Discussion Paper No. 20 of 2002 on Review of Government Policies for the Promotion of Micro and Smallscale Enterprises

Abstract

The Micro and Smallscale Enterprises' (MSEs) sector in Kenya has grown tremendously over the last two decades despite poor policy conceptualization and implementation in the sector. However, this growth is characterized by low productivity and survivalist activities despite the fact that this sector is very strategic in providing future employment. This paper reviews the evolution of policy in the MSE sector, the impediments to policy implementation in this sector, and makes recommendations for the development of this sector. The paper notes that the support framework pursued since 1986 in this sector has been characterized by unsustainable subsidies and stop-go policies that emanate from an inadequate understanding of the sector and its relationship with the rest of the economy. The mismatch between policy pronouncement and resource allocation–capital financial and human–has brought about poor implementation of these policies. The problems that inhibit the growth of the MSE sector still persist three decades after they were recognized. Despite the general failure of policy implementation, the government considers the sector as the source of future employment generation. However, the sector must increase its competitiveness for it to fulfill its role in employment creation. Recent trade liberalization policies have opened new opportunities for MSEs and created new competitive pressures. Further, the limited access to capital and financial services arising from institutional and legal impediments to commercial lending to the MSE, and the poor infrastructure has made it difficult for the sector to adjust to reforms. Since the productive sections of the sector have stagnated despite the incentive-based approaches embedded in the liberal policies, the paper proposes government intervention in building capabilities of enterprises in order to boost competitiveness. This will involve building up human capital, technological capabilities and institutional structures to facilitate effective functioning of markets...