PNG’s SME policy: the right aim, but dubious means

Vocational training, Hohola Youth Development Centre (Flickr/DFAT/AusAID/Ness Kerton CC BY 2.0)
Written by Win Nicholas

Vocational training, Hohola Youth Development Centre (Flickr/DFAT/AusAID/Ness Kerton CC BY 2.0)Introduction

Small and Medium Enterprises (SMEs) are the largest source of employment across the world. Papua New Guinea (PNG) recently released a new SME Policy with the fundamental aim of promoting and driving inclusive economic growth through employment and wealth creation. The overall vision of the Policy is that the SME sector would be a major contributor toward PNG becoming a middle-income country by 2030 and a high-income country by 2050.

The government through its agencies intends to achieve inclusive economic growth through promoting SME sector. Other countries that have experienced robust economic growth through success in the SME sector include New Zealand, Malaysia, Taiwan, and Japan, among others. Many of these countries have transitioned from Third World to developed economies as a result of the SME sector, which has historically been an engine for economic growth.

The recently developed PNG SME Policy is consistent with other development and strategic plans such as the PNG Vision 2050 [pdf] and Development Strategic Plan 2010-2030 [pdf]. The SME Policy states that SMEs are expected to grow from a current 49,500 to 500,000 by 2030. By 2030 employment opportunities in the SME sector would increase from current 291,348 to about 2,000,000 jobs. This is anticipated to cause the unemployment level to fall from the current 84.1% to 49% of the population.

It is also anticipated in the policy that by 2030 PNG citizens would own over 70% of formal economic sector from current 10% by 2030. Income per capita is expected to rise from current $2000 to US $9600. Inclusive and sustained economic growth would be achieved by 2030, as SME’s GDP contribution of 6% would increase to 50%. Most importantly it is expected that, through SME growth, the share of PNG’s population living below the poverty line would reduce from the current 40% to 30%.

The SME Policy as protectionist

In essence the SME Policy is protectionist. Its fundamental aim is to protect locally owned businesses ahead of foreign competitors. Protectionist policies are intended to help the domestic industry to maintain or increase its market share while foreign entities are expected to lose market share and sales revenue.

Currently, only a few cottage-type activities are closed to foreign investment in PNG. The new PNG SME Policy has an extensive Reserves Activity List (RAL) under which many sectors are reserved for 100% PNG ownership (and a few for 51% PNG ownership). Sectors reserved for 100% PNG ownership include trade stores, building, and tourism and security services.

It is also envisaged that special taxation and non-taxation incentives are to be provided for SMEs engaged in RAL activities.

Effects of the SME Policy

The PNG SME Policy is wrongly seeking PNG business development through protectionist policies. The SME Policy would reduce competition, not advance welfare, and it would hamper economic growth. Protectionist policies are also likely to cause the prices of domestic goods and services to increase, and depress foreign investment.

The SME Policy, which is tailored to protect locally owned business, would limit physical, financial and human capital inflows. The SME Policy would disadvantage current foreign businesses and provide a disincentive for future foreign investment in the country. There would be potential loss of skilled employment, training and foreign exchange earnings as foreign business interests diminish.

Many PNG businesses may possess the required resources like the land and ideas to do business, but they are limited with respect to funding and skills. This is where foreign participation can be crucial.

The SME policy is anti-foreigner, discriminatory and contradictory to PNG’s government interests and agenda to attract foreign businesses opportunities in the country. The SME policy is not conducive for growing a vulnerable economy like PNG.

How to support local businesses

Rather than pursuing a protectionist agenda, the government should take alternative measures to support SMEs. The major constraint for doing business in PNG is the lack of essential infrastructural services like better roads and bridges, electricity and telecommunication, among others. The government should increase funding and support such infrastructure services.

An important resource for any business is funding. The government should ensure that the financial sector is providing funds for small businesses to borrow.

The government should encourage locally owned businesses to partner with and learn from foreign businesses, and maximise skills and technological ‘spill-overs’ from foreign to local businesses. A skilled and well-trained workforce would be created through such arrangements.

Conclusion

The SME Policy has the right aim. We should be supporting PNG businesses, but the way to do this is not by shutting out foreign business. PNG needs the capital and expertise of foreign businesses, large and small. The SME Policy should focus on improving the environment for all small businesses, and on strengthening the workforce; not on shutting out access to what we need.

