Why small is not beautiful when it comes to development

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You could call it “the cult of the small”, the idea that small enterprises and smallholder farmers are the backbone of poor economies, the key to social resilience and the best hope for eliminating poverty. You see it in the emphasis on microloans, small businesses and funding community projects. 

These interventions are all very well. Safety nets, telephone banking and rural roads can help the income prospects of the very poorest. By some estimates, small and medium enterprises account for 80 per cent of Africa’s economic output. But the cult of the small needs a corrective. Africa needs to think big.

In cities across the continent, a “micro-entrepreneur”, as the development jargon has it, might just be the owner of a tanning works, a metal-bashing business or a tile-making factory. More likely she is a woman dodging traffic with a tray on her head hawking food to a tiny four-wheel-drive-owning elite. Or a man with a “shoeshine business” consisting of a rag, a broken box and half a tin of shoe polish.

The region’s cities are full of people with no formal jobs, hustling for a living. They are survivors who work long hours scrabbling together a pittance. If Africa’s future depends on their labour, then Africa is in trouble. No amount of access to finance is going to turn such “enterprises” into the building blocks of a modern economy.

Paul Collier, author of The Bottom Billion, says of the transformative effect of complex businesses: “Companies perform a productivity miracle by organising workers to reap gains from scale and specialisation.” The roadside hustler is neither specialised nor productive. To romanticise such an atomised workforce is to accept poverty in perpetuity. 

If many urban jobs are so unproductive, perhaps people should stay in the countryside? That was the view of Muhammadu Buhari, Nigeria’s former president, who told young people “to go back to the farm”.

But the life of most smallholders is less Thomas Hardy and more John Steinbeck. Without irrigation, fertiliser, modern seeds or tractors, productivity across the continent is dismally low. The poorest farmers can’t grow enough to keep their families properly fed, let alone send their kids to school. 

Aubrey Hruby, a seasoned investor in Africa, advocates the intense use of technology to release agriculture from its subsistence stranglehold. African farmers, she says, typically cultivate less than two hectares and produce gross value added of about $2,000, one-fiftieth of the average American farmer. The “cult of the smallholder farmer”, she says, is as damaging as the cult of the micro-entrepreneur.

China’s economic miracle was built on moving unproductive farmers into factories. Research by the African Centre for Economic Transformation, an Accra-based think-tank, shows how African economies have failed to do this. Many not only score poorly but are going backwards. Acet’s measure of economic diversity fell by almost 6 points between 2000 and 2020 while export competitiveness failed to rise over that period from a dismal 13.8. On average the top five exports of African countries account for a dangerously concentrated 70 per cent of the total.

Successful Asian and Latin American economies built complex industrial networks. They were sometimes linked to raw materials like Chilean copper or Malaysian palm oil, but often to an educated workforce, reliable infrastructure and deep pools of savings.

In Africa, Lesotho and Mauritius developed competitive textile industries, Ethiopia established a shoe and apparel industry based on home-produced leather and Benin is trying to transform raw cashew nuts into items that can go on a supermarket shelf. But such efforts are too few.

If the antidote to small is big and complex, the continent is not doing well. There is not a single African company in the world’s Fortune 500. Still, there are bigger businesses than meet the eye, many family-owned. McKinsey listed 400 African companies with annual revenue above $1bn in 2018. Yasmin Kumi’s African Foresight Group has a database of 2,000 companies with revenue of $20mn-$100mn.

More are needed. So is aggressive competition law to ensure they do not rest on their laurels or gouge customers. Policies required to facilitate job-creating businesses are not the normal development fare. They involve tasks like rationalising electricity supply, deepening capital markets, reducing the cost of capital through establishment of pension funds, channelling development into large-scale businesses and nurturing professionally run farms.

A starting point may be jettisoning romantic notions that smallholder farmers and micro-entrepreneurs are the route out of poverty. They are not. Their existence in large numbers is the definition of poverty itself.

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