productivity growth in the OECD area. At the earlier stages, management
capabilities are crucial to survival. As the firm matures, human resource and innovation
strategies increase in importance. By the time the firm has become established, innovation
is crucial for growth. The fastest growing entrants are those that translate strategy into
action in the form of R&D, innovation and training, put great emphasis on hiring skilled
employees and motivating employees, and balance the enhancement of their capabilities in
different areas -- the last being particularly important in high-knowledge sectors. The main
barriers to the development of high-growth SMEs are market failures in capital markets,
government regulations, indirect labour costs, access to foreign markets, and difficulties
in recruiting qualified staff and skilled workers. Women-owned SMEs are growing at a
faster rate than the economy as a whole in several OECD countries, allowing capitalisation
of the skills of educated and trained women who might otherwise be blocked in corporate
advancement because of the glass ceiling. The increased flexibility inherent in owning
ones business allows women to contribute to the income of their families while balancing
work and family responsibilities. However, the economic potential of women
entrepreneurs remains partly untapped; measures are required to improve information and
statistics in this field, as well as to strengthen the preconditions for financing, networks
and technology.
Entrepreneurship tends to vary markedly across regions. An increasing number of regions
are known for generating clusters of dynamic firms which benefit from information spillover and other intangible factors. Regional development policies have been introduced to
assist regions suffering from declining industries. The primary policy tools for attracting

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firms to disadvantaged regions are investment in infrastructure, social assistance, training

and other forms of public assistance. The regional dimension of entrepreneurship is not
limited to clusters of enterprises but also includes micro enterprises. Programmes to assist
the creation and development of micro enterprises in inner cities and remote rural areas
have become widespread policy tools. Governments wishing to adopt policies used
successfully in other regions or countries should take the regional context into account.
Best practice policies
The report ends with lessons from policies undertaken in five areas:
-- Financing
The primary role of the public sector in supporting venture capital is to reduce the risk
and cost of private equity finance, complementing and encouraging the development of the
private capital industry. There is major variation across OECD countries in the use of
funding methods for SMEs, but the provision of equity financing to start-up companies is
more advanced in the United States and Canada than elsewhere. Taxation should not
impose a disproportionately heavy burden on SMEs.
-- The business environment
This can be improved by systematic and careful scrutiny of new regulations and by
implementation of a business impact system to ensure the audit and monitoring of new
legislation. Canada, the United Kingdom and the Netherlands have successfully introduced
procedures to that end. The use of information technologies provides opportunities for
reducing bureaucratic burdens on all companies, including SMEs.
-- Technology
Technology diffusion programmes should: ensure quality control; promote customer
orientation; upgrade the innovative capacity of firms -- including the promotion of general
awareness of the value of innovation among management -- and stimulate demand for
technical and organisational change; build on existing inter-relationships in national
innovation systems and provide greater coherence between programme design (e.g.
targets, objectives, modes of support) and service delivery; build on evaluation and
assessment. Technology diffusion programmes should in particular have mechanisms for
assessment which can guide and improve their operation and management on a continuing
basis. The United States has programmes effectively stimulating quality in diffusion
processes, while Germany has sophisticated institutional set-up catalysing interactions
between existing actors in the national innovation system.
-- Management capabilities
Several G7 governments have sought to enhance the quality of owner/managers of
SMEs either by encouraging training and/or by providing access to advisory and
consultancy services. The most extensive assistance is provided by Japan which has both a
highly developed system of advisory services and SME colleges. The United Kingdom and
Italy have also implemented interesting schemes. Subsidy-schemes aimed at enhancing the
skill base of SMEs should take the following into consideration: specification of
objectives; situation after the removal of the subsidy; collecting information from SMEs
themselves. Measures to encourage information networks must seek to customise
databases and avoid information overload. Four approaches
have been developed to address these issues: know your customer; access; explicitly avoid
interference with market mechanisms; and subsidisation of information.
-- Access to markets