Win Nicholas is a Lecturer in Economics at the School of Business and Public Policy, University of Papua New Guinea.

Win Nicholas

Win Nicholas is a Lecturer in Economics at the School of Business and Public Policy, University of Papua New Guinea.

11 Comments

  • There is government subsidies and protectionism in all economies of the world. This is an acknowledged fact.

    The United States Government grants subsidies and tax exemptions to most of their conglomerates in nearly every industry that, there is. This is done deliberately through their federal budgets. Need I name some of these conglomerates? The list is extensive and is in the public domain for researchers of all shades.

    Australia is no exception, especially in its agri-industry business. They have foreign investment control boards that play the gate-keeping role, filtering what investment to allow and what to decline, operating in lockstep with their meticulous immigration and foreign visa policy.

    Now, they have may have a different name and tag lines to eschew public perception, but flip the pages and their very DNA is plastered with what protectionism tastes, smells and looks like.

    Some Papua New Guineans have covered themselves with the dry excuse of us not having the required skill-sets, capital exposure, credit-worthiness, attitude to work and an endless inferiority-infused-others-list. Such fallacious notions lends themselves to the scale of capital flight the country has been awashed in, in our almost 41 years of statehood. Whose lecture notes indicates that a gas-station (fuel depot) is a complex undertaking? How does one cultivate experience and know-how when the citizens are continually tagged as incapable?Are none of our children, sons and daughters yet to sit in the same lecture rooms that some of “so-called foreign direct investor’s children” have sat and learned the fundamentals of business?

    This SME Policy document has had wide consultations across the length of breath of PNG. It is crafted to capture the aspirations and frustrations experienced by many a budding SMEPreneurs in the country.

    There is diffusion of knowledge,capital and willing investors available everywhere for the right kind of investors but not every so-called foreign direct investment.

    The fears expressed in this article are not a novelty. They have been the usual discourse for eons against such courageous ambitions as this. I say, you can judge us in ten to fifteen years. For now, the train has already left the station.

    Thinking and astute observers of world events understand fully that, such scaremongering crowd that; surreptitiously guards over industries and manipulates public media to paint local entrepreneurs as really “not-up-to-their-scale”. The labeling of native citizens as poor and needing handouts, whilst fencing off opportunities to their own ilk is a documented reality. That is a global trend. We know it.

    Let’s talk about something else.

  • Thanks Win for the article, which I think is well put. I note the contributions from Des, Terry and Koima, and that all disagree with the basic point of your argument- that an SME policy for PNG is a very good idea, but that the strong protectionist bias of the current policy is bad. I think the key issue here is governance. In the hands of a state with underlying functional governance and developmental will (e.g. postwar Japan, Taiwan, and the other East Asian tigers), putting industrial policy / aka protectionism in the hands of state bureaucrats and the political apparatus largely worked, because the state largesse and favours that were distributed were done so on the basis of shared public notions of the universalist public good. History shows that when the same discretion is applied in a weak state with dysfunctional governance and a weak sense of the notion of the public good, and weak notions of noblesse oblige amongst its elite, the favours of protectionism are bestowed on members of elite crony networks. The end result in the latter is economic stagnation and the private enrichment and strengthening of the elite based on state privilege, and further marginalisation of the politically weak (AKA “the poor”). Most of early post-colonial Africa and some Latin American countries typify examples of the latter. In such circumstances, universally bestowed and accessible market enablers such as “essential infrastructural services like better roads and bridges, electricity and telecommunication”, are far more likely to trigger changes in the political economy that will result in the rise of a genuine indigenous bourgeois, than poorly targeted protectionism.

  • Poorly written article.The author fails to compare apples with apples here. He didn’t state that the SME was protectionist only toward small and medium enterprises. These are the grassroots businesses that provide much of the income for the bulk of our population, and very much need to be protected in the face of increasing competition from foreigners putting them out of business. In the absence of a State social welfare system, a protectionist small business policy is an urgent need to our people. This article implies that the policy intends to shut the door to all foreign investment which is untrue. We welcome large foreign investors for the for the spinoff business opportunities they create for local SMEs.

