You are on page 1of 8

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

1
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

2
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

3
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

4
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,

5
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

6
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.

7
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.