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Measures to ease access to markets have focused on international markets, on the one
hand, and public procurement, on the other. Japan has the most developed policy and
institutional set-up for the former, based upon the use of non-discriminatory measures
which seek to support efforts made by SMEs themselves. Policy in this area seeks to
tackle the disadvantages experienced by SMEs due to their lack of access to human
resources, to external markets and to technology. Regarding public procurement, the
United States, and other OECD countries such as Australia, have made comprehensive
efforts to increase the share which small firms obtain of government contracts.
FNDP
SMEs and Empowerment
78. SMEs offer an attractive option to provide employment and increase production and
services, as well as being an avenue of advancement for Zambians. They are well spread
to all parts of Zambia. They are distributing goods and services in parts of the country
where large enterprises fail to do so because formal business is not profitable in those
areas. SME's operate largely in the informal sector. SME's often have lower operating
costs. They employ the largest component of the working population (believed to be
above 66% of the workforce) currently. However the policy that drives the SME sector is
outdated and unsupportive.
79. SMEs depend on Micro-Finance institutions which have exorbitant interest rates. The
skills for entrepreneurship are lacking since Zambia's education system does not emphasize
technical education. Although some technical education exists under the Zambia Institute
of Technology (ZIT), this training is of inadequate quality and is also too little.
80. As part of developing the National Vision 2030 and the Fifth National Development
Plan, 72 district plans were also developed. The reason behind the development of the
district plans was that they were going to form the basis for both decentralisation and rural
industrialisation and therefore the empowerment of the rural economy. There are more
than 300 economic/commercial project ideas included in the district plans. The plans need
to be translated into bankable projects for the communities in those districts to implement.
However, the skills for conducting feasibility studies are lacking. There is need for the
planning division at the Ministry of Finance and National Planning (MoFNP) collaborate
with UNIDO and other agencies to help facilitate the communities to transform their ideas
in the district plans into bankable projects. This should not be done through piloting, but
should be scaled up quickly through a "do it try it and fix it" approach which can bring
results quickly. Financial institutions and the Government, through cooperating partners
have substantial amounts of money for funding. The constraint is bankable projects.
81. Currently, the Zambia Chamber of Small and Medium Sized Businesses (ZCSMBA)
has created initiatives for promotion of SME's through provision of Business Development
Services (BDS). In addition, there is a pressing need to support existing and new SME's to
start small scale manufacturing. There are simple basic processes and plants to
manufacturing soap, candles, charcoal brickets, exercise books, paint, wire fencing,
roofing materials, wire nails, furniture factories, such as the Black Economic
Empowerment (BEE) of South Africa is using to support investment programmes for
disadvantaged people, such as out of school youths, women and the differently challenged.

