Unlocking the potential of CMSMEs in Bangladesh

Despite impressive economic growth, Bangladesh struggles with productivity and innovation

Despite impressive economic growth of more than six per cent per annum in the past decade, policymakers and businesses in Bangladesh continue to ponder why the country continues to rank low in productivity and innovation indices.

The dominance of cottage, micro, small, and medium enterprises (CMSMEs) in the country’s economy, providing employment to an estimated 87% of the active labour force and accounting for nearly a quarter (25%) of the gross domestic product (GDP) says a lot about the productivity. May be this could be explained by the fact that about 80% of the CMSMEs operate informally with a severe ‘decent work deficit’ -a measure of the gap between the reality of the jobs and work conditions people find themselves in, and their hopes for a better life.

Reforms and challenges for CMSMEs in Bangladesh

As the country prepares to graduate from the Least Development Country (LDC) category, the Government of Bangladesh is undertaking several reforms in the economy with implications for CMSMEs. The abolishment of financial and non-financial incentives for exporting firms for example, will directly impact the performance of export oriented CMSMEs and their supply chains. The increasing compliance requirements for global businesses like human rights due diligence may put additional pressure on CMSMEs aiming to penetrate export markets and become part of global supply chains.

On the other hand, the large Bangladesh market and an expanding middle class are attracting international players into the domestic market. Ongoing import tariff rationalisation may immediately open CMSMEs to intense competition from foreign suppliers in the local market. This new development together with the continuing challenges of accessing finance and innovative technologies, and navigating the regulatory environment necessitate comprehensive policy and programming support for the CMSMEs.

Supporting CMSMEs to address productivity and competitiveness challenges

In a recent policy dialogue organised by the Small and Medium Enterprise (SME) Foundation of Bangladesh and the International Labour Organization (ILO), participants called for support to CMSMEs to address the twin challenges of productivity and competitiveness. Productivity could be improved through policy support, regulatory reform, appropriate and adequate institutional set up, technology transfer and human capability development.

There was consensus that export oriented CMSMEs could improve their competitiveness by adopting international best practices and compliance to labour standards on business and human rights, responsible business conduct, and environmental, social and governance (ESG) guidelines to increase their share of both domestic and international markets. They, however, need capacity building to understand and comply with the standards and requirements.

Access to finance remains a key challenge particularly for the cottage and micro-enterprises. Recommendations included looking beyond the traditional low-cost financing to diversifying financial products and services to include equity financing, blended financing, venture financing and so on. Financial institutions will require technical support to develop such products and enabling policies to support their roll-out. There is need to work with business associations to raise awareness on innovative financing products to create effective demand and promote their utilisation among CMSMEs. Financial risks in the sector could be mitigated by expanding wholesale credit facilities, like one provided by the SME Foundation, and development of a credit rating system for the sector.

Developing an enabling business environment for CMSMEs

Bangladesh should also consider developing an online one-stop service portal for CMSMEs to provide information on registration, regulation, and formalisation of these enterprises. Existing models in the Asia-Pacific region go further to include services like business and entrepreneurship training, technology transfer, market linkages, and business-to-business networking. Such a portal requires authoritative institutional arrangements built through inter-ministerial coordination and extensive promotion for effective uptake.

With its normative mandate of promoting full and productive employment and decent jobs for all, the ILO has time-tested resources and expertise to support the policies and programmes for CMSME development. The ILO’s tripartite declaration on principles concerning multinational enterprises and social policies, its recommendations on job creation in small and medium enterprises, and on transition from informal to formal economy offer comprehensive guidelines for the government, employers’ and workers’ organisations to shape up an enabling business environment for CMSMEs.

Unlocking the potential of CMSMEs for Bangladesh’s prosperity

As Bangladesh aspires to become a middle-income country by 2026, the country should strive to sustain its journey towards prosperity by unlocking the potential of CMSMEs. Transforming CMSMEs from their current form of low productivity, low value addition and their subsistence-orientation, into dynamic, profitable engines of economic growth and source of decent work would be critical for the country’s smooth and irreversible LDC graduation, and its eventual transition to a developed country by 2041 as enshrined in the country’s Vision 2041. This will require comprehensive and coordinated policies and programmes supported by the government, the private sector, the UN, and civil society organisations. ILO Bangladesh stands ready to collaborate with the relevant organisations in this journey.

Gunjan Dallakoti, SME Development Specialist, ILO in Bangladesh. [For further communication: Catherine Mgendi, Communications & Knowledge Management Office, ILO Bangladesh; [email protected]]

SDGs, Targets, and Indicators

1. SDG 8: Decent Work and Economic Growth

   • Target 8.2: Achieve higher levels of economic productivity through diversification, technological upgrading, and innovation.
   • Target 8.3: Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity, and innovation.
   • Target 8.5: By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities.

   The article highlights the low productivity and innovation indices in Bangladesh despite its economic growth. It emphasizes the need for policy support, regulatory reform, technology transfer, and human capability development to improve productivity and competitiveness in cottage, micro, small, and medium enterprises (CMSMEs). These targets are directly relevant to the issues discussed in the article.

   Indicators:

   • Indicator 8.2.1: Annual growth rate of real GDP per employed person.
   • Indicator 8.3.1: Proportion of informal employment in non-agriculture employment.
   • Indicator 8.5.1: Average hourly earnings of female and male employees.

   The article mentions the informal operation of around 80% of CMSMEs, indicating a high proportion of informal employment. The focus on improving productivity and creating decent work aligns with the indicators mentioned.

2. SDG 9: Industry, Innovation, and Infrastructure

   • Target 9.3: Increase the access of small-scale industrial and other enterprises to financial services, including affordable credit, and their integration into value chains and markets.
   • Target 9.4: Upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies and industrial processes.

   The article discusses the challenges faced by CMSMEs in accessing finance and innovative technologies, as well as the need to navigate the regulatory environment. These targets highlight the importance of financial support, technology transfer, and sustainable practices for CMSMEs.

   Indicators:

   • Indicator 9.3.1: Proportion of small-scale industries with a loan or line of credit.
   • Indicator 9.4.1: CO2 emission per unit of value added.

   The article mentions the need for diversifying financial products and services for CMSMEs and highlights the importance of sustainable practices. These indicators can be used to measure progress towards the identified targets.

3. SDG 17: Partnerships for the Goals

   • Target 17.9: Enhance international support for implementing effective and targeted capacity-building in developing countries to support national plans to implement all the Sustainable Development Goals.
   • Target 17.16: Enhance the global partnership for sustainable development, complemented by multi-stakeholder partnerships that mobilize and share knowledge, expertise, technology, and financial resources.

   The article emphasizes the need for comprehensive policy and programming support for CMSMEs, which requires collaboration between the government, private sector, UN, and civil society organizations. These targets highlight the importance of partnerships and capacity-building for achieving sustainable development goals.

   Indicators:

   • Indicator 17.9.1: Dollar value of financial and technical assistance committed to developing countries.
   • Indicator 17.16.1: Number of countries reporting progress in multi-stakeholder development effectiveness monitoring frameworks.

   The article mentions the role of the ILO in supporting policies and programs for CMSME development, indicating the importance of international support and partnerships. These indicators can be used to measure progress towards the identified targets.

SDGs, Targets, and Indicators