Article review on The Role of Micro and Small

Enterprises in Reducing Unemployment and Poverty

in Ethiopia

By Adisu Negash adisuneg2@gmail.com

August, 2022
Assela, Ethiopia

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Abstract
MSEs are basically set up with the goal of unemployment and poverty reduction. These
enterprises have a very important and effective role in both developed and in developing
countries because it is considered the backbone of their economies. MSEs can play a role in
improving the socio-economic condition of the poor, create employment opportunity, job creates
greater utilization of local raw materials and improve the economic growth of the country. This
indicates that without the establishment of micro and small scale enterprise, no nation can
achieve a viable economic growth/development or the reduction of poverty. Even if MSEs play a
vital role in the livelihood of rural household by generating income, peoples become little
attention to them because of lack of necessary conditions in order to run this enterprises. These
reviews assess on the importance of MSEs for unemployment and poverty reduction. The review
result suggest that major challenges and problems that faces the small scale enterprise in order
to operating their business is influenced by lack of access to finance, lack of infrastructure, lack
of training in entrepreneurial and management skills, lack of information on business
opportunities, lack of access to premise, Lack of access to capital, inefficient financial market,
problem of skilled manpower, Lack of clear and pragmatic national policy, Socio cultural
constraints, Arbitrary and subjective tax system, high interest rates for borrowing, lack of
production place, lack of market, lack of credit facilities are the major factors influencing on the
operation of MSEs for creations of employment opportunities and alleviation of poverty.

Keywords: MSEs, Poverty, Role of MSEs, Poverty Deduction, Employment creation

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Table of Contents
Abstract........................................................................................................................................................i

Table of Contents.........................................................................................................................................ii

1. INTRODUCTION...............................................................................................................................1

2. LITERATURE REVIEW....................................................................................................................3

2.1. Contribution of MSEs for Poverty Reduction and alleviation of poverty....................................3

3. METHODOLOGY..............................................................................................................................5

4. RESULT AND DISCUSSION............................................................................................................6

5. CONCLUSION AND RECOMMENDATIONS.................................................................................8

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 1. INTRODUCTION
Growth in the working age population is expected to be even more rapid, increasing by 265.8%
in Africa and by 306.6% in sub-Saharan Africa, compared to 28.3% globally (Bhorat &
Oosthuizen, 2020). Consequently, unemployment is a colossal problem in sub Saharan Africa
(Dey, 2012). Entrepreneurship can be a cure for Africa’s problems such as unemployment,
inequality, low productivity, disconnect from global value chains, etc. (Devine & Kiggundu,
2016). The General Assembly adopted resolution 71/221 recognizes the important contribution
entrepreneurship to sustainable development by creating jobs, driving economic growth and
innovation, improving social conditions, and addressing social and environmental challenges
(UN, 2018). Hence, investment in entrepreneurial ventures can contribute immensely to
economic growth and job creation (Arko-Achemfuor, 2017) and thus jobs provide income, which
improves living standards and consumption possibilities (IFC, 2013). Micro, small and medium-
sized enterprises (MSMEs) are a major source of growth, innovation and jobs and their potential
impact on achieving many of the sustainable development goals is much greater than their size
(ITC, 2019). Therefore, there is a great interest of young people to start a business and many of
them are willing to undertake risks and challenges of entrepreneurship (Papulová & Papula,
2015).

Ethiopia most important development priorities were job creation for the increasing supply of
labor force which contributed in reducing poverty (NPC, 2016; WBG, 2018). Hence, the
implementation of the micro and small enterprises (MSEs) development strategies given undue
role to achieve these objectives (NPC, 2016). The revised MSE strategy focus on enhancing the
competitiveness of MSEs, ensuring continued rural development through sustainable growth of
MSEs, and making the subsector a foundation for industrial development (FMSEDA, 2011).
During Growth and Transformation Plan (GTP) I implementation period (2010/2011–
2014/2015), construction sector was largest over other sector which accounts about 36.2%,
followed by services with 20.8%, trade with 15.2%, manufacturing with 14.7% and urban
agriculture accounts 13.1% employment through MSEs (EEA, 2015).

