Are SMEs the solution to youth unemployment?

By Janani Balasubramaniam

Small and Medium Enterprises (SMEs) represent over 50% of our economy and are therefore key players in engendering regional development and inclusive growth, i.e. ensuring that the benefits of growth go to all cohorts of society.  

According to the National Policy Framework for SME Development (2011), SMEs are enterprises which employ less than 300 employees and which have an annual turnover not exceeding Rs. 750 m – this broad definition also includes micro enterprises. 

In many fora, SMEs are classed as “the backbone of the economy” given that they can play a vital role in employment generation, stimulating innovation and filling in gaps in supply of goods and services particularly in areas outside traditional commercial hubs. 

However, despite their importance to the economy and potential to contend with issues such as regional inequalities, SME face various challenges which prevent them from achieving their fullest potential. Access to finance – and an inability to borrow from banks due to stringent requirements – is a key challenge which persists despite policy initiatives by the Government. Another key challenge is maintaining competitiveness in a globalized world by being innovative.

The 2017 Budget includes various proposals which are beneficial to SMEs, primarily in terms of improving access to credit. Notably, as per the proposals, banks will be directed to allocate at least 10 % of their loan portfolio to SMEs, interest subsidies of up to 25% (depending on the size of the SME) are to be given and an allocation is to be made to promote SME products at international trading and promotional events. Whether these will be implemented remains to be seen. 

Youth unemployment, 

a persistent issue

Youth unemployment is a significant and persistent issue in Sri Lanka and arguably an important cause of crime and unrest. What is noticeable about Sri Lanka’s youth unemployment is that educated young people make up a significant proportion of Sri Lanka’s unemployed.

As per the Labour Force Survey (2015), there are provincial disparities as to the proportion of youth unemployment to total unemployment – however, for seven out of the nine provinces, this is over 50%. It is particularly high in the Central, Eastern and Sabaragamuwa Provinces. 

Further, as a proportion of total unemployment, nearly 50% of youth unemployed have completed their GCE A Levels or above, demonstrating that many of the youth unemployed have, in fact, attained a reasonable level of education.  The problem of unemployment is therefore unequally distributed and there is a need for policy interventions to enable those entering the world of work to successfully secure employment. 

As per the National Action Plan for Youth Employment, various reasons account for this high rate of unemployment including class and status, geographical disparities, gender, ethnicity and treatment of persons with disability. Further, from the supply side, weaknesses in the education system, difficulties in transitioning from education to training, low skilled migration and perceptions of specific types of labour are important causes. 

So, is entrepreneurship and promotion of the SME sector alone the key to resolving youth unemployment? Yes, and no. Yes, because the SME sector is diverse and able to incorporate people possessing a wide variety of skill sets. Entrepreneurship is a means of harnessing specific and unique skills which can contribute to economic growth, particularly in the periphery, by stimulating incomes and by creating further employment. However, the underlying factors related to youth unemployment need to be addressed first and many of these relate to attitudes, skills mismatches and culture – these factors are less easy to address.  

What is needed is an environment where youth are able to develop the necessary knowledge and skills to enter the labour market and are able to access information on employment opportunities equally and to look beyond what is traditionally seen as ‘good’ employment. 

Further, in terms of broader policy initiatives, SMEs must be given an environment in which to thrive – i.e. improving long-term access to finance both by increasing the availability of credit, as well as by implementing measures to improve financial management. This, in turn, would improve access to productive employment, particularly for youth and contribute to the overall agenda of inclusive growth. 

(Janani Balasubramaniam is a graduate in Economics and Geography with experience working as a social researcher. She completed schooling at CIS Kandy, and holds an undergraduate degree at University College London. Her interests include development issues and public policy, particularly in relation to migration.)

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