WITH the rising population, economic growth is the only sustainable mechanism for increasing a society’s standard of living.

For Uganda, SMEs are the vehicles to drive growth by encouraging investment and higher productivity which in turn result in more employment and increased tax revenues.

During the late 1980s and early1990s, the Government embarked on improving the country’s investment climate and by the year 2005, private investment as a share of GDP had more than doubled.

Currently, an estimated 80% of all SMEs are located in urban areas, with only 20% in the countryside where most of the people reside.

Their contribution to GDP is at 75%, employing approximately 2.5 million Ugandans in the various occupations like retail trade, basic food processing and services.

SME obstacles
The Government has made an effort in addressing some of the serious obstacles faced by SMEs.

These include high cost of finance, poor saving culture, lack of business start-up capital, lack of credit guarantee schemes, venture capital funds, poor entrepreneurship and inadequate skills.

Even though some progress has been made, more needs to be done to improve productivity and profitability, enhance market competiveness and enable the already established firms remain in business.

Most Ugandans make a living as micro-entrepreneurs farming, street vending, house help and in other related occupations, often operating in the informal sector.

Problems faced by Ugandans in micro jobs
However, these people face the same constraints as firms in the formal sector including policy unpredictability, insecure property rights and limited access to finance and other public services.

A good investment climate would increase incentives for these micro entrepreneurs to become part of the formal sector and also expand the base for tax revenue.

As a result, more funds would be available for public services including health, education and our legendary power problems.

What Government should do
The government should focus on creating an environment that fosters the competitive processes that Joseph Schumpeter called “Creative destruction”-an environment in which firms have opportunities and incentives to test their ideas, strive for success and prosper or fail.

This will encourage people not to give up their ideas immediately when confronted with a few challenges and also not to view themselves as failures.

Firms facing strong competitive pressure are at least 50% more likely to innovate than those reporting such pressure.

Barriers to the diffusion of new ideas should be reduced including barriers to importing modern equipment that improve productivity.

Investment climate improvements should be pro-poor by targeting constraints to activities the common man benefits from.

Government can influence this through the impact of its policies and behaviours on the costs, risks and barriers to competition facing firms.

The government should endeavour to build firm capacities, confidence, transparency and responsiveness to policy and market system.

With this, fledging businesses would get the necessary services without unnecessary delays.

Furthermore, if Government processes are open and transparent, the local firms would not waste time trying to figure out what the real policies and motives of Government are nor would they spend their energy and resources sorting out truth from rumour.

The business environment would be predictable and stable, encouraging more firms to get on board.

The costs of contract enforcement difficulties, inadequate infrastructure, crime, corruption and regulation can amount to over 25% of sales or more than three times what firms typically pay in taxes.

Addressing these issues would be helpful in the way that spending public money efficiently would ease the pressure on revenue collection.

Improving domestic taxation would also be helpful. But usually, tax rates in developing countries are not so different from those in developed countries.

A high level of informality coupled with poor administration and corruption reduces revenue collection, places a disproportionate burden on those who comply and distorts competition.

The ideal business environment can only be achieve if all concerned stakeholders leave their comfort zones and participate.

Not only should businesses, workers, civil servants and entrepreneurs engage in community and national planning and policy processes but also encourage others to engage in stakeholder processes, both formal and informal.