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Some have minimal skills which they have picked up informally, and have established
themselves in open markets, along the highways and under the trees. They are turning out
products and services, in a form of building materials, furniture and motor vehicle repair.
These groups can be re-organised into formal production facilities, where procurement of
raw materials, quality control and marketing can be organised. This requires MoFNP/
MCTI support to facilitate the process through existing organisations like TEVETA,
ZACSMBA and other Civil Society and women Groups.
82. MCTI started an incubator programme, which was supposed to be extended to all the
provincial capitals in Zambia. However, it appears that the businesses supported by the
programme have not graduated. The reasons for this need to be examined. An alterative
approach would be industrial estates.
83. Government policy on SME's should be carried out through ZDA, which in turn can
fund promotional Activities though Organisations such as ZCSMBA.
84. The Zambia education system can support the SME sector better with more emphasis
on technical, engineering and natural science, as well as technical, vocational and
entrepreneurial training. More emphasis should also be placed on ICT.
Short Term Measures.
Financing for the SME sector is currently addressed mainly by the Citizens Economic
Empowerment Commission and some commercial banks. The CEEC in itself is not
equipped to manage an empowerment fund and therefore must either outsource this work
or requested to partner with the Development Bank of Zambia to strengthen its capacity
to perform. Some ideas around the amalgamation of CEEC with DBZ need to be
considered if empowerment is to be seriously addressed. DBZ can now source its own
finance for onward lending while CEEC has to wait for allocations from the national
budget. The DBZ partnership will ensure that citizens empowerment is an ongoing
program with or without Government support.
In addition, innovative financing mechanisms for this sector need to be developed and
rolled out. The existing Credit Guarantee Scheme should be evaluated and, if possible,
expanded. Funds to inject equity capital into SMEs, to reduce their dependence on debt
instruments, have been tried in other countries and should be considered in Zambia.
The role of the ZNTB in public procurement should focus on the SMEs and their
collaboration in order to fulfill large orders put out by Government in line with the goals
of the CEEC and the new ZNTB Act.
The Ministry of Finance and National Planning should facilitate transfer of skills in the use
of COMFAR ICT project planning software to the district, provincial and sector ministry
Planning staff and the private sector in order to enable SME's to take advantage of
available financial facilities.
Government should facilitate carrying out feasibility studies for the commercial and
Economic project ideas contained in both the sector and district plans of the 5 th National
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Development Plan in order to facilitate broad based economic development. The

communities should borrow money and invest in local enterprises. This initiative will
greatly benefit the SME's in the rural areas and empower them as citizens.
Government should speed up approval of the MSME Policy document in order to clarify
the incentive structure of SME's especially in the rural areas.
Government Should re-focus The Citizens' Empowerment fund as an MSME facility in all
sectors of the economy. Implementation should be carried out by all sectors ministries.
However CEE should draw up sector charters, with the sector ministries to clarify what
will constitute citizens empowerment in the individual sectors. Bunching up all funds at
CEE will slow down progress.
Government should introduce a policy of "Do it Try it and Fix it" in order to speed up
implementation of the initiatives in the MSME sector policy.
Long Term Concerns
Revamp, modernise and expand Technical and Vocational Training Institutes, not just
dormitories and dining rooms. Introduce advanced skills training using State of the art
equipment and technology.
Adjust the curriculum of Polytechnics to delivering products and services oriented
curriculum and self employment.
Introduce research and development, and also product development to each of the
institute. Do not confine to industrial research to National Council for Scientific research.
Adapt the Polytechnics to Natural resource endowment of the areas in which they operate,
in order to make it relevant to the people.
Transform The PTC College in Ndola into an ICT University to offer advanced education
in ICT.
Revamp National Institute for Public Administration to offer degree and diplomas
programmes in Public Service and administration, in order to revamp the public service
and instil relevant skill and orientation.
4.0 CONCLUSIONS
The paper has examined the significance of SMEs for employment creation on the African
sub-continent, using Botswana as a case study. Although the sector provides an attractive
option towards creating jobs and improving livelihoods among the economically
vulnerable, the study has shown that there are threats and weaknesses to be overcome
before sustainability can be assured.
Finally, self employment creates a culture of self-reliance, self-determination and economic
independence among the population and curbs the dependency syndrome on the state. The
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enterprises are predominantly owned by citizens and therefore ensure economic

empowerment of nationals. It is the most certain way ensuring income redistribution and
social justice. The sector is the main source from which future entrepreneurial and
managerial skills are likely to emerge.
Given favourable conditions and policies, SMEs would be key in the socioeconomic
challenges faced by Zambia, namely unemployment, poverty and crime levels to mention
but a few. SMEs are a vent of enterprenuerial innovation and support industrial growth.
Existence of MSMEs also encourage the establishment of large firms, as they provide both
backward and forward linkages to large businesses. Therefore, a strong and well
established MSMEs sector can have both direct and indirect effects on economic growth
through increased collective output and indirectly through the encouragement of Foreign
Direct Investment as well as Local Investment.
REFERENCES

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