Mobilizing Green Finance for SMEs

The speech of Mustapha K. Nabli, North Africa Bureau of Economic Studies Intl at Advantage Footprint for Trade and Growth held in UNIBA for G7 on May 11, 2017 at Università degli Studi di Bari

 

 Population dynamics: from Tunisia to the Sub-Saharan Africa challenge

Tunisia’s population increased from 6,4 million in 1980 to 11,2 million in 2015, and will increase only by another couple of million by 2050. Tunisia had a relatively strong state capacity, undertook lots of reforms and policies, including those which led to a dramatic reduction in fertility and population growth since the 1960s.

But despite the many favorable conditions, and the relatively good economic performance and improved social indicators over the long run, the country faced a major political shock in 2011, with its long democratic transition, domestic political and security instability. Tunisia has been the source of migration pressures in Europe, including Italy. Over the same period the population of North Africa doubled from 92 in 1980 to 182 million in 2015. (North Africa’s population will increase by another 90 million by 2050 or about 50%.) The same conditions in neighboring countries as in Tunisia resulted in the contagion which led to the political instability we have witnessed in Egypt and Libya.

 

But these demographics have to be compared to the prospects in SSA!

  • It population has almost tripled between 1980 and 2015 (from 371 to 962 million: x2,6 times). Over the next 35 years the population of SSA is expected to more than double from 1 billion now to 2,2 billion by 2050.
  • This will result in a huge youth bulge and high rate of growth of the labor force.
  • If we assume a continued increase in access to education, including higher education, the dynamics we have seen in Tunisia are likely to be seen in SSA on a much larger scale.

In view of these prospects one can only guess the challenges these population dynamics will cause:

  • Political instability and security issues
  • Challenges of growth and employment
  • Migration pressures which will felt in North Africa and Europe. What we have been observing in terms of migration pressures across the Mediterranean are only early indicators of much more to come!

In view of these challenges it is worth looking a bit more closely to what happened in Tunisia recently to learn lessons and assess risks.

 

The growth and employment story in Tunisia pre-revolution

During the 15 year period before the revolution: macro indicators were broadly positive

  • Relatively strong growth 4,5 to 5% per year
  • Slowdown of population growth, to less than 1% per year
  • High rate of labor force growth: 2,7 to 2,4 % per annum
  • But even higher employment growth contrary to what is often believed: 2,9 to 2,5% per annum

In view of the above indicators, one would have thought that labor market conditions would be improving! And that Tunisia succeeded in overcoming the peak of growth in the labor force with relative ease.

But trouble was actually brewing:

  • True the total unemployment rate was slightly declining
  • But the nature and composition of unemployment was changing dramatically
  • A new type of unemployment was exploding:
    • The share of the unemployed with tertiary education degrees increased from 4% in 1997 to 28% in 2010
    • The unemployment rate of people with tertiary education increased from 8% in 1997 to 23% in 2010.
  • There was clearly a major disconnect between what the economy was creating in terms of jobs and the supply of labor
  • Many policy changes in the education system was churning an accelerating number of university graduates
  • But on the demand side, the jobs being created were for low skilled labor both in the tradable and non-tradable sectors
  • Trade was expanding strongly: the ratio of exports to GDP increased from around 45% in the early 1990s to 56% around 2010.

This huge disconnect in the labor markets was one of the main factors behind the social unrest and uprisings which led to the collapse of the political regime in early 2011. The demographic transition did eventually catch up with the country and create political and social instability.

And I would like to suggest here that this has a lot to do with SMEs and the ability to foster their growth!

The SME problem as the center of these developments

Let us consider the following data for Tunisia during the period 1996-2011 about firm dynamics:

  • A healthy rate of firm creation +11% per year
  • But also a high rate of exit -8% per year
  • A highly skewed distribution with predominance of very small and even micro firms, mostly self-employment
  • Very weak growth dynamics:
    • Few firms sustain their growth, especially from small to medium sized
    • Very few firms grow from medium to larger sized firms: only 2% of 10-50 size become 100+ after 15 years
Size distribution Average rate per year1996-2011
1996 2011 Entry Exit
Total number of firms 100% 100% +11% -8%
   No employees 83% 87% +12%
   1-9 employees 15% 11%
   11-99 employees 1,8% 1,7% +3%
   100+ employees 0,3% 0,3% +1%

 

With these firm dynamics, the economy was able to generate only demand for low skilled and low quality jobs. Large numbers of jobs created, but often self-employed, of low quality ones! No job growth in dynamic SMEs and larger ones who can employ the large number of new university graduates!

  • The main policy problem has been how to support the expansion and growth of small and very small firms?
  • Policy-making has ben unsuccessful, as in many countries in MENA, to find approriate and effective solutions?

This problem is key to meeting the demographic and employment challenge in the decades to come in MENA and SSA.

The MENA challenge: What to do about SMES?

The SME problem in Tunisia is similar to that in almost all of the MENA countries, and is also relevant for SSA. There is a huge gap or “missing middle” in the size distribution of firms: while the rate at which start-ups is created is similar to what happens throughout the world, the rate of survival and growth is very low. This leads to low rate of SME and missed opportunities for job creation and growth. In addition to the general issue of the difficult business environment there are three causes for this gap which are well understood:

  1. Access to finance
  2. Weak skills and capabilities to manage the transition from micro and start-up stage/often informal to larger enterprises
  3. Access to markets.

The solutions lie in policies which aim at:

  • Providing access to flexible and patient financing
  • Providing, bundled with finance, support to enhance skills and capabilities
  • Supporting access to markets
  • Improving the business climate.

These are obviously domestic policy issues.

But here I would like to suggest that there is ample room for international cooperation. We are facing a challenge of gigantic proportions in this corridor going from SSA, to NA and the Southern Mediterranean. It has implications for the stability and welfare of the whole region with lots of spillovers and interdependence. I have to say that cooperation between North and South in order to learn from experience and support actively such policies to support the growth of SMEs have been limited. There is clearly a role Italy and Europe can play, which has not been sufficiently emphasized and acted on despite lots of pronouncements!

 

This leads to another question related to sustainability and the role of SMEs in the MENA-SSA region:

  • Could the package of policies and reforms to help develop SMEs in MENA include a “green dimension” or “sustainability dimension”?
  • Could such inclusion improve the prospects for the development of SMEs or would it be an additional hindrance/burden?

Answering such questions would be most helpful and useful. So let me make a few remarks in this respect. One can argue that life in such countries for SMEs is difficult enough and that pushing for taking into consideration ecological factors would be penalizing. But one could also argue that including a “green dimension” may have positive effects along a number of aspects:

  • A signaling effect about seriousness which adds credibility to an SME.
  • Opening new markets and niches
  • Possible integration into regional value chains.

It would seem that introducing the option of “green business” in the packages which aim at supporting SMEs is worth considering. The additional cost may be minimal given the extent of support required to SMEs, a cost which may be significant but has large payoffs for the development and stability of a region, when looked at in the broader context I suggest, which will be facing huge challenges.