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.