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Given the implication of MSEs to the national development goals and it is a key development
policy, there is little evidence that explore their role in Reducing Unemployment and Poverty in
Ethiopia. Hence, this review article aimed to provide an exploratory insight on the contribution
of MSEs in Reducing Unemployment and Poverty in Ethiopia. The review contributes to the
existing literature by providing evidence for these specific questions. (1) What is the role of
MSEs in reducing unemployment in Ethiopia (2) What is the role of MSEs in reducing poverty
in Ethiopia? This literature review identifies the specific research gaps uniquely relevant for
future researches and policy direction for the development of the sector.

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 2. LITERATURE REVIEW
2.1. Contribution of MSEs for Poverty Reduction and alleviation of
poverty
Despite the country’s success in economic growth and poverty reduction over the past decade,
income inequality and unemployment remain formidable challenges in Ethiopia. Average urban
unemployment was as high as 16.5%. Furthermore, unemployment remains disproportionally
higher for women and youth. At 23%, the female unemployment rate is more than double that of
men (CSA, 2014). Tackling issues of unemployment and poverty through the support and
promotion of large-scale manufacturing industries has repeatedly failed to achieve the required
results. Some argue that focusing on small businesses, which require relatively less financial and
human capital and are able to absorb a significant portion of the labor force, will provide the
solution

Mohammed (2016) stated that the role of micro and small-scale industries is important in a
developing country like Ethiopia for eradicating poverty through growth process of economy,
create employment generation, mobilization of resources and entrepreneurial skill, better
utilization of local resource, equitable distribution of income, rural development and creating
regional balance in promotion, growth of various development activities and supports the growth
of large industries by providing components and semi-finished. Ermias (2017) explained that
MSEs is very important for reducing unemployment and poverty among vulnerable groups, has a
potential to support the Ethiopian economy in achieving its development goals, creation for high
value-added industries, to increase income and domestic saving, promotion of large-scale
manufacturing industries, to create employment opportunities, creation of female-oriented
businesses and creation for investments.

Conduct a study on the contributions of small and medium scale enterprises to economic growth
in Zebilla, They conclude that 85% of the respondent confirmed that MSEs is important for
infrastructural development, 60% respondents ranked the enterprise is more profitable, 25%
indicated moderate while 15% less profitable, 78% of respondent set MSEs is important for
poverty reduction and 69% respondent set MSEs is vital to empowering citizens. In addition to
this SMEs constitute a vital element for the economic growth, improved living standards,
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achieve high levels of productivity and to increase the availability of scarce resource for use
(Akugri et al., 2015). MSEs is a role for poverty alleviation, accelerate the achievement of
economic independence, potential to utilize idle labor force and generate income to the
incumbents including owners, employees and laborers. As his result, the developments of micro
and small enterprises help to reduce the proportion of foreign capital and skills by indigenous
ones, improve efficiency by using his/her fund and skill, best use of his time, equipment,
materials and labor (Abdi, 2014).

Tefera et al., (2013) demonstrated that a dynamic and growing sector of MSEs can contribute to
the realization of a wide range of development objectives such as the attainment of income
distribution and poverty reduction, employment generation, mobilization of savings and
production of goods and services that satisfy the basic needs of the poor. The micro enterprises
sector has been instrumental in bringing about economic transition by providing goods and
services that are of adequate quality and affordable cost to a large number of people in rural
areas, and by effectively using the skills and talents of these people, without requiring high-level
training, large sums of capital or sophisticated technology. The importance of MSEs in general
and new businesses in particular makes a significant contributions in addressing socio economic
problems such as unemployment, poverty, income inequalities, political stability and economic
growth among others (Musara & Gwaindepi, 2014).

