How African Governments Are Undermining Their Own Economies: The Untapped Potential of Small Businesses
Introduction
Africa is often touted as the next frontier for economic growth, with its young population, abundant natural resources, and a growing tech-savvy middle class. Yet, one critical sector remains largely overlooked: small and medium-sized enterprises (SMEs). These businesses are the backbone of most economies, driving innovation, creating jobs, and contributing significantly to GDP. However, in many African countries, SMEs face significant challenges, particularly when it comes to engaging with government entities. This oversight is not just a missed opportunity—it’s a potential economic disaster.
The Bureaucratic Hurdle: Why African Governments Struggle with SMEs
One of the biggest challenges facing SMEs in Africa is the cumbersome bureaucracy that stifles their interaction with government entities. Unlike large corporations that can afford to navigate the complex web of government regulations, SMEs often lack the resources and connections to do so. This problem is exacerbated by the fact that government entities rarely pay attention to what’s happening with SMEs, leading to missed opportunities for both parties.
For instance, when SMEs attempt to engage with government officials, they often face long delays. Emails can take months to get a response, if they receive one at all. When a response finally comes, it is usually the same story: “We don’t have the budget,” or “We don’t have the resources.” While this might be true in some cases, it also reflects a deeper issue—governments prefer working with large corporations that have the resources and influence to push through red tape.
Learn more about the impact of bureaucracy on SMEs in Africa
The Misalignment of Priorities: Why Governments Prefer Corporations
Governments, particularly in Africa, tend to favor large corporations over SMEs for several reasons. Corporations often have well-established government relations teams, which SMEs cannot afford. These teams are experts at navigating the complex regulatory environment, lobbying for favorable policies, and securing government contracts. In contrast, SMEs, which might be more innovative and agile, lack these resources and often struggle to get their foot in the door.
Moreover, corporations can bring significant resources to the table—whether it’s capital, expertise, or technology—that governments find attractive. This creates a vicious cycle where governments continue to work with large corporations while SMEs remain on the sidelines, unable to contribute to or benefit from government projects.
Explore the relationship between African governments and corporations
The Consequences: Economic Stagnation and Missed Opportunities
The preference for large corporations over SMEs has far-reaching consequences for African economies. SMEs are crucial for economic diversification, job creation, and innovation. When they are sidelined, the economy becomes overly dependent on a few large players, making it vulnerable to external shocks. Moreover, the potential for economic growth is stifled, as the entrepreneurial spirit that drives SMEs is left untapped.
For example, a study by the African Development Bank found that SMEs contribute up to 80% of jobs across the continent, but their potential is often hampered by a lack of access to finance, markets, and government support. Without the ability to engage effectively with government entities, these businesses struggle to scale, innovate, and create the jobs needed to lift millions out of poverty.
The Solution: A Government Department Dedicated to SMEs
To address this issue, African governments need to establish departments specifically designed to facilitate connections between SMEs and government entities. These departments should not be run by career government officials but by individuals with a background in business, preferably those who have worked in or advised SMEs. This would ensure that the department understands the unique challenges SMEs face and can advocate effectively on their behalf.
Why Incentives Matter
Another critical component of this solution is the introduction of incentives. Governments are often hesitant to implement incentive-based policies, fearing corruption or budget constraints. However, the reality is that incentives work. People are motivated by incentives, whether they are financial, reputational, or otherwise. By introducing incentives for government officials to engage with SMEs—such as performance bonuses, recognition programs, or even tax breaks for successful collaborations—governments can create a more dynamic and responsive environment for SME growth.
Case Studies: Success Stories from Around the World
Several countries outside Africa have successfully implemented strategies to engage SMEs in government projects. For example, in South Korea, the government has established the Small and Medium Business Administration (SMBA), which provides a range of services to SMEs, including financial support, market research, and networking opportunities. This has led to a thriving SME sector that contributes significantly to the country’s GDP and employment rates.
Similarly, in Germany, the “Mittelstand” (the term used for SMEs) is supported by a range of government policies, including favorable tax rates, easy access to credit, and robust support for innovation. The result is a highly resilient economy, driven by a diverse range of small and medium-sized enterprises.
@ARED Group we have spent a lot of time developing strategies on how to work with government.
The Potential Impact: A Five-Year Transformation
If African governments adopt these strategies, the impact could be transformative. In less than five years, SMEs could become the driving force behind economic growth across the continent. By empowering SMEs, governments would not only diversify their economies but also create jobs, reduce poverty, and increase their resilience to external shocks.
Moreover, by keeping more of the funding within the local economy—rather than relying on foreign corporations—governments can minimize their dependency on foreign aid and donations. This would lead to a more self-sufficient economy, capable of sustaining long-term growth and development.
Conclusion: The Time for Change is Now
The time for African governments to change their approach to SMEs is now. By creating dedicated departments, introducing incentives, and learning from global best practices, they can unlock the untapped potential of their SME sectors. This is not just about economic growth—it’s about creating a more equitable, dynamic, and resilient economy that benefits all citizens. The future of Africa’s economy depends on it.
