THE ROLE OF SMALL AND MEDIUM ENTERPRISES IN PHILIPPINE RURAL DEVELOPMENT

BY: ALEX C. ROLDAN, MBA, DiDevStud

Introduction

The development of the Philippine countryside is seen as a vital area in alleviating the economic condition of the country. Strategies for development evolved over the years since the country’s de-colonization from America in the middle of the 20th century. However until recently, 60% of the population living in the rural areas remain economically depressed compared to its urban counterpart.

Small and Medium Rural Enterprises (SMRE) are continually

present throughout the period, but their existence were not in any way linked to the effort of improving poverty situation in the countryside. It operates independently on the basis of the availability of tradable goods and resources, and its sustainability depends heavily on the ability of the agricultural sector to produce the materials and income surplus.

This seemingly indifferent behavior by the SMRE’s in the Philippine

economic structure can be directly linked to the country’s economic history. A review of the past policies and development directions of the country, showed that the industrial and agricultural sectors were developed independently, and that SMRE’s who could have bridged the gap were left without any assumed role in the middle.

This paper will attempt to show the potential’s of SMRE’s in

assisting the development of the country’s rural areas, its role in the economic structure, and the form that it is capable of doing to effectively respond to the present national development directions. The discussion will show a broader perspective of the country’s development direction and come up with recommendations on the issues of economic development that can be viably responded by SMRE’s. I. The Philippine Rural Development Imperatives

The importance of the rural sector in the Philippines may be illustrated by the fact that approximately 60% or about more than 36 million, of the more than 60.5 million Filipinos reside in the rural areas (Sison & Valera, 1992, p.5). Poverty incidence, defined as percentage households living below poverty threshold, has been consistently higher in the rural areas. Researchers have identified two major causes of rural poverty: a) inherent and persistent socio-economic and political structure

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which exclude the poorest segment of the rural population from participating in productive economic activity, and b) government policies in support to the post-war development strategy which were generally biased against agriculture.

The World Bank (1980) reported that from 1971 to 1975, rural

families living in absolute poverty increased by 23%. Sixty one percent of all Filipino families living below poverty lines had agriculture as their main source of livelihood.

Against this background, there is an urgent need to develop an

effective and sustainable strategy for rural development in the Philippines. It was suggested that increasing the production levels of farmers could respond to their poverty problem. Unfortunately, the experiences of several countries and recent Philippine experience indicated that “increased production is not sufficient to guarantee sustained development in agricultural sector”(Bautista, 1987, p.13).

With these experiences, several solutions or approaches were

identified to respond to the problem. The approaches can be classified through the following; agro-industrial interphase, science and technology, credit and cooperative, marketing and infrastructure and, agriculture education and manpower training (UPLB Study Team, 1991).

The identified approaches in the alleviation of the poverty

conditions in the countryside showed the critical role of the promotion of agriculture related enterprises to this endeavor. This is due to the fact, that agricultural development is enhanced by stimulating the volume and value of transactions flowing along the linkages backward to agriculture and forward to the final consumers through agro-industry and rural enterprises (Kinsey, 1987). There is a substantial potential for increasing the productivity and labor absorption capacity of agriculture through a combination of modern technology and careful crop husbandry in conjunction with related rural industries.

The critical role of the agricultural sector in providing a basis for

stable growth in the Philippine economy was emphasized in a comprehensive program for agriculture launched by the government in 1984. One of the specific objectives was still in line with the past effort “of increasing agriculture’s contribution to the balance of payments through expanded exports and import substitution” (Bello, et.al. 1981, p.14).

The political turmoil and economic crisis beginning on August

1983 further decreased agricultural activity. The World Bank (1981) revealed that the government’s effort since 1974 aimed at increasing the

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participation of small businesses in the countryside development failed to create significant changes as shown by the fact that the rural sector continued to remain disadvantaged compared to their urban counterpart. The government of Corazon C. Aquino has gone further, moving quickly to announce in mid-1986, the adoption of an “employment-oriented agricultural and rural growth as the centerpiece of an ‘Agenda for People Powered Development’ in raising farm productivity and rural incomes” (Bautista, 1987, p.14).

II. Common Issues and Problems Faced by SMRE’s.

Several attempts were made by the Philippine government and

other private sectors to promote the development of the SMRE’s in the countryside to hasten he development process. The most known of these are the MASICAP Program (World Bank, 1980), the Kilusang Kabuhayan at Kaunlaran or KKK in the 1970’s up to the late 80’s, the promulgation of laws exempting small businesses to wage and tax regulations, and in the recent years – the creation of the cooperative development authority.