Epherem (2010) conduct a study on the role of micro and small enterprises in poverty alleviation
in Gulele sub city, the role of MSEs is important for improving the living conditions, saving
habit and income of the members. Their saving becomes 91.84% from the income gained from
their respective enterprises; food intake becomes 69.7%, 62.12% for clothing, 92.4% for
schooling expense, and 72.73% for health care, 78.09% housing facilities due to increment in
income. (Agyapong, 2010) study on the role of micro, small and medium enterprises (MSMEs)
in poverty alleviation in Ghana. The author is of the view that MSMEs help to create jobs and
increase income of the people. This increased income helps the people to obtain better schooling,
health facilities and empowers them to get rid of vicious circle of poverty. Furthermore, growths
in small and medium enterprises (SMEs) also contribute to human capital through on job training
and also contribute to increase tax revenue of the government.

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Study that conducted on socio-economic contributions of micro and small enterprises: the case of
Jimma city, he were tested using Chi techniques; His finding shows that MSEs is important for
employment creation, powerful instrument in economic growth, poverty reduction, quick
production response, saving and income generation, Saving increase, Profit increased, realizing
equitable income distribution, quality of life of the participants improved, developing
entrepreneur’s skills and knowledge, and gender empowering, changing many peoples‟ social
issues and also ways of acquiring businesses, linking different levels of enterprises to facilitate
its development and Transformed into medium and large enterprises (Diriba, 2013).

3. METHODOLOGY
The review adopted a systematic literature review method, which offers an explicit, trustworthy,
and reproducible method to minimize bias, thus providing more reliable findings for the
evaluation and interpretation of previous research relevant to a particular field (Sniazhko &
Muralidharan, 2019). The review based on extensive overview of relevant literature (research
articles, policy documents, and reports) following a systematic review approach utilizing
PRISMA guidelines (Liberati et al., 2009).

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 4. RESULT AND DISCUSSION
Small and medium sized enterprises are an important ingrate for stable and equitable growth in
any national economy. Ethiopia takes the development and expansion of SME’s as the main way
to solve many of the social problems. A universal definition of micro and small enterprise does
not exist given the multitude of different economic, social and geographic differences with the
international context of micro and small enterprise. In some countries, micro and small
enterprises are categorized based on the capital that is invested and in some countries based on
the employment opportunity they provide

The Micro and small enterprises sector is believed to be able to fill the gap that exist between
poor and the rich in developing countries regarding income generation and, unemployment rate.
Successful small businesses are the primary engines for economic development such as income
growth and poverty reduction in many of the developing countries. However, poor infrastructure,
weak public service, inadequate mechanisms for dispute resolution and lack of markets to their
product and formal financing remain major impediments to small business growth (MELFED,
2004).

According to Federal Democratic Republic of Ethiopia (1997-2025), there are three strategies for
the development of MSEs for poverty reduction. The first strategies are Micro and Small
Enterprises Development Strategy of Ethiopia (1997-2010); the fundamental principles of this
strategy are “Agricultural Development Leads to Industrialization” (ADLI) and market economy
principles. This strategy have facing problems: lack of access to finance, say nothing whether
these enterprises are grown to the next higher level or not, cannot define MSEs. The second one
is MSEs Development Strategy, Provision Framework and Methods of Implementation (2011-
2015); the main aim of this strategy is to alleviate the implementation gap of the first MSEs
Development strategy, to shift Agricultural Development Leads Industrialization strategy to
“industry” and to alleviate the financial constraint by means of giving the state government to
give the credit to MSEs. The third one is Industrial Development Strategic Plan (2013-2025); it
emphasis on the economic level of the country should be reaching in the middle level income by
2015 by focusing on manufacturing sector. The main focus of these strategies is for job creation,
promotion of industry and employment creation which gives less emphasis for the economic

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contribution because of difficulty of knowing the exact contribution of Micro and Small
Enterprises to the GDP.

