Boosting Economic Mobility in Asia: SMEs as Drivers of Inclusive Growth

August 12, 2015

By Véronique Salze-Lozac'h

Over the last four decades, Asia has experienced unprecedented economic growth that has shifted the global economic center of gravity to the region. Asia enters 2015 as the world’s fastest-growing region, with the International Monetary Fund predicting that GDP will increase by 5.5 percent this year. But although Asia has become wealthier faster than any other region of the world, striking disparities in growth between and within countries are creating new social tensions and economic vulnerabilities. Indeed, Asia embodies a number of very twenty-first-century paradoxes with extremes of poverty and prosperity mixing strikingly. Among the key challenges facing Asia in this new century are the issues of income distribution and inclusive growth, and their corollary, economic mobility.

Studies show small and medium-sized enterprises (SMEs) are more vulnerable than large businesses to unfair trade practices and nontransparent domestic regulations. Photo/Conor Ashleigh

According to the Asian Development Bank (ADB), income inequality has risen more than 20 percent in Asia over the last two decades. The 2015 International Labor Organization (ILO) report, World Employment and Social Outlook, warns of the risk of continuing, growing inequalities in an Asia where unemployment levels are on the rise, especially among the young, and where falling wage shares may threaten future growth and stability in the region. These trends may be symptoms of a slowdown in economic mobility in many Asian countries, where education may not be enough to ensure a better income than one’s parents, where quality jobs are scarce, and where entrepreneurs face a myriad of barriers that prevent them from seizing their share of the growth. By putting economic mobility in jeopardy, increasing inequality is threatening the expansion of a middle class that has been driving the growth of Asian countries for several decades – a middle class that aspires to better employment opportunities, but also to a “right” to entrepreneurship.

The debate on reducing inequality and boosting economic mobility often focuses on key factors such as ensuring equal access to education, health, basic utilities, and public services; enhancing food security; expanding fiscal redistribution; increasing government expenditures on social security and welfare; and reducing gender inequality. All are important and necessary measures. However, creating open and transparent business environments that support entrepreneurship and small and medium-sized enterprises (SMEs), so they can grow and create jobs and wealth, may be just as important in the fight for more inclusive growth. According to the ADB, SMEs comprised 98 percent of all enterprises in the Asia-Pacific, employed 66 percent of the national labor force, contributed 38 percent of GDP, and accounted for 30 percent of total export value from 2007 to 2012. Women-led enterprises have a critical role to play among SMEs, with a UN report finding that limiting the inclusion of women in the economy costs the region $89 billion a year.

However, SMEs face a host of challenges. Studies show they are more vulnerable than large businesses to unfair trade practices and nontransparent domestic regulations. Limited access to markets and technologies, non-tariff barriers to trade, poor access to finance, lack of access to business information, and difficulty in hiring and training skilled employees also diminish their potential to contribute to the economy. Women entrepreneurs face additional hurdles, such as laws restricting a woman’s right to own a business, limited collateral for borrowing, difficulties filing credit applications and meeting bank requirements, limited access to formal business associations and networks, and lack of awareness of new technology, in addition to the responsibilities that come with often being the primary family caregiver.

Overcoming these barriers to improve economic mobility in Asia will require collaboration between the public and private sectors. SMEs often have fewer opportunities than large businesses to engage in high-level discussions, despite being the bedrock of local economies. Yet their input is necessary for policymakers to understand and address day-to-day business operations, as well as behind-the-border and at-the-border trade challenges. Additionally, for SMEs to be able to play their role in creating jobs and economic mobility, there need to be targeted policies for adapted technological development, innovation, and upgrading; improved access to finance; business services for clusters of firms; and actions to overcome human resource gaps and skills mismatches.

In Southeast Asia, where informal employment and working poverty are high, growth is failing to create the decent work and economic opportunities required for inclusive development. Building the capacity of SMEs across Asia to access information, network, join forces, enter into partnerships, improve their compliance with international standards in all areas, integrate into global and regional value chains, and build their voice to interact more effectively with public authorities would be an effective way to create more decent work opportunities that would boost economic mobility and inclusive growth.

Veronique Salze-Lozac’h is The Asia Foundation’s chief economist. She can be reached at [email protected]. This essay was commissioned by the Organization for Economic Cooperation and Development. The views and opinions expressed here are those of the author, not those of The Asia Foundation.

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