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Friday 1 August 2014

Zambia: From Chickens To Handicrafts, How Can Zambia's Small Businesses Thrive?

Zambian entrepreneurs will flourish only if they are given access to credit appropriately taxed and consulted by the government:

Zambia has implemented extensive business reforms, from reducing the time it takes to start a company to simplifying licensing requirements.

These changes are happening as donors, including the UK's Department for International Development (DfID), are increasingly trying to create conditions as a way to tackle poverty.

The country ranked seventh in sub-Saharan Africa by the World Bank for ease of doing business, foreign direct investment has risen to $1.7bn (£1bn) in 2012 from $72m in 2001.

In 2012, it was reclassified as a lower-middle-income country. And yet the southern African country remains one of the poorest in the world, ranked 141 of 187 countries in the latest human development index. Despite the reforms and consistent economic growth over the past decade, poverty and inequality remain high.

Private-sector development is crucial to growth, and while good business environments can promote equitable economic growth, create jobs and reduce poverty, the link is not automatic.

One issue is that business reforms often focus on transnational companies, and fail to meet the needs of the micro and small businesses that contribute the vast majority of Gross Domestic Product (GDP) and employment options in many developing countries.

So what lessons can governments take from the experience of Zambia, and how can DfID and other donors support such countries in ensuring that reforms benefit the poorest people?

A paper to be published this week by the British aid agency Cafod outlines the main issues identified by small and micro businesses. For example, reforms often focus on access to credit, yet where microfinance lending rates are up to 40%, and security is needed to access loans, small businesses simply lose out.

One entrepreneur had a contract to supply juice to a South African chain but, despite that guaranteed market, could not provide collateral to borrow money and increase production to fulfill the order. How can he grow out of poverty when he cannot grow his business?

Even when small businesses can access credit, a lack of coherent policy has been a challenge in Zambia.

No sooner were poultry businesses, often consisting of chickens reared in the entrepreneur's backyard, given access to small loans in Lusaka province, than the local authority enforced a bylaw banning chickens in backyards for health reasons.

Agencies must collaborate when developing policy so unintended outcomes such as this can be avoided.

Small businesses are often disadvantaged by poor infrastructure, yet decisions are taken on "improvements" without their consultation.

After numerous demands, Ndola Handicrafts and Curios Association was given a place to sell its crafts – isolated, and outside the catchment area of its customers. Governments must consult small businesses if they want to properly tackle their barriers to growth.

Appropriate taxation is critical if small businesses are to thrive and provide routes out of poverty. In Zambia, large businesses are taxed on profit; small businesses are taxed on turnover, facing a tax bill even where they have made a loss. The government must change tax laws to give smaller businesses a level playing field while also reducing corruption and demonstrating how paying taxes benefits the public.

For donors such as DfID, playing an increasingly important role in supporting business-friendly environments, the Zambian experience provides important lessons. First, they must consult small businesses about their needs. Second, they must focus on the needs of different types of businesses, whether they are transnational companies or micro enterprises. Finally, they must tackle barriers to growth such as infrastructure, access to financial services and inequitable fiscal policy.

The private sector can help create growth and employment and further development; favorable business environments are essential to reap these benefits. But only by ensuring these environments are pro-poor at their core will they prove effective at truly lifting people out of poverty.

Source PovertyMatters Blog


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