However, it is still evident today that urban-based entrepreneurs

still dominate the bulk of the business with the rural areas particularly those activities that have direct link to agriculture such as trading. Local businessmen are limited to smaller investments like selling household commodities and the like. Semi-processing of products are either made in urban centers or operated in the locality by few large urban businessmen who apply market-led business strategies whose operations are usually seasonal or temporary in nature.

Aside from the aforementioned observations, the failure of local

SMRE’s to dominate the countryside in recent studies cited the following constraints of their growth;

a. Government Policies – the promulgation of laws that exempt

small enterprises with no more than 20 employees from minimum wage regulations and tax incentives (Montes, 1988), has instead limits the growth of SMRE’s. Experiences showed that small businesses tend to prohibit expansion of their business ventures to avoid taxation and high wage payments, thus, limiting the benefits of the enterprise to the locality. Another thing that discourages local residents to involve in business is the difficulty of following burdensome rules and regulations that often consumes valuable time.

b. Management Expertise – although small firm’s operation appear

to be straightforward, most of the entrepreneurs are faced with the difficulties in dealing with the other technicalities of

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managing their business, such as management, marketing, and financial operations (Mancebo, 1992, p.148). One cause of such difficulty is the fact that one person who makes all of the decisions usually manages these types of enterprises.

c. Information – the limitations of the entrepreneurs in accessing

the latest technical information particularly technology, production process, planning and etc. (David, et.al. 1992,p.48).

d. Marketing – though several efforts were made to assist SMRE’s

on this field, rural enterprises are usually limited to the knowledge of their immediate environs (Curtis & Watson, 1986). This caused them to be ill prepared in handling opportunities and minimizing losses.

e. Credit – there are indications that small enterprises in the

countryside seldom tap the credit and financial sources from formal institutions such as banks (UNESCO, 1990). The growth and proliferation of local moneylenders who impose exorbitant interest rates is a confirmation that rural enterprises require the services of those formal institutions but were not just served effectively. Government subsidized rates at the same time when taken are instead diverted to other projects outside of the general intention (Enoh, 1990).

f. Socio-cultural Factors – this may be a serious handicap to the

development of SMRE’s in the rural areas. The UN (1992) studies identified cultural practices such as that the rural entrepreneurs are expected to share his/her wealth among relatives, thus, limiting the funds available for re-investment.

g. Infrastructure – many of the less traditional and better SMRE’s

are faced with the difficulties in accessing basic infrastructures including as roads, electricity and water. These seriously hamper or even prevent new growths of SMRE’s (Kinsey, 1987).

The above cited reasons though it may seem simple and are

identified, the difficulty seem to continue despite changes and effort to correct the situation. For example, the Land Bank of the Philippines and the Development Bank of the Philippines, both government-owned banking institutions, has been spearheading in responding to the capital requirement of agriculture-based enterprises and the formation of community enterprises to support agricultural and fishery production. Most of those who availed of the credit facility were community cooperatives who were actively reached-out by the bank. Only a handful of local businessmen dared to tap these resources to establish

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businesses that utilize local resources such as land and labor. It is sad to note that he abundance of labor and land that are excess and under-utilized in the rural areas could have been used for more productive activities were not given enough attention.

Most likely, the situation had its roots from the experiences of

rural entrepreneurs from their past ventures such as business failures.

III. Philippine Development Directions and Implications to the Growth of SMRE’s. There are far more reaching reasons why rural SMRE’s are faced

with difficulties in sustaining their businesses. These difficulties are offshoots of small business promotion assistance and activities that were tied only to the resources and opportunities available on the countryside and not towards utilizing the sector to a role that facilitates the redirection of economic development emphasis, such as establishing the linkage between the rural/agriculture and industrial sectors.

To prove this contention, it becomes necessary to review the

country’s past development efforts immediately from its de-colonization (after the 2nd world war). This will be very helpful in arriving at an explanation why the country failed to advance its economy particularly the countryside, and possibly locate the development limitations where SMRE’s are appropriate to respond.

Immediately after the de-colonization of the country, the new

government set the vision of a new republic. The vision was by and large directed to the following. “a) Industrialization, b) high employment, c) high per capita income, and c) equal resource distribution” (Montes, 1988, p.330)

The first economic planning in the Philippines in 1934 enumerated

their major concern for the country’s development; 1. Land delimitation, survey and subdivision of public lands, 2. Agricultural re-adjustments, in view of the impending loss of

American market for agricultural products, 3. Solving rural conflicts, 4. Development of forest resources, mines and minerals, and

fisheries. 5. Steady promotion of manufacturing industries, 6. Regulation of labor and systematic distribution of

population, 7. Encouragement of domestic trade, particularly since it was

not in the hands of the Filipinos,

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8. Promotion of foreign trade, trades reciprocity, and well regulated immigration,

9. Promotion of transport and communication facilities, and 10. Bank and credit facilities – the creation of an independent

currency and sound public finance systems (Montes, 1987, p.345).

