Fostering Growth in the Middle East and North Africa
Chapter 4: SME and Entrepreneurship Challenge
THE ROLE AND IMPORTANCE OF SMEs IN PRIVATE SECTOR DEVELOPMENT Micro, small and medium enterprises (SMEs) are an integral part of the private sector, contributing significantly to job creation and playing a critical role in increasing competition in selected markets, including markets that matter for the poor (DfID 2004c). The SME sector (particularly formal SMEs) appears to become more important as an economy develops. The Ayyagari et al. (2003) analysis of a 76-country SME database1 found that the formal SME sector share of the economy increases substantially with the level of development, from an average of 15.6 per cent of gross domestic product (GDP) in low-income countries to an average of 51.5 per cent of GDP in high-income countries. The formal SME share of total employment increases from 17.6 per cent in low-income countries to 57.2 per cent in high-income countries.2 At the same time the contribution of the informal sector to GDP and total employment declines with the level of economic development. Its share of GDP averages 47.2 per cent in low-income countries but only 13 per cent in high-income countries, and its share of total employment decreases from an average of 29.4 per cent in low-income countries to only 15.2 per cent in high-income countries. The combined contribution of the informal and formal SME sectors remains fairly constant across countries of all levels of development – around 65 to 70 per cent of GDP. What changes is the distribution of the contribution. As national income increases there is a...
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