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New ILO Study: How the right environment can create good jobs in micro- and small-enterprises

Article | 24 March 2004

GENEVA – Entrepreneurs have often bemoaned the fact that setting up a micro- or small-enterprise can be stifled by bureaucratic red-tape – costing the economy viable and good jobs in the process. Now, a new study published by the International Labour Office (ILO) shows how small businesses in many countries in the world can flourish – and help to create jobs and reduce poverty – when the right policy and regulatory environment is put into practice ( Note 1).

For most entrepreneurs in the world, legal registration is often cumbersome, time-consuming, and expensive. The number of procedures required to start up an enterprise varies – ranging from two in Canada to twenty in Bolivia, with the world average around ten.

"Compliance with regulations has costs for MSEs but can also bring important benefits to these enterprises, such as better access to financial services and social security coverage to their workers. Facilitating compliance with regulations can boost the quantity and quality of jobs", says Gerhard Reinecke, co-author with Simon White, of the study.

"Also, we should not forget that policies and regulations affect millions of people who work in MSEs where they are paid low incomes, have little or no social protection and are exposed to dangerous working conditions", he adds.

Based on research carried out in Chile, Guinea, Pakistan, Peru, South Africa, the United Republic of Tanzania and Viet Nam, the study outlines the major principles for reform to create more and better jobs for women and men in MSEs.

In all seven countries, employment in MSEs accounts for the majority of non-agricultural employment, and in six of them their share has been increasing over the 1990s. According to the study, MSEs provide most employment but in many cases new jobs in MSEs simply replace jobs lost elsewhere – due to the downsizing of large enterprises or of the public sector, for example.

Many governments in developing countries have made efforts to support MSEs. In Viet Nam, the Enterprise Law introduced in 2000 reduced the time to register a business from 99 to 17 days and the average cost involved dropped from US$ 660 to about US$ 30. While around 5,000 enterprises per year were registered under the previous law, this figure has jumped up to around 15,000 per year since 2000.

Enforcing labour laws in micro-enterprises is often difficult because entrepreneurs are not always aware of their legal obligations. Innovative methods of implementation can help to overcome this problem, the study says. It cites the 2001 labour law reform in Chile where micro-enterprises with nine or fewer employees found guilty of violating the labour law can replace their fine upon request with a compulsory training programme.

"The findings presented in the book have potential application far beyond the seven countries studied", says Gerhard Reinecke. "Besides more communication and transparency in policies for small enterprises, we need national business laws, taxation and labour regulations that are fair and put MSEs on an equal footing with larger enterprises."

The methodology of this study has been adapted by the ILO and is being used by a number of countries to support their efforts to improve the policy and regulatory environment for MSEs.

Note 1 - Policies for small enterprises - Creating the right environment for good jobs, by Gerhard Reinecke and Simon White, ILO, Geneva, 2004.