    • Des
      What do you mean poorly written article.

      What Nicholas has written is clearly a descriptive understanding of the whole SME concept, policy and how it should work for PNG context. It seems you lack understanding whilst working in the SME program.

      It describes how SME ideology works in real world while you seem to be theoretical and focusing on assumptions which will not work for PNG, bulk of the population. We have already seen evidences of what was described in PNG while you are in the assumption. Do you like PNGans to make bilums, do poultry or piggery or run PMVs with SME loans?? SME should do better for PNGans under the policy then these mere high risky chores.

      You may as well would like to take the useful comments offered by Nicholas for your management purpose and better policy direction.

      Thanks Nicholas for the descriptive analysis.

    • So call young CEOs and bureaucrats should not get excessive publicity for the sack of policy initiatives that are half baked. The SME policy is protectionist in nature as alluded by a number of other thinktank institutions as well. The announcement itself would scare off foreign businesses as already deterred by foreign exchange rationing issue .The local and international professional thinktank bodies in the county are there to provide critical policy analysis, advice and dialogues to ensures policy agendas are fine tune to protect the interest of every players in the market. Your office should critically undertake SME research to find what essentially the local entrepreneurs need at this stage? Does local businesses have the technical and financial capacities to ventures into advance and successful businesses. Is the government robust and find it feasible in assisting local businesses in the area of funding, market accessibility, infrastructures and skills upgrading? In the absence of these and other ranges of important factors, SME policy would not give the desired outcome. These are among many other requirements for effective SME policy implementation.

      • Yes the SME Policy has to be protectionist toward small businesses. Only a real small business owner operating in PNG will know the struggle of being overlooked and denied opportunities in favour of foreign owned small businesses. I have worked with them for over a decade and I understand this better than anyone. We must create a safe space for them to start up, grow and flourish in. Other nations with economies more advanced than PNG recognize the importance of this and practice it to some extent, yet everyone sees fit to criticize PNG when it decides to take the same bold moves to protect it’s people.

        If any one has read the proposed Reserved Activity Listing, they will find that there are exceptions to the rule where foreign small to medium businesses CAN operate in PNG, but only if they meet the exceptions. Otherwise, we welcome large foreign investors who will operate businesses that will make an initial investment of more than K10 million ($3.8m AUD), or who currently have a turnover of that amount or more. Otherwise, leave the small businesses to our people. They need it more.

    • I do not think you fully understand what SME is – SME businesses are those that generates less than K1m per year. The government’s aim of promoting SME to the people is to put money into their pocket, reduce unemployment and improve their standard of living. Domestically our economy, welfare and employment rate would look good if we harness and take heed of those policies of SME on hand but how about at the broader perspective? Will it increase our foreign reserve? Will our exchange rate rise? Will it improve our GNP and economic inflows? From my understanding this SME policy by the government is good but lacks long term vision. If the government is to promote SME in PNG, the government also need to take into consideration what good impact this on our economy at large. A simple case in point is that if government is encouraging people to grow vegetables in their place which is an SME business, then people can grow vegetables and sold it at domestic market but how will that improve our economy at large? Will it improve our GNP or economic inflows? Will government receive any tax out of it? If the government is really about promoting SME in PNG then it need to help citizens as well. Like for these vegetable growers, government can find a market for them abroad so that our local vegetables growers can market their produce offshore. Those countries with highest value in their currency are best countries which we can sell our produce. This will improve our GNP and inflows and boost our local economy as well.

  • Win, on one hand you criticise selective protectionism but on the other hand you acknowledge the economic rise of Malaysia, Taiwan, and Japan. Wasn’t their rise partly because of selective protectionism while certain industries were in their infancy (then opening them to competition after they became stronger)?

    Shouldn’t this be more a debate about WHICH sectors still need foreign investment and foreign skills (meaning profits shipped off-shore) and WHICH sectors require protection?

  • I agree with you and I think it’s time the government make it mandatory for any foreign business intent on doing business in PNG to have a 50 percent partnership with local businesses so that local businesses can benefit from their comparative advantages such as skills, technology, finance and networks to prosper and at the the same time be open to potentially enter other foreign markets themselves through these partnerships.

Leave a Comment

Tweet
Share
Share
+1