Due to the weakness of the first edition of Growth and Transformation plan (GTP I) which do
not consider the Medium and Large enterprises, the second edition of Growth and
Transformation Plan (GTP II) (2015/162019/20) was formulated. From this projection the share
of Micro and Small Enterprises in GDP under base scenario in percent is stated as 1.1 in 2014/15
to 1.8 in 2019/20 and for Medium and Large scale enterprises as 3.7 in 2014/15 to 5.9 in
2019/20. The plan has tried to project the contribution of Micro and Small; and Medium and
Large enterprises to GDP. The entire projection is made only for manufacturing that overlooked
the service sector (Amare and Raghurama, 2017).

Despite the country’s success in economic growth and poverty reduction over the past decade,
income inequality and unemployment remain formidable challenges in Ethiopia. According to
the 2014 Central Statistics Authority report, average urban unemployment was as high as 16.5%.
Furthermore, unemployment remains disproportionally higher for women and youth. At 23%, the
female unemployment rate is more than double that of men (CSA, 2014).

Tackling issues of unemployment and poverty through the support and promotion of large-scale
manufacturing industries has repeatedly failed to achieve the required results. Some argue that
focusing on small businesses, which require relatively less financial and human capital and are
able to absorb a significant portion of the labor force, will provide the solution.

Endalkachew (2008) stated that developing countries have common characteristics of low
economic growth, fast population growth, high level of unemployment and poverty. They
provide employment opportunity to those who do not have access to the formal sector
employment. It is also regarded as a tool for supporting the economic and social conditions of
the poor, especially for the youth and women, by allowing access to education, health facilities
and improves their living standards sustainably. On the other hand, the reviewed empirical
studies reveal that there is a gap with regard to assessment of enterprises’ roles in terms of
employment opportunities, generating income and profit and reducing poverty.

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Micro and small enterprises are most effective but challenged enterprises; helpful in improving
the economic lives of youth and women particularly through generating income, creating
employment opportunities, improving productivity & assets and asset building.They are among
the major economic activities in the Amhara regional state next to agriculture (MOFED, 2002)

5. CONCLUSION AND RECOMMENDATIONS

Micro and small enterprises (MSEs) has been a key area of intervention in Reducing
Unemployment and Poverty in Ethiopia. Given the implication of MSEs in national development
goals and it is a key development policy, there is little evidence particularly at broader context.
Hence, this review article presents a systematic review of studies on the contribution of MSEs in
Reducing Unemployment and Poverty in Ethiopia. The paper has also demonstrated that MSEs
has myriad role in economy growth, industrialization, livelihood and sustainable development as
a whole. In addition, in employment creation, MSEs created jobs for many individuals. The
study also finds out that there is an increase in average number of employees working in MSEs
from year to year.

Depending up on the findings of this study, the following recommendations are forwarded. The
literature review result reveals that participation of micro and small enterprise in poverty and
unemployment reducing has statistically significant. Therefore, any micro and small enterprise
development interventions should include strategies on how to enhance the participation of the
lower income households and strive to become indeed pro-poor.

 Access of credits for micro and small enterprise both at the start up levels and during
operations is very important for achieving the objectives of enterprises in poverty and
unemployment reducing Hence, the government and nongovernmental bodies should
support micro and small enterprise both at the start up levels and during their operations
for easy accessing of credit facilities.

 Education significantly important for reducing poverty in the study area and in the study
area, enabling environments like facilitating cooperation between enterprises with
different development organizations and non-governmental organization, promoting
entrepreneurial development programs, expanding training institutions, promoting
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 market association building should be developed in order to increases the contributions of
MSEs in poverty and unemployment reducing.

 Saving significantly important for reducing poverty and unemployment, it was the
portion of income not spent on current expenditure. Because person does not know what
will happen in the future, money should be saved to pay for unexpected events or
emergencies, without saving, unexpected events can become large financial burdens.
Therefore, extension worker, government and financial institution motivate respondent to
save.

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