These concerns provided the impetus of formulating an economic

direction that the new republic was heading. It also showed that at the start, the Philippines development direction was towards moving from feudal economic system to a capitalist system that encouraged individual investment and industrialization in the urban areas.

For almost a decade since1960, the country embarked on an

import substitution strategy with the aim of reducing dependency from other countries. Major projects during that time were focused on the setting-up of factories and machineries to develop products such as water valves, textiles, electrical fixtures, chinawares, etc.

The following period showed the shift of government’s focus. The

main export is still agriculture, but it financed businesses that require imported materials to operate, thus, the new industries became a burden and were increasingly becoming difficult and expensive to operate. It used foreign exchange generated from agricultural exports that are not substantial to the requirement of the urban-based industrialization program.

The resulting balance of payment deficit led to the adoption of the

export promotion but continued the import substitution strategy. The new direction need heavy subsidies until in 1983 when the government struggled to integrate production and export, increase investment by Filipinos and foreigners, minimize unemployment and limit the increasing balance of payments.

The Philippine economy continued to lag behind with its Asian

neighbors when in 1986 the new government adopted a reversed view of attaining development. In the short-run, the new plan seeks to stimulate recovery by inducing demand through increased incomes especially in the rural areas. In the medium term, the plan identified a rural-based development strategy. It gives the highest priority to agriculture with the intention of removing policies that are biased against the sector.

It is important to note that the economic development strategies

adopted in the Philippines at first, recognized the importance of the rural sector in economic development, failed to make the sector an integral part of the industrialization process. The link between countryside

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development and industrialization was totally cut-of by the succeeding plans of next government administrations that again focused their development strategy to the industrial sector – which are usually located in the urban centers. It was only recently that the government, after the failure of the industrial sector to pull the economy upwards, refocused its attention to the rural areas – as the solution to the growing poverty among the country’s population.

It was very apparent in the past strategies, that the

rural/agricultural and industrial sectors were developed differently from each other. The rural areas were given less priority in infrastructure and other support services. It was already recognized in the past that “the agriculture sector does not produce enough surplus food and basic raw materials needed for inputs of domestic industry and exports. On the other hand, the progress attained in the modern export and industrial sector does not respond to the to the agricultural sector” (Montes 1988, p.341). In resolving the situation, the government embarked on raising funds to improve agricultural production through technology and exportation of cash crops instead of resolving the problem by making the two sectors responsive and supportive to each pother.

The facts clearly showed that the failure lies on resolving the

missing link between these sectors. A structure to facilitate the formation of an agriculture sector that respond to industrial and local needs and vice-versa is absent. The investments made by entrepreneurs in most rural areas that could have bridged these two sector together, were mere consequences of the opportunities that are limited to making profit rather than on the basis of a directed move to utilize the SMRE’s to an interrelated role of economic development and industrialization.

What I am emphasizing here is that, promotion of SMRE’s

should be anchored on the need to effectively link the requirements of domestic industrial and export sector to the rural areas instead of an undirected promotion that is continually threatened by business uncertainties from the absence of a significant role in the National Agenda.

A lot of arguments may arise from this proposition for it

contradicts to the usual practice of setting-up business ventures based on factors that are more predictable and would limit only to exploiting the potential benefits of what the present environment could offer. However, it is worth considering that the sustainability aspect of the SMREs in the Philippine condition as explained, depend on how they respond to the opportunities of the need to link the rural/agricultural sector to the other sectors of the economy.

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Without any clear role in the whole development interaction, chances are, that any effort to strengthen the capabilities of SMRE’s would not adequately respond to their sustainability, much more with addressing the poverty problems in the countryside.

Conclusion

The fact that SMRE’s failed to develop and expand in the countryside, showed that sustaining a rural-based investment is not only threatened by inappropriate operational or technical capabilities, but most notably by the uncertainties of their role in the overall economic growth of the country. One would find it very hard to find appropriate policy support and effective program response to the development and growth of SMREs if its very existence is independent and assumes no significant relevance to the country’s development agenda. It is recommended that to effectively improve the poverty situation in the countryside, the development of SMRE’s should be developed and are directed to objectives that would result in;

• Optimum utilization of existing agricultural lands; • Effective utilization of excess rural labor; • Redirection of capital to rural areas; • Sustained agricultural production that directly supports the

industrialization agenda of the country. It is only when SMRE’s are fully utilized towards these directions

that the sector can share a meaningful and sustained contribution to the Philippine economy.

Note: This paper was presented by the author to the faculties and students of Business and Social Science Departments of Massey University NZ.